Lawyers gain advantage over accountants in advising companies
Two or three months ago we commented on the important decision in Daniels v ACCC (Law Reporter, March 2001). In that case the High Court of Australia ruled that privilege was a matter that was retained by companies in obtaining advice in relation to trade practices matters and that the provisions of the Trade Practices Act (TPA) did not override that privilege. This is an important win for the business community.
The decision was seen by many as a victory for lawyers as well. It confirmed that when companies go to lawyers for advice on issues relating to the TPA (and indeed in relation to other pieces of legislation), in appropriate circumstances they can receive that advice in the knowledge that it cannot be obtained by regulators. However, that decision related to advice which was concerned with potential litigation.
Now, in an important judgment of the Federal Court, Commissioner of Taxation v Pratt Holdings Pty Ltd ( SCA 6], Justice Kenny in a judgment delivered on 10 January 2003 has confirmed that privilege is an important right but that it is a privilege applying to companies seeking advice etc obtained in relation to legal matters and not in relation to other commercial advice that is obtained by companies directly from say accountants.
The decision directly highlights the importance in all companies making sure that they obtain the relevant advice in tax, corporate and other regulatory areas by ensuring the advice is channeled through lawyers.
Pratt Holdings needed advice on the tax deductibility of certain losses that had occurred as a result of the restructuring and reorganisation (it is unnecessary to go into the details). Pratt Holdings used both accountants and lawyers in obtaining that advice. The company had initiated its enquiries on the issue by instructing its accountants in the first instance. The accountants then brought in the company's lawyers to provide legal advice in relation to issues in respect of which both accountants and lawyers do sometimes provide advice.
The Commissioner of Taxation wished to obtain certain documents which had been prepared by the accounting firm in relation to the restrictions. These documents had been provided to the lawyers to comment on. These were relevant in the context of the issue that arose with respect to the tax and other consequential legal issues that were relevant. The company (and the accountants) refused to supply them on the basis that they were privileged.
Justice Kenny however, rejected the claim for legal privilege. The advice had been obtained in relation to obtaining advice in general terms. In that particular context (advice privilege is a different form of privilege to litigation related privilege) the court held, relying on a series of cases in England, Canada, the United States, New Zealand as well as Australia, that while litigation privilege will prevent regulators from obtaining documents including communications between a client and a client's legal advisers for the dominant purpose of use in litigation (even if they have apparently been initially created by others), a different rule applied in the context where legal advice privilege was being sought.
This was privilege which related to confidential communications passing between a client and its legal adviser for the purposes (which have to be a dominant purpose) of gaining legal advice.
Justice Kenny ruled that where, as in the case before her, litigation is "neither pending nor contemplated, communications between a person or his legal adviser and a third party (which is not an agent of either of them) are not privileged, even though the communications were made for the purpose of giving or obtaining legal advice."
The courts have resisted attempts to extend this advice privilege to communications between a client's solicitors and a third party where that third party was not making the communications as an agent of the client seeking the legal advice.
In these circumstances while privilege would extend to communications between a client and its lawyer, the privilege does not extend to agents such as accountants.
Where a third party (not being a lawyer) prepares or brings into existence a report for a client, even though the report was sought by the client for the dominant purpose of legal advice, it would not enjoy the protection of legal professional privilege. The documents must in fact be prepared by the lawyers or must be structured in such a way that the lawyer is the person that is providing the documentation and the advice in related matters to the client.
The position is similar in the United States, Canada, the UK and New Zealand.
In this case the court held that it was for the taxpayer to establish that the communications contained in the documents attracted legal professional privilege. On the views of the court the documents did not attract privilege because, they came within the categories of documents prepared by non-lawyers for the purposes of the client.
While this might be seen by some as an unfair advantage enjoyed by lawyers it is in line with the way in which the issues of legal professional privilege have developed over the years.
It will be interesting to see how the Full Federal Court and perhaps the High Court deals with this issue in due course.
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