Federal Court case: Asahi Holdings v PEP

A recent Federal Court of Australia case has highlighted the importance of ensuring you have a confidentiality agreement in place before your business discloses confidential and privileged documents to another party, such as an insurer.

Waiver of legal professional privilege

In Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Limited (No 2) [2014] FCA 481, the Federal Court held that legal professional privilege in a confidential report relevant to litigation was waived when it was disclosed to an insurer without adequate restrictions to preserve confidentiality.

This case arose in the context of the dispute between the Applicants (Asahi) and the shareholders of a business (and some of its employees and directors) (Sellers), which had been bought by an Asahi nominee company in 2011.

Asahi had taken out insurance policies against breaches of the warranties given by the Sellers as part of the sale agreement. Asahi later claimed that the Sellers had made misrepresentations and breached warranties in the sale agreement by inflating or overstating the ‘earnings before tax, interest, taxes, depreciation and amortisation’ (EBITDA) of the business.

Asahi’s solicitors had prepared a report, which set out the details of adjustments and calculations that it claimed should have been made to the EBITDA to reflect the true financial position of the business. The report was prepared to assist the solicitors to advise on potential claims against the Sellers, and for the purposes of an insurance claim. Asahi then made a claim to its insurers for breach of the insured warranties, and provided the report to the insurers. Asahi stated that as it did not wish to waive privilege, its solicitors marked the documents in the report “Privileged and Confidential”.

Proceedings were then commenced against the Sellers. Pursuant to a court order, Asahi’s solicitors provided the Sellers with a redacted copy of the report. The Sellers sought a full copy of the report, arguing that the legal professional privilege that attached to the report was lost when it was provided to the insurers.

The rationale behind ‘litigation privilege’, a type of legal professional privilege, is to secure and facilitate a fair trial and protect the confidentiality of documents that come into existence for the dominant purpose of litigation. Privilege will be lost where disclosure of the document is inconsistent with the maintenance of confidentiality.

The Court rejected Asahi’s arguments that there was no waiver of privilege because it had sent the report to the insurer for a limited and specific purpose and under conditions of confidentiality. The Court held that no agreement as to confidentiality was to be implied in the circumstances for a raft of reasons, including that:

  • the report was being provided to what Asahi must have recognised as a potential adversary;
  • Asahi did not seek or obtain assurances as to confidentiality from the insurer; and
  • the material was not “obviously privileged”.

The Court went so far as to say that the absence of any attempt by Asahi to have the insurer expressly agree to restrictive terms under which the disclosure would be made “was likely have been objectively understood as flowing from the absence of any need for such restrictions because of the absence of any subsisting confidentiality”. It said that Asahi must have contemplated that the insurer may have wanted to disclose the report to third parties for the purposes of assessing the claim, or use it in litigation in relation to the claim. Disclosure was therefore inconsistent with the maintenance of privilege.

The fact that the documents in the report were marked “Privileged and Confidential” did not carry much weight – the Court thought that this would have been understood as a hangover from the previous use of the documents. Asahi was therefore ordered to handover a full copy of the report to the Sellers.

Implications for dealing with privileged and confidential documents

The best way to secure the confidentiality of a document being disclosed to a party is by express agreement, which sets out the basis upon which disclosure is made and the limitations upon its further use.

An agreement as to confidentiality may be implied in certain circumstances, but it is better to leave no room for doubt. This case illustrates that stamping the documents as “Confidential and Privileged” and providing the document to a party for a specific purpose in circumstances that you think are confidential may not be enough to protect its confidential status.

It is also important to remember that if you provide a privileged document to another person and cannot control its further dissemination by that person, privilege is lost.

Legal professional privilege is a technical area of law and can have a significant impact on your business if accidentally waived – ensure you seek external legal advice where necessary.

A copy of the judgment can be found here: Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Limited (No 2) [2014] FCA 481.