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Privilege and parties’ expectations in international arbitration

Legal privilege was developed in common law jurisdictions to limit the scope of parties’ disclosure obligations under the local rules of civil procedure. However, since the disclosure obligations in continental procedural law traditionally were very limited, no corresponding privilege rules were developed in civil law jurisdictions.

International arbitration provides a forum for cross-border disputes between parties from different legal traditions, who are represented by counsel subject to different ethical rules. Accordingly, no common rules on privilege have been developed in the arbitration arena. For this reason, this system has become inevitably unbalanced and hard to navigate.

One notable example in the international arbitration context is the IBA Rules on the Taking of Evidence in International Arbitration 2010 (IBA Rules). While they purport to strike a balance between the common law and civil law procedural traditions, the IBA Rules are developed on the assumption that production of documents in possession of one of the parties to arbitration may be ordered at the request of the other party (Article 3 of the IBA Rules). At the same time, they acknowledge that “legal impediment or privilege under the legal or ethical rules determined by the Arbitral Tribunal to be applicable” would bar the production of documents (Article 9(2)(b) of the IBA Rules).

The question arises therefore as to which rules on privilege apply in international arbitration. Some commentators advocate the approach driven by the “common expectations of the parties”, whereas others suggest that the most “most protective privilege rules” should apply. Still others promote that the application of national law rules on privilege should be applicable by the arbitral tribunal (for example, by reference to the jurisdiction where an external counsel is qualified, or where the client is incorporated). Arguing in favour of the application of national law rules, Gary Born dismisses the civil law parties’ concerns that they may be denied privilege protection because their national law did not develop such protections. He suggests “a more nuanced consideration of what ‘privilege’ rules would be recognized by civil law party’s jurisdiction in such circumstances” (Gary Born, International Commercial Arbitration, Second Edition, 2014, page 2387).

The issue can be illustrated by the following hypothetical. Let’s assume that Party A, incorporated in England, anticipates a potential dispute with Russian Party B under a contract and obtains legal advice from an English lawyer, C. Let’s further assume that the board of directors of Party A receives an internal memorandum drawn up by the relevant commercial division of Party A, which identified, in particular, the real reasons why Party A has not performed the contract with Party B. Party B also obtains a letter of advice from its Russian lawyer D, and Party B’s board is also presented with an internal memorandum outlining the background of the relationships between the parties and Party B’s commercial division’s view on the difficulties with the contract.

Advice given to Party A by its lawyer, C, will be protected from disclosure by legal advice privilege, but the internal memorandum would not. However, for Party B, as a matter of Russian law, technically neither the legal advice, nor the internal memorandum are protected by any privilege (beyond commercial confidentiality).

If Party B commences litigation against Party A in the English courts, it would (subject to other procedural requirements) likely be allowed to obtain disclosure of the internal memorandum, but not the legal advice. Would Party A be better off from a disclosure perspective if it commenced litigation against Party B in the Russian commercial courts? Looking only at the rules on privilege, one might be tempted to say yes. In practice, the answer is no.

Russian procedural law provides that the application to compel disclosure shall:

  • Identify the piece of evidence.
  • Explain what relevant facts of the case may be proven by such evidence.
  • Explain the reasons why the applicant is unable to obtain this evidence without the court’s assistance.
  • Identify the place where such evidence is located.

In practice, the applicant will be unable to identify both the legal advice, and the internal memorandum with sufficient details to obtain an order for disclosure by a Russian court. The mere allegation that such documents exist would not suffice.

The position may be different if such a case were referred to arbitration. However, the approach should indeed be more nuanced than simply ordering each of the parties to disclose non-privileged information (such as the internal memorandum to the board of directors of Party A, and legal advice and the internal memorandum from Party B), as it will likely lead to unfair results in a cross-cultural context and jeopardize the expectations of the parties to arbitration.

A nuanced approach, such as that suggested by Gary Born, may require the tribunal to take a broader view taking into account the parties’ respective backgrounds and their likely expectations. This means that each party’s national rules of privilege cannot be taken in isolation without any reference to the legal context in which they were developed, nor should they be applied in a vacuum as the only controlling factor for the scope of document production in arbitration. Rather, absent any clear agreement between the parties to establish common rules, the arbitral tribunal should take into account the document production traditions in the respective parties’ home jurisdictions (with rules of privilege being potentially part of it) when devising fair and equal rules on document production for a particular case in front of it.

Consequently, instead of thinking of what rules of privilege apply when deciding on each party’s request for document production, both the parties and the tribunal should consider each party’s national rules of privilege as only one of the factors which might potentially affect rules on document production to be agreed upon. Ideally this needs to be discussed at the case management conference at the outset of the proceedings.

 

Norton Rose Fulbright Andrey Panov

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