CHAPTER ONE Introduction
1.4 Method and outline
The thesis begins in Chapter two by applying a doctrinal method to the historical development of the law of client legal privilege. The doctrine underpinning client legal privilege provides the basis for its current application in the common law and legislation. This chapter employs in-depth analysis of the process of legal reasoning employed by judges in the leading equity and common law cases in the England. Doctrinal legal research is a qualitative method, the law is reasoned and not simply uncovered or ‘found’; the law cannot
38 Australian Law Reform Commission, Privilege in Perspective: Client Legal Privilege in Federal Investigations, Report 107 (December 2007).
39 Commonwealth of Australia, Department of Treasury, Discussion Paper, Privilege in relation to Tax Advice, (April 2011).
40 The Tax Agent Services Act No. 13. 2009 (Cth) superseded the provisions that were formerly in the Income Tax Assessment Act 1936 (Cth) section 251L which covered the privileges and duties of registered tax agents.
be objectively isolated. 41 An exploration of opposing views of judicial decision making and those espousing the theories is undertaken. The declaratory theory where ‘the judge merely
finds pre-existing law; then he declares what he finds’42 is pitted against the judicial creativity or positivist theory of judicial decision making and laid to rest. Client legal privilege has been fashioned by the common law and the ‘creativity’ of judges has influenced its development.43
Client legal privilege is a creature of the common law and therefore it developed in a piecemeal fashion through a series of English equity and common law cases. The common law over time established a number of critical criteria for the recognition of privilege including: the need for confidentiality in the communications involved in seeking and obtaining legal advice and legal services; a lawyer-client relationship based on confidentiality; that the privilege is the right of the client44 and the permanent status of privilege: ‘once privileged, always privileged’.45 Client legal privilege was restricted to the legal profession as at this period, the legal profession was deemed to be the only profession that could provide legal advice.
Chapter three examines the utilitarian rationale for client legal privilege; privilege is justified or rejected by balancing the utility of the privilege against the costs of the privilege to litigation. This chapter uses theoretical research to understand the rationale(s) that underpin the doctrine of client legal privilege and to highlight the flaws in the law. The thesis builds on the concept that law is a social construct and does not exist in a doctrinal vacuum.46 Thus research designed to secure a deeper understanding of the law as a social phenomenon, includes research on the historical, philosophical, linguistic, economic, social or political implications of the law.47 The chapter analyses the impact of John Locke’s theory of individualism and Adam Smith’s economic theory on the utilitarian rationale for client legal privilege.
41
Ian Dobinson and Francis Johns, ‘Qualitative Legal Research’ 22 in Mike McConville and Wing Hong Chui, ‘Research Methods for Law’ (Edinburgh University Press, 2007).
42 Beryl Harold Levy, ‘Realist Jurisprudence and Prospective Overruling’ (1960) 109(1) University of Pennsylvania Law Review 1, 1 (emphasis in original).
43
See Chapter five of the thesis for illustration of judgments in the Australian setting that have influenced the operation of the doctrine.
44 See Minet v Morgan (1873) 8 LR Ch 361.
45 Calcraft v Guest [1898] 1 QB 759, 761-2 (Sir Nathaniel Lindley MR). 46
Terry Hutchinson, Researching and Writing in Law (Thomson, 3rd ed, 2010) 7.
Bentham was opposed to all rules of privilege, with the possible exceptions for Crown secrets and the confession to a Catholic priest.48 Bentham and Wigmore’s opposing views are explored and analysed. Wigmore provided the ultimate utilitarian treatise on client legal privilege and his influence is still evident in legal decisions.49 Wigmore was a passionate believer in the scientific nature of judicial proof; the need to design precise evidentiary rules and a strong believer in the duty to testify. He advocated a narrow set of evidentiary rules that would not obstruct unnecessarily the ‘investigation of truth’ and the ‘administration of justice’.50 He established four criteria as prerequisites to the existence of any privilege protecting confidential communications, providing that only if all four conditions are present should a privilege be recognised51 however, once recognised it should be absolute in character.52
Wigmore’s empirical assumption is that privilege causes the client to engage in full and frank discussions, and that but for the privilege those discussions would not take place. Privilege therefore protects only those disclosures necessary to obtain informed legal advice, which might not have been made absent the privilege. Thus the privilege is valued as a means to an end.53 The protection of confidential communication is not viewed as an end in itself but as a means of promoting candour in the client’s communication, leading to better legal advice and/or representation.
The chapter examines the limited empirical research on whether client legal privilege encourages communications; concluding that there is insufficient evidence to support the assumption that but for the privilege the client would not freely and fully communicate with the legal advisor.
