SCC ruling on common interest privilege welcomed

With its denial of the Crown’s application for leave to appeal in Minister of National Revenue v. Iggillis Holdings Inc., et al., a tax case, the Supreme Court of Canada has restored normalcy to the law regarding common interest privilege, say lawyers.

For at least a decade, Canada’s transactional lawyers have been operating under the assumption that confidential information already protected by privilege that they had agreed to share with colleagues on the other side of a deal or with others who had a common interest, would not lose its privileged status.

Then came the lengthy, reasoned 2016 Federal Court judgment from Justice Peter Annis, who refused to recognize CIP in the transactional context.

On application by the Canada Revenue Agency, he ruled that privilege had been waived and ordered production of a legal memorandum addressed to the tax implications of a sale transaction.

“That was a shock because it was contrary to existing case law and created enormous uncertainty about sharing privileged opinions with the other side in a deal,” says Jeff Galway, a partner with Blake, Cassels & Graydon LLP’s Toronto office, who was not involved in the case.

The Federal Court of Appeal saw it differently, reaffirming and clarifying the traditional view of parties’ ability to share privileged communications in order to advance a commercial transaction.

“Everybody across the country was waiting for this decision, because if Annis’ ruling had been upheld, it would have changed the practice around how deals are done,” says Joel Nitikman, a partner in the tax group in Dentons Canada LLP’s Vancouver office, who represented Iggilis. “It certainly would have severely restricted discussions between deal lawyers on tax issues.”

Had Iggillis been decided differently, perhaps the only way to protect privilege in the deal context would have been to have all the clients involved sign joint retainers with all the lawyers retained.

“That’s the opposite of what the practice is now, where each party has a separate team,” explains Nitikman. “In any case, I don’t know how the joint retainer approach would work, because the duties of loyalty and full disclosure would apply even if the lawyers were giving different advice to different clients.”

As it turns out, the FCA’s reasons may extend CIP further than any Canadian court has taken it before.

“Iggillis is the broadest statement of common interest privilege yet, because the Federal Court of Appeal has extended its application from pure commercial cases — where the legal opinions in issue tend to deal with such matters as good title to property or how to handle litigation — to the tax law context,” says David Outerbridge, a partner in litigation at Torys LLP in Toronto.

Because the FCA’s reasons are such a strong endorsement of the doctrine in the commercial context generally, CIP may now go as far as protecting communications in the lobbying context, where companies are pursuing common interests by joining forces to seek legislative or rule changes that benefit them.

“The public interest protected in the transaction context is the interest in getting transactions done,” says Alexander Cobb, a commercial litigator at Osler, Hoskin & Harcourt LLP in Toronto. “But the public interest in ensuring that lawmakers have the benefit of a thought-out analysis from their constituents is probably worthy of equal protection.”

Caution, however, will still be the order of the day in cross-border transactions involving American jurisdictions, where the law on CIP differs from state to state, says Outerbridge.

“Counsel, particularly those involved in commercial transactions, should understand the very important distinctions between our laws on this issue,” says Dalton McGrath, a partner in Blakes’ Calgary office.

Generally speaking, disclosure of communications protected by solicitor-client privilege to a third party results in a waiver of the privilege. The CIP doctrine, an exception to the waiver rule, seeks to avoid that result where parties have the same interests, share common goals, or are seeking similar remedies.

“Common interest privilege agreements are intended to enable parties to communicate frankly between themselves without waiving a privilege that any one of the parties may enjoy,” says McGrath.

Historically, common interest privilege applies to the sharing of information that takes place for the purpose of (or in contemplation of) litigation, arbitration or dispute resolution proceedings. But Canadian courts have taken it further.

“Some Canadian cases have entrenched that protection in the commercial context in order to allow parties to pursue similar common interests in commercial transactions,” says McGrath.

The British Columbia Court of Appeal’s decision in Maximum Ventures Inc. v. De Graaf in 2007 is generally regarded as having set the tone for Canadian courts. The court ruled that where sufficient commonality exists, the privilege applies even in the absence of actual or contemplated litigation.

“Other Canadian cases have echoed that view,” says McGrath.

But the law can be different in the United States.

While some federal courts of appeal have taken a position similar to the Canadian one, most U.S. courts have applied the privilege only where the shared communications relate to pending or anticipated litigation, says Gavin MacKenzie of MacKenzie Barristers in Toronto.

Somewhat ironically, it was a decision of the New York Court of Appeals that led to Annis’ refusal to recognize CIP in Iggilis. The decision, Ambac Assurance Corp v. Countrywide Home Loans Inc., arose in the context of a merger between Countrywide and Ambac Assurance in 2008. The transaction featured a common interest agreement intended to protect communications between the companies regarding matters affecting the merger, including documents relating to employee benefit plans and legal advice on tax issues.

Ambac had insured some of Countrywide’s residential mortgage-backed securities. When the securities failed during the financial crisis, Ambac sued, alleging that Countrywide had fraudulently misrepresented the loans’ quality. Ambac also sued Bank of America as the successor to Countrywide.

Bank of America claimed that certain communications between itself and Countryside were protected by attorney-client privilege because they related to a number of legal issues the companies needed to resolve jointly in pursuance of the merger. Ambac countered that the voluntary sharing of the confidential material waived the attorney-client privilege.

Two lower courts upheld the privilege, but the Court of Appeals reversed, noting that New York precedent had for over two decades required “pending or reasonably anticipated litigation” as a pre-condition to invoking CIP.

“As an exception to the general rule that communications made in the presence of or to a third party are not protected by the attorney-client privilege our current formulation of the common interest doctrine is limited to situations where the benefit and the necessity of shared communications are at their highest, and the potential for misuse is minimal,” the court stated.

As the court saw it, the commercial context, which differed markedly from the litigation context, did not meet these criteria.

“When two or more parties are engaged in or reasonably anticipate litigation in which they share a common legal interest, the threat of mandatory disclosure may chill the parties’ exchange of privileged information and therefore thwart any desire to coordinate legal strategy,” the court stated. “In that situation, the common interest doctrine promotes candor that may otherwise have been inhibited. The same cannot be said of clients who share a common legal interest in a commercial transaction or other common problem but do not reasonably anticipate litigation.”

MacKenzie also points out that U.S. courts are much less likely to imply that a common interest privilege exists.

“Courts in many states are not inclined to apply the privilege unless it has been evidenced by a formal agreement that includes reference to the privileged communications and to the fact that there is no intent to waive the privilege by virtue of the documents’ disclosure to the parties involved,” he says.