Solicitor's representation letters - can auditors be required to disclose?

When audit time comes around, it is normal practice for a company to ask its lawyers to send a "solicitor's representation letter" to its auditors. If the company is involved in litigation this is likely to include the lawyers' opinion regarding the directors' estimate of the financial outcome of the litigation.

Such communications are plainly confidential between the client, the lawyers and the auditors.

What would be the outcome if the other party to the litigation sought to subpoena those confidential communications in order to obtain useful information regarding the lawyers' opinion of the proceedings? Would the communications be immune from disclosure in the court under the principles of legal professional privilege in the way communications between a client (including a client's agents) and its lawyers normally are under the Evidence Act 1995 (NSW and Cth) and sometimes under the common law?

Presently, the answer is no.

In 2004, Westpac Bank was involved in litigation with 789TEN Pty Limited over a dispute involving the bank's authority to make certain payments out of the company's account. The bank and its lawyers had formed a view regarding the amount of a possible settlement with the company. That highly confidential information would be very useful to the company, if only the company could obtain it.

However, under section 118 of the Evidence Act, the disclosure of confidential communications and documents between the bank (or its agents) and its lawyers, or between its various lawyers, regarding such a matter would certainly be privileged from disclosure because the communications had taken place, and the documents had been prepared, for the dominant purpose of the lawyers providing legal advice to their client, the bank.

Likewise, under section 119 of the Act, disclosure of the communications or documents would also be privileged even if there had been communication with a third party (such as the auditors), or a third party had received or prepared a relevant document, but only if any of those things had taken place for the dominant purpose of the client (in this case the bank) being provided with professional legal services relating to court proceedings.

To get around these protections 789TEN sought to subpoena the bank's request to its lawyers for a representation letter to be sent to the bank's auditors, and the lawyers' letter to the auditors in response to the request. The letters between them certainly disclosed the bank's view of an appropriate figure to settle the proceedings and the lawyers' opinion of the bank's proposal. Naturally, the bank sought orders to prevent the company from having access to those documents, on the basis that they were subject to legal professional privilege. One of the bank's arguments was that the auditors were the bank's agents and hence shared the bank's privilege against disclosure.

Unfortunately for the bank, Justice Bergin of the Supreme Court of New South Wales found that the letters were not privileged under section 118 because the legal advice provided by the lawyers was not provided to the lawyers' client (the bank) nor to any agent of the bank. The advice was provided to the auditors. She found that the independence of any auditor required under the Corporations Act 2001 (Cth) was inconsistent with any notion that auditors could be the agents of an entity that it was auditing.

She also found that section 119 of the Act did not assist the bank because the communication between the lawyers and the auditors was not for the dominant purpose of providing the client (the bank) with professional legal services relating to court proceedings. Instead, the professional legal services were being provided to the auditors for their own purposes.

The bank appealed to the New South Wales Court of Appeal, but the Court upheld Justice Bergin's decision and agreed with her reasons. The bank then sought special leave to appeal to the High Court on the issue, but its application was refused.

Can anything be done to avoid disclosure of confidential communications between a client's lawyers and auditors?

In the conclusion to its judgment, the Court of Appeal considered, and then rejected, the idea that the problem might be avoided if the lawyers provided their opinion directly to the client and the client passed on the opinion to the auditors, excluding the sensitive material. The reason for the rejection was that the dominant purpose for which the sensitive material was prepared was to enable the auditors to carry out their task, not to provide legal advice to the client. Also, as a matter of practicality, the sensitive material could not be withheld from the auditors because it was required by them to properly carry out their duties.

The Court of Appeal concluded that amendment of the Evidence Act or the Corporations Act may be necessary. At the time of publication however, no amendments are proposed by the legislators, although the issue has been canvassed at a recent meeting of attorneys-general.

In the circumstances, the best advice for companies and their lawyers is that they should be circumspect in the estimations and advice which they provide in a representation letter. In general, directors' estimates should merely refer to the known facts of any dispute including the best and worst case scenarios which have already been openly discussed; should only refer to any offers which have actually been made; and should avoid concluding on the likelihood of any particular outcome.