Chapter four acknowledges that there are two competing, but not mutually exclusive, rationales for the privilege doctrine, the utilitarian (instrumental) and the humanistic rights
48 See Gerald J Postema, ‘The Principle of Utility and the Law of Procedure: Bentham’s Theory of Adjudication’ (1977) 11 Georgia Law Review 1393, 1410.
49 The United States Supreme Court, for example appealed to the authority of Wigmore’s treatise in Jaffe v Redmond, 518 US 1 (1996); and Swindler & Berlin v United States, 524 US 399 (1998).
50 John Henry Wigmore, Evidence in Trials at Common Law (McNaughton, revised ed, 1961) vol 8, §2192, 73.
51 Ibid §2285, 527-8. 52
Ibid §2322, 631 (emphasis in original). Wigmore followed the English common law principle of ‘once privileged, always privileged’ in asserting ‘that the privilege continues even after the end of litigation or other occasion for legal advice and even after the death of the client.’
53 Edward J Imwinkelreid, ‘An Hegelian Approach to Privileges under Federal Rule of Evidence 501: The Restrictive Thesis, the Expansive Antithesis, and the Contextual Synthesis’ (1994) 73 Nebraska Law Review 511, 543.
theories (non-instrumental). As noted by Shuman ‘though the approaches differ in theory, they do not show marked differences in practice.’54
Locke’s theory of individualism embraces the principle that individuals have zones of privacy, in which they may conduct themselves according to their own intelligent judgement, as long as they do not adversely affect others. The humanistic rationale is that it is desirable to create certain privileges out of respect for personal rights such as privacy and autonomy. This rationale treats privileges as corollaries to the rights to privacy and personal autonomy.55 The humanistic rationale rests on a moral judgement against compelling the revelations of certain confidential communications. The basis is a normative proposition about the extent to which the government legal system should respect the confidentiality of persons’ communications.56 The United States Supreme Court in Jaffe used a humanistic justification to extend privilege to client-psychotherapist communications, declaring that there are ‘zones of privacy’ protecting ‘personal autonomy’57 and that the protection of privacy was a legitimate `end in itself.’58
The enshrining of the right of privacy in a ‘Bill of Rights’ in western democracies is examined: Australia, is one of the few countries without a national Bill of Rights; New Zealand and its Bill of Rights Act 1990; the United Kingdom with its Human Rights Act 1998
and its adherence to the European Union Convention on Human Rights 1950; and the United States with its Constitutional guarantees for the right of privacy, are all examined. Both the common law and the statutory recognition of the right are explored, with emphasis on the right to privacy for confidential communications in a professional-client setting.
Chapter five shifts the focus to the Australian setting; it applies a doctrinal analysis to pivotal cases in the Australian common law that have influenced the development of client legal privilege. Two main controversies are explored, first whether privilege as a rule of evidence is restricted to the curial context, or whether as a substantive rule it applies to all processes where there is a compulsion to disclose information. Cases examined in reference to this first issue are: O’Reilly v Commissioner of State of Victoria59wherein it was held that client legal privilege be confined to judicial proceedings and Baker v Campbell60 whichin a narrow 4:3
54 Daniel W Shuman and Myron S Weiner, `The Privilege Study: an Empirical Examination of the Psychotherapist-Patient Privilege’ (1982) 60 North Carolina Law Review 894, 906.
55 Imwinkelreid, above n 53, 543-4. 56
Edward J Imwinkelreid, The New Wigmore: A Treatise on Evidence (Wolters Kluwer, 2nd ed, 2009) 295. 57 Jaffe v Redmond, 51 F 3d 1346, 1356 (1995). 58 Ibid. 59 (1983) 153 CLR 1. 60 (1983) 153 CLR 52.
High Court decision,61 less than a year later, reversed the O’Reilly decision and brought the Australian common law into line with that of other common law jurisdictions62 holding that client legal privilege, as a substantive right, was to operate beyond the curial context, to the investigative context.
The second issue concerns the appropriate ‘test of purpose’ to be applied: sole purpose or
dominant purpose test. Grant v Downs63 established the sole purpose test for client legal privilege and twenty-three years later Esso Australia Resources Limited v Commissioner of Taxation64 overruled Grant v Downs and established a dominant purpose test, bringing the Australian law again into alignment with other common law jurisdictions65 and with the
Evidence Act 1995 (Cth). The Evidence Act highlights the increasing role of the legislature in governing client legal privilege and hence the importance of statutory interpretation in the operation of the privilege.
