In a long running case, Sports Direct refused to provide 40 documents and emails relating to information provided to Grant Thornton, the company’s auditors, about the arrangements with Barlin Delivery Ltd.

The company argued that the documents were covered by legal advice privilege and should not be disclosed, and took the case to the Court of Appeal.

The Court of Appeal ruled in favour of Sports Direct, stating that the recipient of a notice by the FRC requesting information under the Statutory Auditors and Third Country Auditors Regulations 2016 (SATCAR) is not required to produce legally privileged documents [Sports Direct International plc and the Financial Reporting Council, [2020] EWCA Civ 177].

This decision applies whether the person entitled to the privilege is the auditor under investigation or the audited entity, and reverses the previous decision of the High Court case.

The Court of Appeal heard that Sports Direct provided around 2,000 documents to the FRC but withheld 40 on the grounds that they are covered by legal professional privilege (LPP).

They comprised emails and attachments to emails sent to or by Sports Direct's legal advisers, either internal or external.

The legal advice that Sports Direct sought related to various matters but included, for example, a challenge by the French, Irish and Finnish tax authorities to the arrangements devised by Sports Direct and its adviser Deloitte in respect of VAT on the international sales of SDR.

Sports Direct has declined to say exactly what the attachments to the withheld emails are but has stated that they include for example contracts between a subsidiary and a third party.

The Court of Appeal said there were two elements to consider.  The first is the ‘infringement issue’ regarding whether or not the retailer is entitled to withhold the 40 documents.

The FRC argued that although the emails do contain material that would ordinarily be regarded as protected by LPP, they fall within a narrow exception recognised in the case law which means that in the particular circumstances of this request there would be no infringement of Sports Direct's privilege if the emails were handed over.

The regulator also sought to argue that any infringement would be a technical infringement only and would be authorised by the SATCAR regime.

The Court of Appeal did not agree with the FRC’s view, previously supported in the High Court, that while it cannot require the disclosure of documents in which Grant Thornton is entitled to claim privilege, it is entitled to compel the disclosure of documents in which Sports Direct claims privilege, because Sports Direct is not the target of the investigation under SATCAR.

The Court of Appeal said there was no justification either for the existence of a no infringement exception to the protection conferred by LPP or for the application of some lower threshold for implying a statutory override on the grounds that any infringement of Sports Direct's LPP would be technical.

The second area of dispute concerned the so-called ‘communication issue’. The FRC argued that even if the emails themselves were protected by LPP, some of the attachments to those emails were pre-existing documents and were not protected by LPP simply by being attached to privileged emails.

The communication issue related to 19 emails which had 21 attachments. The Court of Appeal said that the emails the emails meet the four criteria as to relevance, date, custodian, and search terms in order to be covered by LPP.

However, some of the attachments to the emails were pre-existing documents which, looked at by themselves separately from the emails, would not be protected by LPP. Those attachments taken by themselves do not meet the four criteria set out in the FRC’s notice, and only fall within its scope if they are treated as part and parcel of the email to which they are attached.

The Court of Appeal concluded that if the email is itself privileged, that does not automatically mean that an attachment which is a pre-existing document is also privileged. This is because privilege does not protect either the document itself or the fact that it was sent to a legal adviser under cover of a privileged communication.

As a result, the court allowed Sports Direct’s appeal in relation to the emails that are covered by LPP, which means these emails do not have to be passed over to the FRC.  However, it dismissed the appeal in relation to the attachments to those emails in so far as those attachments are not themselves privileged.

FRC and Sports Direct were last at the High Court in September 2018.

FRC in legal landmark over Sports Direct papers

Sports Direct International plc and the Financial Reporting Council, [2020] EWCA Civ 177] ruling