FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE - discovery and inspection - whether legal professional privilege abrogated by fraud - prima facie case of fraud established but not that legal advice was in furtherance of that fraud - differences between common law privilege and privilege protected by Evidence Act considered.

Evidence Act 1995 (NSW); ss 117, 118, 119, 125

Trade Practices Act 1974; s 53(1)(g)

Waterford v The Commonwealth (1986-7) 163 CLR 54, considered

Russell v Jackson (1851) 9 Ha 387, distinguished

Attorney-General (NT) v Kearney (1985) 158 CLR 500, distinguished and applied

Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 141 ALR 545, applied

O’Rourke v Darbishire [1920] AC 581, applied

Butler v Board of Trade [ 1971] 1 Ch 680, considered

RODNEY TREVOR ZEMANEK v COMMONWEALTH BANK OF AUSTRALIA

NG873 of 1996

HILL J

2 OCTOBER 1997

SYDNEY

THE COURT ORDERS THAT:

1.         The motion be stood over to a date to be fixed to hear argument as to whether privilege attaches to specific documents and costs of the motion.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT (No. 1)

Mr Zemanek, the applicant in proceedings brought against the Commonwealth Bank of Australia Limited (“the Bank”) and various persons who are officers of the Bank, seeks interlocutory relief in the form of various orders.  Some of the orders sought have been resolved by agreement and need not be dealt with by me in these reasons.

The substantive relief which Mr Zemanek seeks (and which is opposed by the Bank) is inspection of various documents in respect of which the Bank claims legal professional privilege.  An affidavit claiming privilege has been sworn by a Mr Lee, who is a partner in the firm of solicitors acting for the Bank.  One group of documents in respect of which privilege is claimed is said to be a bundle of documents being “without prejudiced communications”.  It is, however, now accepted that no privilege exists in these communications and that they should be produced for inspection.  It is obvious, of course, that the contents of those documents are in any event known to Mr Zemanek.

The documents in respect of which privilege is claimed fall into three categories.  First, there are documents which reflect legal advice which the Bank sought from time to time from internal legal advisers during the events leading up to and including the appointment by the Bank of a receiver to Predict Pty Ltd (“Predict”), a company owned or controlled by Mr Zemanek and the Bank freezing all of Mr Zemanek’s accounts and appropriating such credit balances as were in them on account of Mr Zemanek’s indebtedness to the Bank.  Generally speaking, the documents in which this advice is recorded have been produced to Mr Zemanek with the various paragraphs reflecting the advice whited out.

The second category of documents relates to the same period but reflects advice sought and obtained by the Bank from external advisers.

The final category of documents in respect of which privilege is claimed represents advice sought after the events in question, generally from external advisers, and in respect of the litigation.  This third category, which includes briefs to counsel and the like in connection with the litigation, is not the subject of challenge on Mr Zemanek’s behalf.  However, I have been invited to inspect the totality of the documents in respect of which privilege has been claimed to ensure that the documents over which privilege is claimed in fact fall within the categories which I have listed here.

Counsel for Mr Zemanek challenges the claim for privilege on two bases.  First, he submits that privilege does not attach to legal advice sought and given by lawyers employed by the Bank.  Secondly, and more importantly, he challenges the existence of privilege because he says, but only in respect of advice sought prior to the commencement of the litigation, that that advice was sought either in furtherance of a fraud or an offence or the commission of an act that renders the Bank liable to a civil penalty.  The offence upon which Mr Zemanek relies is a false or misleading representation allegedly made by the Bank falling within the terms of s 53(1)(g) of the Trade Practices Act 1974 (Cth).  Section 79(1)(a) of that Act makes a contravention of the section an offence punishable, in the case of a corporation by a fine not exceeding $200,000.  It is not in dispute between the parties that in consequence s 53(1)(g) is an offence which renders a person in contravention liable to a civil penalty.

Sections 118 and 119 of the Evidence Act 1995 deal with the rejection of evidence in proceedings in the Court if that evidence would result in disclosure of communications between, inter alia, a client and a lawyer for the dominant purpose of being provided legal advice or in respect of proceedings in which the person seeking the advice is a party.  Those sections are subject to the provisions, inter alia, of s 125 of that Act which is relevantly in the following terms:

“(1)     This Division does not prevent the adducing of evidence of:

            (a)        a communication made or the contents of a document prepared by a client or lawyer (or both), or a party who is not represented in the proceedings by a lawyer, in furtherance of the commission of a fraud or an offence or the commission of an act that renders a person liable to a civil penalty; or

            (b)        a communication or the contents of a document that the client or lawyer (or both), or the party, knew or ought reasonably to have known was made or prepared in furtherance of a deliberate abuse of a power.”

