Legal professional privilege and funds: untangling the web

An investment manager (a management company with three directors) retained Slaughter and May (S) to act for the investors in a managed fund. The fund was structured as an English limited partnership; the partners were the investment manager and the investors. S took their instructions for the partnership from one of the investment manager's directors (H).

Dissatisfied by the performance of the fund, H became unsympathetic toward his employer, the Babcock & Brown (B&B) group, which owned and operated the management company. H asked S for advice about potential claims available to the investors against the B&B group, and even asked for advice about claims against the management company itself. He wanted this advice kept secret from the investment manager's two independent directors, and from the investors in the partnership that were affiliated with the B&B group. S advised as instructed.

When the investors brought claims against the B&B group, the group (advised by Freshfields Bruckhaus Deringer (F)) tabled a resolution to remove the investment manager from office. In seeking to identify the limited partnership's books and records for handover to the new investment manager, F came across S's legal advice, which had been emailed to H at his group email address and was duly stored on a B&B group server. F refrained from reviewing the material, considering that it was prima facie privileged, at least as against some of the B&B group entities for whom they acted (see box "Privilege").

S confirmed that LPP was asserted by their clients, although it was not immediately apparent to F whom S were advising. The B&B group sought clarification of the material's status from the High Court, arguing that S's clients had no claim to LPP against the B&B group, nor against the world at large.

In this confused and unusual situation, the first question for the court was to identify S's clients. The court held that the retainer by the investment manager meant that all the individual partners were S's joint clients, acting through the investment manager as their agent. There could therefore be no LPP in the advice as against any one of the partners, even those aligned with the B&B group (from whom H wanted the advice kept secret).

Applying established authority, the court further ruled that the immediate shareholder of the investment manager was entitled to review the legal advice on matters where there was a common interest, but not otherwise. The court declined an invitation to go further than the established authorities, and held that the immediate shareholder was not entitled to share the material with its own shareholder (and so on up the corporate tree). The investors could therefore assert LPP against these indirect shareholders.

The more controversial submission was that there could be no LPP in the advice as against anyone at all, on the basis of the fraud exception to LPP (see box "The fraud exception"). The B&B group claimed that the exception was invoked because H secretly took advice from S against the interests of his own company. The court agreed that there was a strong prima facie case of iniquity made out as far as the advice addressed such claims. The result was that S's clients had no claim to LPP in S's advice.

The judgment highlights how the complex web of legal relationships not uncommon in the funds sector can easily tangle so that the boundaries between different interests become hard to identify.

There is little doubt that H's instructions were intended to benefit the investors; however, he proceeded without regard to his own fiduciary duties as a director. Advisers should be alert when acting on instructions from an agent with divided loyalties, mindful of the risk that their advice may not be privileged if sought in circumstances amounting to a prima facie breach of the agent's duty to one of his principals. The fraud exception does not require fraud in the criminal sense, and breach of a private law duty can be sufficient.

The court analysed the authorities as featuring a wrongdoer who "has gone beyond conduct which merely amounts to a civil wrong; he has indulged in share practice, something of an underhand nature where the circumstances required good faith, something which commercial men would say was a fraud or which the law treats as entirely contrary to public policy."

Also bound to catch attention are the court's conclusions on the status of the legal advice as against different companies in the B&B group. While the court turned to established authorities to decide the entitlement of the management company's immediate shareholder to review the advice, it turned to policy to decide the shareholder's entitlement to share the advice with its own shareholders. The reasoning is concise, and appears to rest on the court's desire to limit any encroachment on the basic rule of LPP. However, the decision suggests that the existence of an intermediate holding company will itself bring down the cloak of LPP as between a parent and subsidiary. Care will therefore be needed to ensure that any waiver of LPP in the parent's favour is not any wider than intended.