26 Aug 2004

Legal advice privilege and communications with third parties

by Gina Elliott, Zoe Millington-Jones

Communications between a solicitor or client and a third party are privileged if it can be established that they were prepared for the dominant purpose of giving or obtaining legal advice. It is not necessary that the third party be an agent of the solicitor or client.

Confidential communications between a solicitor and client are, if made for the dominant purpose of giving or obtaining legal advice or for use in existing or anticipated litigation, generally subject to legal professional privilege.

In our December 2003 edition of Insights, we reported that the position was less clear when the communications are between the solicitor and a third party (such as an expert) or the client and the third party.

The Full Federal Court in Pratt Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 122 has clarified the position. This is an important decision as it is the first Australian appellate authority on the issue of whether, if a principal directs or authorises a third party who is not an employee or agent to prepare a documentary communication for the dominant purpose of it being communicated to a legal adviser for the purpose of obtaining legal advice, that documentary communication from the third party to the principal is privileged irrespective of whether it is the client or the third party who delivers the communication to the lawyer.

Position before Pratt Holdings

As set out in our December 2003 edition of Insights, the common law in Australia is that legal professional privilege attaches to:

  • confidential communications passing between a client and the client's solicitor for the dominant purpose of obtaining or giving legal advice ("legal advice privilege"); and
  • confidential communications passing between a client, the client's solicitors and third parties for the dominant purpose of use in or in relation to litigation, which is either pending or in contemplation ("litigation privilege").

Before the decision of the Full Federal Court in Pratt Holdings, different principles governed the availability of legal advice privilege and litigation privilege where the relevant communications involved third parties.

  • Communications with a third party by solicitor or client could be protected by litigation privilege provided litigation was reasonably anticipated or in contemplation and the communication was for the dominant purpose of use in relation to the litigation.
  • However, where litigation had not commenced and was not reasonably anticipated, legal professional privilege applied to communications with third parties but only in the limited circumstances where the third party was acting as the agent of the client or the solicitor for the purpose of making the communication.

The Full Federal Court in Pratt Holdings has now extended the privilege doctrine and held that communications between a solicitor or client and a third party will be privileged if it can be established that they were prepared for the purpose of giving or obtaining legal advice. It is no longer necessary that the third party be an agent of the solicitor or the client.

Background

The appellants, Pratt Holdings and PriceWaterhouseCoopers ("PwC") appealed from a decision of Justice Kenny holding that legal professional privilege did not attach to certain communications between them. The communications were contained in documents to which the respondent, the Commonwealth Commissioner of Taxation, said he was entitled to have access by virtue of section 263(1) of the Income Tax Assessment Act 1936 (Cth). The question in the appeal was whether legal professional privilege restricted the Commissioner from having access to these documents.

The documents were created in connection with Pratt Holdings obtaining legal advice from its lawyers, Arnold Bloch Leibler ("ABL") in relation to the rearrangement of corporate finances. At the time, there was no litigation on foot, in preparation or contemplated. An issue arose concerning the taxation consequences of significant losses incurred by an entity in the Pratt group. As part of its advice, ABL recommended that Pratt obtain a valuation of assets from an independent accounting firm to assist in determining the quantum of the losses of this entity.

Pratt Holdings retained the accounting firm PwC to prepare a paper and an asset valuation. PwC was informed that the paper was to be prepared to enable Pratt to brief ABL but was not provided with details of any specific instructions to ABL. PwC did not send any documents directly to ABL and did not confer directly with ABL.

Justice Kenny held that in the absence of contemplated or actual litigation, advice privilege did not subsist in a communication between solicitor or client with a third party, unless the third party was an agent of the client or solicitor for the purpose of the communication. Justice Kenny held that PwC could not be considered a representative or agent of Pratt Holdings for the purpose of obtaining legal advice:

"PwC was simply engaged to produce a paper and valuation for Pratt Holdings. It discharged its task by conveying the report and the valuation to Pratt Holdings (along with other documents) with a view to Pratt Holdings conveying the information to ABL (or with a view to Pratt Holdings conveying so much of this information as Pratt Holdings considered appropriate to convey to ABL)."

On that basis, Justice Kenny held that the documents prepared by PwC were not privileged. This approach made it unnecessary for her to make a finding as to the dominant purpose pursuant to which the documents were created.