The sections clearly do not cover the entire field of the common law doctrine of legal professional privilege.  They are confined to circumstances where evidence is to be adduced in the Court and an objection is taken.  In some respects they are wider than the common law.  For example, Grant v Downs (1976) 135 CLR 674 poses a test of sole rather than dominant purpose.  In other respects (and particularly the confining of the sections to evidence adduced or sought to be adduced) they are narrower.

On their face these sections have no direct relevance to the question of discovery and inspection which is before me.  That question would seem still to be governed by the general law.  Neither party addressed me in argument as to the differences between the common law of legal professional privilege on the one hand and the provisions of the Evidence Act on the other.  However, for present purposes it seems to me the differences are not substantial and that such differences as may exist have no practical consequences in the present application.

The first matter which is raised by Mr Zemanek need not detain us.  It was held by the High Court in Waterford v The Commonwealth (1986-7) 163 CLR 54 that privilege attached to confidential professional communications passing between salaried legal officers employed by government agencies and those seeking their assistance.  Provided that the legal adviser is acting as such and not as a player in the transaction, there is no reason why communications of legal advice passing to or from a salaried legal adviser should be any the less privileged than would be the case if the advice was sought from an external adviser.  The difficulty may be in a particular case whether the in-house adviser is acting as an adviser or in some other capacity.  That difficulty does not arise here.

In so far as the matter is to be dealt with under the Evidence Act there is left no room for doubt.  The legal privilege protected under that Act is in essence that attaching between client and lawyer.  Section 117(1) defines “client” as including:

“(a)     an employer (not being a lawyer) of a lawyer;”

The consequence is, as the handbook prepared by the Attorney-General’s Department commenting on the Act points out, that privilege can be claimed even though the lawyer who provided the relevant legal advice or professional legal services was an employee of the client who claims privilege.

It is clear, when regard is had to the reports of the Law Reform Commission upon which the Evidence Act is based, that the intention in legislating was not to narrow the ambit of legal professional privilege.  To the contrary.  Certainly there was no intention to detract from the principle in Waterford’s case to which reference has already been made.

It follows in my view that any attack on the privilege claimed by force only of the fact that the advice came from in-house lawyers must fail.

I turn now to deal with the question whether the Court should deny privilege because the advice in question was in furtherance of a fraud or other act attracting a civil penalty.

It has always been the common law that it was open to a party resisting a claim for legal professional privilege to show reasonable grounds for believing that the communication was one made in furtherance of an illegal or improper purpose, such as fraud.  The most obvious case was where the solicitor was party to the fraud.  No privilege in such a case could attach to the communication because the contriving of the fraud was not part of the solicitor’s duty: cf Russell v Jackson (1851) 9 Ha 387 at pp392-3 (68 ER 558 at 560) cited by Gibbs CJ in Attorney-General (NT) v Kearney (1985) 158 CLR 500 at 513.

The principle was not confined to fraud.  It extended to other cases where the communication was made in furtherance of an illegal object.  The paramount test seems to be one of public interest.  If privilege which is conferred to secure the better administration of justice is used to protect communications to further a deliberate abuse of statutory power, the conferral of privilege would clearly be contrary to public interest.  The common law poses no lower threshold than the statutory provision of the Evidence Act.  A communication in furtherance of a fraud or in furtherance of conduct constituting an offence will not be protected by the privilege whether at common law or as a result of s 125 of the Evidence Act.

Where it is alleged that the communication falls outside the ambit of protection for legal professional privilege it is not sufficient for the person seeking to have the privilege abrogated merely to state that the communication was made in furtherance of a fraud or other illegal purpose: Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 141 ALR 545.  Something more will be required.  There are some differences in approach in the various judgments of the High Court in Propend, but those differences are not for present purposes relevant.  The party seeking to rebut the claim of privilege must do so by evidence.  The majority view in Propend is that the evidence in question must be admissible.  There must be “not merely an allegation ... of a fraud, but ... something to give colour to the charge”: O’Rourke v Darbishire [1920] AC 581 at 604 per Viscount Finlay, cited with approval by Gibbs CJ in Attorney-General (NT) v Kearney (supra).  There must be some prima facie evidence that there is some basis in fact for the claim that the communication was in furtherance of the fraud or other illegal purpose.

