Legal Professional Privilege (Part 2)

Recently we discussed the general principles concerning legal professional privilege (‘legal privilege’) in Part One of this series. By way of example we examined the recent decision of The Commissioner of Taxation v Pratt Holdings Pty Ltd and PricewaterhouseCoopers [2005] FCA 1247.

We now turn to a number of practical issues. While legal privilege is divided into advice privilege and litigation privilege as reflected in sections 118 and 119 of the Evidence Act 1995, our article focuses on the problems relating to advice privilege.

Waiver of privilege

A client or their agent may express or impliedly forego a claim for legal privilege over a communication which they may otherwise be entitled to. This is caused by their conduct in relation to the confidentiality of the communication at issue. In such a circumstance the privilege could be ‘waived’.

Waiver may be express or by implication. Section 122 of the Evidence Act sets out waiver as occurring in circumstances where a party has knowingly and voluntarily disclosed the substance of the evidence. Disclosure waiver is an example of express waiver and occurs where a privileged document is knowingly and voluntarily disclosed to a third party. The Evidence Act uses the term "another person” rather than a "third party”. "Another person” is not defined in the Evidence Act.

Implied waiver can occur inadvertently and the conduct of the party arguing to maintain legal privilege over the communication must be considered, even when the party’s conduct is contrary to their intention.

Waiver was considered in depth by the High Court in Mann v Carnell (1999) 201 CLR 1. The decision found that waiver occurs where the conduct of the client is inconsistent with the maintenance of confidentiality. Considerations of fairness are relevant, but not an overriding principle. Mann v Carnell also supported the proposition that mere disclosure of a confidential communication to a third party does not necessarily waive legal privilege. However, to maintain legal privilege, the person who asserts the privilege must demonstrate that the communication is confidential and is provided to the third party on a confidential basis.

ATO Audit Reports

The Federal Court recently considered the test for waiver of legal privilege in Rio Tinto Ltd v Commissioner of Taxation [2005] FCA 1336. The case is a good example of inconsistency and inadvertent implied waiver.

As part of an appeal to the Federal Court regarding the denial by the Commissioner of a tax rebate on dividends Rio Tinto wanted to obtain documents from the Commissioner which it believed would assist in its argument against the denial of the rebate. The Commissioner objected to the production of these internal documents on the grounds they were protected by legal privilege.

Rio Tinto wanted to access documents relied upon by the Commissioner in exercising his discretion. The Commissioner had referred to legal advice obtained during the exercise of his discretion in both court documents and an Audit Report created and released by the Commissioner. The Audit Report included the following statement preceding the grounds which the Commissioner would be relying on:

"The Commissioner will be relying on the following grounds which have been confirmed by Senior Tax Counsel (….) and supported by AGS (….) and opinions obtained from counsel”.

"There is a dispute about the conversion ratio. Ampolex maintains that the correct ratio is 1:1 and has legal advice supporting this position.”

Leave has been sought to appeal the decision to the Full Federal Court.

Statements made to the ASX

In another case of implied waiver, the Supreme Court of Victoria in Switchcorp Pty Ltd & Ors v Multimedia Limited [2005] VSC 425, found legal privilege had been waived over legal advice referred to in an announcement made to the Australian Stock Exchange (ASX). Multimedia made a statement to the ASX in relation to the primary matter between Switchcorp and itself and stated:

"The Board’s lawyers have been instructed to vigorously defend the claim and have advised that the plaintiff’s claim will not succeed.”

In the present case, however, the statement set out above was found to be "a clear and deliberate disclosure of the gist or the conclusion of legal advice received by Multimedia from its lawyers” and therefore legal privilege was waived.

Conclusion

These decisions serve to alert tax, accounting and legal professionals to take care when creating a report or providing advice to, or on behalf of clients, in particular where communications with legal advisors form some part of that report or advice. The decisions make it clear that any disclosure of the contents of legal communications could inadvertently waive legal privilege over that communication. The decisions referred to above do not provide guidance as to when a form of words would be acceptable so as to allude to a matter without waiving legal privilege, but Multimedia did find that such a situation may exist.

The examples of statements which Courts have found to have waived legal privilege, set out above, demonstrate that the test for an acceptable form of words which would not waive legal privilege is very strict.

The issue of implied waiver may be irrelevant as the very provision of legal advice by a client to a third party may be an express waiver, or if legal advice is provided by a client’s legal advisors, at the direction of the client to a third party, the advice may not attract privilege at all. Where advice is in contemplation of litigation the argument for maintaining privilege is much stronger. The purpose for which a communication is made becomes a very important consideration.

Audit professionals and privilege

Audit professionals are in a unique position when dealing with legal advice in the course of a statutory audit of financial statements. The Corporations Act 2001 (‘Corporations Act’) requires certain standards of conduct to be met and maintained by an auditor during an audit under the Corporations Act. This duty can conflict with the principles of legal privilege when the auditor deals with legal advice during the course of the audit.

