Saturday, April 15, 2017

Privilege; The Federal Court of Canada Limits Common Interest Privilege

The topic of legal privilege is complex.   Recently the Supreme Court of Canada released a couple of decisions which make this abstruse topic a little easier to understand.   Both of these cases are worthy of review.  

The first case is a decision dealing with solicitor-client privilege: Alberta (Information and Privacy Commissioner) v. University of Calgary, 2016 SCC 53, [2016] 2 S.C.R. 555  at

In the second case the Supreme Court of Canada dealt with litigation privilege: Lizotte v. Aviva Insurance Company of Canada, 2016 SCC 52, [2016] 2 S.C.R. 521 at

In addition to these cases the Federal Court of Canada also released a lengthy and complex decision dealing with the issue of privilege: Iggillis Holdings Inc. v. Canada (National Revenue), 2016 FC 1352 (CanLII) at

The Federal Court was required to deal with the Canada Revenue Agency's application to require a memo produced in a commercial transaction and which was being refused to be produced based on the assertion of common interest privilege ("CIP").  The omnibus decision will be of impact to many and particularly to business persons who operate under the understanding that simply retaining a lawyer will allow communication between legal counsel to be characterized as privileged.  The Iggillis decision concludes that CIP can only be asserted if such communication has a litigation purpose.  What follows are quotes from the Iggillis decision which I have highlighted to accentuate points made by the Honourable Justice Enns:

[12] The Applicant argues that the Memo is not privileged because it is primarily a “business document” wherein the legal advice is incidental to the true nature of the transaction. The Applicant also claims that the Memo is not subject to CIP and, therefore, that Abacus lost or waived its privilege over the Memo when Mr. Nitikman circulated the Memo to Mr. Kirby. The Court rejects the Applicant's submissions.

[14] The Court's first concern was the effect of CIP on the Court's ability at trial to ultimately decide the substantive matter if the Memo was found to be privileged. In this case, the only evidence before the Court describing how the Transaction was concluded would have been the resulting transactions themselves, as described in public documents. This was acknowledged by Counsel for the Respondents. This means that lawyer-to-lawyer legal communications and related information pertaining to how the agreement was negotiated would no longer be available to the courts. This struck the Court as a result that would not only deny the courts an extensive quantity of information on how transactions were formed, but also highly relevant substantive information that in many respects could determine the outcome of the litigation.  

[17] In terms of advancing the “economic and social values” of society, I also could not apply this reasoning to the seventeen pro forma transactions in this case, which were undertaken for the sole purpose of tax avoidance on a commercial transaction. Tax avoidance is permitted in view of the strict application of principles of interpretation and the rule of law, but it is not conduct that should be encouraged and assisted by new privilege doctrines meant to keep relevant evidence challenging the legality of these schemes out of the courts. 
[28] The Court further rejects CIP as an acceptable form of SCP (solicitor-client privilege) for a number of reasons.  These include among others:  
1) CIP entered the law of privilege under a cloud of confusion as being similar to JCP and an appropriate extension of litigation CIP.
2) Advisory CIP cannot be rationalized as an appropriate extension of litigation CIP. Litigation privilege and SCP are distinct conceptual animals having different doctrinal rationales. Litigation CIP is compatible with the strategic advisory foundation of litigation privilege, while advisory CIP is irreconcilable with and destructive of SCP founded on maintaining the solicitor-client relationship.  
3) Accordingly, the Court respectfully concludes that Ambac was correctly decided but on the wrong legal principle for failing to reject advisory CIP because it cannot be reconciled with SCP doctrine. For the same reason, the Court concludes that the Giesel article was unsound in rejecting litigation CIP based upon its incompatibility with SCP doctrine, but correct in the rejection of advisory CIP on those grounds.  
4) Advisory CIP is in an inherent conflict with and destructive of the rational underlying SCP such that rationalization of advisory CIP as a “defence” to waiver is unsustainable, as are its other rationales of being supported by expectation interests or the emerging doctrine of selective waiver. As advisory CIP is incompatible with SCP doctrine, there is no necessity to undertake a cost-benefit analysis of its effects.  
5) Nevertheless, an analysis of advisory CIP with respect to factors relevant to the administration of justice demonstrates that the costs significantly outweigh the benefits. Indeed, advisory transactional CIP undermines the administration of justice in that it only enables transactions that anticipate litigation.
6) Policy issues relating to the social and economic values of commercial transactions said to be enabled by advisory CIP are irrelevant to SCP. In any event, those policy values allegedly said to be promoted by advisory CIP are speculative, unnecessary in relation to enabling most transactions, and otherwise limited to fostering transactions that anticipate litigation that undermine the administration of justice. As well, those commercial transactions appearing to constitute much of the jurisprudence relating to advisory CIP are of no, or questionable economic or social benefit to society. 

