Practical Law

In JSC BTA Bank v Ablyazov and others, the claimant Kazakhstani Bank sought disclosure of documents concerning Mr Ablyazov’s assets from Mr Ablyazov’s current and former solicitors. It was agreed that these documents would attract legal professional privilege unless falling within the so-called “iniquity exception”.

As the judgment arguably widens the application of this exception, those acting in cases where there are allegations of fraud should be aware of its potential application, even where there is no suggestion that they were aware of the fraud.

The question that I therefore seek to consider in this blog is, when will legal professional privilege cease to apply in respect of documents passing between a lawyer and his client in circumstances where there is no allegation of wrongdoing or knowledge of iniquity on the part of the solicitor?

The iniquity exception

Where a person consults a solicitor in furtherance of a criminal or fraudulent purpose (almost always, unbeknown to the solicitor), the resulting communications between the client and the solicitor do not attract legal professional privilege. This is known as the iniquity exception. However, when the iniquity exception applies is not a straightforward question and it is often said that it is rarely applied.

The Ablyazov litigation

The facts of the Ablyazov litigation are so extraordinary that they read like something from a Hollywood film script.

Mr Ablyazov became chairman of the Bank after its former chairman died in a hunting accident. However, Mr Ablyazov was removed from his position by the Kazakh government after a few years and fled to London after the Bank alleged that he had defrauded it of over US$6 billion. Despite defending the various cases brought against him on the basis that he was the victim of a politically-motivated campaign to eliminate him as an opponent of the regime, the English court gave judgment against Mr Ablyazov for some US$4.6 billion. It also debarred him from defending the proceedings by reason of his contempt of court in lying about and concealing his assets pursuant to various freezing and disclosure orders, for which he was sentenced by Teare J to 22 months imprisonment.

Mr Ablyazov went on the run from the British authorities. He was found and is currently in prison in France embroiled in extradition proceedings to both Russian and Ukraine. He is also the subject of live criminal proceedings in Kazakhstan where it is alleged that he ran an “organised criminal group”.

Mr Ablyazov has been consecutively represented by three firms: Clyde & Co, Stephenson Harwood and Addleshaw Goddard (the solicitors). The extent of their advice and involvement has varied, but the common theme is that they have all acted for Mr Ablyazov in relation to affidavits he gave concerning the disclosure of his assets and in the litigation concerning the worldwide freezing and receivership order against him. Of course, there is no suggestion that they were aware of any wrongdoing by Mr Ablyazov.

Mr Ablyazov’s evidence in relation to his assets was found to be “extraordinarily inadequate” (by Teare J). To take but one example, Mr Ablyazov told lies to the court during a two-day hearing in 2009 about a storage and distribution park in Moscow valued at between US$300 million and US$700 million. He said that he had transferred his 75% share in the park before the date of the worldwide freezing order. Clyde & Co refused to provide the transfer agreement on the basis that it was not caught by the terms of the worldwide freezing order. However, this turned out not to be true as the transfer agreement had been (unbeknown to Clyde & Co) fraudulently backdated.

Since 2009, Mr Ablyazov has committed numerous breaches of the worldwide freezing order. For instance, the court found that he dealt with loan rights over a piece of Russian real estate valued at US$80 million and, in 2010, it was found that Mr Ablyazov had a vast secret network of undisclosed companies and assets.

As part of the committal judgment, Teare J found that throughout the litigation, Mr Ablyazov (who was by this time represented by Addleshaw Goddard) had relied upon backdated and fabricated documentation and suborned the giving of false evidence on a wide ranging basis. The Court of Appeal went on to dismiss Mr Ablyazov’s appeal against his committal and found that:

“Mr Ablyazov’s contempts have been multiple, persistent and protracted, have embraced the offences of non-disclosure, lying in cross-examination and dealing with assets, and have been supported by the suborning of false testimony and the forging of documents… Mr Ablyazov, emboldened perhaps by the wealth at his disposal, which enables him to travel, hide and still instruct lawyers on a prodigious scale, continues to obstruct justice with an attempt at impunity for the consequences of this litigation.”

