How to handle privileged communications in international arbitration

Ted P Pearce

Bradley Arant, Boult Cummings, Charlotte, North Carolina

tpearce@bradley.com

When parties come together to negotiate International Master Franchise Agreements they focus on royalty splits, development schedules and the boundaries of the territory granted to the master franchisee. Alternative dispute resolution provisions are usually only given little consideration, much less how privileged communications are to be handled if a dispute arises. While privilege issues are not as glamorous as the seemingly core terms of the agreement, the issue can become paramount if the master franchise relationship breaks down and results in the dispute being submitted to international arbitration. As the arbitration winds its way towards a hearing the parties realise that no attention has been given to the exchange of allegedly privileged communications or whether the substantive law they agreed upon covers privilege issues. Moreover, since the confirmation of an arbitral award may occur in a jurisdiction other than the seat of the arbitration, one question may be whether the treatment of privileged communications can be seen as affecting the fundamental fairness of the arbitration proceeding, which could determine whether the award is confirmed or vacated?

Privilege issues that are not handled in pre-contract negotiations will be left to the tribunal to decide whether communications are privileged, and if so, whether they are required to be produced, and whether there has been any waiver of an assumed privilege. This article will address what has been a widely debated but unresolved issue of what may be considered the appropriate method for applying the attorney-client privilege in international arbitration.

The attorney client relationship is a sacred relationship that permits clients and their counsel to explore numerous issues without worrying about whether non-parties will have access to their discussions and written communications. As noted by the US Supreme Court in the Upjohn case, ‘the attorney client privilege exists because “sound legal advice and advocacy serves the public ends” […] such advice or advocacy depends upon the lawyer’s being fully informed by the client.’.[1] Without the protections afforded by the attorney-client privilege communications and the relationship between the client and their attorney would be less predictable and more chaotic.

Not surprisingly, countries outside the United States approach the attorney-client privilege differently, often depending on whether a country’s judicial system is grounded in civil or common law. For example, within common law jurisdictions, such as the US, legal advice privilege aims to facilitate an honest uninhibited discussion between client and lawyer by shielding the client from extensive disclosure rights.[2] Conversely in civil law jurisdictions ‘legal advice privilege derives from overarching obligations of confidentiality. Breaches of that duty may invite disciplinary action against the lawyer and possible criminal sanctions.’[3] Moreover, countries such as Belgium, Finland and France do not recognise the privilege for in-house counsel, while Chinese courts and the European Court of Justice have implied that they do not recognise privilege for any counsel outside their respective jurisdictions.[4] The absence of unified treatment of the attorney client privilege can undermine the expectations of parties to an arbitration on how their client communications will be treated.

Most parties that choose arbitration in their international agreements do so because they believe this dispute resolution procedure will provide them with efficiency, informality, expertise of the arbitrator, and fairness. Accordingly, the tribunal has the responsibility of preventing inefficient, delayed and confusing proceedings.[5] As a creature of contract, parties negotiating arbitration procedures are free to address myriad issues that they believe will arise in arbitration. Well-constructed arbitration provisions will be likely to address the number of arbitrators, how they are chosen, the jurisdiction of the arbitrator(s), the allocation of costs and attorneys’ fees, choice of substantive law, the seat of the arbitration, and the scope of damages that the arbitrator can award. While certain discovery issues may be addressed, like the number of depositions that can be taken and how many interrogatories may be asked, what is not likely to be covered is the admissibility of alleged privileged communications. Consequently, those issues may be left to the discretion of the tribunal without providing it with any guidance on whether a party can compel the production or disclosure of these communications.

While most international agreements address the issue of governing substantive law, the designation of applicable law may not be enough to address the issue of privileged communications. In the first place, the preliminary question is whether the issue of privilege is governed by substantive law or procedural law? If document production is a matter of procedure are there procedural due process issues that must be taken into consideration? In other words, will the law of the situs of the arbitration proceeding control? Civil law systems generally characterise privilege as one of substantive law. Conversely, common law jurisdictions generally characterise it as an issue of procedure. Consequently, if the tribunal decides that privilege is a procedural issue then the law of the situs of the arbitration could trump the parties’ designation of substantive law. In addition to the issue of procedural versus substantive law, there arises the question of whether the issue of privilege will be governed by statute, ethical codes, international norms or local law. And most importantly, what is the role of the tribunal in this calculus?

