Discovery of an Auditor's Forensic Report and Legal Privilege
Vertex Ltd sues its former auditors, Harney & Co, for negligent audit of its 2022 financial statements. Vertex alleges that the auditors failed to detect a €1.4m revenue overstatement. In a notice for particulars, Vertex seeks discovery of 14 categories of documents, including: (a) board minutes and management accounts; (b) emails between Harney & Co and its solicitors between January and June 2023, when the claim was threatened; (c) a 60-page forensic accounting report commissioned by Harney & Co in July 2023 after receipt of Vertex's letter of claim; and (d) draft audit working papers. Harney & Co refuses categories (b) and (c) on the ground of legal professional privilege. It says the report was prepared for the dominant purpose of defending the claim. Vertex argues that the report contains factual analysis that cannot be obtained elsewhere. The discovery motion is listed for 12 December 2024. Vertex has already spent €28,000 on discovery.
1. Advise whether categories (b) and (c) are privileged.
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Category (b) is likely to be privileged. Legal advice privilege protects confidential communications between a client and a lawyer made for the purpose of giving or receiving legal advice, whether or not litigation is contemplated. Emails between Harney & Co and its solicitors in the period when a claim was threatened will ordinarily fall within that privilege, and litigation privilege may also attach if litigation was reasonably contemplated and the communications were for that purpose. Category (c) requires a closer analysis. Litigation privilege protects a document created for the dominant purpose of pending or contemplated litigation, and it can extend to a report by a non-lawyer such as a forensic accountant if the dominant purpose was to defend the claim. The fact that the report contains factual analysis does not automatically destroy privilege, because the test looks to purpose, not content. However, pre-existing factual documents that were not created for the litigation are not privileged merely because they were sent to the accountant or exhibited to the report. Vertex should therefore distinguish between the report itself and the underlying source material. On the facts, the report commissioned in July 2023 after the letter of claim is likely to be protected by litigation privilege.
2. What should Vertex do next? Consider the relevance and necessity test and costs.
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Vertex should not bring a discovery motion seeking categories (b) and (c) in their entirety. Under Order 31 r.12, discovery must be relevant to the matters in question and necessary either for disposing fairly of the proceedings or for saving costs. Even if the report is relevant, privilege is a valid objection, and a motion to compel production of privileged material will almost certainly fail. The court may inspect documents to determine a privilege claim, but it will not order production merely because the other side says the material is useful. Vertex should focus on categories (a) and (d), which are factual records and not privileged, and should seek a list of documents and, where appropriate, interrogatories or a notice to admit facts. It can also ask Harney & Co to identify the factual documents relied on in the report, without demanding the report itself. If Vertex believes the report has been waived into the public domain or was created for a non-litigation purpose, it should put that case on affidavit with evidence, not mere assertion. Bringing a failed motion would expose Vertex to a costs order and add to the €28,000 already spent. A targeted request and, if necessary, a narrowed motion is the proportionate course.