McHugh J in Propend (at 587) said:

“A mere allegation of illegal purpose or fraud is not, of itself, sufficient to displace a claim of legal professional privilege.  A person who alleges that legal professional privilege does not apply to a communication tenders an issue for decision and has the onus of proving it.  Subject to any statutory provision to the contrary, any evidence tendered in a court of justice to prove an issue must comply with the ordinary rules of evidence.  Legal professional privilege is a legal right.  Its prima facie application to a communication can only be displaced by admissible evidence.  That evidence does not have to prove that the communication was made in furtherance of a crime or the commission of a fraud, but it must establish a prima facie case that the communication was so made.  In O’Rourke v Darbishire, Viscount Finlay said that what is required is ‘something to give colour to the charge’.  The statement must be made in clear and definite terms, and there must further be some prima facie evidence that it has some foundation in fact.”

A somewhat higher test was suggested by Gough J in Butler v Board of Trade [1971] 1 Ch 680 at 689:

“If one rejects the bare relevance test, as I have done, then what has to be shown prima facie is not merely that there is a bona fide and reasonably tenable of crime or fraud but a prima facie case that the communications in question were made in preparation for or in furtherance or as part of it.”

Having regard to Propend Mr Zemanek swore a long affidavit which was admitted without objection and tendered various documents in support of his case. The evidence was generally in admissible form.

I turn now to consider the evidence which Mr Zemanek gave.  In the narration which follows it must be emphasised that I make no finding of facts.  No evidence has been adduced at this stage by the Bank.  For the purposes of the motion only, I am invited to accept the evidence which Mr Zemanek has deposed to.  The Bank’s submission is simply that this evidence, which represents Mr Zemanek’s case at its highest, is insufficient to show that the advice obtained from internal lawyers was in furtherance of fraud or of conduct in breach of s 53(1)(g).

The story for present purposes commences on 28 May 1996.  Mr Zemanek’s operating company, Predict, at that date had accounts with the Bank.  In particular it had a bill facility which the Bank had agreed was to be rolled over at regular intervals so long as there was no default.

Following a meeting held on 28 May 1996 between executives of Predict, including Mr Zemanek, and a Bank officer, Mr Feathers, Mr Feathers recommended that the Predict connection with the Bank thereafter be handled by a Bank officer whose principal role was recovery rather than ongoing credit.  Mr Feathers spoke of developing strategies to deal with Predict.

Predict had been involved in seeking contracts in China which contracts had been lost but was still optimistic of being awarded large contracts in the immediate short term.  However, Predict had a cash flow problem.

Despite optimistic predictions by Mr Zemanek, on 28 May 1996 the Bank decided to undertake a forced recovery of funds and the appointment of a receiver to Predict.  However, the Bank remained silent about its intentions and did not communicate them to Mr Zemanek.

Predict had been operating on an agreement for accommodation which had been reached in June 1993.  That agreement was for a bill discount facility of $1M.  The Bank was entitled to cancel or reduce the facility at any time by written notice, but in the absence of notice, the facility was for a term of eight years.

On 3 June 1996 an internal memorandum was issued from a Mr Stephenson of the New South Wales Lending Service Asset Management Unit (the Bank’s recovery unit) to Mr Feathers, telling Mr Feathers that the “migration” of the account to the Asset Management Unit should be handled tactfully and advising that Mr Feathers had “an important role to play”.  Mr Feathers was told not to refer to the Asset Management Unit or Debt Recovery Centre in his dealings with Mr Zemanek but to tell Mr Zemanek only that the bank/client relationship was now to be managed by the Bank from its New South Wales lending services office.  Mr Zemanek relies, inter alia, upon this deception, as indeed it seems to have been.  Thus on 5 June 1996 Mr Feathers, acting in accordance with his instruction, advised Mr Zemanek that a new relationship manager, Mr Metcalf, would be handling his account.  Mr Zemanek was not advised that his account had passed to the Debt Recovery Centre.  The Asset Management Unit, to which Mr Metcalf belonged, was a unit charged with minimising the lending losses of the Bank and maximising its recoveries.