Few institutional arbitration rules

In the absence of a contractual clause privilege issues are left to the tribunal’s discretion without much to guide its decision-making process. Without guidance from substantive law the arbitrator will often look to the rules embodied in various arbitration institutions such as the International Bar Association (IBA) or the International Centre for Dispute Resolution (ICDR), which may be incorporated in the parties’ arbitration provision. Yet even reference to these rules may not be enough. As an example, Article 9 of the IBA Rules on the Taking of Evidence in International Arbitration suggests that the arbitrator consider the need to protect the confidentiality of a document as well as the expectations of the parties when addressing the admissibility of a potentially privileged communication.[6] Specifically, Rule 9(2)(b) permits the tribunal to exclude any evidence on grounds of ‘legal impediment or privilege under the legal or ethical rules determined by the Arbitral Tribunal to be applicable.’[7] Beyond those guides the admissibility of those documents is left to the tribunal. Likewise, ICDR rule 24(5) provides the only reference to confidential documents. In that section ‘the arbitrator may condition any exchange of information subject to claims of commercial or technical confidentiality on appropriate measures to protect such confidentiality’. In essence, the issue of confidentiality is left to the arbitrator’s discretion. While Article 24(2) does provide the parties the ability to deviate from the general exchange of information by written agreement with consultation from the arbitrator, the fact is that after the dispute reaches arbitration the parties’ position as to production of documents has already hardened so that it would be less likely that an agreement on this issue of privilege can be reached at this stage of the dispute.

Possible solutions

Noted legal scholars who have addressed this issue agree that there is no lodestar to guide tribunals in grappling with international privilege issues. Instead, they have suggested a number of solutions trying to balance both ‘the parties’ expectations upon entering arbitration and balancing their respective positions so as not to tip the scales in favor of one over the other’.[8] The options are far ranging, with none being a silver bullet. The range of possibilities include: the law of the seat of the arbitration; the law governing the substance of the dispute; the law of the place where the document is located; the law of the jurisdiction where the attorney is located who holds the document; the law of the jurisdiction most closely related to the privileged document; the law where the document was created; conflict of laws approach; and least- and most-favoured nation approaches. Advantages and disadvantages can be found in each of these approaches. With each option one party may achieve its expectations but will the approach be considered fair?

While there is no consensus on what is the best approach that a tribunal should undertake to both meet the parties’ expectations while maintaining fairness, one noted legal scholar in dispute resolution concluded that in the absence of a contractual agreement the most-favoured nation approach is the most practical choice. According to the proponent of this choice, she believes that the most-favoured nation standard ‘augments predictability while reducing confusion and, in the process complies with the parties’ expectations and notions of equality.’[9]

The most-favoured nation approach requires ‘the tribunal to apply the law of the most protective standard to both parties’.[10] The law to be applied is the law of the jurisdiction where the party has its residence, not where counsel is admitted to the bar.[11] In essence, the most restrictive law would prevent disclosure of privileged documents even though the law of the other jurisdiction would not restrict the production or use of privileged documents or information. Since this approach favours restrictions on disclosure, a party entering arbitration can be confident that it will not be asked to produce documents that would be privileged under its own law. It would seem that this approach would satisfy the need for fairness and equality. The proponent also suggests that this approach will discourage forum shopping since both parties could take comfort in that to the extent that the more favourable law embraces the concept of privilege both parties are protected.

While the most-favoured nation approach seems to satisfy the issue of fairness and party expectations, there are those that would argue that this approach is not without its drawbacks. For the party that has no expectation of privilege, the most favoured nation approach may deprive it of the designated privileged communication, which it determined was necessary to prove its claim in the arbitration. Therefore, adopting this approach could be seen as interfering with the tribunal’s duty to establish all the facts of a case and all the parties a fair opportunity to present their case.[12]

Conclusion

When drafting international franchise agreements, it is the responsibility of the parties to provide sufficient time and thought to the parameters of its dispute resolution provisions. When drafting those provisions, if the parties are going to rely on arbitration, they should try to provide the tribunal with as much guidance as possible for it to make decisions that may have far reaching impact to the parties. Among these issues are how to handle privileged documents and conversations that parties may deem to be protected by the attorney client privilege. By articulating a standard to be used in the arbitration the parties will provide a certain amount of predictability to their chosen dispute resolution mechanism. While there are many approaches that the parties can take to guide the tribunal in deciding privilege issues, the use of the most-favoured nation approach, is seen to satisfy the twin goals of satisfying the parties expectations and the fairness of the proceedings. If the parties fail to address the handling of the privilege issue from the outset, they risk expending considerable resources in legal and arbitration fees to determine the admissibility of these communications in the arbitration proceeding.