Legal professional privilege: the risks with intra-corporate group legal advice

A recent Federal Court judgment in the long running Lehman Bros cdo battle royale, Wingecarribee Shire Council & Ors v Lehman Bros Aus Limited (in liq) ¹, looked at, in part, the risks that arise in applying privilege to intra-corporate group communications. Legal counsel need to properly identify the client within a corporate group who seeks the legal advice and the reasons or purpose for the advice. If care is not taken on these threshold issues, privilege may not exist and confidential or sensitive commercial communications might be exposed to outside scrutiny.

Ruling

During the current class action trial in NSW brought by the local councils against Lehman Bros Australia Ltd (in liq) (Lehman) for damages arising out of investments in Lehman cdo financial products, the applicants sought production of certain Lehman "group" documents over which privilege claims were made. The application was heard by a Judge other than the Trial Judge.

The Court ordered production of all but one of the documents, ruling that Lehman's privilege claims could not be sustained. The Court made a number of findings concerning the threshold test for privilege claims and the protections granted to intra-corporate communications.

Facts

The following facts are relevant to the Court's ruling on the privilege issues.

• The Lehman position was set out in an affidavit of Shaun Ansell, a corporate lawyer employed by Lehman. Mr Ansell was not cross examined on his affidavit.
• Mr Ansell was employed by Lehman from March 2007 until October 2008. In late 2007, Lehman changed its named from Grange Securities Ltd to Lehman Brothers Australia Ltd following the acquisition of certain shares in its issued capital by "Lehman Brothers entities". These entities were not identified.
• Mr Ansell explained his day to day responsibilities in providing legal and compliance advice to Lehman.
• In September 2007, following complaint by Lehman's customers, Lehman conducted a review of the sale of financial products by its Fixed Income Division. This included a review of the prevailing sales practices to allow Lehman and the other Lehman entities to seek (and obtain) legal advice: (1) in relation to Lehman's legal position; (2) whether Lehman could discontinue the employment of various employees, and (3) whether the Lehman entities (as purchaser of Lehman) had claims arising from the sale of the financial products.
• Mr Ansell's evidence was that the relevant communications were created for each of the three purposes outlined above.

Judicial reasons - privilege and intra-corporate communications

Privilege principles

The Court reinforced the principle that the dominant purpose test focuses on the creation of the particular communication and in whose name the communication is created².

The Court found that the various purposes which motivated the lawyer's conduct were all equal with no one purpose being "the ruling, prevailing or most influential purpose"³. The privilege claimed was that only of Lehman and where there were mixed purposes, and one was foreign to Lehman (for the "other entities"), that purpose was not the dominant purpose⁴.

For these reasons, Lehman failed to establish with "focused and specific evidence"⁵ that a dominant purpose existed for Mr Ansell creating 5 of the 6 relevant communications constituting legal advice given to Lehman.

Intra-corporate communications

The question of privilege and the flow of communications within corporate groups were raised by Lehman as an additional argument.

The Court rejected Lehman's arguments, holding that the issue of privilege applying within corporate groups was on the authorities⁶, properly a consideration of: (1) whether privilege in fact existed, and (2) whether privilege had been waived.

The critical test in determining whether a client has waived privilege is set out in the judgment of the High Court of Australia in Mann v Carnell ⁷, which involves a consideration of whether particular conduct (in disclosing the advice) is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. As no privilege existed, the question of waiver did not arise

Lessons on privilege and corporate communications

The following lessons can be taken from this judgment:

• for a communication to be privileged, it must have been created for the dominant purpose of relevantly, the giving or receiving of legal advice;
• there may be several purposes for which a communication is created, but if the "legal advice" purpose is not the "ruling, prevailing or most influential purpose", the communication will not be privileged;
• intra-corporate communications can properly be privileged so long as they satisfy the threshold dominant purpose test and if they do not, there is no privilege;
• when legal advice is provided within a corporate group to one or more "clients" (the identified corporate entities), care must be taken to properly identify "the client", to separate out the legal advice to each "client" to ensure the lawyer's legal advice, given to the client(s), is protected by privilege;
• where a claim for privilege is asserted, the onus is on the party asserting the claim to produce focused and specific evidence in support of the claim for privilege.

If these steps are not properly considered at the time that potentially privileged communications are created, clients run the real risk that no privilege exists in such documents and they might have to be produced to a commercial opponent, an aggrieved investor or a curious regulator!