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Good Housekeeping: Avoiding the Pitfalls of In-House Practice

Cover Story

Cite as: December 2012 86 (12) LIJ, p.28

Recent cases considering the dominant purpose test, engagement of experts and handling corporate groups highlight the different ways in which courts view in-house counsel and their private practice colleagues.

By Sascha Hindmarch and Martin Meredith

Often commentaries on “in-house privilege” revolve around the concept of independence and putting in place in-house structures and practices to ensure the independence of the office of general counsel (or its equivalent). To a certain extent this has lost sight of the dominant purpose test and some specific difficulties in-house lawyers face that differ from their external counterparts. Although touching briefly on the “independence” issue, the main focus of this article will be on the court’s reasoning associated with the dominant purpose test in the in-house context and specifically in-house challenges regarding expert engagement and corporate groups.

The Difficulty

It is well established that the dominant purpose test underpins privilege claims and as such recognises that a lawyer may produce a document that has a range of purposes. The critical issue is determining the dominant purpose of the document.1 While the concept is easy, the practical reality of ensuring it is followed in-house is not so straightforward.

This difficulty from an in-house perspective – as identified by Lord Scott in Three Rivers District Council v Governor of Bank of England (No. 6)2 – stems from the courts’ view that an in-house lawyer is a “client’s ‘man of business’” and therefore their “advice may lack a relevant legal context” (at [38]).

It goes further. The independence of the legal advice also creates a difficulty – a relationship existing between the independence of the advice and the dominant purpose of a document.3 Having said that, the idea that independence is a condition precedent to privilege has been rebutted,4 with cases like Zemanek v Commonwealth Bank5 and Australian Hospital Care Pty Ltd v Duggan (No. 2)6 supporting that position. Further, Tamberlin J, co-writing extra-judicially, has observed that:

“[T]he best approach to deal with the emerging trend of impugning the independence of in-house counsel in the context of disputes over privilege is for the court to inspect the documents in question and obtain as much evidence as possible so that it can make an informed judgment as to whether or not the documents satisfy the dominant purpose test.”7

While it is difficult to argue that there is a prima facie presumption against the independence of in-house lawyers’ advice,8 the discussion below shows that courts appear to view the status of in-house lawyers differently to that of external lawyers. It reinforces that in-house lawyers need to be particularly mindful when it comes to these issues and ensure that appropriate mechanisms are in place to protect their communications. These difficulties are particularly prevalent when it comes to in-house lawyers briefing experts or advising related entities within a corporate group.

Expert Engagement – From the Inside or Outsource?

The different status of the in-house lawyer amplifies the challenges encountered when experts are engaged, as seen in two recent cases: Sydney Airports Corporation Ltd v Singapore Airlines Ltd & Qantas Airways Ltd (Sydney Airports)9 and Perry & Anor v Powercor Australia Ltd (Powercor Australia).10 Objectively proving the dominant purpose for the creation of a document causes problems for the in-house lawyer, as the courts place little weight on any subjective intention. Arguably, this is because the court will take the view that a document prepared (or caused to be prepared) by an in-house lawyer is more likely to be for multiple purposes and not necessarily for the dominant purpose of providing legal advice. Rightly or wrongly, the rationale is that a client is more likely to consult their in-house legal adviser on “non-legal” matters than they are to consult an external lawyer.

Sydney Airports

Sydney Airports illustrates this point well. A senior in-house counsel commissioned a report on an accident at Sydney airport. Privilege was claimed over the report on the basis that it was prepared for the dominant purpose of litigation. However, on the evidence it was possible to assign four purposes to the production of the report – for litigation, to identify the cause of the incident, to show the circumstances in order to allay the concerns of the regulator and to make recommendations to avoid future accidents (at [15]). Spigelman CJ noted that it was open to the judge at first instance to apply an objective test and refuse to give the in-house lawyer’s subjective intention determinative weight (at [44]). The claim for privilege failed.

The case gives an insight into the court’s thought process when it comes to its perception of the in-house lawyer. On appeal, counsel submitted that an in-house lawyer was equivalent to an external lawyer for the purposes of privilege and that the court at first instance11 had treated the in-house lawyer differently by reason of her position.12

Tellingly, Spigelman CJ indicated that a legal practitioner’s status was a relevant consideration when it comes to assessing the purpose of a document’s existence:

“An in-house solicitor is, by reason of his or her position, more likely to act for purposes unrelated to legal proceedings than an external solicitor who, in the normal course, has no relevant function other than that involving legal proceedings and/or legal advice (at [24]).”

Such reasoning appears to indicate that courts apply a different mindset to in-house lawyers and illuminates a subconscious (or perhaps a conscious) presumption by the court that there is a distinction to be made between in-house and external lawyers.

Powercor Australia

The more recent example of Powercor Australia reinforces the difficulty for in-house lawyers and that the subjective intention of in-house counsel is not determinative when courts apply the dominant purpose test.