The Court then applied the law to the CRA's request for information:

"A. Is the Abacus Memo Prima Facie Protected by Solicitor-client Privilege?

(b) Privilege only applies to legal advice, broadly understood"

[61] Legal advice (as opposed to business advice) provided orally or in writing by a lawyer to his or her client is privileged (R v Campbell, [1999] 1 SCR 565 at para 50; Superior Plus Corp v R, 2015 TCC 132 at paras 38, 46, aff'd 2015 FCA 241). In relation to the legal advice privilege (as opposed to business advice), what matters is whether the lawyers are being asked qua lawyers to provide legal advice: Three Rivers DC v Governor and Company of the Bank of England (no 6), [2004] UKHL 48 at para 58 cited in Behague v Revenue & Customs, [2013] UKFTT 596 at para 21 (TC)).
[70] I disagree that two parties mandating their lawyers to work together on behalf of both clients to find a “business solution” to their mutual advantage, but based upon the consequences of implementing their legal advice on the specific issue of tax savings, renders the fruit of their labour a mere business record as argued by the Applicant, given the almost exclusive legal content of the Memo. I also do not find that the Memo is a business record because the parties' lawyers worked together at each step of the Transaction to work out solutions based or legal conclusions. Similarly, the Memo remains essentially legal advice for their respective clients even though the parties were required to cooperate to implement the overall tax plan to reduce taxes. 

"(c) Other Facets of Advisory CIP Doctrine"

[80] Advisory CIP does not require that there be an agreement in writing to create it (Sable Offshore Energy Project v Ameron International Corp, 2015 NSCA 8 at para 68). Considering its scope of application, CIP will extend protection to all parties, including accountants and other professionals, who were within the umbrella of the confidentiality that the parties intended to create as against third parties (Canada (National Revenue) v Welton Parent Inc, 2006 FC 67 at para 67).This is an important consideration when assessing the scope of the communications that advisory CIP protects.
The Federal Court referred to a decision of Bank Brussels Lambert, the United States District Court for the Southern District of New York which dealt with the issue of lack of litigation purpose:

[87] In any event, the Court discussed what it considered the more “troublesome question”, where entities have “parallel interests but are not actively pursuing a common legal strategy”, stating at page 447 as follows:  More troublesome is the question of whether the doctrine can be stretched to apply to communications between entities that have parallel interests but are not actively pursuing a common legal strategy. In its most extreme form, this version of the common interest doctrine has been described as follows:

A community of interest exists among different persons or separate corporations where they have an identical legal interest with respect to the subject matter of a communication between an attorney and a client concerning legal advice. The third parties receiving copies of the communication and claiming a community of interest may be distinct legal entities from the client receiving the legal advice and may be a non-party to any anticipated or pending litigation. The key consideration is that the nature of the interest be identical, not similar, and be legal, not solely commercial. The fact that there may be an overlap of a commercial and a legal interest for a third party does not negate the effect of the legal interest in establishing a community of interest. Duplan Corp. v. Deering Milliken, Inc., 397 F. Supp. 1146, 1172 (D.S.C. 1975).  In practice, however, the Duplan court required more than merely concurrent legal interests. Although the court found that a communication with a non-party that was contractually obligated to be the party's legal patent advisor fell within the common interest doctrine, it held that disclosure to the exclusive licensee of the party's patent constituted a waiver. Id. at 1175.  The common interest doctrine, then, has both a theoretical and a practical component. In theory, the parties among whom privileged matter is shared must have a common legal, as opposed to commercial, interest. In practice, they must have demonstrated cooperation in formulating a common legal strategy.  