Pratt and PwC claimed that Justice Kenny erred in finding that PwC was not an agent of Pratt for the purpose of making or receiving communications to or from ABL and, irrespective of that issue, erred in not finding that legal professional attached to the documents in question. The appellants argued that Justice Kenny's approach was misguided and that the Australian approach involved a single rationale for the application of privilege. There was no basis for applying different rationales for advice and litigation privilege.

The English position: the criterion of agency must be established

English authorities have divided legal professional privilege into the discrete categories of litigation and advice privilege (beginning with Wheeler v Le Marchant (1881) 17 Ch D 675 and more recently in the Three Rivers decisions [1]. The difference between the two categories is that where the relevant communication is between the solicitor or client and a third party, an additional criterion of agency must be satisfied before legal advice privilege is available.

The appellants argued that the English cases - with their requirement of an agency relationship - were too narrow and not applicable in Australia. It was submitted that there was instead a single "purpose test" approach to privilege which did not require the existence of an agency relationship. They stated that the English authorities were inconsistent with the approach adopted by the High Court of Australia. The appellants argued that the agency test was artificial and illogical, separating communications between the solicitor and third party from the surrounding circumstances. They submitted that if the dominant purpose criterion is satisfied and the communication is confidential, then the communication is privileged irrespective of whether litigation is anticipated or pending or whether the communication is made by an agent of the client, provided that it is made at the direction or with the authority of the client who held the requisite purpose.

Decision of the Full Federal Court in Pratt Holdings

On appeal, the Full Federal Court (Justices Finn, Merkel and Stone) unanimously reversed the first instance decision. The court held that communications between a solicitor or client and a third party would be privileged if it could be established that they were prepared for the dominant purpose of giving or obtaining legal advice. It was not necessary that the third party be an agent of the solicitor or client.

The court decided that the appeal could be answered without considering whether there were two discrete species of privilege (ie. advice and litigation privilege) having different rationales, or one unified doctrine (applying to both litigation and legal advice) with a single rationale. In his judgment, Justice Finn explained that:

  • despite the significance that a person may place on a communication with a professional adviser, it will not be protected from disclosure in legal proceedings or from an authority exercising coercive powers requiring production of information except if made with the dominant purpose of giving or obtaining legal advice; and
  • the rationale for the exception is that it serves the public interest in the administration of justice by encouraging full and frank disclosure by clients to their lawyers.

Justice Finn referred to the primary principle, as stated by Barwick CJ in Grant v Downs (1976) 135 CLR 674 at 677:

"…a document which was produced or brought into existence either with the dominant purpose of its author, or of the person or authority under whose direction, whether particular or general, it was produced or brought into existence, of using it or its contents in order to obtain legal advice or to conduct or aid in the conduct of litigation, at the time of its production in reasonable prospect, should be privileged and excluded from inspection" (emphasis added)

Although Grant v Downs involved a claim for litigation privilege, Justice Finn considered that the principle formulated by Chief Justice Barwick was intended to be declaratory of the law for the future and had equal application to legal advice and litigation privilege.

In rejecting the distinction between whether a communication is prepared internally by a corporation or externally by a third party, Justice Finn referred to the fact that legal professional privilege had been recognised as not merely a rule of substantive law, but as an important common law immunity.

His Honour thought that an analysis of whether a document attracts legal advice privilege at the time it is created should start with consideration of the intended use or uses of the document which accounted for it being brought into existence. As part of that inquiry, attention should be focused on the purpose (or purposes) of the person who created the document, or who, if not its author, had authority to, and did, procure its creation.

The court accepted that the relevant person was an employee of Pratt, but noted that Justice Kenny at first instance did not make findings as to what Pratt Holdings' purpose was in procuring the preparation of the PwC report.

Justice Finn considered PwC was not an agent of Pratt as it simply did not "assume such a representative function on Pratt's behalf as the agency concept presupposes." That in itself, however, was not a sufficient reason to deny a third party privilege. According to his Honour:

"The important consideration... is not the nature of the third party's legal relationship with the party that engaged it but, rather, the nature of the function it performed for that party. If that function was to enable the principal to make the communication necessary to obtain legal advice it required, I can see no reason for with-holding the privilege from the documentary communication authored by the third party."

