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Focus: Legal professional privilege – in-house counsel and the 'independence' test

6 October 2010

In brief: A recent Federal Court decision throws further light on the increasingly vexed question of whether in-house lawyers are sufficiently 'independent' from their employer to satisfy the requirements of legal professional privilege. Importantly, the decision adds support to the proposition that the decision in Rich v Harrington may have overstated the degree of independence necessary. Partner Richard Harris (view CV) and Senior Associate Stephanie Wee consider the implications of the decision.

How does it affect you?

  • The Dye v Commonwealth Securities Limited (No 5)1 decision again highlights first, the importance of the ability of in-house counsel to establish that, in the particular circumstances in which the claim for privilege is made, the advice is 'independent' and, second, that a personal interest in the outcome of the given issue will undermine the ability of the lawyer to establish that independence.
  • However, the decision in Dye does suggest that the test for independence outlined in the controversial 2007 decision in Rich v Harrington2 may have overstated the nature of the independence requirement and suggests that the obligation may go no further than that the lawyer be professionally qualified and acting in a professional capacity on the issue in question.

Legal professional privilege and Rich v Harrington

Client legal privilege is a fundamental common law right protecting, in certain circumstances, communications between a client and a lawyer made for the dominant purpose of seeking or providing legal advice or for the purpose of actual or anticipated legal proceedings from forced disclosure. For a communication to be privileged, the lawyer involved must be providing the advice in an 'independent' capacity.

The decision in Rich v Harrington (as summarised in Focus: Privilege - May 2008), and a number of other recent Australian decisions, have focused on the nature of the 'independence' requirement and the question of whether in-house counsel, given their status as an employee or partner of the organisation, can satisfy the independence test. Those decisions reflect a broader international focus on the issue and scrutiny of the nature of the relationship between the legal adviser and the client (see Focus: In-house lawyers and legal professional privilege: the European view continues).

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The facts in Dye

Justice Katzmann's decision in Dye arose from a dispute between the parties regarding claims for privilege made over communications between Commonwealth Securities Limited and its in-house counsel. The in-house counsel gave evidence and was cross-examined about the specific roles he performed in the course of his employment. It was acknowledged that his role involved both legal and non-legal functions.
In essence, the court found that:

  • the fact that the lawyer involved also performed some non-legal functions in the course of his role did not undermine the ability to claim privilege. Any communications made in the capacity as a lawyer could still be privileged;
  • while some of the lawyer's other employment responsibilities could have affected his independence, that does not necessarily mean that the communications can't be privileged;
  • what is necessary is to examine the precise capacity the lawyer was acting in at the time of the communication; and
  • whether the 'independence' requirement did require the lawyer to establish that the advice was of an 'objectively independent character' (the judge expressed reservations as to whether the test was that high); the lawyers here had satisfied that criterion.

Accordingly, the claims for legal professional privilege ultimately turned on the fundamental test of whether the documents in dispute were created for the dominant purpose of obtaining or providing legal advice.

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Implications

The decision highlights that there remains a degree of uncertainty as to the circumstances in which in-house counsel will be able to satisfy the 'independence' requirement in relation to privilege. The determination of those claims will involve a detailed and careful consideration, in the context of the particular facts of each case, of:

  • the degree of professional detachment in the relationship between client and adviser; and
  • the degree to which the adviser has a personal interest in the issue or personal loyalty to the client.

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Comment

The concept of 'independence' remains a touchstone in the court's consideration of claims for privilege involving in-house counsel. Given the continued focus of courts on the issue and the risk that claims for legal professional privilege will fail in circumstances where independence is not established, businesses should endeavour to take structural precautions to help preserve and establish the independence of their in-house legal resources. It would also be prudent for businesses to take precautions to mitigate or remove the 'independence' risk in relation to issues involving heightened degrees of potential litigation, regulatory investigation or reputational risk.

Footnotes
  1. Dye v Commonwealth Securities Ltd (No 5) [2010] FCA 950.
  2. Rich v Harrington [2007] SFA 1987.

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