Legal professional privilege: substance over form in Pratt case

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1 COMMERCIAL LITIGATION We report on two recent cases that have important implications for legal professional privilege Inside: Your publication: If you would prefer to receive our publications in electronic format, please VISIT OUR WEB SITE TO READ ALL FOCUS EDITIONS Legal professional privilege: substance over form in Pratt case Partner Belinda Thompson and Lawyer Tamsin Hone report on a recent Full Federal Court decision that represents a triumph of substance over form in the realm of legal professional privilege. Background In Pratt Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 122 (12 May 2004), the Full Federal Court unanimously held that privilege can attach to documents prepared by a third party at a principal s direction and returned to the principal to then give to a solicitor, provided the documents were prepared for the dominant purpose of obtaining legal advice. Facts Pratt Holdings Pty Ltd (Pratt Holdings) and PricewaterhouseCoopers (PWC) appealed a Federal Court decision of Justice Kenny in which she held that legal professional privilege did not attach to certain communications between them. The communications were contained in documents, including a valuation report, to which the Commissioner of Taxation sought access under section 263(1) of the Income Tax Assessment Act 1936 (Cth). Pratt Holdings argued that the documents were created by PWC, at its request, to enable Pratt Holdings to provide instructions to its solicitors, Arnold Bloch Leibler. At fi rst instance, Justice Kenny held that in the absence of contemplated or actual litigation, advice privilege does not subsist in a communication between a solicitor or client with a third party, unless the third party is an agent of the client for the purpose of obtaining legal advice from the lawyer. Her Honour held that, in this case, particularly as there had been no direct contact between PWC and Pratt Holding s solicitors, PWC could not be considered an agent of Pratt Holdings. As a result, her Honour held that, even assuming the communications were confi dential and made for the dominant purpose of obtaining legal advice, they were not privileged. 1

2 Full Court decision On appeal, the Full Court (Justices Finn, Merkel and Stone) found in favour of Pratt Holdings and PWC. It held that the important consideration was not the nature of the legal relationship between the third party and the client, but the nature of the function performed by the third party for the client and the purpose for which the communication was made. In the circumstances, therefore, the fact that PWC was not an agent of Pratt Holdings did not provide a suffi cient or principled reason for denying privilege to the communications 1 it had authored. Provided that the communication was made for the dominant purpose of enabling Pratt Holdings to obtain legal advice, privilege would extend to the communication between PWC and Pratt Holdings. Given that no fi nding of fact had been made at fi rst instance in relation to the purpose for which PWC s report had been procured by Pratt Holdings, the court ordered that this question be sent back to the primary judge. The Full Court found in favour of Pratt Holdings and PWC. It held that the important consideration was not the nature of the legal relationship between the third party and the client, but the nature of the function performed by the third party for the client. In separate judgments, Justices Finn and Stone (with whom Justice Merkel agreed), relied on the principle set down by Chief Justice Barwick in Grant v Downs (1976) 135 CLR 674, that there did not need to be common identity between the person who authored the document and the person with the required purpose. Therefore, a document that was produced either with the dominant purpose of its author, or of the person or authority under whose direction it was produced, of using it or its contents in order to obtain legal advice, should be privileged and excluded from inspection. The court reviewed previous authorities regarding the scope of legal advice privilege, in particular the decision of Wheeler v La Marchant (1881) 17 Ch D 675 (Wheeler), upon which the trial judge had relied. However, their Honours determined that the question before them had not previously been determined. In the absence of binding authority, and in light of the recognition of legal professional privilege as an important common law immunity 2, their Honours stated that the present question was to be decided by reference to principle and legal policy - concentrating on substance and not form. Provided that the communication was made for the dominant purpose of enabling Pratt Holdings to obtain legal advice, privilege would extend to the communication between PWC and Pratt Holdings. Their Honours both rejected that there should be an artifi cial distinction between situations where expert assistance is provided by an agent of the client and where it is provided by a third party. In addition, the availability of the privilege should not depend on whether the expert opinion is delivered to the lawyer directly by the expert or by the client. Justice Finn held that: The important consideration in my view 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 party. 3 Justices Finn and Stone also recognised that there were very clear policy reasons to support extending the privilege to such third party communications. They agreed that, if the policy implicit in the rationale for legal professional privilege is not to be subverted, the dominant purpose criterion must be applied, recognising that the situations in which people need legal advice are increasingly complex and that a client who lacks the requisite knowledge, expertise or resources may need the assistance of third 2 Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 192 ALR 561 at Pratt Holdings per Finn J at [41]. 1 [2004] FCAFC 122 (12 May 2004), per Finn J at [41]. 2