Thereafter, a meeting took place on 12 June 1996 between Mr Zemanek, Mr Metcalf and Mr Stephenson.  At that meeting Mr Zemanek was told that excesses above a level of funding of $475,000 would not be tolerated.  Mr Zemanek says that he was misled into believing at the very least that the current level of funding would be continued.  It was, perhaps, open to Mr Zemanek to have taken this admonition as indicating that the Bank had no problem provided that the Predict account was not overdrawn beyond the $475,000 limit.  Accordingly, Mr Zemanek provided a further $100,000 of his own funds as a further loan to Predict.  His evidence is that in so doing he relied upon the representation which he says was implicit in the admonition.

A memorandum from the Bank dealing with the meeting indicates that Mr Zemanek offered to provide information to the Bank including management accounts, cash flow projections and the like.  Mr Zemanek expected funds to be received from Lion Nathan (Australia) Ltd (“Lion Nathan”) with which company Mr Zemanek had a contractual dispute.  Mr Zemanek also expected receipt of an export market development grant in the order of $250,000 in July.  Mr Zemanek advised the Bank that his operation in China would require at least $3M equity investment and the Bank indicated that it would communicate with Mr Zemanek its exact requirements after the file had been reviewed.

A further meeting between Mr Zemanek and Bank officers took place on 25 June 1996.  The purpose of the meeting was apparently to discuss the negotiations that had been continuing between Mr Zemanek and Lion Nathan concerning the claims which Mr Zemanek had against  that company.  It is unnecessary to discuss the various matters concerning Predict’s business which were raised at the meeting.  It suffices to say that Mr Stephenson confirmed that the Bank was not prepared to increase its current exposure above existing committed facilities and that separate discussions would need to be held in the future.  Mr Zemanek understood Mr Stephenson to be saying that the existing facilities would continue but would not be increased.  The words used are perhaps capable of being so understood.

According to Mr Zemanek’s evidence, however, a representation by the Bank that existing facilities would be continued was quite false because the Bank had already determined in a strategy document which the Bank documents suggest bore date 14 June had been prepared with the ultimate view of the Bank putting a receiver into Predict and terminating Predict’s arrangements with the Bank thus putting it out of business.  The Bank denies the existence of this document and says that the date is a typing error.  It is unnecessary to resolve this question at the present time.

On 25 June 1996 the Bank wrote to Predict a letter.  At that time the banking arrangements were as follows:

Overdraft facility - base limit                 $100,000

Temporary excess                                $375,000

Bill discount facility limit                        $1M

Working capital guarantee limit  $500,000

Contingent liabilities                              US$597,500

The Bank noted that the temporary excess of $375,000 was due for payment on 1 July 1996.  The letter said that unless sufficient funds were received by that date the Bank intended to cancel the overdraft limit and place the account in reduction.  The letter continued:

“Any outstanding balance will be transferred to a new ‘Fully Drawn Loan’ in the name of Predict Pty Limited.  The Bank will allow the company to continue to operate the cheque account, however the future conduct will be on a strictly credit only basis.”

The letter indicated as an interim measure that the Bank would require fees, interest and the like to be paid on the fully drawn loan account as and when due.  The letter advised that a bill of $150,000 was due for roll over on 27 June 1996 and indicated that if the roll over costs including discount were not paid on 27 June the Bank would require payment of the face amount of the maturing bills on that day.  The letter sought a presentation of a business plan including information which the letter listed.

Mr Zemanek took the letter as indicating, as indeed the letter itself suggests, that Predict could continue to trade with a fully drawn loan account using its cheque account in credit, pending at least further discussions on the business plan.  Mr Zemanek said from his experience he had reason to expect that the fully drawn loan account would be allowed to continue for at least a six month period.  Whether that is so or not, the letter hardly suggested that in but a few days the Bank would freeze all Predict’s accounts.

Between 25 June 1996 and 1 July 1996 approximately $619,000 was banked into the accounts of Predict.  On 28 June Mr Zemanek expected to receive a payment from Lion Nathan and an export market developing grant of $208,000 (not $250,000 as originally expected) was approved.

On 1 July 1996 the fully drawn loan account was established.  There are handwritten notes from someone in the Bank from which Mr Zemanek asked me to infer that it was intended that the fully drawn account continue only for three days.  I cannot do this as, at this stage, I do not know when those handwritten notes were put on the document.  In any event, apart from the fully drawn loan account, the Predict account was on that day in credit to the extent of $160,211.68

During the course of the day of 1 July 1996 Mr Metcalf made various calls to staff of Predict to enquire whether all moneys received had been banked.  He asked for credit slips to be faxed to him.  On the next day Mr Metcalf took action to freeze all Predict accounts.  The inference is inescapable that he waited until all cash amounts had been credited to Predict’s account before doing so.  In the absence of other evidence, I would also infer that this step was part of a strategy that was in place by 25 June 1996.

