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An ever-decreasing privilege?

18 October 2007

We are all expected to comply with the law. In many circumstances this requires candid disclosure of objectives in order to receive legal advice before a course of action is selected. The protection of such disclosure and advice is “legal privilege”.

In New Zealand, legal privilege applies to certain communications with all lawyers, regardless of their employment situation. However, in this issue of Counsel we examine two recent overseas cases which may potentially impact on the ability of clients to claim legal privilege for certain communications with their in-house counsel.

These days it should be uncontentious to say that legal privilege is more than an ordinary rule of evidence. It is a fundamental condition on which the administration of justice as a whole rests. If a communication qualifies as privileged, that privilege is absolute and will protect the communication from disclosure in legal proceedings and otherwise. Privilege must be predictable: it cannot be effective if it may be overridden through a later balancing exercise against other important public-interest considerations.

Equally undoubted is the statement that legal privilege applies to certain communications with all lawyers, regardless of their employment situation. In New Zealand at least, clients of in-house counsel have just as much claim to the protections of privilege as clients who choose to obtain their legal advice from lawyers in private practice.

So much for the Privilege 101 lesson. Two recent overseas court decisions have raised our legal antennae, finely tuned (as they should be) for all potential derogations of the “fundamental condition” of privilege.

The two recent cases – one of the European Court of First Instance (CFI) and one of the Federal Court of Australia (FCA) – may potentially impact on the ability of clients to successfully claim legal privilege for certain confidential communications with their in-house counsel in particular. The cases focus on the independence (or rather the perceived lack of independence) of in-house counsel as advisers of their employer. This “independence issue”, along with questions regarding the onus of proof to support privilege claims, are effectively used as the basis in the two cases for denying the protections of privilege where it otherwise may apply.

The European case

First, in Akzo Nobel Chemicals Limited v Commission of the European Communities (17 September 2007, CFI, T-125/03, T-253/03), the CFI held that communications with in-house lawyers – “that is, legal advisers bound to their clients by a relationship of employment” - are automatically excluded from claiming protection under legal professional privilege.

The rationale for this (perhaps fortunately for us, based on a strict application of EC regulations and precedent) is that legal professional privilege applies only to those lawyers who provide advice “in full independence”, identified as “advice provided by a lawyer who structurally, hierarchically and functionally is a third party in relation to the undertaking receiving that advice” [see paras 166-169]. This is seen as necessary based on the concept of a lawyer’s role “as collaborating in the administration of justice by the courts and as being required to provide, in full independence, and in the overriding interests of the administration of justice, such legal assistance as the client needs”.

The Australian case

Secondly, in Telstra Corporation Ltd v Minister of Communications (No. 2) [2007] FCA 1445, the FCA ordered Telstra to produce a number of emails that were either to or from its in-house counsel. It did so on the basis that there was no evidence before the Court regarding the independence of the internal legal counsel, without which the Court could not be sure whether the counsel’s “advice was at risk of being compromised by virtue of the nature of his employment relationship with his employer".

To satisfy the ‘independence test’ in this case, the Court held that counsel would have to establish that his or her “personal loyalties, duties and interests” did not “influence the professional legal advice which he gives".

In terms of onus of proof, the Court made clear that it was up to a party relying on privilege as the basis for refusing to produce relevant documents to establish that privilege claim. It stated, “It is for a party claiming privilege to show that the documents for which the claim is made are privileged. He may succeed in achieving this objective by pointing to the nature of the documents or by evidence describing the circumstances in which they were brought into existence, but it should not be thought that the privilege is necessarily or conclusively established by resort to any verbal formula or ritual".

