Releasingdocuments to auditors is not a complete waiver of solicitor-client privilege,according to the
The
ruling is likely to relieve at least some of the anxiety of auditors who must
obtain sensitive material from clients to complete audits. The decision is also
likely to be of interest to corporate counsel.
Philip
Services Corp. (Receiver of) v. Ontario Securities Commis-sion, penned by
The
case involved an investigation by the staff of the Ontario Securities
Commission (OSC) into the dealings of a public company, Philip Services Corp.
In 1997, the company became aware that one of its officers had fraudulently
diverted millions of dollars. It sought legal advice as to whether the
information should be disclosed in a prospectus being filed in anticipation of
a $364-million public offering. It did not disclose the fraud in the
prospectus.
Shortly
after the offering, the company made a series of other disclosures which
substantially altered its financial picture. Its shares dropped dramatically
and it sought bankruptcy protection.
The OSC began an investigation under s. 11 of
the Securities Act, based on staff concerns that Philip did not adequately
disclose negative financial information prior to the public offering. In
response to a summons, the company's auditors, Deloitte & Touche LLP,
assembled more than 300 files for review by OSC staff. Philip also made
disclosure in response to a summons. Included in the documents were several
legal opinions obtained by Philip prior to the filing date. Notes of
discussions with the audit committee after the filing were also turned over.
In
the course of one of its own hearings, the OSC, which is both regulator and investigator,
ruled that a range of documents, including the legal opinions and notes of
conversations, were not privileged because Philip released the documents to its
auditor without cautioning that it was not waiving lawyer-client privilege.
The
judgment notes that the documents (mostly legal opinions from Philip's counsel)
were given to Deloitte "in its capacity as auditor and not otherwise. That
brings us to the heart of this case: what is the effect of giving privileged
documents to your auditor? Does the privilege, or any part of it, survive?"
OSC
staff took the position that the giving of privileged documents to the auditor,
without cautioning that they were privileged for other purposes, amounts to a
complete waiver of the privilege. But the Divisional Court disagreed, noting
that "there is no free-standing duty on auditors to make public disclosure of
everything they learn that might interest the criminal or tax authorities;
their duties arise from their role as auditors as governed by law and professional
obligations."
The
role of the OBCA was crucial: Philip's counsel, David Byers and Bradley Davis
of Stikeman Elliott LLP, submitted that "the statute creates a compulsion to
disclose to the auditor which is inconsistent with the concept that disclosure
to the auditor is voluntary and so forms the basis for an implied waiver of
privilege for all purposes. Whether the statute is formally invoked or not,
company and auditor alike are aware of it and the company must be deemed to
have acted under it, as a form of practical compulsion."
Lane
referred to the Supreme Court of Canada's 2002 ruling in Lavallee, Rackel &
Heintz v. Canada, which he said sent a "clear" message on the issue:
"restrictions on solicitor-client privilege to attain other important social
objectives are to be closely scrutinized and restricted to what is absolutely
necessary for the competing objective so as to achieve the minimal necessary
impairment of solicitor-client privilege."
OSC
staff argued that such a limitation of the waiver would prevent auditors from
disclosing information revealing fraud, which they would otherwise be likely to
do. But the court concluded that the auditor would be able to use the
privileged documents across the full range of auditing responsibilities, including
resigning as auditors, without the need for releasing the privileged documents
to third parties, including securities regulators.
"With
a regulated public company, the resignation of the auditor accompanied by a
refusal to certify the accounts is the kind of weapon that renders the
disclosure of legal advice redundant," the judgment says.
In
fact, the privilege continued, even though some legal documents were released
to the OSC by Deloitte. The auditor did not have the authority to release the
opinions, the decision said.
"The
mere possession of the documents did not carry the authority to waive the
privilege. The fact that the disputed documents largely came into the
possession of [OSC] staff via an unauthorized disclosure by Deloitte undermines
their usefulness in the hands of staff," Lane wrote.
Lane
also considered whether there was an implied waiver of the privilege as a
result of extracts from some of the privileged material appearing in the
statement of allegations prepared by OSC staff as a result of its decision to
proceed against Philip. But he concluded the privilege is only so waived if the
party entitled to the privilege is the one that chooses to put the contents of
privileged material in issue.
"A
party may act in such a fashion as to make it unfair for that party to continue
to maintain the privilege. But the opposite party may not, by referring to the
legal advice given to the party with the privilege, thereby put the privileged
advice in issue."
Byers
noted that the court was essentially dealing with competing public objectives
and was looking for a balance.
"The
court was dealing with some policy concerns," he noted. "They were that
auditors should have full access to all the documentation that they would need
to properly perform their function, and that the corporate statute says that
the company has to comply with requests, or at least co-operate with its
auditors.
"Then
you have a conflict between [that] and the company objective of not waiving
privilege against the world with respect to any legal opinions the auditors may
want to look at," said Byers.
"Those
[objectives] kind of collided. . . . The court had to deal with cases that were
all over the map on the point and the court decided that both objectives could
be accomplished if you were able to provide privileged documents to your
auditors without waiving the privilege to the world."
Byers
also suggested that the ruling on the effect of the OBCA was crucial.
"The
company has no choice: if demanded by the auditors [under the statute] you have
to give the privileged documents to the auditors," he said. "That is probably
something that has never been said before."
Byers
said he had not even gone that far in his argument but instead had submitted
that the company should not be put in the position of having to choose between
complying with the requests of auditors and losing privilege, or not giving the
documents and taking the risk that the auditors would withhold their audit
opinion.
"The
court said the company is not in that choice, because they have no choice; if
the auditors ask for it, you have to give it," he said. "I thought that was
pretty interesting."
The
OSC has decided not to appeal the decision and will be proceeding with the
formal hearing, without the use of the disputed documents.
Karen
Manarin and Judy Cotte, who represented the OSC, called the decision
well-reasoned.
The
ruling is significant, they believe, because it clarifies the law in an area
where there are several conflicting decisions. The "interesting" thing about
the case, Manarin said, is that, if the company decides to use the opinions in
the OSC hearing for certain purposes, the OSC can renew its application to say
the privilege has been waived.
"The
really nice thing about this decision is that it puts the responsibility back
on the commission, so that if they use the opinions in the course of the action
to justify their actions, we can say, 'You know what, privilege has been
waived.' The important thing about this decision is that it gives us a road
map."