[89] Even in applying this reasoning that it might be arguable that engaging lawyers for the purpose of having the transaction concluded where there is no joint coordinated legal strategy, it is clear to the Court in this matter that Abacus and the Respondents formulated a shared sale transaction based upon a joint legal strategy to complete the transaction and to that end carefully coordinated the legal efforts of their lawyers which ended up defining the nature of the commercial transactions that the parties concluded.

[90] The present situation also falls into the exception in Bank Brussels Lambert because, unlike in that decision, the legal issues motivating the share sale transaction structure were not incidental to the Memo, but its raison d'ĂȘtre. In either case therefore, the Memo would be entitled to protection under the CIP doctrine on the basis of the principles enunciated in Bank Brussels Lambert, assuming it applied to advisory CIP. I conclude that the American jurisprudence presented to the Court by the Applicant is of no assistance in this matter where the parties are represented by separate counsel but “engage in a common legal enterprise”.

"(2) The Establishment and Recent Expansion of Legal Advisory CIP"

[104] All communications in a JCP situation are within the solicitor-client relationship and the privilege is coherent with the SCP doctrine. Conversely, the communications in an allied lawyer CIP situation are not limited to those between a lawyer and his or her client seeing as the lawyer does not have a solicitor-client relationship with the other parties who have their own separate counsel. Therefore, to apply the doctrine of SCP to communications in the allied lawyer setting is to protect communications that are not solely between an attorney and the attorney's client and therefore not essential to the relationship. Such an application of the doctrine of SCP is contrary to its own raison d'ĂȘtre, that is encouraging full and frank disclosure of information by the client to the lawyer and by its essential nature being to the benefit of the administration of justice. 
[120] Given that transactional CIP is rationalized by encouraging the “free flow of information” between the allied clients and lawyers, the expansion that this represents to the costs to the administration of justice in obstructing the introduction of large amounts of relevant evidence is obviously significant. The Court suspects that the reported cases raising issues of advisory CIP are only a tiny fraction of those where the privilege is being used in conjunction with the everyday advice provided by commercial lawyers negotiating a commercial transaction where there exists a common interest of having the transaction concluded.
[134] The Court nevertheless concludes that the jurisprudence supporting advisory CIP was established under a cloak of confusion with common interests in JCP and litigation privilege and with very little analysis of the factors and considerations relating to the legitimacy of advisory CIP. 
[150] However, it is the Court's view that the consequences of modifying the rules on waiver have not been fully thought through. The Court finds that Advisory CIP as an exception or defense to waiver of SCP is irreconcilable with and eviscerates the SCP doctrine of any meaning.

"D. Maintaining Litigation CIP while Rejecting Advisory CIP
(1) Introduction"

[174] In this section, the Court explains why it respectfully disagree with Professor Giesel's conclusion rejecting litigation CIP, while also disagreeing with the Majority in Ambac as to its reasons why advisory CIP should be upheld. In both cases, the Court's disagreement is based on what it concludes to be a failure to recognize that litigation CIP relies on litigation privilege, which provides a different rationale than that of advisory SCP. The distinction between the two underlying doctrinal rationales permits CIP to be an acceptable doctrine in litigation-related matters, but not in legal advisory circumstances, such as for commercial transactions.
[175] On the same premise, the Court also respectfully disagree with the Dissent in Ambac that opines that because SCP doctrine makes no distinction between litigation and other areas of law in its application, advisory CIP should be similarly accepted as is litigation CIP. The Dissent similarly fails to recognize the fundamental difference between litigation and advisory privilege. Once the distinction is recognized, it follows that the application of CIP in litigation matters has no bearing on its application in an advisory situation.
[176] The outcome of the distinction between the two forms of privilege is that litigation CIP is reasonably “coextensive”, or “consistent” in layman's language, with litigation privilege. Conversely, advisory CIP is not reconcilable with SCP doctrine. Therefore, advisory CIP should logically and reasonably be rejected on this basis. Moreover, this conclusion is sufficient to reject advisory CIP, without the requirement to demonstrate that the costs of the privilege outweigh its alleged benefits. This conclusion flows from the rationale of SCP doctrine.