The Court recognised its power to examine the documents for itself, and (somewhat disturbingly) suggested that that power “has been exercised too sparingly in the past, springing possibly from a misplaced reluctance to go behind the formal claim of privilege". [See para 27]

The FCA made a distinction between internal legal advisers generally, and “opinions expressed by identified senior counsel where one might start off with the premise that by its nature the document would have privilege attaching to it". In all other cases, the onus was on the party claiming the privilege to satisfy the independence test. [See para 36]

Another notable observation by his Honour Justice Graham is that cross examination of deponents who have verified a list of documents may become more common under the “dominant purpose” test for privilege (that is, that communications must be for the dominant purpose for seeking or receiving legal advice before privilege will attach). [See para 26]

His Honour cited a 2005 Federal Court decision, Seven Network Limited v News Limited, where it was held that: “The dominant purpose test has particular importance in relation to the position of in-house counsel because they may be in a closer relationship to the management than outside counsel and therefore more exposed to participation in commercial aspects of the enterprise … As a matter of commercial reality, however, both internal and external legal advisers will often be involved in expressing views and acting on commercial issues … The authorities recognise that in order to attract privilege the legal adviser should have an appropriate degree of independence so as to ensure that the protection of legal professional privilege is not conferred too widely”. [See Telstra, para 30]

The New Zealand position

It appears from the FCA judgment that the decision regarding onus may be particular to the civil procedure requirements under the relevant Australian Court rules. Nevertheless, it is at odds with the settled approach in New Zealand whereby if a litigant swears an affidavit claiming privilege in relation to certain documents, a court will, generally speaking, accept that affidavit as sufficiently justifying the privilege claim unless there is cogent evidence to challenge that view. In other words, here the onus is on the party challenging a privilege claim to back up that challenge before a court will require (further) evidence to support the privilege claim and/or will itself inspect the documents subject to challenge.

In a 2006 case, Bay of Plenty Electricity Limited v NGC New Zealand Limited, Chapman Tripp contended and the High Court agreed that there needs to be a “reasonable basis” for going behind an assertion of privilege by (in that case in-house) counsel. The Court considered whether there was “sufficient doubt to go behind the claim to privilege to warrant inspection by the Court” and on the evidence concluded that there was not. [See paras 61-62]

While New Zealand in-house counsel are not likely to be automatically excluded from providing privileged legal advice any time soon due to a perceived lack of independence as in Akzo, the Telstra case does highlight the need for a reasonable level of vigilance in the separation of commercial advice and legal advice to best ensure that any legal advice proffered will be recognised as such and seen as sufficiently independent to warrant the protection from disclosure that privilege affords.

As legal advisers and business managers, we can and should properly resist possible erosions of privilege and of the protections from disclosure that privilege affords. Such erosions can impact on clients’ ability to receive the best possible legal advice based on candid communications by the clients. There may be some instances of abuse, but these are not immune from specific sanctions, and cannot justify proposals (from judges or others) to undermine the essence of legal privilege.

In-house counsel are an important part of the legal profession. In our experience, they are acutely aware of their professional obligations and of the need to provide objective advice. The two decisions noted in this issue of Counsel imply a “second class” status for such counsel, and their thrust should be resisted as unprincipled and wrong.

We would be happy to provide you with copies of the Telstra and Akzo cases if they are of interest.

Postscript – other moves afoot

Two other recent examples of the issues in the area of legal privilege bear mention:

  1. under the recently commenced Evidence Act 2006, the effective removal of the protection of privilege for legal advice and other correspondence with overseas legal practitioners for litigation privilege purposes has already received much attention in legal and business circles.  Chapman Tripp has carefully considered this point and has added its voice to the chorus of calls on the Government to urgently address this anomaly by passing an Order in Council including overseas practitioners in the definition of “legal adviser” for the purposes of that Act; and

  2. the Australian Law Commission has released a Discussion Paper (DP 73) on privilege, headlining what it sees as “misuse of privilege for cynical or tactical reasons” such as to delay or frustrate investigations or legal proceedings, and proposing a number of reforms including that the onus be placed squarely on parties claiming privilege to provide details of privileged documents and the basis of the privilege claim.