The High Court today refused special leave to appeal the decision of the NSW Court of Appeal in Westpac Banking Corporation v 789TEN Pty Ltd [2005] NSWCA 321. The High Court held that an appeal would have insufficient prospects of success to warrant a grant of special leave. This decision will have a significant impact on the relationship between companies and their auditors and perhaps with other external advisers, such as between insurers and actuaries or loss adjusters.
Previously, the Court of Appeal had unanimously held that letters between a company’s solicitors and its external auditors were not privileged because those documents were not created for the dominant purpose of providing legal advice or services to the company. Their Honours held that the legal services were rather provided to the auditors, who are exercising an independent statutory function. Both sections 118 and 119 of the Evidence Act 1995 (NSW) provide that client legal privilege only attaches when a client’s lawyers are providing the relevant legal advice or services to the client (or its agents). As a result, advice from Westpac’s solicitors to its auditors regarding the reasonableness of the directors’ estimate of liability for the proceedings at hand was not privileged. That advice would inevitably have included at least some analysis about the prospects of success in the proceedings.
As the Court of Appeal recognised, the effect of the decision is that parties in litigation with companies will routinely subpoena that company’s auditors for production of these solicitor representation letters. Their Honours acknowledged that these letters often contain highly sensitive information and that this would create difficulties in the proper performance of the audit function. For example, the legitimate concern of companies seeking to preserve the confidentiality of their legal advice might lead to the issue of a qualified audit opinion. However, the Court of Appeal stated that the only solution to this dilemma is legislative intervention.
Without any legislative intervention, one solution to the difficulty would be for the auditors to themselves retain solicitors (perhaps the company’s own solicitors) to advise about the relevant proceedings. In that case, the auditors will have the benefit of privilege. Presumably, the terms of the retainer between the company and the auditors would require the auditors to maintain that privilege. However, such a solution is riddled with difficulties and is unlikely to be commercially feasible.
A simpler solution would be to disclose to the auditors only documents that have already been created for a privileged purpose and rely upon the exception to waiver in section 122(2)(a) of the Evidence Act. Unfortunately, the construction of that section has not been settled, and as the law stands there is a possibility that privilege could be lost over those documents.
Without a satisfactory solution, it is likely that there will be tension between the auditors’ desire to independently verify directors’ estimates and a company’s desire to keep sensitive information privileged and confidential.
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