The proceedings arose out of the Victorian bushfires. Powercor sought to claim privilege over several reports concerning the cause of the fires, arguing that the in-house lawyer who commissioned the reports did so in order to provide legal advice in connection with anticipated litigation.

The evidence led was that the in-house lawyer discussed the possible legal implications of the fires with Powercor’s CEO shortly after the event. As a result, on her evidence, she was instructed to arrange an investigation into the fires so that she could give legal advice on Powercor’s overall exposure to the allegations (at [13] and [56]). Critically, no evidence was led from Powercor’s CEO.

It was submitted that there were multiple purposes for commissioning the reports in addition to the anticipated litigation – namely, to deal with the royal commission, to comply with reporting requirements under relevant legislation and to inform management of the cause so that it could take necessary steps as part of its normal business operations (at [57]). Moreover, it was argued that the mere fact that the reports were provided to the in-house counsel to facilitate legal advice was not determinative of the purpose underlying the documents’ creation (at [62]).

The claim for privilege failed, with Robson J finding that there were a number of reasons for obtaining the reports. One of the critical aspects of the case from an in-house perspective was the weight given to the failure to call the CEO to rebut the inferences that the reports were prepared for multiple purposes and not just to give legal advice.13 It goes to show that in-house lawyers need to be conscious of the reasons for the actions they are taking on behalf of the business and the instructions they are receiving from members of the business. In-house lawyers’ subjective views are simply not enough to satisfy the dominant purpose test.

Comparing with Waco & Centro No. 2

Comparative analysis of Powercor Australia and Sydney Airports with Inspector Anthony Nicholson (Workcover Authority of NSW) v Waco Kwikform Ltd (Waco)14 and Kirby v Centro Properties Ltd (No. 2) (Centro No. 2)15 – both dealing with the engagement of experts by external lawyers – also provides an insight into the court’s thinking when it comes to these matters.

In Waco Backman J considered whether internal investigation documents and a report into a workplace fatality were privileged. In contrast to Sydney Airports, in Waco external lawyers who had been retained by the defendant immediately after the accident to provide legal advice commissioned the investigation report on the accident. In particular, the external lawyers expressed in correspondence to their client that they were required to prepare a report so that legal advice could be provided and that it be marked: “Privileged and confidential – prepared solely for the purposes of obtaining legal advice” (at [21]).

In referring to Sydney Airports the argument run by Workcover was that the report was prepared for multiple purposes, including compliance with the defendant’s policy, detecting whether there was any fault in the system of work at the time of the accident and determining whether there was any breach by employees or subcontractors of the defendant’s policy (at [25]).

Comparatively, the court in Powercor Australia was willing to draw inferences (which required rebuttal) from the evidence that Powercor obtained the reports for multiple purposes. However, the court in Waco was not willing to draw those same rebuttal inferences. Instead it found that the documents were created for the dominant purpose of obtaining legal advice and, in fact, placed weight on the defendant’s external lawyers’ letter marked “privileged and confidential” and stating that the only purpose for providing the report was so legal advice could be obtained (at [35]).

Centro No. 2 provides another interesting comparative consideration of the issue. In that case a number of documents were the subject of privilege claims. The relevant documents related to reports prepared and investigations undertaken by external lawyers and accountants KPMG (at [47]–[48]).

Relying heavily on Powercor Australia, it was PwC’s contention that there were a multiplicity of purposes for the creation of the documents, of which any legal purpose was not dominant (at [62]). However, Bromberg J, in distinguishing Powercor Australia and upholding the claim for privilege, said:

“[T]he evidence before me showed that what had happened in relation to the classification of debt had been at least the subject of an initial investigation by management . . . [T]he involvement of lawyers and the use of legal expertise and assistance was . . . a necessary and legitimate part of the process of investigating Centro’s obligations . . . This was not a situation where the investigative report of non-lawyers is sought to be protected from disclosure simply because a lawyer has been instructed to evaluate a report once prepared and provide legal advice (at [92]).”

The end result and judicial comments in Waco, Centro No. 2, Powercor Australia and Sydney Airports provide an interesting dichotomy and raise questions as to whether courts perceive and treat in-house counsel differently from their external counterparts.

While much was made in Waco of the lack of evidence regarding the so-called “multiple purposes” and the letter from the external lawyers stating there was only one purpose, it does lead to the question of whether a different result would have occurred if the report had been commissioned by the defendant’s internal lawyers, as was the case in Powercor Australia and Sydney Airports. No doubt the in-house lawyers in Powercor Australia and Sydney Airports would say that their involvement and “the use of their legal expertise and assistance was a necessary and legitimate part” of the process of investigating their companies’ obligations in much the same way as it was for the external lawyers in Centro No. 2.