The Australian Taxation Office’s (ATO) Access and Information Gathering Manual states that the owner of a legally privileged communication may disclose its contents to a third party for a specific purpose without waiving that privilege. It demonstrates this with an example of a client being audited for the purposes of the Corporation Act by an audit firm. The client is required to provide their auditors with all of their communications, including legal communications, for the purpose of the audit. The client asserts this action has not waived privilege over the legal communications because the alternative of not disclosing these communications would be that the auditors would not have signed off on the accounts. The ATO upholds that in this circumstance legal privilege has not been waived as disclosure was made for the limited and specific purpose of conducting the audit.

Importantly, it can be inferred from the example above that the communications referred to were not created for the purpose of conducting the audit, rather provided to the auditors for the specific purpose of conducting the audit. This is a subtle and important difference. There is no question over whether the communication prima facie attracts legal privilege, rather whether the legal privilege has been waived.

Conversely, where communications are created for the purpose of an audit, legal privilege will not be attached to the communications from the outset. This is discussed further below.

The ATO’s position is consistent with Mann v Carnell above, that mere disclosure of a confidential communication to a third party does not necessarily waive legal privilege.

Solicitors Representation Letters

The receipt of legal advice by auditors such as Solicitor’s Representation letters for the purpose of an audit will not attract legal privilege.

In the Court of Appeal of New South Wales’ Supreme Court decision in Westpac Banking Corporation v 789Ten Pty Ltd [2005] NSWCA 321, the Court found that it makes no difference to the finding of legal privilege whether information relating to legal advice is provided to a client’s auditors directly by the client or by their solicitors at the direction of the client.

The sole or dominant purpose of the communication is paramount. Where the communication has been made for the purpose of an audit, it will not attract legal privilege. This is because the sole or dominant purpose is not for the purpose of giving or receiving confidential legal advice or anticipated or actual litigation.

Dominant Purpose

Westpac sought an order from the Court preventing 789TEN from having access to two letters as part of wider proceedings, arguing both letters were protected by legal privilege. The wider proceedings were brought by 789TEN against Westpac regarding an alleged breach of mandate, or terms of authority, by Westpac. Westpac argued the letters were protected under both legal advice privilege and litigation privilege.

The first letter was from Westpac to their solicitors requesting the solicitors advise Westpac’s auditors (PricewaterhouseCoopers ("PwC”)) of their opinion of an estimate of any financial settlement that might be incurred in the wider proceedings between Westpac and 789TEN. The second letter was from the Westpac’s solicitors to PwC fulfilling this request.

Westpac argued the letters were created for the purpose of providing legal advice to Westpac, thereby attracting the legal advice privilege and they were received by PwC as agent for Westpac. Legal advice privilege under s118 of the Evidence Act does not include communications involving third parties and as such, PwC would have to be acting as an agent for Westpac to argue the communications were privileged.

As noted above, Westpac also argued the letters were prepared for the dominant purpose of providing a professional legal service relating to the proceedings, and thereby attracted the litigation privilege.

The Court found the dominant purpose of the creation of the letters was so PwC could carry out its audit obligations. A purpose of the creation of the letters may have been to inform Westpac of whether their director’s estimate of its contingent liability with respect to the wider proceedings was correct or otherwise, but this was not the dominant purpose. The Court found the letters would have been prepared irrespective of such an intention as PwC required advice from Westpac’s law firm for the purpose of carrying out its audit obligations under the Corporations Act (the second letter) and such advice could only be provided with Westpac’s authorisation (the first letter).

Auditor as Agent?

At first instance, it was found there was nothing in the Corporations Act that would authorise PwC, as Westpac’s auditor, to act as an agent for Westpac. Rather, the Corporations Act dissuaded this idea.

The Court of Appeal did not comment on the Corporations Act and whether it prevented PwC from being an agent of a company they were auditing. However, the Court, agreed with the finding at first instance, noting there was no agency agreement between Westpac and PwC, and it would be impossible to regard PwC as receiving the relevant information as an agent for Westpac, particularly given PwC received the information for its own purposes.

Potential Reform?

The Court and the judge at first instance considered a passage from Auditing in Australia which it interpreted as encouraging managers of companies, when assessing contingent liabilities, to instruct their lawyers to provide contingency liability information to their auditors notwithstanding the fact the information will not be privileged. The alternative of not providing the information would be that the audit would be qualified.

The Court considered this is a problem which may require legislative intervention but such intervention must not extend the privilege beyond its intention and scope which is no different from that of the litigation privilege.