The Evidence Act 1995 (Cth) reinforces both Murphy J’s views in Baker v Campbell that the privilege, previously referred to as ‘legal professional privilege’ should be known as ‘client legal privilege’ and the dominant purpose test proposed by Barwick CJ in his dissenting decision in Grant v Downs. The Evidence Act was limited to the adducing of evidence in cases before the Federal Courts therefore, from 1995 until the 1999 High Court Esso decision there were differing rules applying to cases before the Federal Courts as opposed to the common law pre-trial procedures.66
The chapter addresses the question of whether client legal privilege is abrogated by legislation requiring the production of confidential information. In Corporate Affairs Commission of New South Wales v Yuill67 the High Court overturned President Kirby’s decision,68 and held that relevant legislation69 abrogated by necessary implication the
61
Majority judgment: Murphy, Wilson, Deane, and Dawson JJ. Dissenting judges: Gibbs CJ, Manson and Brennan JJ.
62 Most influential was the New Zealand case of Commissioner of Inland Revenue v West-Walker [1954] NZLR 191. In England the House of Lords in R v Derby Magistrates Court Ex parte B [1996] AC 487 recognised client legal privilege as a substantive right applying to search and seizure powers.
63 (1976) 135 CLR 674. 64 (1999) 43 ATR 506.
65 Waugh v British Railways Board [1979] 2 All ER 1169, 1174 (Lord Wilberforce) the House of Lords, introduced the dominant purpose test for client legal privilege. In the New Zealand Court of Appeal case Guardian Royal Exchange Assurance of New Zealand v Stuart [1985] 1 NZLR 569, 605 (Richardson J) also introduced the dominant purpose test.
66 State and territory versions of the Uniform Evidence Act have extended the operation of client legal privilege to pre-trial procedures. See Chapter five of the thesis.
67 (1991) 172 CLR 319 (Majority judgment: Brennan, Dawson and Toohey JJ. Dissenting judges: Gaudron and McHugh JJ).
68 Yuill v Corporate Affairs Commission of New South Wales (1990) 20 NSWLR 386, 407. 69
The legislative provisions referred to involved sections 295, 299(2)(d) and 308 of Part VII of the Companies Code (NSW).
operation of client legal privilege in that context. The matter was finally resolved by the High Court in the unanimous decision in Daniels Corporation International Pty Ltd v ACCC 70
where the Court, adopting a human rights justification for the privilege, held that ‘statutory provisions are not the be construed as abrogating important common law rights, privileges and immunities in the absence of clear words or necessary implication to that effect.’71
Chapter six, continues the emphasis on the Australian common law and examines the Commissioner of Taxation’s extensive and coercive powers of access and investigation, provided for in sections 263 and 264 of the Income Tax Assessment Act 1936 (Cth) (ITAA).
The doctrinal methodology is adopted to examine a number of high profile cases involving the relevant sections of the ITAA and the operation of client legal privilege in the tax arena. The chapter examines the history of the legislation and finds that it is little changed from its first incarnation in 1915. The scope and the operation of sections 263 and 264 are examined and the interaction of these powers with ‘procedural fairness’ and the doctrine of ‘legitimate expectation’ is also explored. Both sections 263 and 264 have been found by the courts to be subject to client legal privilege, making it one of the key brakes on the Commissioner’s powers.
The differing justifications for client legal privilege and the privilege against self- incrimination are examined through key common law cases including Environment Protection Authority v Caltex Refining Pty Ltd72 and Perron Investments Pty Ltd v Deputy Commissioner of Taxation.73 Sections 8C and 8D of the Taxation Administration Act 1953
(Cth), which create offences respectively, of failing to comply with a request to produce documents, and failing to comply with a request to give evidence, ‘to the extent that the person is capable of doing so’ are examined in the case law to determine whether the words can be interpreted as abrogating the privileges. The courts concluded that client legal privilege unlike the privilege against self-incrimination is not abrogated by either the ITAA or the TAA.
Chapter seven examines the curbs on the Commissioner’s powers, concluding that client legal privilege is one of the key limitations to the Commissioner’s powers. The chapter seeks to secure a deeper understanding of the law as a social phenomenon, concentrating on the political content of the law. The Commissioner as an agent of the Commonwealth is required
70
(2002) 213 CLR 543 (Majority judgment: Gleeson CJ, Gaudron, Gummow and Hayne JJ). McHugh, Kirby and Callinan JJ produced separate judgments while agreeing to allow the appeal.
