Federal Court guidance on application of legal advice privilege to typical legal and non-legal email chain communications involved in a complex commercial transaction

By 08/08/2014Privilege
legal privilege in email chains

The Federal Court (Beach J) has recently handed down a decision which provides general and specific guidance on the application of legal privilege to typical legal and non-legal email chain communications involved in a complex commercial transaction.  The case is Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Limited (No 4) [2014] FCA 796.

Background

In 2011 a share sale agreement was executed under which Asahi acquired shares in Flavoured Beverages Group Holdings Limited (FBGHL) from various respondents.

In 2013 Asahi commenced proceedings claiming that certain respondents had made misrepresentations concerning the financial position of FBGHL.

In 2014 the respondenemats issued subpoenae to, inter alia, Nomura, Deloitte and Rothschild (the third party advisers).

Together with the law firms Freehills and Bell Gully, the third party advisers and others were engaged by Asahi as “exclusive advisers” for the share sale transaction.

Orders were made that Asahi be given first right of access to documents produced by the third party advisers and give to the respondents a list of documents over which privilege was claimed and the basis for the privilege claims.

The respondents disputed Asahi’s claims for privilege on the basis that the third party advisers were engaged for the purpose of providing financial and commercial advice to Asahi in relation to the transaction.

The main issue for determination was whether relevant communications were made for the dominant purpose of obtaining or providing legal advice, despite being made by or disseminated to the third party advisers, in many cases in the absence of being sent or copied to Asahi’s lawyers (at [11]).

The matter concerned the assessment of claims for legal advice (ie not litigation) privilege made under the common law, rather than under s 118 of the Evidence Act 1995 (Cth).

Statement of Principles

Beach J commenced by setting out the following well-known general principles:

1.  “[The party asserting the privilege bears] the onus of establishing the claims, including each factual element necessary to establish the requisite dominant purpose. In that respect, focused and specific evidence is required in respect of each communication, rather than mere generalised assertion let alone opaque and repetitious verbal formulae. There should be sufficient evidence which proves directly or by inference that the dominant purpose for the communication was for the relevant client to be given or to obtain legal advice. The communication also has to be confidential.” (at [29])

2.  “[T]he relevant time for ascertaining purpose is when the communication was made. If the communication was a written communication, the relevant time is when the document came into existence. If the communication was constituted by the forwarding of a copy document, the purpose for the creation of the copy document at the time that the copy was created is what is relevant.” (at [30])

3.  “[T]he relevant purpose may be either that of the author or initiator of the communication, or the person at whose request or under whose authority the communication was created or made. The circumstances will dictate the focus.” (at [31])

4.  “[T]he purpose is to be objectively ascertained. Evidence of the subjective intention of the author or person requesting the creation of the communication (document) is significant but not conclusive. Purpose can also be determined from the content of the document understood in its full context. Indeed, the latter analysis can carry greater weight, particularly over generalised hearsay or even compounded hearsay evidence from a person other than the author or person requesting the creation of the communication (document).” (at [32])

5.  “[I]t is not sufficient to show a substantial purpose or that the privileged purpose is only one of two or more purposes of equal weighting. The requisite purpose must predominate. It must be the paramount or most influential purpose. One practical test is to ask whether the communication would have been made (whether the document would have been brought into existence) irrespective of the obtaining of legal advice. If so, the communication (document) may not satisfy the dominant purpose test. Such a test will entail addressing the question of the intended use(s) of the document which accounted for it being brought into existence.” (at [33])

6.  “[I]t may be that that the entirety of a document may be privileged. Alternatively, it may be that only part of a document meets the dominant purpose test. A particular document may contain or consist of many communications, such as an email chain, only some of which were made for the requisite dominant purpose.” (at [34])

7.  “[A] document may be privileged to the extent to which it records a privileged communication, even if the document itself would not satisfy the dominant purpose test.” (at 35])

8.  “[The Court has] the power to examine the documents in question and should not be reticent in exercising that power.” (at [36])

His Honour then went on to distil a statement of principles from Pratt Holdings Pty Ltd v Commissioner of Taxation (2004) 136 FCR 357 (Pratt) in cases where documents concerning direct lawyer/ client communications are not involved, but rather cases involving internal third party adviser documents, or communications between a third party adviser and a client:

1.  “[A] communication made by a third party adviser to a client’s lawyer if made for the requisite dominant purpose of the client obtaining legal advice from the lawyer will be privileged. Direct evidence of purpose can come from the third party adviser, the lawyer or the client. The purpose may also be readily inferred given the directness of the communication from the third party adviser to the client’s lawyer. Further, it is not necessary to ask whether the third party adviser was acting as the agent of the client, including in making the communication to the client’s lawyer. The absence of such an agency does not deny the existence of the privilege attaching to the communication, although its presence may fortify it. In terms of the third party adviser’s status, the important characterisation 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.” (at [38])

2.  “[A] communication made by a third party adviser to a client if made for the requisite dominant purpose of the client then obtaining legal advice will be privileged. Again, direct evidence of purpose can come from the third party adviser or from the client; it can also come from the lawyer, but that usually may not be as probative if the lawyer was not a party to the communication. The purpose is not as readily established as in the previous scenario.” (at [39])

