England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Rolls Building, Fetter Lane, London, EC4A 1NL
		18/12/2013

Mr Justice Hamblen :

Introduction

1. The Claimant ("Starbev") applies under CPR 31.19(5) challenging the claim of the Defendant ("ICEH") to withhold inspection of two categories of documents on the ground of litigation privilege.
2. The documents consist of:

(1) Documents relating to advice received from Barclays in April 2012 concerning the structuring of the consideration for the sale by Starbev of the Central and Eastern European brewing business ("the Business") that it had previously acquired from ICEH ("the Barclays documents").

(2) Documents relating to ICEH's dealings with KPMG after 20 July 2012 in the course of work done for ICEH in relation to an agreement known as the Contingent Value Right Agreement ("CVR") ("the KPMG documents").

Factual background

3. In summary, the underlying claim concerns the proper construction and application of the CVR pursuant to which ICEH is entitled to deferred consideration (i.e. an "Excess Return Payment") following its sale of the Business to investment funds ("the CVC Funds"). Starbev is the investment vehicle through which the CVC Funds' acquisition was indirectly made. The sale completed on 2 December 2009.
4. The claim has arisen because on 3 April 2012 Starbev entered into an agreement with a subsidiary of Molson Coors to re-sell the Business. The consideration was a cash payment of €1,437m and a non-transferable Note ("the Note") of not less than €500m redeemable after December 2012. The claim concerns whether and the extent to which ICEH is entitled to a share of these proceeds.
5. So far as material to the present application, ICEH's entitlement arises if the "Cash proceeds" of the sale to Molson Coors exceed certain thresholds, which are determined by reference to the "Investment Amount".
6. "Investment Amount" is defined in the CVR as "the aggregate Cash Investments in Starbev Interests made by the Investor and applied by Starbev in acquiring Relevant Interests at the SPA Completion" (clause 1.1).
7. The higher the Investment Amount figure, the less to which ICEH is entitled by way of an Excess Return Payment. Moreover, the relevant multiple applicable to the Investment Amount itself varies, depending on the time that has expired from the date of completion of the original sale of the Business.
8. The CVR contains an anti-avoidance provision in clause 4.4.3. This provides that, where a transaction is structured "with the purpose of reducing payments to ABI [i.e. ICEH]", that transaction is to be treated as an "Equity Return", defined (so far as relevant) as "Cash proceeds".
9. The CVR also contains a right for ICEH to appoint independent accountants to "verify and report to [ICEH] on the amount and timing of any such payments and transactions and any other transactions relevant to the calculation of the IRR, whether the Investment Threshold has been exceeded and each Excess Return Payment." (clause 3.3).
10. The issues in the proceedings are set out in the List of Issues but may be summarised as being:

(1) Whether the "Investment Amount" is €720m (adjusted to €717,489,388.03) as Starbev claims or some other (lower) figure as ICEH contends;

(2) Whether ICEH is estopped by convention from contending that the Investment Amount is different to that claimed by Starbev and notified to it in December 2009;

(3) Whether the transaction by which Starbev sold the Business to Molson Coors was structured with the purpose of reducing the payments due to ABI under the CVR and engages the anti-avoidance provisions in clause 4.4 of the CVR (introduced by amendment in November 2013).

The law relating to "litigation privilege"

11. The legal requirements of a claim to litigation privilege may be summarised as follows:

(1) The burden of proof is on the party claiming privilege to establish it – see, for example, West London Pipeline and Storage v Total UK [2008] 2 CLC 258 at [50].

(2) An assertion of privilege and a statement of the purpose of the communication over which privilege is claimed in a witness statement are not determinative and are evidence of a fact which may require to be independently proved. The court will scrutinise carefully how the claim to privilege is made out and the witness statements should be as specific as possible – see, for example, Sumitomo Corporation v Credit Lyonnais Rouse Ltd (14 February 2001) at [30] and [39] (Andrew Smith J); West London Pipeline and Storage Ltd v Total UK Ltd [2008] EWHC 1729 (Comm) at [52], [53], [86] (Beatson J); Tchenguiz v Director of the SFO [2013] EWHC 2297 (QB) at [52] (Eder J).