71 Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543, 553 (Majority judgment: Gleeson CJ, Gaudron, Gummow and Hayne JJ). 72
(1992-3) 178 CLR 477. 73 (1988) 20 ATR 504.
to behave as a ‘model litigant’ in the conduct of litigation. Government agencies exercise power for the public good and must act as a moral exemplar.74 The Commissioner’s extensive powers create an imbalance with the taxpayer and in an effort to address this imbalance the Commissioner has voluntarily committed to a Charter75 of taxpayers’ rights and granted concessions to external accountants’ confidential communications with their clients.76 Australian Governments of both Labor and Liberal persuasions have shown a preference for allowing the Commissioner to exercise autonomy in implementing tax laws, rather than legislating ‘taxpayers’ rights’ or imposing other controls over the agency.
The chapter also addresses the influence of the High Court under the leadership of Sir Garfield Barwick and its literalist interpretation of legislation, in frustrating the Commissioner’s efforts to combat tax avoidance. The Commissioner had to seek the Government intervention with legislation to redress the situation; Part IVA of the ITAA was enacted in 1981 to this end. When Part IVA failed as the panacea, it was amended, most recently in 2013.77 The chapter articulates the fundamental issues identified in the 2007 ALRC Report Privilege in Perspective which led to its recommendation that a ‘New Zealand style’ right of non-disclosure for tax accountants be introduced to ‘level the playing field’. Chapter eight turns the focus on attempts by other jurisdictions to ‘level the playing field’ between tax lawyers and tax accountants, and examines the legislation passed in the United States78 and then in New Zealand,79 with a view to determining whether similar approaches should be adopted in Australia. The chapter examines the political environment within which the legislation was made, especially in the United States, and the rivalry between the two professions. The United Kingdom has not enacted legislation to specifically protect confidential taxpayer -tax accountant communications, though from 198980 until the House of Lords decision in Grenfell,81 the tax profession worked on the assumption that a taxpayer
74 See Australian Securities and Investments Commission v Meredith Hellicar [2012] HCA 17, 84 (2 May 2012) (Heydon J).
75
Australian Tax Office, ‘The Taxpayers Charter Your Rights, Your Obligations. How to be Heard.’ (Charter Booklet) (ATO, 1997).
76 Australian Taxation Office, Guidelines to Accessing Professional Accounting Advisors’ Papers (issued 16 November 1989, reviewed 30 June 2010) <https://www.ato.gov.au/General/Gen/Guidelines-to- accessing-professional-accounting-advisors--papers>.
77 Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth), 78 Internal Revenue Service Restructuring and Reform Act 1998 Pub L No 105-206, 112 Stat 685 22 July
1998. 79
Taxation (Base Maintenance and Miscellaneous Provisions) Act 2005 (NZ).
80 Taxes Management Act 1970 (UK) amended in 1989 to include section 20B(9) - (11) as a result of the recommendations of Report of the Committee on Enforcement Powers of the Revenue Department, (Cmnd 8822 HMSO, 1983) presided over by Lord Keith of Kinkelrecommendations of 1983.
81
Regina (on the application of Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax and another [2003] 1 AC 563.
privilege did exist. The taxpayer privilege provided for in each of the three jurisdictions reviewed have their shortcomings, nonetheless taxpayers do enjoy some protection of their confidential communications with their tax accountants - more than is currently the case for Australian taxpayers who have to rely on the Commissioner’s voluntary concession to external accountant work papers. Lessons are drawn from each of the jurisdictions, lessons that if heeded in Australia could lead to an effective taxpayer privilege.
Chapter nine proposes a legislated taxpayer privilege for Australia. The thesis has adopted a doctrinal analysis to determine the existing law of client legal privilege in the tax context; considered the problems currently affecting the law and the policy underpinnings of the existing law, highlighting the flaws in the policy and then proposed law reform.82 The chapter analyses the ALRC’s 2007 Report83 recommendation for a tax advice privilege, and the Government’s belated response in the 2011 ‘Discussion Paper: Privilege in relation to Tax Advice;’84 using these as a counterpoint to the proposed taxpayer privilege.
The chapter analyses both the Law Council of Australia and the Institute of Chartered Accountants of Australia’s (ICAA) submissions to the ALRC 107 Report’ and to the 2011 ‘Discussion Paper’ to highlight the differences between the two opposing arguments and responds to the issues raised. The Commissioner’s Guidelines are subjected to criticism by both groups, the Law Council’s solution is to amend the Guidelines, while the ICAA concludes, and the thesis agrees, that the Guidelines are beyond repair. The ICAA points to the Tax Agents Services Act 2009 (Cth) as evidence that tax accountants are highly regulated and required to respect the confidentiality of their clients, to countervail the perennial argument by the legal profession that accountants are not subject to regulation.