The issues concerning privilege

In the present case, the Bank sought disclosure of all documents provided to or produced by the solicitors relating to Mr Ablyazov’s assets or former assets. In support of its application, the Bank argued that:

• Legal professional privilege does not exist where the advice or litigation is in furtherance of a fraud or crime of similar iniquity (the iniquity exception). Disclosure may be ordered where there is a strong prima facie case that the iniquity exception applies (Kuwait Airways Corpn v Iraqi Airways Co).
• There was a strong prima facie case that the iniquity exception applied to all the documents the solicitors held concerning the former or current assets of Mr Ablyazov. While the Bank did not allege that the solicitors knew or were a party to any iniquity, the Bank’s case was that the solicitors were unwittingly retained and used by Mr Ablyazov to further his iniquitous strategy, which was designed fraudulently to deceive the Bank and the court as to the nature and extent of his assets by perjury, falsification of documents and wilful defiance of court orders on a vast scale.
• Accordingly, it was argued that disclosure should be ordered because the solicitors were likely to hold documents casting light on Mr Ablyazov’s beneficially owned assets, which might assist the Bank in executing its judgments and enforcing the court’s orders against him.

Mr Ablyazov’s response was, in summary, that it is insufficient to prevent privilege attaching because a solicitor is used in the conduct of litigation to advance a case on behalf of his client, which the client knows to be untrue and therefore involves perjury, or an attempt to deceive the other party and the court or disobey court orders. That is the “ordinary run of case” in which privilege applies. Although Mr Ablyazov’s conduct may have been seen as persistent and involving large sums, there was no principled distinction between his conduct and the “ordinary run of case”.

The legal problem: why doesn’t the iniquity exception apply in all fraud cases?

Longmore LJ summarised the iniquity exception in Kuwait Airways (No 6) as being if a person consults a solicitor in furtherance of a criminal purpose then, whether or not the solicitor knowingly assists in the furtherance of such purpose, the communications between the client (or his agent) and the solicitor do not attract legal professional privilege.

Numerous cases have also confirmed that the principle is not confined to criminal purposes, but extends to fraud or other equivalent underhand conduct that is in breach of a duty of good faith or contrary to public policy or the interests of justice (BBGP v Babcock & Brown).

The underlying rationale for legal professional privilege, which the iniquity exception defeats, was set out by the House of Lords in R v Derby Magistrates Court ex parte B:

“The client must be sure that what he tells his lawyer in confidence will never be revealed without his consent. Legal professional privilege is thus much more than an ordinary rule of evidence, limited in its application to the facts of a particular case. It is a fundamental condition on which the administration of justice as a whole rests.”

Consequently, such privilege is not prevented from attaching merely because the solicitor is engaged to conduct litigation by putting forward an account of events that the client knows to be untrue and which therefore involves a deliberate strategy to mislead the other party and the court, and to commit perjury (R v Snaresbrook Crown Court Ex p DPP [1988] QB 532). Thus, in Snaresbrook, the Court of Appeal distinguished between the “ordinary run of cases” and those cases where the iniquity exception applies:

“Obviously, not infrequently, persons allege that accidents have happened in ways other than the ways in which they in fact happened, or that they were on the correct side of the road when driving while actually they were on the wrong side of the road, and matters of that sort… [The iniquity exception] applies in my view to circumstances which do not cover the ordinary run of cases such as this is.”

However, as is apparent from this quotation, the Court of Appeal gave little guidance about where the dividing line lies between the “ordinary run of cases” where a defendant has lied, and the cases where the iniquity exception applies.

Kuwait Airways (No 6) was also vague about where this line is drawn, focusing instead on the scale of the pervasion of justice:

“The present case is far from the ordinary run of cases envisaged [in Snaresbrook] and is much more than a mere case where, in the words of Lord Goff, a client gives wrong information to his solicitor which ‘if acted upon would lead to the commission of perjury’. Here there was a widespread conspiracy to deceive the English Court which was acted upon and has proved to have led not only to perjury but to forgery and the pervasion of justice on a remarkable and almost unprecedented scale.”

