The recent Federal Court decision of Justice Bromberg in Asahi Holdings (Australia) Pty Limited v Pacific Equity Partners Pty Limited (No 12)  FCA 481 seems to have caused some consternation in the market around the maintenance of legal professional privilege in material exchanged between insureds and insurers. The decision however has less to do with maintaining privilege in circumstances where parties have a common interest and more to do with the means by which privilege can be maintained in circumstances where there is no common interest between the parties.
It is timely to review the established authorities on common interest privilege issues and instructive to view the Asahi decision in the context of these authorities and those dealing with the maintenance of privilege in the absence of a common interest
Common interest privilege – a refresher
At common law, a person who would be otherwise entitled to the benefit of legal professional privilege may waive the privilege. If a privileged document is given to a third party so that its contents cease to be confidential, the privilege in it is usually lost and will be regarded as waived. It is the inconsistency between the act of giving or disclosure with any continuing intention to maintain confidentiality which effects a waiver: Mann v Carnell  201 CLR 1.
There is an exception, however, where the person entitled to the privilege and the person to whom the document is disclosed have such a commonality of interest in relation to the subject matter of the privilege that the sharing of the document is consistent, rather than inconsistent, with a continuing intention to preserve confidentiality and privilege: Marshall v Prescott  NSWCA 152.
In the Marshall case a passage by Lord Denning MR in Buttes Gas & Oil Co v Hammer (No 3)  QB 223 at 243 on common interest privilege was cited with approval as follows:
As noted in the passage above, parties have a common interest where they have the self-same interest. Conversely, in general, parties with their own individual interests which are selfish and adverse to each other do not have the necessary commonality of interest.
If parties with a common interest exchange privileged information and documents relating to their common interest, the privilege in that information, documents or copy documents is not lost.
In Spotless Group Ltd v Premier Building and Consulting Group Pty Ltd  VSCA 201, cited with approval in Marshall, it was held that the identity of interest between an insurer and the insured was an illustration of those with a common interest.
Specific to the insurer and insured relationship, in Marshall, the NSW Court of Appeal reviewed the relevant authorities and noted the following key points in relation to common interest privilege between insureds and insurers:
- insurers have a common interest with their insureds in litigation brought against the insured because, as underwriters of the insured's liability, they have an interest in ensuring that the insured mounts the most effective defence;
- insurers have that interest even before they decide to accept indemnity because, upon accepting indemnity, they become subject to steps taken earlier in the litigation;
- an existing common interest is not lost by the potential for future divergence of interests:
"This was made clear by Robert Walker J in Nauru Phosphate Royalties Trust v Allen Allen & Hemsley (22 March 1996, reported in Vol 13 of Tolley's "Professional Negligence", p 64), where solicitors holding insurance were defending claims brought against them by a client and discovery was sought of correspondence between the solicitors and their insurer concerning the claim. The judge observed that the solicitors and their insurers had a common interest in defending the action brought by the client while it remained on foot and the extent of the cover had not been finally determined. In relation to defence of the claim, they were "facing the same way", although on the question of ultimate liability of the insurer to the solicitors, there were opposing interests."
The decision in Asahi
In the Asahi casea dispute arose between applicant purchasers and respondent vendor shareholders of a business. The insured applicants had taken out insurance policies against breaches of the warranties given by the respondents as part of the sale agreement. The insured applicants commenced proceedings against the respondents claiming that they had made misrepresentations and breached warranties in the sale agreement. The insured applicants also made a claim under the warranty policy for indemnity in respect of the same breaches. The privilege issue arose because the insured applicants provided to the insurers a copy of a privileged report in support of their claim under the warranty policy. The respondents argued that in doing so, the applicants had waived privilege.
In Asahi the court was not dealing with the more usual situation involving liability insurance where an insurer may be called upon to indemnify its insured for any liability in the proceedings against it. Quite the opposite. In this case the court accepted that the particular and somewhat unique terms of the warranty policy under consideration and the share sale agreement, which was the subject of the litigation, created a divergence of interest between the insured applicants and the insurers to whom they had disclosed privileged material and an alignment of interest between the insurers and the respondents.
That is, it was in the interests of the insured applicants, in relation to both the claim made upon the insurer and the claim made against the respondents, to establish that the respondents had engaged in misleading and deceptive conduct. In relation to that same subject matter, and so as to avoid liability, it was in the interests of the insurer and in the interests of the respondents to establish that the respondents did not engage in misleading and deceptive conduct. It was significant in Asahi that the insurers' rights of subrogation against the respondents under the policy were highly qualified and limited to an event of fraud by the respondents and that no allegation of fraud was made and there was no suggestion that any such allegation was in contemplation.
As such it was found that there was no sufficient commonality of interest between the insured applicants and the insurers. The situation was quite different to the case of a liability insurer dealing with a claim made against its insured where both insurer and insured have an interest in the insured's defence.
In the event, in Asahi, the judge went on to consider whether privilege had been preserved notwithstanding that this was a situation where voluntary disclosure had been made to a potential opponent in circumstances where there was no common interest between them. The court recognised that voluntary disclosure from one to another, in the absence of a common interest, does not necessarily waive privilege provided the disclosure occurred in circumstances which are inconsistent with the waiver of privilege. This follows earlier decisions along these lines such as Australian Rugby Union Limited v Hospitality Group Pty Limited (1999) 165 ALR 253 and Rich v Harrington  FCA 1987.
In the absence of a common interest, in Asahi it was held that if the basis upon which privileged material is made available is restricted so as to secure its confidentiality, the disclosure of it may not be inconsistent with the maintenance of the confidentiality which the privilege serves to protect. It was held that this was best effected by an express agreement which spells out the basis upon which the disclosure is made and the limitations upon the use to which the documents may be put. It was also recognised that agreement as to confidentiality may be implied from the circumstances (see also the Australian Rugby and Rich cases referred to above).
Ultimately it was found on the facts in Asahi that there was no agreement restricting the use of the material disclosed and that no such implication arose from the circumstances. It was accordingly held that the applicants had waived privilege in the subject report.
In the more usual case involving claims against insureds under liability policies, the insureds and their insurers have a common interest in the defence and/or settlement of the claim or the litigation. That an insurer and insured's interests may diverge in the future on policy indemnity issues does not negate their common interest in the defence of the litigation and so privilege is not lost in privileged information and documents exchanged pursuant to the common interest.
That said, for prudence and clarity it is nevertheless good practice when privileged information and material is exchanged between insurers and their insureds in these circumstances for them to specifically acknowledge and agree that:
- privileged material is provided pursuant to their common interest in the claim or the litigation;
- by providing the material, they do not waive and nor is there any intention to waive privilege;
- that the privileged material is provided and to be kept on a confidential basis.