Michael Axe reports on the eagerly anticipated Supreme Court decision that confirms that confidential communications between clients and their accountants are not protected from disclosure by Legal Professional Privilege, and so highlights the dangers of seeking legal advice from non-lawyers.
Legal Profession Privilege (LPP) is a form of confidentiality
covering communications between clients and their lawyers, which
provides clients with an absolute right to refuse to disclose such
communications in legal proceedings. LPP can arise where the
communications relate specifically to pending or contemplated
litigation ("Litigation Privilege"), or more generally
where the communications relate to the seeking or giving of legal
advice ("Legal Advice Privilege" or LAP). However,
Legal Advice Privilege has historically only applied to legal
advice provided by lawyers, and not to legal advice provided by any
other parties.
The Prudential case
In November 2007, Prudential was served with statutory notices
by HM Revenue & Customs (HMRC) requiring it to disclose the
legal advice it had received from its accountants in relation to
its tax liabilities. Prudential argued that its
accountants' legal advice was covered by LAP, primarily on the
basis that it was the nature of the legal advice that is relevant
to the application of LAP, not the status of the person giving the
advice.
The case proceeded to the Court of Appeal in October 2010, and the
implications of Prudential's application were sufficiently far
reaching that the Institute of Chartered Accountants of England and
Wales, the Law Society and the Bar Council were all allowed to make
submissions.
The Court of Appeal rejected Prudential's application and
confirmed that LAP only applied to qualified lawyers (subject to
some statutory exceptions) and did not apply to legal advice
provided by accountants or other non-lawyers. However,
Prudential were given permission to appeal the decision to the
Supreme Court.
The Supreme Court's decision
In 2013 the Supreme Court upheld the Court of Appeal's
earlier decision by a majority of 5 to 2, and confirmed that LAP
did not extend to
legal advice provided by accountants or any other
non-lawyers.
The Supreme Court's decision was primarily based on two key
issues, namely the need for certainty, and the role of Parliament
in law-making.
In relation to the first issue, the Supreme Court considered that
to extend LAP to accountants and non-lawyers would add an
unnecessary degree of uncertainty into a legal principle that is
currently very clearly defined and understood, namely that LAP only
applies to qualified members of the legal profession. The
Supreme Court considered that it would be counterproductive to
muddy the waters in this way.
However, the two dissenting judges agreed with the logic of
Prudential's argument that it should be the nature of
the legal advice that determines whether it is covered by LAP, not
the status of the person giving the advice. The
Supreme Court did agree that if the law regarding LAP was to be
changed on such a fundamental level, it was the role of Parliament
to do so, not the Courts. The law regarding LAP was currently
perfectly clear as to who was and was not covered by LAP, and if
accountants (or any other non-lawyer group) wished to lobby
Parliament to amend the existing law, it was open for them to do
so.
The risks of instructing non-lawyers or non-independent lawyers
In light of the Supreme Court's decision in Prudential, any
party that obtains legal advice on its tax liabilities from an
accountant rather than a lawyer will have significantly less
protection from disclosure should its tax status ever be called
into question. This could be of particular concern to
companies that implement a "tax minimisation" scheme
based on advice from accountants (or other tax consultants), as the
companies might be forced to disclose their
"confidential" communications with their advisors
regarding the scheme if HMRC later decides to commence tax evasion
proceedings against them. This is, of course, despite the
fact that if exactly the same advice had been given by a lawyer,
LAP would apply.
This threat of disclosure may ultimately lead to more tax advice
being sought from lawyers rather than accountants. Perhaps
more worryingly, some parties may seek advice from accountants
without disclosing all relevant details to the accountants (for
fear that the details might ultimately become discloseable),
meaning that any advice provided by the accountants will not be
based on a complete picture of all relevant facts.
Alongside the Prudential case is the European Court of
Justice's decision that LPP does not apply to advice provided
by in-house lawyers in relation to competition law matters (see our
earlier article No legal privilege for in-house lawyers in
competition law matters). Both these cases highlight the
dangers of seeking legal advice from non-lawyers or non-independent
lawyers.
Litigation Privilege
The Supreme Court's decision in the Prudential case was,
however, only concerned with the Legal Advice Privilege, not the
"Litigation Privilege" form of Legal Profession Privilege
which can apply to confidential communications relating to the
giving/receiving of advice or the gathering evidence in relation to
litigation.
Litigation Privilege will normally cover communications passing
between the client and its lawyer, or between the lawyer or client
and a third party (such as accountants or other professional
advisors), provided of course that the communications relate to
existing, pending or reasonably contemplated litigation.
However, the Court of Appeal has previously confirmed (for example,
in the 2004 case of USA v Philip Morris Inc & Others)
that neither "a distinct possibility that sooner or later
someone might make a claim" nor "a general
apprehension of future litigation" would be sufficient to
qualify as existing, pending or reasonably contemplated
litigation. Instead "litigation must have been
reasonably in prospect" at the relevant time (although
this did not mean that "there must have been a greater
than 50% chance of litigation").
This means that it is very unlikely that Litigation Privilege, as
an alternative, would apply to confidential communications passing
between a client and its accountant (or other non-lawyer advisors)
in relation to issues such as its tax liabilities, until such time
as litigation becomes reasonably likely (which will no doubt
normally be some time after the initial advice is
provided).
Given the unavailability of Litigation Privilege in such
circumstances, it therefore remains the case that if the
confidentiality of the initial advice is to be protected by Legal
Advice Privilege instead, such advice must be provided by a
qualified lawyer.
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.