Commercial Litigation: When is your lawyer not really your lawyer?

Date: May 19, 2008

Authors: Michael Pickering B.A., LL.B. (Hons.), LL.M., M. A.

Over the last decade, there has been enormous growth in the appointment of in-house lawyers employed by corporations to provide a range of legal services from corporate covenants to debt collection to litigation support and advice. These lawyers are generally called in-house or general counsel. 

Over this last decade, the position of such in-house general counsel have become more powerful with chief lawyers of large public companies commanding salaries well in excess of partnership returns for the partners of large city law firms. This is an indication of how important these companies view their in-house lawyers and the ability of those companies and senior executives to seek confidential and legally privileged advice and assistance. 

This arrangement, however, is dependent upon the law recognising that the relationship between a corporation and its employees on the one hand and the in-house corporate counsel on the other hand is that of client and lawyer which will attract legal professional privilege and obligations of confidentiality. 

As this article will show, this recognition is being challenged overseas by the European Commission.

What is at stake in this European dispute is legal privilege which is the long-standing convention whereby someone accused of a crime can discuss his or her evidence with his or her lawyer without fear that those discussions could be used against them. Details revealed in private conversations with your lawyer cannot be passed to prosecutors to bolster a case against you.  

The privilege also applies within a business context. If a company, wary of operating in an increasingly aggressive regulatory environment, discusses its sales techniques or the method it uses to price its product with its lawyers, those “privileged” discussions should not find their way into the hands of competition regulators such as the Australian Competition and Consumer Commission or the Australian Securities and Investments Commission which are investigating allegations of price fixing against the company.

In Europe in 2003, the United Kingdom subsidiary of Akzo Nobel, a Dutch chemicals business, was raided by the European Commission’s competition arm. This organisation is generally similar to the Australian ACCC. Whilst rummaging around Akzo’s offices collecting evidence, the EC investigators also seized documents that had passed between business managers and the company’s internal in-house legal counsel. Akzo claimed that the documents were legally privileged and had to be returned. The EC disagreed. The EC argued that a business can only rely upon legal privilege to restrict access to documents if they were prepared or used by external lawyers and not by internal in-house counsel.  

The argument between Akzo Nobel and the EC ended up before the European Court of Justice in September 2007. At that time, the European Court sided with the European Commission. The European Court of Justice is like the Supreme Court for the European community. The Court reaffirmed an earlier ruling that said only outside or external counsel were entitled to legal privilege. The European Court of Justice effectively held that the bond of employment between an in-house lawyer and the business he or she works for erodes his or her privileged position. In-house legal counsel are too close to their bosses and are therefore tainted. They are not sufficiently independent from their clients for the privilege to be recognised. The case is now on appeal to the European Court of Justice’s Court of Appeal. 

This development could seriously erode a company’s ability to use its in-house counsel. If the European Court of Justice’s Court of Appeal upholds the earlier decisions, European companies would have to use external lawyers much more frequently. A similar development is possible within Australia. 

At present, there are a number of enquiries into the extent and use of legal professional privilege. Some of these enquiries result from the Cole Royal Commission into the Australian Wheat Board’s dealings with Iraq in breach of United Nations sanctions where the Royal Commissioner took the view that some clients and their lawyers may have been abusing legal professional privilege to hide the commission of serious crimes. The European situation will certainly be considered by those enquiries.  

As any wise business person will already know, the way to keep secrets is to only tell them to people who are not in close proximity with you and with each other. Otherwise, leakage is inevitable. Having to use external lawyers, therefore, may not be such a great sacrifice in the long run particularly if the corporation does wish to maximise its chances of successfully claiming confidentiality or legal professional privilege over business sensitive discussions and negotiations. Why take the risk, outsource you legal requirements.

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