If a year is to end with something that causes a bang, then the decision in Minister of National Revenue v. Iggillis Holdings Inc. and Ian Gillis Et Al., 2016 FC 1352 did just that. In reasons that are ambitious, complicated, lengthy (125 pages) and, which will likely provoke significant discussion, the Court held that advisory common interest privilege has “incorrectly [been] accepted in both the United States and Canada.”
The judgment is an upheaval of law. The facts that resulted in the judgment are straightforward. The Respondents entered into a contract to sell assets and shares to another party. The purchaser and seller were each represented by counsel. Each lawyer communicated with his clients, the lawyers discussed and negotiated the transaction between themselves and the circle of communications continued. As described by the Court, “[t]he legal advice also traveled in both directions, as Mr. Kirby’s opinions were simultaneously provided to his client and communicated to [the purchaser].”
Together, and on the basis of the communications, negotiations and legal opinions, a memo was drafted which set out the numerous transactions needed to accomplish the primary transaction. Again, as described by the Court, “[t]he purpose of circulating such memorandum and diagrams was to ensure that Mr. Kirby (a) agreed on the steps in the Transaction that would be taken to purchase the shares, (b) understood the tax risks involved in such steps, and (c) had the opportunity to discuss such risks and negotiate changes to the Transaction to minimize or allocate such risks.”
The Court accepted that the “bi-directional communication” was for the purpose of advancing the common interests of the parties. The Court also accepted that the communications between each client and lawyer were protected by solicitor client privilege.
CRA served the Respondent with a Requirement to produce the memo. The Respondent took the position that the memo could not be compelled as it was protected by common interest privilege. The Minister applied to the Court to enforce compliance with the Requirement and, it was in that context that the Court rejected the existence of advisory common interest privilege and ordered that the memo be produced.
To understand the judgment and its significance, it is first necessary to understand the distinctions that the Court drew between solicitor client privilege, litigation privilege, joint client privilege (where two or more clients are represented by the same lawyer), common interest litigation privilege and advisory common interest privilege. Advisory common interest privilege is said to provide the protection of solicitor client privilege, to shared communications between lawyers and their respective clients when the clients have a common legal interest that does not relate to litigation. It is this privilege that the Court rejected.
To understand the judgment and its significance it is also necessary to understand the reasoning which drove the Court’s analysis. The Court had “difficulties understanding the justification for the doctrine” and also, was “concern[ed] in terms of fairness due to its impact if applied in a legal process challenging the Transaction.” This “concern” which was expressed by the Court specifically included the concern which would arise in circumstances where CRA might challenge the tax consequences of a transaction. The Court used plain language in addressing this:
…lawyer-to-lawyer legal communications and related information pertaining to how the agreement was negotiated would no longer be available to the courts. This struck the Court as a result that would not only deny the courts an extensive quantity of information on how transactions were formed, but also highly relevant information that in many respects could determine the outcome of the litigation.
In terms of advancing the “economic and social values” of society, I also could not apply this reasoning to the seventeen pro forma transactions in this case, which were undertaken for the sole purpose of tax avoidance on a commercial transaction. Tax avoidance is permitted in view of the strict application of principles of interpretation and the rule of law, but it is not conduct that should be encouraged and assisted by new privilege doctrines meant to keep relevant evidence challenging the legality of these schemes from the courts.
The Court was unequivocal in rejecting the idea that any economic or social value could justify the existence of the privilege. For example, in rejecting existing law that found the privilege to exist, the Court wrote that “those commercial transactions appearing to constitute much of the jurisprudence relating to advisory CIP (common interest privilege) are of no, or questionable economic or social benefit to society.”
The Court concluded that though common interest privilege “in transactional circumstances is strongly implanted in Canadian law and indeed around the common-law world”, the Court “nevertheless is very strongly of the view that CIP (common interest privilege) is not a valid component of SCP (solicitor client privilege) doctrine”. Further, and in a strong rejection of the analysis that previous courts have offered: “the jurisprudence supporting advisory CIP was established under a cloak of confusion with common interest in JCP (joint client privilege) and litigation privilege and with very little analysis of the factors and considerations relating to the legitimacy of advisory CIP.”
The Court’s reasons offer extensive legal analysis which warrants careful attention. The reasons also offer intriguing references, such as to the theories of psychologist Daniel Kahneman to explain how common interest privilege came to be so widely adopted despite the legal errors (as found by the Court) which form the foundation for the privilege. Finally, the reasons include strong assertions which might be regarded by some as controversial. For example:
“It is also the Court’s experience that more lawyers at trial tends to increase the costs of the process with little apparent benefit”.
“…evidence from years of shared experience of judges and litigators would confirm that over-claiming is already a not-uncommon practice in the field of traditional SCP.”
“As far as the Court is able to determine, the conclusion that CIP promotes the formation of commercial contracts in the jurisprudence cited in support of this proposition, represents the unsupported opinions of judges.”
“The Court can take judicial notice of the fact that the horizontal or vertical concentration of production and services are thought by economists to harmfully augment monopolistic and oligarchical economic structures contributing to other socially harmful interests.”
“CIP will also enable commercial transactions that are of questionable legality given the purposes they are put to. Examples abound. They may involve placing wealth off shore, or estate planning of wealthy persons, or multinational corporations shifting their costs to high-tax countries and their profits to low-tax countries.”
In the result the Court concluded: “The administration of justice has and will function quite nicely without advisory CIP.”
The more theoretical aspects of the Court’s reasons might become the subject of lively discussion in classrooms or seminars. Others might challenge some of the Court’s assertions such as whether “estate planning” is of “questionable legality” or, whether judicial notice may properly be taken of the theories of some economists. Undoubtedly, some commercial lawyers and their clients will strongly disagree with the Court’s findings with respect to value that attaches to protecting their common interest communications.
Apart from these discussions that might take place, the judgment gives rise to very serious issues for lawyers who advise clients on commercial transactions, and for clients who instruct and receive advice from lawyers on such transactions. For such lawyers and for such clients it is essential that this case be well understood because, if there was previously comfort taken in the belief that certain communications were protected from disclosure, the basis for the belief may no longer be correct in law.
This might mean that the wisdom underlying certain communications between lawyers will need to be reconsidered. This might also mean that the advice that is given to a client with respect to audit risk surrounding certain transactions will need to be recalibrated. At the very least, lawyers will be well advised to consider, and reconsider their communications in light of this judgment as it would be unfortunate for a lawyer’s communications to serve as the basis of a reassessment against a client when the lawyer has (now) mistakenly believed that the communications would be protected from disclosure based upon advisory common interest privilege.
Appeal proceedings have already been commenced. Given the comprehensive reasons which the Court provided in support of its conclusions and given the utmost importance of the legal issue, it is important that the law develop with the benefit of the wisdom of an appeal court.