The recent decision of the High Court in The Financial Reporting Council Ltd v Frasers Group Plc (formerly Sports Direct International Plc)  EWCH 2607 (Ch) reinforces the principle that, even where litigation is reasonably within contemplation at the time, a communication or document will only be protected by litigation privilege where it has been prepared for the sole or dominant purpose of litigation.
The decision is the latest instalment in the on-going investigation by The Financial Reporting Council ("FRC") into Grant Thornton's audit of Sports Direct International ("SDI", now Frasers Group) in 2016. The FRC sought the production of three reports that had been prepared by Deloitte LLP ("Deloitte") between January and July 2015 (the "Documents") advising SDI's subsidiary, SportsDirect.com Retail Ltd ("SDR"), on the implementation of a new or enhanced tax structure (the "2015 Structure") following an enquiry from the French tax authorities in relation to SDR's existing distance selling arrangements.
SDI asserted that the 2015 Structure had been implemented by SDR for the "exclusive purpose of responding to the real and present threat of litigation" that SDR anticipated would arise either from the French tax authorities and/or other tax authorities. SDI therefore sought to resist production to the FRC on the grounds that the Documents were protected by litigation privilege.
Nugee LJ commenced with a reminder of the applicable legal principles and the core requirements for a successful assertion of litigation privilege, as summarised in Three Rivers DC v Bank of England (No 6)  UKHL 48: (a) litigation must be in progress or in contemplation; (b) the communications must have been made for the sole or dominant purpose of conducting that litigation; and (c) the litigation must be adversarial, not investigative or inquisitorial.
Although the question as to whether litigation is reasonably in contemplation can often be difficult particularly in the context of regulatory investigations, Nugee LJ regarded this as subsidiary to the real question of whether the Documents were created for the dominant purpose of litigation. Nugee LJ merely noted that, notwithstanding the "apparently bland nature" of the initial correspondence from the French tax authorities, he was not persuaded that he could properly go behind SDR's evidence that a challenge from the tax authorities was anticipated (and there was no reason for him to doubt the evidence that it was also anticipated that this would likely and ultimately lead to litigation).
Turning to the primary question, Nugee LJ concluded that the Documents were not prepared for the dominant purpose of litigation. Rather, they had been prepared by Deloitte to advise SDR on the implementation of a new or enhanced structure that would be less open to challenge from tax authorities and to explain how tax would be accounted for under that structure. Although the Documents could in a very broad sense be considered as a response to a likely challenge by the French tax authorities, crucially, they were not created for the purpose of advising SDR on the merits of litigation about the pre-2015 tax structure or advising SDR as to how best to conduct or settle any such litigation.
Even if future litigation challenging the validity of the 2015 Structure was also in reasonable contemplation at the time, the dominant purpose of the Documents was not related to litigation. As Nugee LJ put it, "A taxpayer who takes advice as to how to structure his affairs does not do so for litigation purposes. He does so because he wants to achieve a particular result for tax purposes… Even if it is contemplated that the particular structure will be likely to be attacked by the relevant tax authorities and that there will be litigation, the advice as to how to implement the new structure – or, if this is preferred, how to revise or enhance an existing structure – is not primarily advice as to the conduct of the future possible litigation. It is primarily advice as to how to pay less tax…"
This decision is a useful reminder of the strict requirements that must be satisfied in order for an assertion of litigation privilege to be successful. In particular, it highlights the importance of being clear about the purpose when commissioning or creating a piece of work in connection with litigation or regulatory investigations and distinguishing between litigation and commercial purposes. Care must, of course, be taken where there is dual purpose, and a factual analysis on a case-by-case basis remains key to establishing the dominant purpose of communications or documents for which litigation privilege is sought.