3 party experts to be able to instruct its legal adviser appropriately. Justice Finn noted that: To deny that person the ability to utilise services of a third party to remedy his or her own inability or inadequacy unless he or she is prepared to forego privilege in the documents prepared by the third party, is to disadvantage that person relative to another who is able adequately to make the desired communication to a legal advisor by relying upon his or her own knowledge. For the law to provide such an incentive not to utilise the services of third parties in such circumstances is to undercut the privilege itself. It would not facilitate access to effective legal advice nor would it facilitate effective communication with legal advisors for the purpose of obtaining legal advice. 4 Nevertheless, while the court has recognised that legal professional privilege may attach to third party communications, Justices Finn and Stone both stated that such communications would be carefully scrutinised to determine whether they could properly be said to have been prepared for the dominant purpose of obtaining legal advice, so as to attract privilege. Justice Finn warned against misapplying this principle, noting that discrete advices from other professional and business advisers will rarely be capable of attracting the privilege and that privilege does [not] extend to third party advices to the principal simply because they are then routed to the legal advisor. 5 Implications The decision in Pratt Holdings increases a client s ability to marshal all necessary information to obtain legal advice, with greater comfort that the information may be subject to legal professional privilege and so be protected from being required to be produced in a court proceeding or regulatory investigation. Nevertheless, the Full Federal Court has clearly foreshadowed that claims for legal advice privilege will be subject to close scrutiny by the courts. Care still needs to be taken, therefore, when taking steps to obtain information from third parties so as to strengthen claims of legal professional privilege in respect of those communications. 4 Pratt Holdings per Finn J at [42] [43]. 5 Pratt Holdings per Finn J at [46]. Can privilege apply to communications with overseas legal professionals? Each case will depend on its facts, but the recent Kennedy decision suggests that it may be diffi cult for clients in Australia to claim legal professional privilege over their communications with foreign lawyers, Senior Associate Lucas Shipway reports. Background The recent widely publicised case 6, involving an attempt by Trevor Kennedy to claim legal professional privilege over notes prepared for a meeting with his Swiss lawyer in Switzerland, illustrates important issues in relation to the limits of privilege in the context of communications with overseas legal professionals. Justice Gyles held that it is inconsistent with the rationale for legal professional privilege to treat all communications between an Australian client and a foreign lawyer, concerning advice as to foreign law, as privileged. The facts, as found by Justice Gyles of the Federal Court, were as follows. Newspaper reports were published in October 2003, alleging that Mr Kennedy had been involved in dealings with various Swiss banks. The implication of the articles was that monies had been hidden from Australian authorities by means of such dealings. Immediately after those reports were published, Mr Kennedy travelled to Zurich and met 6 Kennedy v Wallace [2004] FCA

