Heinrich Louw April 11 2014 Legal professional privilege and invoices from attorneys Cliffe Dekker Hofmeyr | Corporate Tax - South Africa Heinrich Louw Corporate Tax FactsDecisionCommentOn March 17 2014 the Western Cape High Court reached a decision in A Company v Commissioner of the South African Revenue Service (16360/2013 – as yet unreported).FactsThe applicants were three companies in a group of companies. In the course of conducting an audit of the applicants' tax affairs, the South African Revenue Service (SARS) directed a request for relevant material at the applicants in terms of Section 46 of the Tax Administration Act (28/2011).Specifically, SARS required the applicants to provide it with copies of certain invoices issued to the applicants by their attorneys in respect of legal services rendered. The invoices contained certain fee notes pertaining to the legal services.The applicants were of the view that "all communications between attorneys and their clients are legally privileged, including invoices", and that SARS was not entitled to copies.SARS strongly disagreed. After various exchanges of correspondence, the applicants provided SARS with redacted copies in which some of the fee notes were censored.SARS was not satisfied with the redacted copies and insisted that it be provided with full copies on the basis that "the detail provided [in the fee notes] does not in any way constitute advice given by an attorney to a client".The applicants argued that:"The privilege does not only attach to the advice itself. Where the communication is so closely linked to the advice sought that by disclosing the communication the privilege would be undermined, the communication itself does not have to be disclosed."As a result, the applicants approached the Western Cape High Court for relief in the form of a declaratory order to the effect that "the redacted portions of the invoices… are protected from disclosure by reason of legal professional privilege".DecisionThe court summarised the law relating to legal professional privilege as follows.Communications between a legal adviser and a client are protected from disclosure if:the legal adviser was acting in a professional capacity at the time;the adviser was consulted in confidence;the communication was made for the purpose of obtaining legal advice;the advice did not facilitate the commission of a crime or fraud; andthe privilege is claimed.The privilege extends to all communications directly related to the seeking or giving of advice.The court confirmed that the rationale for legal professional privilege is that the confidentiality that it bestows is necessary for the proper functioning of the legal system. A person must be able to turn freely to a legal adviser for advice as to what may or may not be done and where he or she runs a risk, especially given the complexity of law and the fact that it reaches far into all aspects of business.The court also stated that the rule regarding legal professional privilege is a substantive rule of law and not merely a rule preventing certain communications from being admitted as evidence.The court further stated that, generally, it is not possible to judge whether privilege is validly claimed if the party claiming such privilege provides no legal context. In short, details need to be provided.The court criticised the applicants for providing no context or sufficient details for the claim of privilege, other than stating that the fee notes were privileged. Specifically, the applicants did not:"explain how mere references in the fee notes to work done or documents considered would 'undermine' the applicants' privilege in respect of the content of communications with their attorneys concerning the seeking and giving of advice."On the other hand, SARS provided context as to why it required uncensored copies of the invoices. It appears that, among other things, SARS was investigating a structured finance transaction relating to the applicants (allegedly one to which the general anti-avoidance rules applied), and the fee notes could have revealed whether the applicants or other group companies had knowledge of the flow of funds in the transaction.The applicants did not argue that the fee notes would be irrelevant to SARS's investigation.The court went on to say that the only way in which the applicants could succeed without providing context were if the invoices were – as a whole and by their very nature (by reason of the category of document) – privileged.The applicants abandoned any argument to the effect that the invoices as a whole were privileged by their nature, and only pursued the argument that the redacted portions of the invoices were privileged. The court nevertheless found it relevant to enquire whether the invoices from the attorneys were privileged.After reviewing various judgments handed down in the English courts (as well as in the New Zealand courts), the court concluded that attorneys' invoices or fee notes are not privileged as a whole by their nature because they:"are not created for the purpose of giving advice";"are not ordinarily of a character that would justify it being said of them that they were directly related to the performance of the attorney's professional duties as legal adviser to the client";"are rather communications by a lawyer to his or her client for the purpose of obtaining payment for professional services rendered";"relate to recoupment for the performance of professional mandates already completed, rather than to the execution of the mandates themselves"; and"do not form part of the 'continuum of communications'" relating to legal advice.Additionally, the court held that:referring to advice sought or given is not the same as disclosing the substance of the advice;such a reference to the fact that advice has been sought or given in a document that is not by its nature privileged does not give rise to any privilege;"[i]t is the actual communications between the client and the lawyer involved in the seeking and giving of the advice - identifiable as such within the broad and generous parameters referred to … [in case law] … or references in other documents that would disclose their content or from which their content might be inferred that are the matter in respect of which legal advice privilege may be claimed";"[this] does not include the content of a document which merely records, without disclosing their substance, that such communications have occurred"; and"if the fee note refers to the advice only in terms that describe that it was given, without disclosing its substance, I do not consider that the mere reference would be sufficient to invest the relevant content of an otherwise unprivileged document or communication with legal advice privilege".However, invoices and fee notes might contain parts in which privilege can be claimed. This is particularly so "if the fee note set out the substance of the advice, or contained sufficient particularity of its substance to constitute secondary evidence of the substance of the advice".The court noted that in such cases, privilege must be claimed by redacting the parts of the document considered to be privileged – precisely as the applicants had done in the current matter.To determine whether a specific part of a document is subject to privilege – keeping in mind the general rules noted above – the court must test whether "upon an objective assessment… the references disclose the content, and not just the existence, of the privileged material".However, as mentioned, the problem facing the applicants was that they had failed to provide any legal context or details for purposes of placing the court in a position to make such a finding.Nevertheless, the applicants made uncensored copies of the invoices available to the court for purposes of inspection.Therefore, the court was invited to take a 'judicial peek' at the uncensored fee notes in order to make a finding. The court was reluctant to do so, because this generally places one party (in this case SARS) at a disadvantage, as it is kept in the dark. The applicants should have provided the necessary legal context in their papers. However, SARS agreed to a judicial examination of the invoices.After reviewing the invoices – and given that the applicants had provided no legal context to assist the court – the court found that most of the references in the fee notes did not:"set out the substance of any request for legal advice or the content of any advice given"; and"afford any material that [the court] could identify as providing secondary evidence by which the content of the privileged communications that occurred in the course of the work being billed for could be inferred".Therefore, legal professional privilege was not extended to these references.The court found only three references in the fee notes from which "the character of the advice sought by the client may be inferred, in the sense of conveying not only that advice was sought, but also the substance of the client's evident concern in an identifiable legal context". Accordingly, these references attracted legal professional privilege.As such, the applicants enjoyed only limited success.CommentIt is important to be mindful of the information that might be contained in invoices and fee notes from attorneys. These documents are not by their nature subject to legal professional privilege. Even though some references could potentially be subject to privilege, references that attract no privilege could still reveal otherwise confidential information to SARS, which it might seek to use against taxpayers.For further information on this topic please contact Heinrich Louw at DLA Cliffe Dekker Hofmeyr by telephone (+27 11 562 1000), fax (+27 11 562 1111) or email (firstname.lastname@example.org). The DLA Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.