(3) The party claiming privilege must establish that litigation was reasonably contemplated or anticipated. It is not sufficient to show that there is a mere possibility of litigation, or that there was a distinct possibility that someone might at some stage bring proceedings, or a general apprehension of future litigation – see, for example, United States of America v Philip Morris Inc [2004] EWCA Civ 330 at [68]; Westminster International v Dornoch Ltd [2009] EWCA Civ 1323 at paras [19] – [20]. As Eder J stated in Tchenguiz at [48(iii)]: "Where litigation has not been commenced at the time of the communication, it has to be 'reasonably in prospect'; this does not require the prospect of litigation to be greater than 50% but it must be more than a mere possibility".

(4) It is not enough for a party to show that proceedings were reasonably anticipated or in contemplation; the party must also show that the relevant communications were for the dominant purpose of either (i) enabling legal advice to be sought or given, and/or (ii) seeking or obtaining evidence or information to be used in or in connection with such anticipated or contemplated proceedings. Where communications may have taken place for a number of purposes, it is incumbent on the party claiming privilege to establish that the dominant purpose was litigation. If there is another purpose, this test will not be satisfied: Price Waterhouse (a firm) v BCCI Holdings (Luxembourg) SA [1992] BCLC 583, 589-590 (cited in Tchenguiz at [54]-[55]); West London Pipeline and Storage Ltd v Total UK Ltd at [52].

12. In relation to the Court's approach to the assessment of evidence in support of a claim for privilege, it has been stated that it is necessary to subject the evidence "to "anxious scrutiny" in particular because of the difficulties in going behind that evidence" – per Eder J in Tchenguiz at [52]. "The Court will look at 'purpose' from an objective standpoint, looking at all relevant evidence including evidence of subjective purpose" – ibid. 48(iv). Further, as Beatson J pointed out in the West London Pipeline case at [53], it is desirable that the party claiming such privilege "should refer to such contemporary material as it is possible to do without making disclosure of the very matters that the claim for privilege is designed to protect".
13. As was further stated by Beatson J in the West London Pipeline case at [86]:

"(3) It is, however, difficult to go behind an affidavit of documents at an interlocutory stage of proceedings. The affidavit is conclusive unless it is reasonably certain from:

(a) the statements of the party making it that he has erroneously represented or has misconceived the character of the documents in respect of which privilege is claimed: Frankenstein v Gavin's House to House Cycle Cleaning and Insurance Co, per Lord Esher MR and Chitty LJ; Lask v Gloucester Health Authority.

(b) the evidence of the person who or entity which directed the creation of the communications or documents over which privilege is claimed that the affidavit is incorrect: Neilson v Laugharane (the Chief Constable's letter), Lask v Gloucester HA (the NHS Circular), and see Frankenstein v Gavin's House to House Cycle Cleaning and Insurance Co, per A L Smith LJ.

(c) the other evidence before the court that the affidavit is incorrect or incomplete on the material points: Jones v Montivedeo Gas Co; Birmingham and Midland Motor Omnibus Co v London and North West Railway Co; National Westminster Bank plc v Rabobank Nederland.

(4) Where the court is not satisfied on the basis of the affidavit and the other evidence before it that the right to withhold inspection is established, there are four options open to it:

(a) It may conclude that the evidence does not establish a legal right to withhold inspection and order inspection: Neilson v Laugharane; Lask v Gloucester Health Authority.

(b) It may order a further affidavit to deal with matters which the earlier affidavit does not cover or on which it is unsatisfactory: Birmingham and Midland Motor Omnibus Co Ltd v London and North West Railway Co; National Westminster Bank plc v Rabobank Nederland.

(c) It may inspect the documents: see CPR 31.19(6) and the discussion in National Westminster Bank plc v Rabo Bank Nederland and Atos Consulting Ltd v Avis plc (No. 2). Inspection should be a solution of last resort, in part because of the danger of looking at documents out of context at the interlocutory stage. It should not be undertaken unless there is credible evidence that those claiming privilege have either misunderstood their duty, or are not to be trusted with the decision making, or there is no reasonably practical alternative.