Conclusion

Communications created for the purpose of enabling the auditor to perform an audit will not attract legal privilege. Obtaining the communications directly from the legal advisors or from the client (having already obtained it for the purpose of the audit from the legal advisors) does not affect this finding. In contrast, the ATO accepts that merely disclosing to an auditor of otherwise privileged legal advice involves no waiver of legal privilege.

The matter may not be over however, as leave has been sought to appeal the decision to the High Court.

In-house Counsel and privilege

As noted above, legal privilege relates only to confidential communications between a client and their legal advisor acting in their capacity as an independent legal advisor for the dominant purpose of providing or obtaining legal advice will attract legal privilege.

In-house counsel refers to the circumstance where a legal advisor’s "client” is also that legal advisor’s employer. Questions can arise concerning whether advice provided in this circumstance will attract legal privilege. These questions can be based around whether the legal advisor has sufficient independence or whether they are in fact a legal advisor.

Section 117 of the Evidence Act defines "lawyer” simply as including "an employee or an agent of a lawyer” and defines a "client” to include an employee or agent of a client.

Vance Decision

In the recent decision of the ACT Court of Appeal in Commonwealth of Australia and Air Marshall Errol John McCormack in his capacity as Chief of Air Force v Russell Vance [2005] ACTCA 35 (23 August 2005), the Court of Appeal overturned a decision of the ACT Supreme Court where it was found that legal privilege in relation to in-house legal advice will only arise where the legal officer providing the legal advice holds a practising certificate or has a statutory right to practice.

The Court of Appeal overturned the Supreme Court decision by determining the appropriate test to apply in resolving whether documents are privileged in the proceedings, is set out in the Evidence Act, rather than the common law test.

The Court of Appeal found in applying these two sections, that legal privilege did not require the lawyer to hold any further qualifications than that of the position of lawyer. As a result the Court found the Evidence Act test for legal privilege will include a wider group of legal advisers and legal advice than that provided for in common law.

The Court found the presence of a practising certificate may be an important indicator that the lawyer is giving independent professional legal advice, but is not the only factor. Emphasis should be placed on the circumstances of the communication.

In Waterford v The Commonwealth of Australia [1987] HCA 25, the High Court (five judges sitting) confirmed the Commonwealth could claim privilege over legal advice obtained from within the Government. Most of the Court’s discussion concerned only the application of privilege over legal advice provided to the Government by Government-employed legal advisers. However, Brennan J considered that salaried lawyers are not to be "assimilated to the position of the independent legal profession for the purpose of determining the availability of legal professional privilege.” His Honour considered an in-house legal adviser’s independence differs when the legal adviser is in the employment of the Crown, and accordingly may attract legal privilege.

Dawson J disagreed with Brennan J and considered privilege should extend to communications between salaried lawyers and those who employed them. In contrast, Deane J considered advice provided by salaried lawyers to their employers would attract privilege where the lawyer was "listed on a roll of current practitioners, held a current practising certificate, or worked under the supervision of such a person.”

The other judges hearing the matter, Mason and Wilson JJ, did not consider legal privilege in relation to non-government in-house counsel.

Conclusion

As a result of the Vance decision, the common law position appears uncertain. Vance is possibly inconsistent with the High Court’s finding in Waterford by extending the privilege to non-Government in-house counsel and by suggesting a practising certificate is not fundamental to providing independent legal advice.

Accordingly, communications with or from a client’s in-house counsel may attract legal privilege and the appropriate care must be taken to avoid waiving this privilege if it exists.

Copies of legal advice

The High Court decision (seven judges sitting) of AFP v Propend Finance Pty Ltd (1997) 188 CLR 501, found that a copy document that is created for the dominant purpose of obtaining legal advice may be privileged. Further, a copy document may be privileged where the original document is not privileged. The key to determining whether a copy document is privileged is not the privilege status of the original but whether the copy has been made for a privileged purpose (also Spassked v FCT [2002] FCA 491).

Legal advice from foreign lawyers

Legal advice obtained from a foreign lawyer may also be privileged. The Full Federal Court in Kennedy v Wallace [2004] FCAFC 337 considered that a connection between advice sought and obtained and the administration of the Australian court system was not required. The case involved the receipt of legal advice by an Australian client from a foreign lawyer. Further, the Court considered to limit the privilege by excluding a foreign lawyer’s advice from legal privilege would undermine the rationale of the privilege.

Legal Professional Privilege (Part 3)

In the next part of this series we will examine practical issues arising in the briefing of lawyers and in briefing independent experts. We will also examine the practical operation of the ATO’s approach to handling claims of legal privilege as well as administrative concessions in respect of professional accountant’s working papers and Board papers on tax risk issues.

For more information please contact:

Michael Bersten, Partner Phone: + 61 2 8266 6858 Send email

Louise Massey, Partner Phone: + 61 2 8266 6427 Send email