Good news for regulators: NSW Court of Appeal upholds ASIC's qualified privilege defence

By Ian Bloemendal, Nick Josey, Chloe Hogan and Adam Rose
22 Jul 2021
Regulators should continue to be prudent in their approach to dealing with sensitive material, especially where that material has not yet been fully substantiated or a formal investigation has not commenced.

A recent decision of the NSW Court of Appeal has upheld the availability of qualified protection for regulatory authorities against defamation claims made against them. Regulators should nevertheless avoid complacency and take active steps to act reasonably to enable a statutory qualified privilege defence, which ASIC failed to obtain (although it did succeed on its qualified privilege defence at common law). Regulators should also carefully vet proposed publications to ensure compliance with defamation laws since getting it wrong may still have expensive consequences.

In the decision of Schlaepfer v Australian Securities & Investments Commission [2021] NSWCA 129, the New South Wales Court of Appeal found that the Australian Securities and Investments Commission (ASIC) defamed trader Daniel Schlaepfer and companies owned by him in the course of advising Australian stockbrokers (including UBS, Bank of America, Merrill Lynch and Credit Suisse) that ASIC was concerned that unlawful market manipulation had been committed (an allegation of layering the market). ASIC was, however, successful in maintaining its qualified privilege claim at common law. This provided a complete defence to Mr Schlaepfer's damages claim, although it failed in its truth defence (which occupied a substantial portion of the proceedings). ASIC has nevertheless had to bear a considerable amount of unrecoverable costs for both the initial trial and appeal after Mr Schlaepfer was successful on most issues.

What is "qualified privilege" and when will it apply?

Qualified privilege is a defence of "confession and avoidance" at common law and under statute to defamation claims. It recognises that, in some circumstances, the public interest requires a person to be able to make frank and uninhibited communication to a recipient without the fear of being held liable for defamation, even if it turns out that the statements are incorrect.

In Schlaepfer, the Court of Appeal noted common examples where this defence may be required. These examples included reports to police, statements made in response to reference checks for the purpose of employment, and complaints to regulators of professional misconduct.

Different tests apply under both common law and statute:

  • Common law: looks to whether the maker and recipient of a defamatory statement each have an interest in what is conveyed (generally referred to as a "community of interest"). This does not require a perfect correspondence of interest – the interest may be founded on a duty to speak and a duty to listen to what is conveyed. It also does not contain the same "reasonableness" test that is required for statutory qualified privilege. Reasonableness is not an element of the defence of qualified privilege at common law.
  • Statute: defamation legislation enacted across different Australian States and Territories generally requires that:
    • the recipient has an interest or apparent interest in having information on some subject;
    • the matter is published to the recipient in the course of giving to the recipient information on that subject; and
    • the conduct of the defendant in publishing that matter is reasonable in the circumstances.

As the defence is founded on notions of public policy, courts have traditionally set the bar high in deciding when freedom of communication outweighs an individual's right to the protection of his or her reputation.

The decision of the New South Wales Court of Appeal and the qualified privilege defence

The appeal decision followed an initial ruling in November 2019 by Justice Fagan in the Supreme Court of NSW which found, among other conclusions, that Mr Schlaepfer had not been identified in the communications to the brokers by ASIC, but that regardless ASIC was otherwise protected from liability by the defence of qualified privilege (both at common law and under statute).

In deciding the appeal, Justice McCallum (Justices Meagher and White agreeing) noted that the primary judge's conclusion on the issue of identification flowed from his conclusion on the issue of publication: that is, on the primary judge's finding as to the words spoken by Mr Yanco, no particular corporation or organisation was identified. The Court of Appeal disagreed. It found instead that an identification of Mr Schlaepfer was established by a contemporaneous email which was sent after Mr Yanco (for ASIC) had called a broker, and by a separate market update that referred to an individual who was "unmistakably Mr Schlaepfer".

The Court of Appeal also rejected the primary judge's findings that the defence of qualified privilege under section 30 of the Defamation Act 2005 (NSW) was made out, noting that the "fact that Mr Yanco's communications were made without any opportunity to respond was fatal to the element of reasonableness required to be established in order to make out the statutory defence". Despite this, ASIC was able to rely on the defence of qualified privilege at common law (which does not include a test for the reasonableness of the conduct) as the relevant community of interest existed having regard to ASIC's responsibilities and functions.

Accordingly, notwithstanding a positive finding that it had defamed Mr Schlaepfer, ASIC was ultimately successful in relying on a defence of common law qualified privilege to avoid a damages payout, and the lawsuit was consequently dismissed. ASIC nevertheless faced cost consequences for failing to establish its "truth" defence which occupied a good portion of the proceedings, as Mr Schlaepfer was required to only pay one third of the costs of the trial below and the appeal, as his reputation was vindicated despite the loss.

ASIC protected despite engaging in conduct that was not "reasonable"

In Schlaepfer, the main defamatory conduct complained of included:

  • statements made by ASIC and Mr Yanco to senior executives of a number of major stockbrokers in Australia in November 2014. These statements included comments that ASIC was concerned that Mr Schlaepfer's company was engaging in a form of market manipulation known as "layering"; and
  • a market surveillance update that was published after many of the above statements were made, which identified a "former trader at Swift" as the founder and owner of Merlito and Select Vantage.

The Court separately dealt with the qualified privilege defences under both the common law and NSW's Defamation Act 2005 (NSW).

Statutory duty

The principal issue in dispute on appeal in relation to the statutory qualified privilege plea was whether ASIC's conduct in publishing the information was "reasonable" in the circumstances.

The Court found that the communications were made without any opportunity for Mr Schlaepfer to respond. This was fatal to the element of reasonableness, noting the:

  • pre-emptive nature of the step taken (prior to ASIC commencing any civil penalty action or directing Mr Schlaepfer's bank to terminate the business account), and
  • extremely serious nature of the step taken (as it would clearly have severe reputational and business impacts).

Common law

The main question at common law was whether the relevant "community of interest" existed so as to warrant the protection of the communication. In considering this issue, the Court noted ASIC's extensive powers and responsibilities in monitoring and promoting market integrity and consumer protection in relation to the Australian financial system.

The Court ultimately found that ASIC did not require an express legal duty to publish the information, rather, the question was whether the community of interest existed for the occasion on which it was published. Ultimately, the Court considered that the relevant community of interest existed.

It was irrelevant that ASIC had other regulatory options available to it that may have been less "incendiary" than making the communications to the stock brokers – that went to the element of "reasonableness", which is only relevant when considering whether a statutory duty was owed.

Accordingly, the appeal was dismissed.

Implications for regulators and the regulated

This case has clear ramifications for both regulatory bodies and market participants.

In Schlaepfer, ASIC's conduct was ultimately not condoned by the Court, with the Court of Appeal noting that:

"Although ASIC has succeeded in establishing the defence of qualified privilege at common law, that is a defence of confession and avoidance. To put the matter another way, Mr Schlaepfer has established in the appeal that he was defamed, but defensibly so."

So, while regulatory authorities are offered some comfort by the Court's broad approach to circumstances in which a shield from defamation claims may apply, this judgment should not be treated as permission for those authorities to engage in defamatory conduct.

Regulators should continue to be prudent in their approach to dealing with sensitive material, especially where that material has not yet been fully substantiated or a formal investigation has not commenced.

On the other hand, the judgment recognises that in the performance of their statutory duties, a regulator may not always undertake their role or reach conclusions in a perfect manner, and the defence of qualified privilege is available where there is no malice. Such a defence, may, however, come at a cost if other defences (such as truth) are also pleaded and are lost, in circumstances where they occupy a lot of the time required at trial.

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