(d) At an interlocutory stage a court may, in certain circumstances, order cross-examination of a person who has sworn an affidavit, for example, an affidavit sworn as a result of the order of the court that a defendant to a freezing injunction should disclose his assets: (House of Spring Gardens Ltd v Wait; Yukong Lines v Rensburg; Motorola Credit Corp v Uzan (No. 2)). However, the weight of authority is that cross-examination may not be ordered in the case of an affidavit of documents: Frankenstein's case; Birmingham and Midland Motor Omnibus Co Ltd v London and North Western Railway Co and Fayed v Lonrho. In cases where the issue is whether the documents exist (as it was in Frankenstein's case and Fayed v Lonrho) the existence of the documents is likely to be an issue at the trial and there is a particular risk of a court at an interlocutory stage impinging on that issue."

The Barclays documents

14. I propose to consider this claim to privilege first as it comes first in time.
15. The individual within ICEH who was involved in seeking the advice of Barclays was Mr Golden (Vice-President, Mergers and Acquisitions).
16. His evidence is that:

(1) Having received notification in an email dated 3 April 2012 that the consideration for the re-sale of the Business by Starbev included the Note, he was "immediately suspicious" and considered that "by deferring part of the consideration, Starbev was attempting to take advantage of the fact that the Investment Threshold was potentially significantly greater … after December 2012", as per witness statement of Robert Golden.

(2) Having subsequently been informed that Starbev was of the view that the Investment Amount was €720m (and not €500m as he had believed), it seemed to him that "Starbev had deliberately structured the sale of the Business in order to "game" the CVR and thereby eliminate (rather than simply reduce, as I had initially thought) ICEH's Excess Return Payment".

(3) As a result, it occurred to Mr Golden "that ICEH would end up in another dispute with Starbev".

(4) He "therefore sought advice from ABI's advisors, Barclays Capital, as to what steps were available to ABI to challenge the structuring of the sale to Molson Coors, with a view to discussing this further with ABI's legal advisors".

17. ICEH submits that this evidence is corroborated by evidence of Mr Caton to similar effect and by the following facts and matters:

(1) The background of disputes between ICEH/ABI and Starbev relating to the implementation of the agreement for the sale of the Business as set out in Mr Golden's statement.

(2) The evidence of ICEH's litigation solicitor, Mr Southwell of Skadden Arps, Slate, Meagher & Flom (UK) LLP, that the advice received from Barclays Capital was shared with ABI's then legal advisors, Clifford Chance (its corporate solicitors).

(3) The fact that one of KPMG's roles, when first instructed in June 2012 was stated to be to "support ABI and CC's [Clifford Chance LLP] investigation of CVC [i.e. the CVC Funds] compliance with the anti-avoidance clauses in the CVR agreement".