[184] The principal conclusion this Court draws from Blank is that although the case law regarding CIP does not make a distinction between litigation privilege and SCP, there are nonetheless fundamental differences in the rationales underlying the two forms of privilege. One is to protect the adversarial process, the other to protect the solicitor-client relationship. SCP is all about the relationship. These differences legitimize the grounds for accepting litigation CIP to expand the scope of the privilege as a strategic adversarial consideration in the litigation context by providing an exception to waiver, a rationale that does not apply to advisory CIP.
[187] The primary purpose of the confidentiality provided by litigation privilege, which is only temporary, is to protect litigation strategies in the adversarial process. Due to the strategic nature of the adversarial legal process, litigation cannot be conducted without maintaining the confidentiality of solicitor-client and other communications necessary to the adversarial process of litigation. It is very important, therefore, to stress that confidentiality is intrinsic and essential to litigation strategy which is a fundamental component of the adversarial system. Were it otherwise, it would be tantamount to showing your cards in a poker game.
[194] In contradistinction to litigation privileges, advisory CIP occurs before the facts that will give rise to the litigation have occurred. Its supposed purpose is to promote transactions by confidentiality, but the real advantage of CIP occurs when it is applied a trial. In other words, the real purpose of advisory CIP in enabling transactions occurs when the parties anticipate litigation occurring as a result of the transaction that they are negotiating, such as described by Respondents' Counsel above. This purpose is purely strategic, to keep the evidence of their privileged communications out of the anticipated trial so as to improve their chance of success.  
[195] This purpose is incompatible with SCP doctrine. It is to encourage disclosure to encourage compliance, which includes preventing litigation. It is not to encourage transactions that anticipate creating litigation, and thereafter afford a strategic advantage to the allied parties by keeping relevant evidence about how the transactions was negotiated out of the trial.
[205] Accordingly, the Court concludes that the correct ground for rejecting advisory CIP is that it is not coextensive and reconcilable with SCP requirements. This being the case, by the ordinary tenets of privilege law, there should be no need to proceed with a cost-benefit analysis of advisory CIP. The disclosure of confidential information either is compatible with SCP doctrine, or not. If not, the matter stops right there.
[230] There exist other means to limit litigation between negotiating parties who exchange confidential information, such as by a non-disclosure agreements (“NDA”). These are common-place in commercial law and will be upheld by the courts. The courts will also accept most other reasonable requests to protect confidential commercial information during litigation. Similarly, concerns about the risks of future litigation due to a party not obtaining full or accurate information during negotiations is usually provided for by appropriately drafted due diligence agreements. In addition, there are various legal protections against most forms of misrepresentation available under the common law and statutes.
[258] It is a reasonable inference that commercial law lawyers, in an environment of significant high-value transactions, may face requests from powerful strong willed business clients to employ the privilege where not entirely appropriate. This is compounded by the fact that providing a cloak of secrecy over negotiation communications is invaluable to the practice of commercial law as an advantage to have lawyers lead on the negotiation of CIP based transactions by cloaking much of the negotiations, as was the situation in this matter.
[259] Consequently, the pressures on law firms who claim to be able to keep commercial negotiations secret, or who are facing clients who may be pushing the envelope on CIP claims raise a serious potential for abuse. If refusing to comply with the client requests means that the client is unhappy, or may lead to the work going off to one the client's other law firms, or the firm next door, the pressure to accommodate may be extremely high.
[260] Even in a situation where there is less pressure from the client, as noted, the fact is that most legal opinions involve a range of possible outcomes such that a lawyer can reasonably opine that the courts will have to decide whether the privilege applies. When one opinion is favored by the client, it may be accommodated, even if not as solid as a more conservative claim of privilege than otherwise would be recommended by the lawyer.
[261] It is in this context that transparency remains the optimal solution to ensuring that abuse is minimized in the negotiation of commercial transactions. It is generally accepted that transparency, brought to any kind of situation where there is a potential for abuse, is an appropriate response to assist in deterring the misconduct, where no other form of deterrence exists, or is effective.
[262] In conclusion, it is likely that CIP, by its complexity and its limits on the transparency of commercial transaction negotiations, in addition to the environment that this privilege often operates in, would present an augmented potential for abuse occurring in its application and thereby an additional cost to the administration of justice beyond that occurring from ordinary use of SCP.
[291] It is not disputed that society benefits from some commercial transactions. This is implicitly recognized as members of society enjoy the fruit of many of these transactions in nearly everything they do and how they live in modern society. As pointed out though, only commercial transactions that anticipate litigation or require the privilege to enable the transaction need CIP, making this issue irrelevant to most commercial transaction that are concluded. In addition, the positive views on the economic and social interests that are said to be inherent in CIP, would diminish if it is recognized that the nature of many of the transactions provide no, or questionable economic or social benefit to society. 
[292] The CRA believes that the transactions the parties and their corporate entities arranged under the cloak of legal secrecy so as to avoid paying significant taxes are abusive. Abusive tax avoidance schemes are a significant category of transactions that greatly benefit from CIP, yet do not provide any meaningful economic or social benefit to society. 
[293] “Transformative” commercial transactions involving mergers and acquisitions of corporations or their assets also raise highly controversial issues about their societal benefits. The Court can take judicial notice of the fact that the horizontal or vertical concentration of production and services are thought by economists to harmfully augment monopolistic and oligarchical economic structures contributing to other socially harmful interests.