4 with his Swiss lawyer. While en route, he prepared certain notes on hotel notepaper for the meetings. The Australian Securities & Investments Commission (ASIC) subsequently seized those notes as part of an investigation following the press reports. The rationale for legal professional privilege The matter for determination was whether or not a valid claim of legal professional privilege could be maintained for those notes. Mr Kennedy argued that he should be granted the benefi t of the privilege and have the notes returned to him. ASIC argued that there was a risk that the rationale for privilege that is, that it facilitates the administration of justice in Australia would be subverted if privilege were allowed to apply to communications with foreign lawyers, who, by defi nition, are not bound to facilitate the administration of justice in Australia. ASIC pointed to the following factors in support of its argument: the Swiss lawyer was not subject to the jurisdiction of any Australian court or any Australian disciplinary procedures; no evidence had been adduced by Mr Kennedy to demonstrate that the lawyer was subject to any disciplinary regime in Switzerland comparable or compatible with the Australian system; and the lawyer s competence had not been demonstrated and the court should not assume that foreign lawyers levels of legal or ethical competence or training are comparable or compatible with Australian requirements. Other courts may not follow the strict approach taken by Justice Gyles when faced with different facts. Justice Gyles found in favour of ASIC on two alternate grounds. First, Justice Gyles held that it is inconsistent with the rationale for legal professional privilege to treat all communications between an Australian client and a foreign lawyer, concerning advice as to foreign law, as privileged. Where, as here, the communications were aimed at assisting an Australian to take advantage of foreign secrecy laws to evade scrutiny of assets and transactions by Australian authorities, including taxation authorities, privilege was not available because such a purpose was contrary to the administration of justice in Australia. Second, Justice Gyles held that Mr Kennedy had failed to demonstrate via evidence that the dominant purpose for making the notes was to obtain legal advice and, in the absence of the benefi t of the doubt that might be afforded to communications with lawyers within Australia, privilege had not been established. Rather: The overwhelming inference to be drawn in all of the circumstances is that Kennedy s dominant underlying purpose in meeting with [his Swiss Lawyer] was to take all available steps to preserve or enhance the secrecy from Australian authorities, including ASIC, of his dealings in or relating to Switzerland. It appears that this inference was enhanced for Justice Gyles by the fact that Mr Kennedy dealt with the Swiss lawyer directly rather than via his Australian lawyers. Ritz Hotel Ltd v Charles of the Ritz Ltd Other courts may not follow the strict approach taken by Justice Gyles when faced with different facts. Previous decisions have recognised privilege for communications with foreign lawyers. In Ritz Hotel Ltd v Charles of the Ritz Ltd (1987) 14 NSWLR 100, a memorandum between American in-house lawyers at Revlon Inc was held to be privileged from production in proceedings in Australia. It appears from the judgment that evidence was put before the court in that case to show that the American lawyer was a qualifi ed lawyer and member of the Bar of the State of New York, that he was acting in the capacity of a professional legal adviser to Revlon Inc, and that he had a reasonable degree of autonomy in that role. No equivalent evidence was produced in relation to the Swiss lawyer in the Kennedy case. Implications The Kennedy case suggests that, when attempting to make out a claim for privilege in respect of a communication with a foreign lawyer, it is critical not only to establish that the dominant purpose of the communication was to obtain legal advice, but also to produce evidence, if possible, that will persuade the court that the lawyer is bound by legal and ethical obligations comparable or compatible with those in Australia. It also assists if communications with foreign lawyers are conducted via lawyers in Australia. 4

5 For further information, please contact: Paul Nicols Partner, Sydney Ph: Paul.Nicols@aar.com.au Paul Meadows Partner, Melbourne Ph: Paul.Meadows@aar.com.au Geoff Rankin Partner, Brisbane Ph: Geoff.Rankin@aar.com.au Sydney Melbourne Brisbane Perth Port Moresby Singapore Hong Kong Jakarta Shanghai Bangkok Phnom Penh 8421 David Martino Partner, Perth Ph: David.Martino@aar.com.au Simon McConnell Partner, Hong Kong Ph: Simon.McConnell@aar.com.au Have your details changed? If your details have changed or you would like to subscribe or unsubscribe to this publication or others, please go to or contact Barbara Leis on or Barbara.Leis@aar.com.au 5