18. In the light of that evidence ICEH submits that it has shown both that litigation was reasonably anticipated and that the dominant purpose of instructing Barclays was in connection with that anticipated litigation.
19. I am not satisfied that Mr Golden's evidence goes this far. I consider the effect of his evidence to be that he had a suspicion concerning the sale of the Business by Starbev and instructed Barclays to investigate in order to see if there was substance to his suspicion. Barclays' role was investigatory. Unless and until they confirmed that there was substance to Mr Golden's suspicion there was no real reason to anticipate litigation.
20. This is borne out by his statement that "it occurred to me that ICEH would end up in another dispute with Starbev". This suggests no more than that such a dispute was a possibility. It does not connote that it was reasonably anticipated both that there would be such a dispute and that it would result in litigation. Whether or not it would do so was unlikely to be known until Barclays investigated and reported.
21. That Barclays' role was investigatory is borne out by a number of contemporaneous documents which refer to their role as one of checking the position and calculating the payment that might be likely to come to ICEH as a result of the sale. For example, following notification of the sale, Mr Golden sent an email on 3 April 2012 stating: "See notice below from CVC re agreement to sell Starbev to Molson Coors. We will follow up with a review the impact on ABI's CVR…" (emphasis added). Later that day Mr Golden responded to an email from Mr Caton which set out the likely payout for ICEH from the sale by stating: "Thanks Nick. Please check it with….Barclays". Also that day Mr Golden responded to an email in which he was informed by tax counsel that the gain from the sale should be tax free by stating: "Fantastic, not sure about potential payout given deferred nature of some of the price... in process of trying to calc." (emphasis added).
22. Further, as the contemporaneous documents show, ICEH had good and independent reason to have these checks and calculations made because of earlier public statements made to the effect that additional payments of US$800 million might be received in the future from the sale to Starbev. This purpose for getting Barclays to "check" "calc" and "review the impact on ABI's CVR" was not addressed in its evidence.
23. Although it is said that Barclays' advice was to be and was shared with its corporate solicitors, Clifford Chance, that takes the matter little further. They may well have been part of the investigatory exercise, but that is all it was at that stage.
24. Finally, as considered below, it is striking that ICEH's evidence is that litigation was not reasonably anticipated in early July 2012 when KPMG was instructed, even though its instruction included investigation of the anti-avoidance position. This is seemingly inconsistent with litigation being reasonably anticipated in relation to such matters over two months before.
25. For all these reasons I am not satisfied that it has been shown that litigation was reasonably anticipated at the time that Barclays was instructed to provide advice, still less that such litigation was the dominant purpose of so instructing them. The claim for litigation privilege relating to the advice is accordingly not made out.

The KPMG documents

26. The individual within ICEH who was involved in the appointment of KPMG, and specifically instructed KPMG to prepare a written report after 20 July 2012, was Mr Nick Caton, at the time a Director in the Global Acquisitions and Mergers group.
27. His evidence is that:

(1) KPMG were originally appointed in early July 2012 in order (amongst other tasks) to conduct an "audit" (under clause 3.3 of the CVR) of the various notices that Starbev had sent ICEH under the terms of the CVR. That audit included auditing the Investment Amount, which Starbev alleges to be €720m as adjusted.

(2) In the course of that exercise KPMG identified various additional documents that it required to complete the audit. That information was provided on 18 July 2012 and was discussed with KPMG who reported in a call on 20 July 2012. In the course of that call it emerged that there were good factual grounds to suppose that the Investment Amount was not €720m: KPMG pointed to the fact that Starbev's accounts indicated that it had subscribed for only €699.6m of preferred equity certificates in Caspian and that approximately €15.4m of those had been issued as consideration for the supply of certain services by Starbev to Caspian.

(3) Mr Caton says that on 20 July 2012:

(a) "it became clear to me that ICEH was likely to dispute Starbev's quantification of the Investment Amount … I anticipated that it might well end up in litigation"; and

(b) "I therefore instructed KPMG to prepare a written report of its conclusions and the arguments that might be available to ICEH to challenge Starbev's analysis, for the purposes of that prospective litigation".

28. ICEH submits that Mr Caton's evidence is corroborated by the following facts and matters:

(1) Prior to July 2012, there had been a history of post-completion disputes between ICEH and Starbev, one of which had resulted in adversarial proceedings.

(2) In January 2012, based on information received from Lazard, the board of ABI (the parent company of ICEH) had received a presentation on ICEH's potential "Excess Equity Return" on the assumption that the Investment Amount was €517m. The significance of the KPMG investigation in this context is that it provided factual support for ABI's pre-existing supposition that Starbev had exaggerated the Investment Amount: the KPMG oral report on 20 July 2012 demonstrated that there was a substantive issue here.

(3) Mr Southwell states that the communications from KPMG after 20 July 2012 "followed and were responsive to privileged legal advice" and that KPMG was asked for its views on the quantum of the Investment Amount "on the basis that there would be an adversarial dispute".

