Article by Dera Nevin, ©2006, Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on Litigation - May 2006
Businesses risk waiving privilege over legal opinions if they share these with third parties such as bankers, financial advisers or potential purchasers during the due diligence process. Parties to transactions should become aware of when and how privilege can be lost so that they can take steps to preserve it.
Businesses may obtain legal opinions over which they claim either or both of solicitor-client privilege and litigation privilege. During the due diligence process in a corporate or commercial transaction, businesses may wish or be asked to share those opinions with third parties, such as bankers, financial advisers or potential purchasers. Can a business maintain a claim of privilege over a legal opinion if that opinion is disclosed during the due diligence process? Is there any way to reduce the risk of a legal opinion losing its privileged status if it must be disclosed?
A leading case on privilege in Ontario remains the Ontario Court of Appeal decision in General Accident Assurance Co. v. Chrusz. That case confirmed that courts will recognize solicitor-client privilege where legal advice of any kind is sought in confidence from a professional legal adviser. Solicitor-client privilege operates against the world. If this privilege is waived once, it is usually considered lost.
However, Chrusz suggested that solicitor-client privilege can, in certain circumstances, extend to communications between a solicitor or a client and a third party without being waived. The privilege will be preserved where the third party is "empowered by the client to perform a function on the client’s behalf which is integral to the client-solicitor function". Communications with bankers and other financial advisers, when made to obtain legal advice about a commercial transaction, should in many circumstances meet this functional test.
In contrast, litigation privilege exists to provide a protected area to facilitate investigation and preparation of a case for trial. A party asserting litigation privilege must show that the communication was made with the "dominant purpose" of the litigation in mind. The scope of litigation privilege is limited by the demands of the discovery process and the principles of access to justice and trial fairness. While solicitor-client privilege is claimed against the world, litigation privilege can be claimed only against the adversary. Consequently, there can be a wider scope for sharing information subject to litigation privilege with third parties and strangers to the litigation without waiving the litigation privilege. Additionally, Chrusz recognized a "common interest privilege" that will operate to protect communications subject to litigation privilege that are shared with third parties or strangers to the litigation without waiving the privilege if there is a "common interest in litigation or its prospect". However, as litigation privilege and common interest privilege will only protect communications made with third parties in the course of or in relation to litigation, it will not usually apply when legal opinions are shared during a corporate or commercial transaction.
Many courts are responding to the perceived need to preserve privilege in the due diligence process by borrowing and applying common interest privilege to the transaction arena. This privilege is emerging because courts have recognized that parties must have a "zone of privacy" within which to explore and effect corporate/commercial transactions. The British Columbia Supreme Court in Fraser Milner Casgrain LLP v. Canada (Minister of National Revenue) observed that those engaged in commercial transactions must be free to exchange privileged information without fear of jeopardizing the confidence that is critical to obtaining legal advice. The court suggested that the economic and social values inherent in fostering commercial transactions merit the recognition of a due diligence common interest privilege that is not waived when parties exchange documents prepared by legal advisers during the course of negotiations.
Similarly, in Pinder v. Sproule, the Alberta Court of Queen’s Bench held that disclosure to third parties of legal opinions subject to litigation privilege during a commercial transaction did not result in waiver of that privilege on common interest privilege principles. The party owning the legal opinion has every expectation that the recipient will respect the privilege, will not disclose it to the adversary, and will use it for a purpose entirely outside the scope of the litigation. The adversary has no legitimate interest in seeing the privileged document just because the party holding the document is engaged in some collateral commercial transaction. The judgment called for the development of a category of "commercial transaction privilege" to protect legal opinions exchanged during commercial transactions.
Despite these developments, a category of "commercial transaction privilege" is underdeveloped, and has yet to receive formal recognition by Ontario courts. In order to show an intention to maintain privilege over a legal opinion disclosed during a corporate/commercial transaction, it may be appropriate to obtain an undertaking from third parties that acknowledges:
1. that the legal opinion is to remain confidential;
2. that the third party is not to disclose it or its contents to anyone without the consent of the holder of the information; and
3. that confidentiality in the document cannot be unilaterally waived by the recipient.
The undertaking should also set out the purposes for which the information is being disclosed and should limit the number of persons/parties who view the opinion to only those who must see it to complete the transaction and provide legal advice relating to the transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.