This article was originally posted on CCH iKnow.
Two recently decided cases have provided some important insights into how legal professional privilege works in the context of inquiries conducted by the Australian Securities and Investments Commission (ASIC) and the ATO.
Legal professional privilege (“LPP”) is a vitally important doctrine in our system of law – balancing the interests of parties in being able to obtain information from the other side in a dispute with the benefits to the system of clients being able to confidentially access legal advice and legal support in litigation.
LPP is only “activated” where the relevant communication was for the dominant purpose of:
In practice, the effect of a successful claim for LPP is that it permits the non-disclosure of confidential communications between a client and lawyer in the face of a request or even a statutory requirement (such as through an information or production notice) to otherwise provide that communication.
Protected communications for LPP can be oral, written or recorded, and may be between a lawyer (including in-house lawyers) and their client, between their agents or even between the lawyers/client and a third party. The privilege ‘belongs’ to the client, rather than to the custodian of the relevant communication – who may be the lawyer, theirs or the client’s agents or a third party in the communication chain.
Importantly, the communication needs to be confidential in nature, so disclosure of the communication or its contents too widely can stretch that confidentiality too far – resulting in what is called ‘waiver’ of the privilege. As discussed below, whether there has been an effective waiver of privilege is a question of how much was disclosed, to whom and in what circumstances.
While parties can (and should) attempt to resolve such LPP claims wherever possible, it is ultimately up to the courts to adjudicate LPP disputes where the parties can’t agree. In the process of trying to resolve such a disputed LPP claim, the claiming party should be careful not to unintentionally disclose the contents of the communication – as this may end up waiving the privilege. This may be a particular risk in providing schedules of documents over which LPP is being claimed – as the more a party may say about that document, the more likely it is to disclose the contents of the communication and thus risk waiver of LPP.
The first case TerraCom Ltd v Australian Securities and Investments Commission  FCA 208 was decided by Stewart J on 11 March 2022 and dealt with whether a forensic report commissioned by lawyers attracts privilege and whether waiver occurred when the report was referred to in:
The Court also further considered whether privilege may have been waived over part or the whole of the document and whether the Court in such a case has the power to examine the report to determine the issue of potential partial waiver.
This case concerned an investigation by ASIC of TerraCom Ltd relating to the testing, certification and sale of coal. ASIC sought documents from TerraCom and seized a report prepared by PricewaterhouseCoopers (PwC) allegedly for TerraCom’s lawyers. TerraCom claimed LPP over that report.
The issues were:
On the basis of evidence from a TerraCom director, Ashursts (a law firm) and PwC’s engagement letters, the Court found that the dominant purpose of preparing the PwC report was for it to be used by Ashurst as a basis to for them to give TerraCom legal advice.
On the waiver question, the Court found that the test is whether there has been an inconsistency between what a client has done and the retention of the privilege. The Court found that the letter to shareholders and the second ASX announcement, which conveyed the purported conclusion of the PwC investigation, waived privilege over the PwC report.
A final issue for the Court was whether the power to examine the document for the purpose of deciding privilege extended to decide whether the privilege in the whole document was waived if the privilege in a particular subject matter included in the document was waived.
The Court decided to examine the PwC report because it was not practical to determine the extent to which those parts of the report covering the one subject matter can be properly and fairly understood if separated out from the rest of the report.
After that examination, the Court found that the partial disclosure of the report by the disclosure of the subject matter of concern led to waiver over the whole report.
The second case FC of T v PricewaterhouseCoopers 2022 ATC ¶20-821  FCA 278 was decided by Moshinsky J on 25 March 2022 and dealt with the application of LPP to documents produced by a multi-disciplinary partnership.
In February 2019, the Commissioner of Taxation commenced an audit of Flora Green as head company of a tax consolidated group. In the course of their audit, the Commissioner issued notices to produce documents under s 353-10 of Sch 1 to the Taxation Administration Act 1953(Cth).
These notices were issued to a partner of PwC Australia, which is a multidisciplinary partnership (provides both legal and non-legal services) that provided services to the JBS Group and Flora Green (collectively known as the ”JBS Parties”).
In response to the notices, the JBS Parties (as the clients) claimed LPP through PwC Australia over approximately 44,000 documents. The Commissioner disputed the claims of privilege over approximately 15,500 documents arguing the following grounds:
The first two grounds if made out would apply to all of the documents in dispute. In contrast, the third ground required a document-by-document analysis to determine whether each document is privileged.
