09 Dec 2005

Dominant purpose, third parties, and legal professional privilege

by Zoe Millington-Jones

Where possible, when it is necessary to obtain advice from a third party for the purpose of giving or receiving legal advice, the solicitor should communicate directly with the third party.

The Federal Court decision in The Commissioner of Taxation of the Commonwealth of Australia v Pratt Holdings Pty Limited [2005] FCA 1247 (5 September 2005) has highlighted the practical difficulties in proving that communications between client and a third party (who is not an agent or employee of the client) are for the dominant purpose of giving or obtaining legal advice.

Background

The decision of the Full Federal Court in Pratt Holdings Pty Limited v Commissioner of Taxation [2004] FCAFC 122 extended the privilege doctrine regarding communication with third parties.

The case concerned an application by the Commissioner of Taxation, for declarations that legal professional privilege did not attach to communications constituted by documents held by PricewaterhouseCoopers ("PwC") on files relating to its former client, Pratt Holdings Pty Limited. 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. An issue arose concerning the taxation consequences of significant losses incurred by an entity in the Pratt Group. ABL recommended that Pratt obtain a valuation of assets to assist in determining the quantum of losses of this entity. Under ABL's direction, Pratt Holdings retained the accounting firm PwC to prepare a paper ("PW Paper") and an asset valuation ("Yoni Valuation").

At first instance, Justice Kenny held that where litigation had not commenced and was not reasonably anticipated, communications with third parties only attracted legal professional privilege where the third party was acting as the agent of the client or the solicitor for the purpose of making the communication. However, on appeal, the Full Federal Court (Justices Finn, Merkel and Stone) held that legal professional privilege is available where the communication between a solicitor or client and a third party is prepared for the dominant purpose of giving or obtaining legal advice, notwithstanding that the third party is not an agent of the solicitor or client and no litigation is pending or anticipated.

Justice Finn said:

"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 withholding the privilege from the documentary communication authored by the third party."

The Full Court remitted the matter to Justice Kenny to determine Pratt Holdings' purpose in preparing the documents in dispute.

Difficulties of satisfying the dominant purpose test identified by the Full Federal Court

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

The Full Court warned that particular care needed to be taken in evaluating evidence of purpose in a setting in which the third party performs a professional function for a principal is a matter in which legal advice is to be or is being sought by that principal because:

  • the third-party principal relationship will not, of itself, attract privilege to exchanges made in it;
  • advice given by non-legal 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 so 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 its subject matter, with the principal then determining:
    • 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
    • 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 adviser, 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 inform the principal in making the principal's communication to the lawyer (whether or not that communication embodied wholly or substantially the content of the document) and not to record the communication to be made."

Examination of the purpose of the creation of the documents by Justice Kenny

Justice Kenny accepted that the following principles applied in relation to the identification of the dominant purpose for the creation of a document:

  • The purpose for which a document is brought into existence is a question of fact. The dominant purpose must be determined objectively, having regard to the evidence, the nature of the documents and the parties' submissions.
  • The evidence of the intention of the document's maker, or of the person who authorised or procedured it, is not conclusive of purpose.
  • The dominant purpose for the creation of a document is to be determined at the time of its production. Thus the fact that a document is provided to solicitors for advice is not determinable of the purpose for which it was created.
  • The dominant purpose is not the same as the "primary" or the "substantial" purpose. The "dominant" purpose is the ruling, prevailing, paramount or most influential purpose. The "dominant purpose" brings within the scope of the privilege a document brought into existence for the purpose of a client being provided with professional legal services notwithstanding that some ancillary or subsidiary use of the document was contemplated at the time.
  • Where two purposes are of equal weight, neither is dominant in the relevant sense. Hence, a document is not privileged from production where:
    • one purpose for its creation is to obtain legal advice, but there is another equally important purpose; and
    • if the decision to bring the document into existence would have been made irrespective of any intention to obtain legal advice.

Pratt Holdings' claim for privilege related to a number of documents, including internal working documents of PwC, documents created by PwC that were provided to Pratt Holdings and documents created by Pratt Holdings that were provided to PwC. Justice Kenny considered that Pratt Holdings' claim for privilege in respect of these documents depended on whether its claim for privilege in respect of the preparation of the "PW Paper" was upheld.

Justice Kenny found that:

  • The PW Paper (save for a version dated August 1994) was created for a number of reasons:
    • To assist in a valuation of assets (the Yoni Valuation) in order to determine the quantum of losses incurred by an entity in the Pratt Group. The Yoni Valuation itself noted that, among the things that PwC relied on or took into account in preparing the valuation, was the PwC Paper. The evidence of the relevant partner of PwC was that he suggested the PW Paper be prepared because the making of the Yoni Valuation required an analysis of facts which could best take the form of a position paper.
    • To explain certain matters concerning the tax implications of the losses and to record relevant information, for the benefit of the Pratt Group's taxation and insurance manager (Mr O'Halloran) and other people acting in the Pratt Group's interest.
    • To enable Pratt Holdings to instruct ABL, in order that ABL could provide the legal advice Pratt Holdings sought.
  • Mr O'Halloran played a critical role in the preparation of the various versions of the PW Paper. Mr O'Halloran controlled the flow of information between PwC, Pratt Holdings and ABL. He wanted PwC to explain to him matters so that he could determine what to communicate to ABL. He filtered, adapted and exercised independent judgment as to what was to be provided to ABL.
  • The fact that Mr O'Halloran provided various versions of the PW Paper to ABL did not of itself account for the existence of these documents.
  • Accordingly, Pratt Holdings had not established that the dominant, in the sense of prevailing and paramount, purpose for the obtaining of any version of the PW Paper was the obtaining of legal advice and therefore the PW Paper was not privileged.

Going forward

Justice Stone in her appeal judgment commented that the availability of privilege did not depend on whether the expert opinion was delivered to the lawyer directly by the expert or by the client.

However, it may be less difficult to establish that the dominant purpose of a communication is for obtaining or giving legal advice where the communication is directly between a solicitor and the third party expert, rather than between the client and the third party.

Where possible, when it is necessary to obtain advice from a third party for the purpose of giving or receiving legal advice, the solicitor should communicate directly with the third party.

In communications between a solicitor or client and a third party (who is not an employee or agent of the solicitor or client) for the dominant purpose of giving or obtaining legal advice, if it is not feasible for the solicitor to communicate directly with the third party, such dominant purpose may be easier to prove if:

  • It is made clear in correspondence with the third party that the commercial information is requested for the dominant purpose of obtaining legal advice; and
  • The third party communication is provided to the solicitor without modification or filtering by the client.

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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.