(4) As a matter of fact, following the further communications from KPMG, on 21 August 2012 (i.e. just a month later) ICEH formally wrote to Starbev setting out its position on the Investment Amount. It can be seen from that letter that it was dependent on KPMG's investigations and input (the analysis provided is based on "information provided to KPMG by Starbev") and, although the letter is not described as a pre-action letter, it ends with an express reservation of rights "arising out of, or in connection with, the CVR Instrument" i.e. in substance it is a pre-action letter. Starbev replied to that letter on 3 September 2012 and sent a letter before action on 28 September 2012.

29. ICEH therefore accepts that the purpose of instructing KPMG in June 2012 was to carry out an audit pursuant to its rights under the CVR. That is borne out by a number of contemporaneous documents including KPMG's written retainer. It contends that as a result of KPMG's investigations and oral reports, by 20 July 2012 not only was litigation reasonably anticipated but the dominant purpose of instructing KPMG thereafter became such litigation. Starbev challenges this and submits that it is contrary to the contemporaneous documentation, which documentation is not addressed in ICEH's evidence.
30. Starbev places particular reliance on KPMG's retainer letter dated 4 July 2012 which provided:

"We set out below the terms of the engagement of KPMG LLP to carry out work in connection with a review of certain payments and transactions connected to a contingent value right entered into between [ABI] and [Starbev] dated 2 December 2009 (the "CVR") and certain books and records relating to each payments and transactions (the "Engagement"), as discussed recently...

1 Scope of the work

We have discussed and agreed with you the scope of our work which is set out in full in Appendix 1. Attention is drawn to the limitations in the scope of our work set out therein.

Any agreed developments in the scope of our work as the engagement progresses will be recorded in writing and will be subject to the terms set out in this letter unless otherwise agreed in writing.

This engagement letter covers only the work under clause 3.3 of the CVR. It does not cover any assistance in your reaching agreement with Starbev Sàrl and Starbev LP in relation to the amount of any Earnout Consideration. If we are instructed to assist you in connection with any further work, we will agree the parameters under which we will operate and set out our responsibilities in an addendum to this letter...

2 Reporting

During the course of the engagement we may supply oral, draft or interim advice or reports or presentations of our interim findings to Ms. Randon or an authorised ABI representative identified in writing by Ms. Randon.

Following completion of our work we shall report formally in writing to Ms. Randon

Our report(s) will present the findings of our work for the purpose of assisting you with your enquiries in connection with the proposed Engagement.

3 Timetable

A provisional timetable for the delivery of our services is as follows, together with the assumptions on which it is based. We shall use all reasonable endeavours to meet this timetable.

Commence work - 5 July 2012 (subject to information availability)

Draft report - within two weeks from commencement of work

Our work will be dependent upon receiving without undue delay full co-operation from all relevant officials of Starbev Sàrl and Starbev LP and their timely disclosure to us of all information as we may need for the purposes of our work."

[emphasis added]

31. In relation to the retainer Starbev emphasises in particular: (i) that it confirms that KPMG's retainer only covered audit work under clause 3.3; (ii) that the next stage contemplated was seeking "agreement" with Starbev, assistance for which was not covered; (iii) that KPMG would report in writing; (iv) that any developments in the scope of work would be recorded in writing, and (v) that no mention is made of anticipated litigation. As Starbev points out, not only does the retainer make no mention of litigation, but the next stage contemplated was discussion and agreement rather than disputation and litigation.
32. Starbev also stresses an email sent by Mr Caton to KPMG on 20 July, the day on which it is claimed litigation privilege incepted. It stated:

"Subject: Project Black Sea CVR summary

Richard, Olga, Ivan,

I hope you're doing well. As part of our normal process with projects such as these, we'd like a written summary that outlines the work you've done the past couple weeks with respect to the Black Sea CVR. I know the investigation is not yet complete, but I think it would be helpful if we could review a draft version of the report by the middle of next week. Please let me know if you disagree or prefer another process."