Court orders disclosure

In Ablyazov, Popplewell J found that the iniquity exception applied and the solicitors should give disclosure of documents relating to Mr Ablyazov’s assets and former assets. He stated that the line to be drawn between “the ordinary run of cases” and those cases where the iniquity exception will apply is based on three principles:

• Legal professional privilege attaches to communications between solicitor and client which are confidential. The quality of confidence is a prerequisite to the privilege, because it is the protection of such confidence which forms the bedrock of the rationale for the privilege as essential to the administration of justice.
• Communications made in furtherance of an iniquitous purpose negate the necessary condition of confidentiality. It is this which prevents legal professional privilege attaching to communications for such purpose.
• The reason that communications in furtherance of iniquity lack the necessary quality of confidentiality is that communications can only attract confidentiality if they are made in the ordinary course of professional engagement of a solicitor. It is the absence or abuse of the normal relationship that arises where a solicitor is rendering a service falling within the ordinary course of professional engagement, which negates the necessary confidentiality and therefore the privilege. The “ordinary run of cases” involve no such abuse: a solicitor instructed to defend his client of a criminal charge performs his proper professional role in advancing what the client knows to be an untrue case.

Practical implications for solicitors representing fraudsters

The majority of us rarely deal with cases where a fraud is committed on the scale of that committed by Mr Ablyazov. However, whether we will have to disclose privileged documents in cases concerning much more “mundane” frauds is something we should all be aware of.

While it seems likely that Ablyazov will be appealed, the current position appears to be that if the client’s iniquity puts the advice or conduct outside the normal scope of a professional solicitor-client relationship, or renders it an abuse of that relationship, a communication for such purpose cannot attract legal professional privilege.

What this means in practice is far from clear, although Popplewell J gave the following illustration:

• In a criminal case, where a lawyer is engaged to put forward a false case supported by false evidence, the client will be using the solicitor to provide the services inherent in the proper fulfilment of such engagement, even where in denying the crime the defendant puts forward what the jury finds to be a bogus defence.
• However, in civil proceedings, where there is a deception of the solicitors in order to use them as an instrument to perpetuate a substantial fraud on the other party and the court, that may well be indicative of a lack of confidentiality, which is the essential prerequisite for the attachment of legal professional privilege.

Thus, “the deception of the solicitors, and therefore the abuse of the normal solicitor-client relationship, will often be the hallmark of iniquity which negates the privilege”. In other words, the relevant distinction appears to be between circumstances where the client is:

• Advancing (through his evidence and presentation of his case) a false case for the purpose of defeating the case against him. While it involves perjury by the client, it still retains the protection of privilege.
• Misusing his solicitor for some extraneous purpose, over and above advancing a false case. In these cases, privilege will be lost as the iniquity exception will apply.

The difficulty with this distinction is that it is almost always possible to recast what has been done as “merely” advancing a misleading case. It may not be possible to see what extraneous purpose the client might have for advancing that case. That is even more difficult in relation to interlocutory matters, where the location of assets for example does not relate to the substantive case in the first place. The implications of Ablyazov could therefore be seen as potentially very far reaching.

However, there are two things to be mindful of that may reduce the ambit of the iniquity exception, and which suggest that Ablyazov does not represent a significant expansion of that exception:

• Although the principles should apply in the same way at an interlocutory stage, it is less likely that communications in the context of preparation for a substantive trial will fall within this exception. They are inherently more likely to be directed towards advancing or defeating (even if by lies) a particular case for the purpose of winning that case, rather than for an extraneous purpose. However, as noted in Kuwait Airways (No 6), particular caution will have to be shown in relation to interlocutory matters – when the facts are not established – and so it is likely that this kind of application will be of greatest practical utility at the post-judgment enforcement stage in the search for assets, as in Ablyazov.
• Counsel for Mr Ablyazov argued, quite rightly in my view, that the number of perjuries or concealments should form no principled distinction from the ordinary run of cases and nor should the sums of money involved. Thus, if there is to be a clear principle concerning when the iniquity exception applies, it should be capable of applying to a case concerning a single perjury and/or a modest sum of money. However, Popplewell J’s comments in Ablyazov about the principle applying where there has been a “substantial fraud on the other party and the court” are potential grounds for distinguishing the judgment in less “extravagant” fraud cases.