An Australian Federal Court has ruled that accounting giant PwC overused legal professional privilege when representing a tax client—a move that could deter clients from using multi-disciplinary practices and make their law-and-consulting offerings more difficult to manage, law firms say.
But the Big Four accounting firms see the judgment as a vindication of their business model because it held that a lawyer-client relationship exists in the context of multi-disciplinary practices (MDPs), affording clients the right to claim legal professional privilege over confidential communications.
The case is the first time legal privilege in and MDP has been tested before an Australian court and will likely have ramifications for mixed law and consulting offerings. Legal professional privilege is known in some jurisdictions as attorney-client privilege.
The decision stems from a case heard last year, in which the Australian Taxation Office (ATO) disputed claims of legal professional privilege over 15,500 documents claimed by PwC on behalf of its client Flora Green, a subsidiary of Brazilian meat processor JBS Global.
The tax office argued the form of the engagements did not establish a relationship of lawyer and client sufficient to claim legal professional privilege, and the services provided by PwC were not those of a relationship between lawyer and client sufficient to claim legal professional privilege.
It also argued the documents in dispute were not communications made for the dominant purpose of giving or obtaining legal advice from one or more of PwC’s lawyers.
To decide the case, Justice Mark Moshinsky examined a sample of 116 documents, and found 49 were privileged, 6 partly privileged and 61 not privileged.
Moshinsky said in his ruling that in many cases the communication did not satisfy the dominant purpose test for privilege. “That is, I have concluded that the document is not (and does not record) a communication made for the dominant purpose of giving or receiving legal advice,” he wrote.
However, he rejected the tax office’s arguments about the general nature of the relationship between PwC and JBS Global, saying he was satisfied that at least in some instances, a lawyer-client relationship existed.
For professional services firms like the Big Four, this was the key part of the ruling.
“The Federal Court judgment has endorsed the provision of legal services through an MDP,” said Martin Caplice, Asia-Pacific tax controversy leader at EY, who also rejected assertions the ruling reduces the attractiveness of multidisciplinary offerings.
“Significantly, the Commissioner of Taxation failed in his attempt to generally impugn the provision of legal services by PwC Australia under its MDP engagement structure as not creating a lawyer and client relationship.”
Caplice and others noted they were commenting on what they know from the preliminary judgment. Justice Moshinsky’s full reasoning had not yet been released.
Caplice noted that the manner in which EY provides legal services is very different from those considered in the dispute with PwC.
“EY provides legal services pursuant to a lawyer and client relationship where the legal partner contracts and interacts directly with clients. We do not interpose non-legal practitioners between our lawyers and the client, nor do we have our non-legal practitioners act as either our client’s agent or the agent of our lawyers,” he said.
Angelina Lagana, partner and national tax dispute resolution & controversy leader at KPMG Law, said the ruling does not change the law on legal professional privilege and was based on the particular facts and circumstances surrounding the lawyer-client engagement in question.
“KPMG Law has never had any of their client LPP claims challenged by the ATO,” she said.
PwC provided a one-line statement about the ruling. “PwC Australia welcomes the clarity brought by the Federal Court judgment on this complex area of law,” the firm said.
Deloitte did not comment.
Multi-disciplinary practices blend the use of lawyers and consultants to provide tax advice to multinational companies in an attempt to become a one-stop-shop for major clients. At the same time, the ATO is increasing its scrutiny of international companies operating in Australia.
“This type of holistic offering may become more difficult to manage, while also claiming the benefit of legal professional privilege,” said Jehan-Philippe Wood, a commercial disputes and insurance partner at Clyde & Co.
“The alternative is a more segregated approach to different types of work, but this runs counter to what MDPs seek to achieve and may not be what the client wants.”
The decision may deter clients from MDPs, to the extent it suggests an MDP’s claim of legal professional privilege might be more readily challenged or be more likely to fail than a similar claim by a traditional law firm.
“To those clients who are concerned about confidentiality and the benefits of claiming [legal professional privilege], this decision may give law firms or those MDPs who can demonstrate effective management of these issues a competitive edge,” Wood said.
In his full judgment, released this week, Justice Moshinsky said privilege does not extend to advice provided by third parties simply because they are then “routed” to the legal adviser.
K&L Gates commercial litigation lawyers Christien Corns and Sam Rappensberg agreed, noting that the decision highlights the advantage of engaging a separate law firm to provide legal services so as to best preserve claims of legal professional privilege.
“The ‘lawyer-client’’ relationship is more obvious, and claiming privilege over communications made in the context of that relationship is arguably less susceptible to challenge,” they said. “The judgment ought remind hybrid firms to clearly separate their legal and non-legal work for clients so that there is no unintended waiver of privilege over any otherwise privileged legal communications.”
Annemarie Wilmore, a partner specializing in tax dispute resolution at Johnson Winter & Slattery, also said the judgment will potentially reduce the attractiveness of multidisciplinary firms.
The judgment puts MDPs’ taxpayer clients on notice that if non-lawyers are providing tax advice, each and every communication needs to be individually assessed to determine whether its dominant purpose is for giving or receiving legal advice, or recording that advice, she said. Where both non-lawyers and lawyers are providing advice, care needs to be taken to ensure the advice from the lawyers is not inadvertently waived.
“This is more challenging in a multidisciplinary practice than in a traditional law firm, as typically in a multidisciplinary practice context there are several non-lawyers assisting the lawyer to provide its legal advice,” she said.
Some clients may now be concerned that the tax office will continue to challenge legal professional privilege claims in a multidisciplinary practice context, she added.
However, the tax office rejected this suggestion and also rejected any suggestion that law firms have an advantage when claiming privilege.
“Legal advice may be privileged regardless of whether it is provided by lawyers at a traditional law firm or a multi-disciplinary practice. On the other hand, lawyers and non-lawyers in a traditional law firm or a multi-disciplinary practice may provide advice that is not privileged,” ATO Deputy Commissioner Rebecca Saint said in a statement.
“We do not accept blanket claims for privilege made on the basis that the engagement was with a traditional law firm or an agreement to provide legal services is in place.”