Philip Services Corp., (Receiver of) v. Ontario Securities Commission
 O.J. No. 4418 (Div. Ct.), rev’g (2004), 27 O.S.C.B. 10003 (Ontario Securities Commission)
The Divisional Court of Ontario recently considered the law in Ontario regarding the legal protections that attach to privileged solicitor-client communications shared by a client with its auditors. In a 1994 decision, Cineplex Odeon 1, it had been held that a client is required to waive solicitor-client privilege for all purposes when its auditor requests a privileged document that is required for the completion of the audit. In the new ruling, the Divisional Court concluded that, given a company’s statutory obligation to cooperate with its auditor and the public policy rationale for encouraging full and frank disclosure, when a company provides a privileged document to its auditor for the purpose of the audit, the document remains protected by the privilege against any further disclosure.
On November 6, 1997, Philip Services Corp. (Philip) made a public offering of approximately twenty million common shares, fifteen million of which were to be sold in the United States and five million in Canada and internationally. On the same date, Philip filed with the Ontario Securities Commission (the Commission) a prospectus that included its audited financial statements for the years ended 1995 and 1996, and its unaudited financial statements for the first nine months of 1997.
In January 1998, two months after the public offering, Philip made the first of a series of announcements that significantly reduced Philip’s earnings as set out in its audited 1995 and 1996 financial statements, and substantially altered its 1997 financial picture. Following these disclosures, the price of Philip’s shares dropped dramatically and Philip subsequently sought bankruptcy protection.
In May 1998, Enforcement Staff of the Commission (Staff) commenced an investigation into the adequacy of the disclosure made by Philip in support of the public offering. A Summons was served by Staff on Deloitte & Touche LLP (Deloitte), Philip’s auditors, requiring the production of documents relevant to the investigation.
In response to the Summons, Deloitte produced to Staff a number of legal opinions (the Legal Opinions) that were in its possession. These had been prepared by Philip’s solicitors for Philip and provided by Philip to Deloitte prior to the commencement of the investigation. Deloitte had not sought Philip’s consent or authorization to produce the documents.
On August 30, 2000, the Commission issued a Notice of Hearing and Statement of Allegations against Philip and seven of its former officers and directors (the Respondents) alleging that they failed to make full, true and plain disclosure of material facts in the prospectus. In the Statement of Allegations, Staff quoted extensively from some of the Legal Opinions.
Following the release of the Statement of Allegations, Philip objected to Staff’s use of the Legal Opinions on the basis that the documents remained protected by solicitor-client privilege. The Commission directed that Staff bring a motion to permit the Commission to consider whether Staff should be entitled to rely on the Legal Opinions in the enforcement proceeding. On the motion, Philip (then in receivership) asserted that Staff could not rely on the Legal Opinions because Philip had not intended to waive privilege over the Legal Opinions when the documents were provided to Deloitte, and Deloitte did not have the capacity to waive privilege on Philip’s behalf.
In ruling on this motion, the Commission considered the Cineplex case, in which the court held that a privileged document provided to an accountant can only remain privileged where the accountant is using his skill as an accountant in acting as the agent of the client to obtain legal advice, not where the accountant receives the privileged document in his capacity as auditor. The Commission held, as a matter of fact, that the Legal Opinions had been provided to Deloitte in its capacity as auditor, not to assist Philip in obtaining legal advice. Accordingly, privilege over the Legal Opinions was held to be lost when the content of the documents was discussed in the presence of members of Deloitte and when Philip provided the documents to Deloitte. As a result, Staff was permitted to rely on the Legal Opinions in the proceeding against the Respondents.
Philip appealed the decision of the Commission to the Ontario Divisional Court.
Divisional Court Recognizes Need to Extend Privilege Protection
The first issue considered by the Honourable Mr. Justice Lane (who wrote the unanimous decision of the Court) was whether disclosure of privileged documents to an auditor performing the audit function results in a waiver of privilege for all purposes. Justice Lane observed that restrictions on solicitor-client privilege to attain other important societal objectives are to be closely scrutinized and restricted to what is absolutely necessary for the competing objective, so as to achieve the minimal impairment of solicitor-client privilege.
The Court held that auditors, in pursuit of their important public function of ensuring the fairness of the presentation of the accounts of public companies, are empowered by legislation to compel their audit clients to produce to them whatever documentation the auditor believes is required for the audit. The Court concluded that the legislation makes it mandatory for a company to produce all documents that are requested by the auditor, even where the company believes that the documents are protected by solicitor-client privilege.
Taking into account that auditors are third parties to their clients, the Court held that the production of privileged documents to an auditor must necessarily result in some waiver of the claim for solicitor-client privilege.
However, the Court also held that there is no necessity, in order to achieve the societal objective of fair financial statements certified by fully informed auditors, that the waiver of privilege go beyond the auditors. Accordingly, the Court held that there was only a limited waiver of privilege when Philip discussed the Legal Opinions with Deloitte and when Philip provided the documents to Deloitte. The documents, while in Deloitte’s possession, were to be protected from disclosure to Staff.
The Court then considered whether, if the Legal Opinions remained privileged at the time Philip provided them to Deloitte, any subsequent steps taken by Deloitte or Staff could negatively impact on Philip’s claim of solicitor-client privilege. The Court held that the disclosure of privileged documents to Staff by Deloitte does not waive privilege in the documents, as Deloitte lacked the requisite authority to waive privilege over the documents. The Court also held that Staff’s unauthorized publication of extracts from the Legal Opinions cannot be permitted to alter the privileged status of the documents. Justice Lane concluded that when Staff obtained the Legal Opinions from Deloitte, Staff should have sought direction on notice to Philip on how to treat the documents and cannot now assert that their own publication can affect the privileged nature of the documents.
On this basis, the Court reversed the Commission decision and ordered that the extracts from the Legal Opinions contained in the Statement of Allegations be removed.
 Cineplex Odeon Corporation v. Canada (Minister of National Revenue, Taxation) (1994) 114 D.L.R. (4th) 141 (Ont. Gen. Div.)
Philip (by its receiver) was represented by David R Byers and Bradley M Davis of Stikeman Elliott’s National Litigation Group.