"VII. Conclusion"

[298] Advisory CIP is not a valid constituent form of SCP and therefore has no application to the facts of this case for the following reasons:
1. Advisory CIP was incorrectly accepted in both the United States and Canada based upon a misapprehension that it was supported by similar rationales and purposes said to support JCP and litigation privilege, when they bear no relation to advisory CIP.  
2. JCP is a valid form of SCP, while CIP is not.  
3. Litigation CIP is compatible with litigation privilege based on a shared adversarial purpose. However, litigation privilege is distinct from SCP. The primary function of SCP is to maintain the solicitor-client relationship without which the administration of justice cannot function. It is not rationalized as serving any adversarial purpose. For that reason neither ligation privilege nor litigation CIP shares any functional compatibility with advisory CIP.  
4. Not only does advisory CIP not conform to the fundamental tenets of SCP, it is incompatible with them. Indeed, its application guts SCP of its purpose and function. The ad hoc rationales said to justify advisory CIP, such as it being an exception or defence to waiver, a form of selective waiver, or supported by anexpectation of confidentiality, must be rejected because they eviscerate SCP of its purpose and function.  
5. Advisory CIP provides no benefit to the administration of justice in either enhancing compliance or maintaining the solicitor-client relationship, while significantly adding to its costs. Advisory CIP significantly expands the quantity of relevant evidence that is denied to the courts. It is not available to most users of advisory legal services and unfairly disadvantages them at trial. Furthermore, it provides an increased potential for abuse, while undermining the administration of justice by predominantly enabling transactions that anticipate creating litigation.  
6. External policy factors relating to the use of SCP, such as advisory CIP providing economic and social benefits to society by fostering commercial transactions are incompatible with SCP, which is limited to factors affecting the administration of justice.  
7. Resort to external policies represents an attempted case-by-case justification of a SCP which is incompatible with the class of SCP. Advisory CIP as a case-by-case justification of privilege requires the demonstration on a balance of probabilities to be of such unequivocal importance to society that it demands protection.
8. The claimed policy benefit of advisory CIP of enabling commercial transactions is entirely speculative, and more likely represents a cost to society by the fact that advisory CIP mostly enables transactions that anticipate litigation which undermine the administration of justice, or are otherwise of no, or harmful value to society.
9. The prior jurisprudence of the Federal Court of Canada, namely the Pitney Bowes decision, is not binding on this Court. Pitney Bowes is distinguishable as it was a matter involving joint client representation, not allied lawyer CIP. The Court in Pitney Bowes also applied unsound jurisprudence from other Canadian and American courts that relied on the false external policy factor of advisory CIP fostering commercial transactions and unsupportable expectations of confidentiality.

[299] Accordingly, the application is allowed. The Respondents are required to produce the Abacus Memo pursuant to subsection 231.2(1) of the ITA.
[300] No costs are awarded. The Court rejects the Applicant's submissions that the Memo was business advice, concluding instead that advisory CIP is not a legitimate or acceptable application of solicitor-client privilege.