Seek­ing to ex­tend le­gal pro­fes­sional priv­i­lege

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

THE is­sue of le­gal pro­fes­sional priv­i­lege arises in many cir­cum­stances. For in­stance, the South African Rev­enue Ser­vice (SARS), when ask­ing for in­for­ma­tion from a tax­payer, usu­ally re­quires such in­for­ma­tion in terms of sec­tion 74 and sec­tion 74A of the In­come Tax Act. In these re­quests they some­times ask for, among other things, all tax opin­ions re­lat­ing to a par­tic­u­lar trans­ac­tion.

The Tax Ad­min­is­tra­tion Bill will, once it comes into ef­fect, re­place the pro­vi­sions of sec­tion 74A of the In­come Tax Act and will set out the in­for­ma­tion which must be pro­vided by a tax­payer on re­quest from SARS.

One of the few cir­cum­stances where doc­u­ments do not have to be pro­vided to SARS is where such doc­u­ments are sub­ject to le­gal pro­fes­sional priv­i­lege.

Sec­tion 64 of the Tax Ad­min­is­tra­tion Bill also recog­nises le­gal pro­fes­sional priv­i­lege and sets out cir­cum­stances for de­ter­min­ing whether such priv­i­lege ap­plies to doc­u­ments re­quested by SARS.

In the re­cent UK case of Pru­den­tial PLC and Pru­den­tial (Gi­bral­tar) Lim­ited v Spe­cial Com­mis­sioner of In­come Tax and Philip Pan­dolfo (HM In­spec­tor of Taxes) Pru­den­tial at­tempted to ex­tend the ex­ist­ing rule of le­gal pro­fes­sional priv­i­lege to ad­vice on tax law given by ac­coun­tants. The court of ap­peal unan­i­mously con­firmed that le­gal pro­fes­sional priv­i­lege did not ap­ply to any other pro­fes­sion­als ex­cept solic­i­tors and bar­ris­ters. This mat­ter is now on its sec­ond ap­peal and Pru­den­tial is again seek­ing to ex­tend le­gal pro­fes­sional priv­i­lege be­yond the le­gal pro­fes­sion.

This ar­ti­cle pro­vides some back­ground to le­gal pro­fes­sional priv­i­lege in SA and its im­por­tance in re­spect of tax dis­putes with SARS.

The ra­tio­nale of this priv­i­lege is that it pro­motes the pub­lic in­ter­est be­cause it as­sists and en­hances the ad­min­is­tra­tion of jus­tice by fa­cil­i­tat­ing the rep­re­sen­ta­tion of clients by le­gal ad­vis­ers. It en­cour­ages peo­ple to seek and ob­tain le­gal ad­vice to en­sure that the law is ap­plied and that lit­i­ga­tion is prop­erly con­ducted. Lawyers are re­garded as part of the sys­tem of ad­min­is­tra­tion of jus­tice, and for that sys­tem to be able to func­tion prop­erly peo­ple must be able to ob­tain le­gal ad­vice and rep­re­sen­ta­tion, se­cure in the knowl­edge that what they dis­close to their lawyers will re­main confidential and be pro­tected against pub­lic dis­clo­sure.

Le­gal priv­i­lege ap­plies to com­mu­ni­ca­tions (writ­ten or oral) in the fol­low­ing two sit­u­a­tions:

Com­mu­ni­ca­tions be­tween a le­gal ad­viser and his client made for the pur­pose of ob­tain­ing or giv­ing le­gal ad­vice.

Com­mu­ni­ca­tions be­tween le­gal ad­viser and client, or be­tween ei­ther of them and a third party, for the pur­pose of pre­par­ing for lit­i­ga­tion.

The com­mu­ni­ca­tion must have been made in con­fi­dence. The priv­i­lege is a right of the client, and has to be claimed. It can be waived, ex­pressly or by im­pli­ca­tion. It does not ap­ply when the ad­vice is sought for a crim­i­nal or fraud­u­lent pur­pose.

The ad­vice must have been sought and given in a pro­fes­sional ca­pac­ity. Orig­i­nally, le­gal pro­fes­sional priv­i­lege was re­stricted to bar­ris­ters and solic­i­tors (ad­vo­cates and at­tor­neys) as of­fi­cers of the court, in independent prac­tice, and sub­ject to the ethics and dis­ci­pline of their pro­fes­sions.

In mo­dem times, when more lawyers are em­ployed by large cor­po­ra­tions, in­sti­tu­tions and gov­ern­ments to pro­vide ‘in-house” le­gal ad­vice and ser­vices, the ques­tion has arisen whether le­gal pro­fes­sional priv­i­lege at­taches to com­mu­ni­ca­tions be­tween them and their em­ploy­ers.

In par­tic­u­lar the is­sue arises whether le­gal pro­fes­sional priv­i­lege also ap­plies to in-house coun­sel. In the UK case of Al­fred Cromp­ton Amuse­ment Ma­chines Ltd v Com­mis­sioner of Cus­toms and Ex­cise, Lord Den­ning in the Court of Ap­peal ex­pressed the view that le­gal pro­fes­sional priv­i­lege ex­tends also to such in-house salar­ied le­gal ad­vis­ers. In his view they were in the same le­gal po­si­tion as lawyers who prac­tised on their own ac­count, the only dif­fer­ence be­ing that they acted for one client rather than for many.

A con­trary view was ex­pressed by the Euro­pean Court of Jus­tice in AM & S Europe Ltd v Com­mis­sion of the Euro­pean Com­mu­ni­ties on the grounds that in-house lawyers lack the in­de­pen­dence to jus­tify mak­ing their ad­vice priv­i­leged, an independent lawyer be­ing one “who is not bound to his client by a re­la­tion­ship of em­ploy­ment”.

In SA the ques­tion of the ex­ten­sion of the priv­i­lege to salar­ied in-house le­gal ad­vis­ers has yet to be defini­tively pro­nounced upon by the Supreme Court of Ap­peal, but at high court level Lord Den­ning’s view has been ap­proved. In Mo­hamed v The Pres­i­dent of the Repub­lic of SA, Judge Hoff­mann, af­ter con­sid­er­ing the mat­ter in some de­tail, con­cluded as that “to limit the scope of le­gal pro­fes­sional priv­i­lege to clients and lawyers in pri­vate prac­tice is not, in my view, jus­ti­fied in law”.

Aca­demic writ­ers in SA tend to re­gard the ques­tion of the ex­ten­sion of the priv­i­lege to salar­ied le­gal ad­vis­ers as be­ing still an open one, but the weight of opinion seems now to be shift­ing in favour of such an ex­ten­sion.

In the light of de­vel­op­ments in the com­mon law world and of the de­ci­sion of the Cape High Court in Ma­homed’s case, it is con­sid­ered that when it is fi­nally seized of the mat­ter, the Supreme Court of Ap­peal may well ex­tend the priv­i­lege to salar­ied le­gal ad­vi­sors. How­ever, as in the UK Pru­den­tial case, it is un­likely that le­gal priv­i­lege will be ex­tended to ac­count­ing firms pro­vid­ing tax ad­vice.

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