3.  “[W]here a third party such as an accountant, broker, merchant banker, financial adviser, due diligence specialist and others of a non-legal genus perform work for a client in a non-litigation setting, care needs to be taken with analysing the precise purpose for each communication. Take a substantial acquisition or merger. A client may engage and seek advice from a number of non-legal advisers as well as consulting lawyers. Legal and non-legal advice might be sought on the structure, bid vehicle, terms and conditions of any offer or agreement, finance of the bid vehicle, due diligence of the assets and liabilities of the target, assessment of the financial metrics of the target pre and post-acquisition such as EBITDA including any underlying projections, and so forth. In short, legal and non-legal advice might be sought on the same topic so that the topic in all its dimensions is fully analysed by and for the client. The various advices given by the non-legal advisers “will rarely be capable of attracting privilege for the reason that they will almost invariably have the character of discrete advices to the principal as such, with each advice, along with the lawyer’s advice, having a distinctive function and purpose in the principal’s decision making…” (Pratt at [46]).

4.  “Even where all such advices are interrelated, that is, they provide a collective basis for an informed decision by the client, this does not deny the force of the previous point that non-legal advices will rarely attract privilege.” (at [40]-[41])

5.  “[I]f non-legal advices are provided to a client who then chooses to provide them to its lawyers, that does not clothe the original non-legal advices with privilege. They ordinarily will have been prepared for a non-legal purpose. But copies that might subsequently be created by a client and given to its lawyers may attract privilege (Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501). Generally, privilege does not extend to non-legal advices to the client simply because they are at the same time or later “routed” to a legal adviser.” (at [42])

6.  “[E]ven if a client, in procuring a non-legal advice from a third party adviser has it in mind at the time that it requests that advice that it will also submit the non-legal advice to its lawyer, that may just demonstrate a multiplicity of purposes for the creation of the non-legal advice. But in such a scenario, the privileged purpose is unlikely to be the dominant purpose. Each communication and the reason for its creation needs to be carefully reviewed.

… in elaboration of this last point, a client may have conducted itself so as to demonstrate that the procurement and use of the non-legal advice was not for its communication to its lawyer, but rather to principally advise the client on the very subject matter of that non-legal advice. Further, the less the client performs the role of a conduit of that non-legal advice through to its lawyer and the more it “filters, adapts or exercises independent judgment” in relation to that advice, the less likely the dominant purpose test is likely to have been satisfied (Pratt at [47]). From such behaviour of the client, it can more readily be inferred that the dominant purpose for the creation of the non-legal advice was for a non-privileged purpose.” (at [43]-[44])

The “continuum” argument

The applicants contended that legal privilege attached to various drafts of an Indicative Offer in circumstances where:

  • Freehills had been briefed to advise on, and had advised on those drafts;
  • the drafts that it had advised on were modified to incorporate Freehills’ advice;
  • such drafts were circulated to other non-legal advisers of Asahi including Nomura;
  • Nomura and other non-legal advisers would review those drafts and provide input to Asahi;
  • Freehills as the lead legal advisers signed off on the final form of the document.

His Honour rejected this contention (at [66]-[72]) on the evidence and made the following important observation:

“I do not accept the argument that where you have an important transactional document where multiple non-legal advisers are providing their own commercial (non-legal) advice, together with the legal advisers, who are the ultimate gate keepers, that the non-legal advisers internal considerations and their separate advice, ipso facto is for a dominant privileged purpose.  And that is so even if the non-legal advice is ultimately passed back to the lawyers, directly or through the client.  Each specific communication needs to be looked at with considerable care.  Prima facie, the internal non-legal adviser considerations would not be for a dominant privileged purpose.”

Further, there was a conceptual problem with a contention:

“that in a sequence of drafts of a particular document, if a lawyer has input into a draft, then all later drafts are privileged.  What happens if the first draft was created by the client, say a letter of offer or heads of agreement?  What happens if the first draft is created by a non-lawyer third party adviser?  What happens if for later drafts there is 90% input from non-lawyer third party advisers and 10% input from the lawyers?  What happens if the lawyer adds or changes no content to the non-lawyers’ draft, but advises that it is acceptable?  The advice is privileged, but the draft?  To accept the breadth of the applicants’ submissions would be to accept that privilege applies to these drafts.” (at 69])

Moreover:

“Unless for a specific draft, something can be pointed to such as “lawyer only” mark ups, in my view you cannot simply say that the whole draft is privileged.  More precise detail is required.  On the facts of this case, I have no such detail.  This is not a case where the particular communications that I am dealing with are draft agreements prepared by a lawyer or the draft agreements are prepared by others but with a lawyer’s handwritten observations, notes and cancellations thereon, which are privileged.” (at [70])

His Honour applied the above principles in a detailed analysis of 19 documents comprising email chains between Asahi and its legal and non-legal advisers.

Comment

A typical complex commercial transaction involves email chain communications between lawyers, the client and third-party advisers.  Unless particular care is taken to ensure that each such communication is created with the requisite dominant privileged purpose of obtaining or providing legal advice, many such communications will be exposed to the other parties in any subsequent litigation.