33. As Starbev points out: (i) the email makes no mention of anticipated litigation, either as the context to, or the purpose for, the request for a written summary – on the contrary, the request was described as "part of our normal process"; (ii) the scope of this request goes no further than KPMG had already agreed to in its retainer letter, and (iii) the report was to cover work which had already been done, "the past couple weeks" – i.e. before litigation was allegedly in prospect. These are compelling points which were not sought to be addressed by ICEH in evidence.
34. Reference was also made to an email recording a conference call on 20 July which included representatives of Clifford Chance which was said to be a "catch up call to discuss our next steps on Black Sea". Starbev points out that if, as ICEH asserts, litigation was reasonably anticipated at that time then Clifford Chance would have been duty bound to advise ICEH of the need to preserve disclosable documents. As CPR 31 BPD, para 7 makes clear, this is to be done "as soon as litigation is contemplated". In the event this was not done until an internal instruction was given by Mr Katerberg, the group legal director on 5 October 2012. Starbev submits that that timing is itself of significance, although Mr Katerberg explained that it was his practice to give such instruction where litigation is more likely than not.
35. As the authorities make clear it is necessary to subject the evidence claiming litigation privilege "to "anxious scrutiny". This is all the more so when a related claim to such privilege has already been rejected by the court. Further, as Beatson J pointed out in the West London Pipeline case at [53], it is desirable that the party claiming such privilege "should refer to such contemporary material as it is possible to do".
36. In the present case Mr Caton has not sought to address still less to explain the contemporaneous documents which, for the reasons set out above, contradict or at the very least question his assertion of privilege. None of those documents are privileged.
37. Further, there is an inherent implausibility in the claim for privilege made. At the date of the retainer on 4 July 2012 litigation was not reasonably anticipated and the primary purpose for instructing KPMG was to carry out a clause 3.3 audit. By 20 July 2012, however, it is asserted that not only had litigation become a purpose for instructing KPMG, but that it had become the dominant purpose for so doing. Within a couple of weeks the original purpose of instructing KPMG had been relegated to a purely subsidiary role. Further, there is no explanation in the evidence as to why and how the original purpose became so diminished.
38. In addition, there is no record of the KPMG retainer being changed or extended. On ICEH's evidence KPMG was now being asked to fulfil a very different role, yet its retainer remained the same.
39. Yet further, the instruction to produce a report related to work which had been commissioned as a clause 3.3 audit, which had already been done and which KPMG were already obliged to produce in written form and the production of which was said to be part of "normal process". It is difficult to see how the purpose of doing work already done can be changed by an instruction to put it in writing in such circumstances.
40. Reliance was placed on the evidence of Mr Southwell, but he was not instructed or involved at the material time and so he can only give second hand evidence. ICEH suggested that if I was doubtful as to its claim for privilege I should inspect the documents myself. However, as the authorities make clear, that is a matter of last resort. It is generally undesirable for the Court to consider material which is not to be shown to one of the parties and I am not persuaded that it would be appropriate for me to do so in this case. If ICEH has a good claim for litigation privilege, it should have been able to make it good without reference to privileged material.
41. Having carefully considered the parties' evidence and submissions I am not satisfied that it has been shown that litigation had become the dominant purpose of instructing KPMG by 20 July 2012. In so far as it is necessary I consider that it is reasonably certain that the witness evidence on this issue is incorrect when one has regard to the evidence as a whole, and in particular to the contemporaneous documents. It may be that by 20 July litigation was reasonably anticipated. It may also be that that contemplated litigation had become a purpose for instructing KPMG. However, I do not accept that it has been established that it had become the dominant purpose for so doing.
42. For all these reasons I am not satisfied that the claim for litigation privilege has been made out in relation to the KPMG report it was instructed to produce on 20 July 2012.

Conclusion

43. For the reasons outlined above I do not consider that the claim for litigation privilege has been made out as claimed by ICEH. The Barclays advice and the KPMG report, together with documents relating thereto up to the time of the production of the advice/report respectively, should therefore be disclosed. As to when the curtain of litigation privilege came down, it may be that there is an alternative date which ICEH wishes to put forward in the light of my ruling. The latest date would be likely to be 28 September 2012 when the letter before action was sent. ICEH may, however, wish to contend for an earlier date such as at or around the time of its letter of 21 August 2012. The advice and report are likely to shed light on the appropriate date to be taken. I would hope that this would be capable of agreement. If not, then the parties may seek a further ruling.