Justice Stone stated that:

"The coherent rationale for legal professional privilege developed by the High Court does not lend itself to artificial distinction between situations where that expert assistance is provided by an agent or alter ego of the client and where it is provided by a third party. Nor… should the availability of privilege depend on whether the expert opinion is delivered to the lawyer directly by the expert or by the client. Provided that the dominant purpose requirement is met I see no reason why privilege should not extend to the communication by the expert to the client."

Policy reasons for extending privilege to third party communications

The court recognised that there were policy reasons for extending the privilege to third party communications:

  • the complexity of present day commerce means that it is increasingly necessary for clients to have the assistance of experts, including financial experts such as accountants, in formulating a request for legal advice and in providing legal advisers with sufficient under-standing of the facts to enable that advice to be given;
  • to deny a natural person or corp-oration the ability to utilise third part-ies, unless he or she is prepared to forego privilege in the documents pre-pared by the third party, is to disadvantage that person or corporation relative to another who is able make the desired communication to a legal adviser by relying on his or her own knowledge or resources; and
  • for the law to provide such an incentive not to utilise the services of third parties would be to undercut the privilege itself. It would not facilitate access to effective legal advice nor would it facilitate effective communication with legal advisers for the purpose of obtaining legal advice.

Examination of purpose of preparation of documents

The court set aside the decision of Justice Kenny and remitted the matter back to the primary judge for consideration of Pratt Holdings' purpose in having the documents prepared.

The Full Court was satisfied that its approach would not lead to an "uncontrollable extension of the privilege". It recognised that satisfying the relevant purpose test would be difficult. This is because the purpose, let alone the dominant purpose, behind the preparation of commercial advices will usually be independent of the need for legal advice.

The court also warned that particular care needed to be taken in scrutinising the claimed purpose where a third party performs a professional function for a principal in a matter where legal advice is sought because:

  • the third party-principal relationship (whether it be accountant-client, assessor-client or otherwise) will not, of itself, attract privilege to exchanges made in it;
  • advices given by professional advisers may have the character of discrete advices to the principal to assist the principal's decision-making. Those other advices will not later become privileged in the adviser's hands simply because they are subsequently "routed" to the legal adviser by the principal;
  • notwithstanding the principal's stated purpose, the principal may have conducted itself in the matter as to indicate that the intended use of a document authored by a third party was not its communication to the legal adviser as the principal's communication, but rather it was to advise and inform the principal regarding the subject matter, with the principal then determining:

    (a) in what manner, if at all, the whole or part of the document would be used by the principal in making its own communication; or
    (b) the purpose or purposes for which the document could or should be used.

Justice Finn stated:

"the less the principal performs the function of a conduit of the documentary information to the legal ad-viser, the more he or she filters, adapts or exercises independent judgment in relation to what of the third party's document is to be communicated to the legal adviser, the less likely it is that that document will be found to be privileged in the third party's hands. This will be because the intended use of the document is more likely to be found to be to advise and the inform the principal in making the principal's communication to the lawyer… and not to record the communication to be made".

Implications

The decision in Pratt means that clients can feel more secure that information solicited from third parties to obtain legal advice will be protected from disclosure in the courts and from regulatory organisations. The technical relationship with the third party is now irrelevant and the availability of privilege no longer depends on whether the expert opinion is delivered to the lawyer directly by the third party or by the client. Providing the dominant purpose requirement is met, privilege will attach to the communication.

However, it remains to be seen whether the High Court and other appellate courts will adopt a similar approach to the Federal Court (time has now expired for the Commissioner to appeal to the High Court). Also, the common law position will not apply to situations where privilege is governed by provisions of the Evidence Act.

In light of the court's warning that close scrutiny will be paid to the purpose of the communication, clients should be aware that it may be difficult to prove that commercial information is requested from third parties for the dominant purpose of obtaining legal advice. Such dominant purpose may be easier to prove if the following steps are taken:

  • It should be made clear in correspondence with the third party that the commercial information is requested for the dominant purpose of obtaining legal advice (over any business purposes).
  • The third party communication should be provided to the solicitor without modification.

 

[1] Three Rivers District Council v The Governor & Company of the Bank of England [2003] EWCA Civ 474, applied in Three Rivers District Council v The Governor & Company of the Bank of England [2004] EWCA Civ 218

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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.