PwC is a multidisciplinary practice that uses teams that included both legal practitioners and non-legal practitioners. In the “Statement of Work”, it was notable that the charge out rates for at least one of the non-legal practitioners was higher than the charge out rate for the legal practitioner.
The Court found that, at least in some relevant circumstances, a lawyer-client relationship existed between legal practitioners at PwC Australia and the JBS Parties. It therefore became necessary for the Court to consider whether, on a document-by-document basis, each document was subject to legal professional privilege.
In the case, the client engagement partner from PwC for the JBS Parties provided an affidavit and oral evidence and was cross-examined. An employee solicitor at PwC also provided affidavits. The Legal Manager and Chief Financial Officer of JBS Group were also cross-examined. The Commissioner relied on six affidavits of an acting director who was not cross-examined.
As part of a case management process, the Court decided to set down for hearing a separate question relating to 100 sample documents (50 to be chosen by the Commissioner and 50 by the respondent) given the large number of documents in dispute.
In selecting the sample, the Commissioner did not have access to the documents (as they were the subject of extant LPP claims) but did have access to a schedule that listed the documents and provided some details about them.
In an interesting development, the Court appointed three barristers as amici curiae (‘friends of the Court’) to assist the Court in determining whether the documents subject to the LPP dispute recorded communications that were:
In this process, the sample size was 116 documents of which 49 were found to be privileged; 6 were partly privileged; and 61 were not privileged. The reviewers considered each sample document and, based upon that analysis, Moshinsky J concluded that many of the communications were NOT made for the dominant purpose of giving or receiving legal advice.
Importantly, the originally published version of the judgment was heavily redacted to reflect the importance of protecting the content of the relevant communications subject to the LPP claims. Even though the final published version of the judgment still contains substantial redactions to reflect those concerns, this version reveals a bit more guidance on why some of the non-privileged documents were not covered by LPP.
Both cases were decided under the common law and NOT the Evidence Act 1995 (Cth) because litigation on the substantive issues between the parties was neither on foot nor contemplated. The common law LPP doctrine and “client legal privilege” under the Evidence Act 1995 are not precisely aligned and the court in TerraCom rejected an argument based on an Evidence Act 1995 case, instead relying on the common law LPP doctrine.
In both cases, the Court found it necessary to examine the actual documents as well as affidavits, oral evidence and in the PwC case cross-examination. In applying the dominant purpose test it is unlikely that a Court will decide merely on the face of the documents without further evidence.
Terms of engagement for the relevant lawyers or third parties involved in the chain of communications are important in determining dominant purpose, but Courts will generally want more. As in the TerraCom case, a document (the report) that was originally found to be privileged can lose that privilege through subsequent waiver by contrary conduct. It is often tempting for a client to release the gist of a privileged document in order to satisfy some external scrutiny. However, referring to the contents of the communication can lead to waiver of LPP – so it can be a fine line to walk in practice. The moral of the story is: “You cannot keep your privilege if you give too much of it away”.
For multidisciplinary practices, in the PwC case, the Court found that there could be a lawyer client relationship in such arrangements. The Court then went on to decide whether each document was subject to LPP. As there was a large number of documents involved, the Court considered a sample of 116 documents. Courts need to facilitate the just resolution of disputes according to law, and as quickly, inexpensively and efficiently as possible: see s 37M of the Federal Court of Australia Act 1976 (Cth).
At the time of writing no decision had been published on how the remaining 15,384 documents not in the sample would be treated, but it is doubtful that the Court would consider each document individually. We suggest that all parties to such disputes should consider ways of limiting the documents in dispute to those that really matter, lest the Court impose case management procedures that may not be in the party’s best interests.
Overall, it seems that taxpayers, their advisors and the ATO are all going to see further developments as these principles are tested in practice in future litigation. Hopefully, the resulting case law will help to:
These are not new issues and the challenges are as real now as they were back in 2008 – see the Australian Law Reform Commission, Privilege in Perspective: Client legal privilege in federal investigations (ALRC Report 107, February 2008).
Finding the right balance may be difficult but is essential for everyone in our tax and legal systems.
In February 2022, Bruce Collins of Tax Controversy Partners collaborated with CCH Learning to run a webinar on these issues: ‘ATO access and information gathering power – Finding the right balance?’ which may be accessed via this link.
Obtaining legal advice when receiving an access letter is important, as expert tax lawyers we can provide you with guidance and representation throughout your engagement with the ATO.
At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice and representations to ensure you are protected. Please contact us for help using our online contact form, via email at email@example.com or by phone at 02 8513 3813.