Authoritative conclusions on the courts’ treatment of in-house lawyers are difficult to reach, but there does appear to be an inconsistency that puts the in-house lawyer on notice to take care. While the divide may be closing between the in-house and private practice lawyer,16 a gap remains.

Corporate Groups

Corporate groups with related entities also have the potential to cause difficulty for in-house lawyers when it comes to claiming privilege over communications. The inherent burden for in-house counsel is to ensure that they are clear about for whom they act and to whom their advice is to be provided, a lawyer-client relationship being fundamental.

Wingecarribee Shire Council v Lehman Brothers Australia Limited (in liq) (No. 5)17 is illustrative of the care in-house lawyers need to take on the issue. The applicants argued that the relevant documents were brought into existence for multiple purposes, including advice sought by and provided to other related entities (at [24]). On the latter point it was argued that there was no relevant lawyer-client relationship between the in-house lawyer and the related entities (at [24]).

Yates J held that, where a lawyer is employed by one corporate entity and gives advice to another entity within the corporate group, that communication would not necessarily be privileged. Notwithstanding that there was the purpose of giving legal advice, one of the purposes was for the provision of such advice to a related entity (at [27]). As Yates J observed:

“[I]f there existed an equal purpose for the creation of a document that was foreign to the respondent, it could not be said that the dominant purpose for its creation was to obtain legal advice or assistance for the respondent (at [29]).”

Yates J also found that on the evidence no lawyer-client relationship existed between the in-house lawyer and the related entities (at [34]). In the court’s view, giving the advice to other related entities did not demonstrate whether a lawyer-client relationship existed between the in-house lawyer and other entities at the time the documents were created. It was not enough to say that the in-house lawyer owed duties of confidentiality in respect of the communications contained in those documents at the time they came into existence. As the court noted, “[m]ore is required to establish a lawyer-client relationship at a relevant time” (at [35]).

Practical Tips

The cases demonstrate that privilege remains more difficult for in-house counsel than external lawyers. As a result in-house lawyers need to be more vigilant and disciplined in their approach. A necessary first step to address the issue is to have appropriate internal legal structures, mechanisms and protocols in place (for example, reporting lines, practising certificates and employment contracts). In addition, some practical tips to guide the in-house lawyer, particularly when it comes to dealing with experts and corporate groups, include the following:

1. It may be trite, but always carefully consider the purpose of the document. Do not mix commercial and legal advice and be sure to control circulation. Make it clear what the purpose of the document is and that the document is confidential (and remains so).

2. Ensure that necessary evidence as to the purpose of the document is collected from all relevant sources at the time of taking instructions.

3. If an in-house lawyer engages forensic experts, ensure that he/she has the necessary skill base to undertake the required task, not only to protect privilege but also to ensure that the experts receive appropriate instructions. If in doubt, outsource to an external provider.

4. Consider whether an expert should be asked to provide multiple reports separating facts from opinions.

5. Remember who the client is, especially where there are corporate groups involved, and make it clear to whom the advice is being given.

6. Only disclose the document – even to related entities – where there is common interest privilege.

While these practical tips are by no means exhaustive or foolproof, they will assist the in-house lawyer to remain alert to, and disciplined about, the job at hand.

SASCHA HINDMARCH is the former general counsel at the University of South Australia. MARTIN MEREDITH is a barrister at Commercial Chambers, Adelaide. The numbers in square brackets in the text refer to the paragraph numbers in the judgment.

1. Esso Australia Resources Ltd v Commissioner of Taxation (1999) 201 CLR 49.

2. [2005] 1 AC 610.

3. Kirby v Centro Properties (No. 2) [2012] FCA 70 at paragraph 11, quoting AWB Pty Ltd v Cole (No. 5) [2006] FCA 1234 at paragraph 44.

4. B Tamberlin and L Bastin, “In-house counsel, legal professional privilege and ‘independence’” (2009) 83 Australian Law Journal 193 at 197.

5. [1997] FCA 1016.

6. [1999] VSC 131 at paragraph 54.

7. Note 4 above, at pp197–8.

8. Note 6 above at paragraph 67. Compare Southern Equities Corporation Ltd (in liq) v Arthur Andersen & Co (No. 6) [2001] SASC 398 at paragraph 8 and Telstra Corporation Ltd v Minister for Communications (No. 2) [2007] FCA 1445 at paragraphs 12 and 36.

9. [2005] NSWCA 47.

10. [2011] VSC 308, upheld on appeal in Powercor Australia Ltd v Perry [2011] VSCA 239.

11. Note 9 above at paragraph 17.

12. Note 9 above.

13. In addition to the finding at first instance, see the Court of Appeal’s discussion: [2011] VSCA 239 at paragraphs 21–35.

14. [2009] NSWIRComm 123.

15. [2012] FCA 70.

16. T de Govrik, “Closing the gap on the private profession” (2012) 22(1) The Australian Corporate Lawyer 10.

17. [2011] FCA 245.


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