Privilege and multidisciplinary partnerships: Federal Court hands down critical privilege guidance

By Amber Agustin, Phil Bisset, Luke Furness and Meera Pillai
14 Apr 2022
The PwC case demonstrates that the structural differences between how work is undertaken within different types of firms is fundamentally relevant to whether legal professional privilege will attach to communications.

Further to our initial analysis, the Federal Court has released detailed reasons in the ATO's largely successful legal professional privilege challenge against PwC and one of its clients. All taxpayers using multidisciplinary partnerships should review the judgment and their arrangements.

Key privilege risks in a nutshell

Of benefit to taxpayers dealing with the ATO and other regulators, is the final judgment in Commissioner of Taxation v PricewaterhouseCoopers [2022] FCA 278, which contains more details about the structuring of the advisor-client relationship and the reasons for the legal professional privilege (LPP) claims. Key risk factors for taxpayers engaging "Big 4" Professional Services firms and multidisciplinary partnerships (Big 4/MDP firms) flowing from the judgment include:

  • where both lawyers and non-lawyers are providing advice, but taxpayers are dealing with the non-lawyers directly;
  • lawyers are "in the mix", but there's no firm indication that they are substantially reviewing the work done by non-lawyers on their behalf; and
  • lawyers are providing advice on accounting matters and not advice about tax or corporate law.

PwC provides services

In 2019, the Commissioner of Taxation audited a number of Australian companies (the JBS entities) in relation to legal services that Big 4/MDP firm PricewaterhouseCoopers Australia (PwC) had provided. PwC provided the services between 2014 and 2016 using both legal practitioners and non-legal practitioners, pursuant to an initial umbrella engagement agreement and nine Statement of Work documents.

The Commissioner issued a notice to PwC requiring it to provide certain documents. In response, the JBS entitles claimed LPP over 44,000 documents, with the Commissioner disputing the claims with respect to 15,500 of the documents. In 2020, the Commissioner commenced proceedings to challenge the LPP claims.

Can a lawyer-client relationship exist in a Big 4/MDP engagement?

The Commissioner relied on three grounds. The first two grounds were with respect to the lawyer-client relationship and if either had been successful, it is likely that none of the 15,500 documents in dispute would have been privileged:

  • firstly, the form of the engagements did not establish a lawyer-client relationship;
  • secondly, the services were not provided pursuant to a lawyer-client relationship; and
  • thirdly the documents were not made for the dominant purpose of giving or obtaining of legal advice from lawyers.

The Commissioner argued:

  1. the non-lawyers were both "assisting" and acting as "agents" of the JBS entities, which meant they purported to be both lawyer and client, which created conflicting roles and undermined the necessary independence for maintaining privilege;
  2. the arrangements non-lawyers were operating under were generally "so obscure and multifaceted" that they prevented a lawyer-client relationship arising; and that the non-lawyers were senior partners with their own areas of expertise who had notably higher charge out rates, performed the majority of the work, and did more than merely assist the PwC lawyers; and
  3. the documents in dispute did not record, communications for the dominant purpose of giving or obtaining legal advice from one or more lawyers of PwC Australia.

The Federal Court described the engagement arrangements as "perhaps confusing", but found that the Commissioner’s “global” assertion was not made out, and that a document-by-document review was required. The Court seemingly accepted the relevance of the Commissioner’s arguments and submissions as to the “confusing” engagement arrangements, and found that many of the factors in ground (b) above "may well be relevant" to a document-by-document review for privilege. Finally, the Court held that to satisfy ground (c), given there was a lawyer-client relationship in at least some cases, it was necessary for it consider on a document-by-document basis whether 116 sample documents were subject to LPP.

Which documents were privileged: a costly, cautionary tale for taxpayers?

Having found that the question of LPP could not be resolved “globally” for all documents in issue, the Court and parties undertook a costly and resource-intensive process of considering and determining the LPP status of nominated sample communications, as a notional proxy set of representative documents. After months of preparation and a five-day hearing, the Court found that of the 116 sample documents, 49 were privileged, six were part privileged, and 61 were not privileged.

While the key takeaway for taxpayers may be that complicated engagement arrangements involving the kind of arrangements set up by PwC in the present case, the Court’s reasons offer valuable privilege guidance for stakeholders on the application of the law of LPP.

Outlined in the table below are six examples from the judgment:

examples from judgement 

While the Commissioner has taken care to clarify that his understanding of the law of LPP does not differ as between the Big 4/MDP firms on the one hand, and “traditional law firms”, this case demonstrates that the structural differences between how work is undertaken within different types of firms is fundamentally relevant to whether LPP will attach to communications.

While a number of “traditional law firms” now have non-legal practitioner partners, it is the scale those arrangements, the character of the work undertaken by the non-legal teams and the fundamental character of the services provided by the firm that will likely remain of interest to the Commissioner as he determines how best to address his concerns over incorrect claims of LPP in the context of firm structure and engagement arrangements. Taxpayers may well be anxious about the likely costs and distraction as the implications from this decision for Big 4/MDP firms emerge.

Is guidance available from the Commissioner on LPP?

This case is also part of a more general push by the Commissioner to address LPP claims as well as ensure greater transparency from taxpayers. On 31 October 2021, the Commissioner released draft guidance on how it will approach claims for LPP by taxpayers and their lawyers (the Legal Professional Privilege Protocol, September 2021). Adherence is voluntary but the Commissioner notes that those who do not follow the approach should expect further inquiries to determine if the LPP claims are acceptable. If adhering to the draft protocol, taxpayers will be required to provide details on the legal issue being advised on, the dominant purpose for which a document was prepared, particulars those who received a document and confirmation of whether the advice was from legal practitioners, in-house counsel, or non-lawyers.

Following this case, the draft protocol is likely to be updated and finalised. The Commissioner is also likely to continue to narrowly interpret the "accountant's concession", an administrative concession conferred by the Commissioner, such that it only applies to written communications of accounting firms providing advice in certain, strict circumstances.

What taxpayers and tax practitioners should do now

  • Taxpayers should examine their engagements with Big 4/MDP firms involving non-lawyer tax advisers to ensure privilege will not be lost.
  • Tax practitioners should review, and update where required, internal processes on how tax advice is prepared where non-lawyers are involved, in light of both the case and Commissioner's draft protocol on LPP, and create practical guidance for staff where needed.
  • All stakeholders should monitor the development of the Commissioner's draft protocol on LPP, which is still in draft form.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.