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Australia – Loss Of Legal Privilege In Breach Of Warranty Claim – A Case Of Hard Cheese For The Purchaser.

17 October, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

Lactalis Jindi Pty Ltd & Anor v Jindi Cheese Pty Ltd & Ors [2013] VSC 475

 

WHAT YOU NEED TO KNOW

 

  • A Business Sale Agreement may restrict a purchaser’s right to bring a claim for breach of warranty by providing that such a claim may be brought only if the purchaser has obtained a legal opinion that it has reasonable prospects of success in that claim.
  • If a purchaser obtains the necessary legal opinion and brings legal proceedings for breach of warranty, it is likely that privilege attaching to the legal advice will be waived under the Uniform Evidence Act. The position may be otherwise if the claim is made in a jurisdiction where the Uniform Evidence Act does not apply (Queensland, South Australia, Western Australia) or if it is made by way of alternative dispute resolution.
  • One solution is for the Agreement to provide that the vendor may not seek production of the legal opinion relied on by the purchaser. (This was an option recommended by Almond J in Lactalis Jindi Pty Ltd & Anor v Jindi Cheese Pty Ltd & Ors [2013] VSC 475 at [63]).
 

Background

 

The defendant vendors entered into an Agreement with the plaintiff purchasers for the sale of a cheese manufacturing business. Under the Agreement, part of the purchase price was held by the third defendant and retained by him if the purchaser made a Bona Fide Claim against the vendor for breaches of warranties and/or under certain contractual indemnities.

 

A “Bona Fide Claim” was defined to mean a “Claim or Claims by the Purchaser against a Vendor for breach of a Sale Document (including breach of Warranty), for which it has obtained a legal opinion from senior counsel with not less than 10 years’ experience at the Bar that the Purchaser has reasonable prospects of success of that Claim in a court of relevant jurisdiction”.


The plaintiffs commenced proceedings for breach of warranties. In their pleadings, they alleged they had obtained the requisite legal opinion, pursuant to their obligation under the Agreement. The vendors sought an order for the production of the legal opinion.

 

Legal Issues

 

The plaintiffs claimed that the opinion was protected by client legal privilege under section 119 of the Evidence Act 2008 (Vic) (the Act), on the basis that it was a confidential document prepared by counsel for the purposes of contemplated litigation. The defendants argued that the plaintiffs had waived privilege over the opinion under section 122(2) of the Act. Section 122(2) of the Act provides for the loss of privilege where the client has acted inconsistently with the claim for privilege. Under section 122(3), a person is taken to have acted inconsistently with the claim for privilege if:

 

a) they “knowingly and voluntarily disclosed the substance of the evidence to another person”; or

 

b) “the substance of the evidence has been disclosed” with their express or implied consent. In this case, the defendants submitted that the plaintiffs had waived privilege by:

 

  • entering into the Business Agreement that required the plaintiffs to obtain a legal opinion from senior counsel that they had a reasonable prospect of success in their claim if they were to bring a claim for breach of warranty; and
  • disclosing the substance of the legal opinion in their pleadings.
 

Entry Into The Agreement

 

The former argument failed. Almond J stated at [20]:

 

In my view, until a step was taken by the purchaser under the relevant clause, there could be no question of waiver of client legal privilege. At the time of entry into the agreement, the opinion did not exist and the purchaser had not
elected to trigger the clause to prevent the release of any part of the Deferred Amount. Setting up a regime for future use of the occasion should arise falls short of implied waiver of client legal privilege.

 

Pleading The Opinion

 

The latter argument was successful.

 

Almond J noted at [28] that the circumstances in which privilege is waived under section 122 of the Act are not identical to the circumstances in which privilege is waived under the common law1.


The operative question at common law is whether the person claiming the privilege has acted inconsistently with the maintenance of the claim. In contrast, under the Act, once one of the requirements under section 122(3) is met, a party is taken to have acted inconsistently with their claim of privilege, and therefore section 122(2) – the waiver of privilege – is satisfied. In other words, once one of the requirements under section 122(3) is met, it is not necessary to further consider the issue of inconsistency under section 122(2) ([58]).


His Honour further found at [60] that there is no “overriding principle of fairness operating at large” in respect of the relevant provisions under the Act.

 

However, in His Honour’s view, considerations of fairness may inform the analysis of whether disclosure was made knowingly, voluntarily or consensually ([61]). Even if considerations of fairness were relevant to whether the substance of the evidence had been disclosed, those considerations would favour disclosure because it would allow the defendants to assess whether the opinion properly “triggered” the warranty claim, and therefore to plead accordingly.

 

Knowing And Voluntary Disclosure

 

Almond J accepted the defendants’ submission that the plaintiffs had “knowingly and voluntarily disclosed the substance” of the opinion in their pleadings. His Honour found that the plaintiffs had made the disclosure knowingly, given that the plaintiffs’ solicitors had deposed that the disclosure was necessary to establish the basis for the plaintiffs’ claims ([31]).

 

His Honour also found that the plaintiffs had deliberately disclosed the opinion, because the disclosure was a consequence of the plaintiffs deciding to enforce their contractual rights. Relying on Ampolex Ltd v Perpetual Trustee Co (Canberra) Ltd (1996) 40 NSWLR 12, his Honour concluded that it could not be said that the disclosure arose by mistake or by compulsion of law ([35]).

 

Substance Of Opinion

 

His Honour then considered the meaning of “substance of the evidence”, citing with approval at [38] Adelaide Steamship Co Ltd v Spalvins (1998) 81 FCR 360, in which the Full Federal Court held that it requires a quantitative test as to whether there is sufficient disclosure to warrant a waiver of privilege. The question here was whether disclosure of the conclusion amounted to disclosure of the substance of the legal opinion.

 

His Honour reviewed the authorities under the common law and found that they did not appear to establish a general rule: at common law, it appears, disclosure of the conclusion of legal advice may or may not amount to a waiver of privilege.
His Honour found that, for the purposes of section 122(2), the authorities tended to show that “at least an express or implied summary of legal advice received amounts to disclosure of the substance of the advice” ([55]).

 

His Honour concluded at [56] that, in general, the case law provided limited guidance unless there were similar facts. In this case, Almond J found that, having regard to the terms of the contract, the substance of the opinion should be understood to be the conclusion that the plaintiffs had reasonable prospects of success. Therefore, by revealing that conclusion, the plaintiffs had disclosed the substance of the opinion.

 

1 Here the Act applied because in Victoria the privilege provisions of the Evidence Act apply to pre-trial production – see section 131A of the Act.


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For further information, please contact:

 

Ashley Wharton, Partner, Ashurst
[email protected]


Ben Wong, Ashurst
[email protected]

 

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