It seems that a meeting took place between Mr Stephenson, Mr Metcalf and Mr Kenzler, all officers of the Bank on 2 July 1996.  At this meeting they reviewed their strategy, making reference to a memorandum of 16 June 1996.  Perhaps this is the same memorandum as that referred to earlier as dated 14 June 1996.  Mr Kenzler, who was the Senior Manager Credit Recovery, advised that the Bank should retain the amount of $208,000 received from Austrade by way of the Export Market Development Grant to reduce the temporary accommodation.  He also endorsed the freezing of a United States account and confirmed instructions to pursue the appointment of a receiver to Predict and another company, Depipe Pty Ltd, apparently also in Mr Zemanek’s camp.

Mr Zemanek requested an urgent meeting with the Bank and this was held at approximately 4.30pm on 2 July 1996.  He asked for reasons for the Bank’s action but was given none.  He was not told that the Bank contemplated appointing a receiver.

On 4 July 1996 a further bill was due for roll over.  The normal practice of the Bank was to write shortly before the date due for roll over to remind the customer that roll over was to take place.  No letter of that kind was ever sent on this occasion.  It is Mr Zemanek’s case that the Bank was deliberately taking steps to ensure that Predict committed a default in respect of the roll over, so that it could appoint a receiver.

Notwithstanding this, Bronwyn Zemanek, the Finance and Administration Manager of Predict, was aware that the roll over was due.  She faxed the Bank requesting the Bank to debit foreign currency account with the cost of the roll over of $325,000.  There were sufficient funds in the account to do this.

On 4 July 1996 the Bank purported to set off all of the Predict accounts against debit balances.  Letters of cancellation and letters of demand and the like had all been prepared on 3 July 1996 in preparation for the bill default on 4 July 1996.  It might be added that the Bank ignored the instructions given on 4 July to roll over the bill thereby ensuring a default.

In summary, the fraud or alleged breach of s 53(1)(g) is said to arise from the following.

1.         The deliberate deception engineered by Mr Stephenson to mislead Mr Zemanek into believing that the Predict account was being dealt with in the ordinary way by Head Office of the Bank when it was being dealt with by the recovery section.

2.         The deliberately false representation on 28 May 1996 that Predict could continue to operate its account within ordinary Bank arrangements when a recovery strategy was in the course of being formulated.

3.         A deliberately false representation on 12 June 1996 that existing relationships between the Bank and Predict would continue so long as the excess account was kept to $475,000.  It is said that this was false as the Bank had already determined on recovery.  As a result of the representation Mr Zemanek invested further funds of his own.

4.         A further representation said to have been made on 25 June 1996 that existing facilities could continue when this was false and deliberately false, as subsequent events showed.

5.         The establishment of the fully drawn loan account in circumstances where Mr Zemanek was led to believe that this account could continue for at least six months when there never was any intention for it to continue more than a few days after the maximum amounts of money had been credited to the account so that the Bank could recover the maximum amount in respect of its indebtedness.

6.         The freezing of all accounts on 2 July 1996 without reference to Mr Zemanek and in circumstances where at that stage he was not in default, all for the purpose of ensuring that Predict would default in rolling over the bill due on 4 July, giving a ground for the appointment of a receiver.

7.         The failure to advise Mr Zemanek of the roll over of the bill in accordance with ordinary practice with a view to ensuring that Predict defaulted on rolling over the bill.

8.         Ignoring instructions to roll over the bill from an account in credit, thereby ensuring Predict was in default leading to the set off of all accounts and the appointment of a receiver.

I think it must be said that there is a prima facie case established by Mr Zemanek that the Bank has pursued a deliberate course of conduct by making statements or representations to him knowing them to be false with a view to inducing Mr Zemanek to deposit the maximum amount of moneys with the Bank to his detriment.  Such conduct, if ultimately established, would amount to fraud.  Whether or not it would amount to a breach of s 53(1)(g) need not be considered.

It follows that, to the extent that legal officers of the Bank gave advice to further this fraud a prima facie case would be demonstrated, that legal professional privilege would be abrogated.  However, there was not a scintilla of evidence to suggest that any lawyer, whether internal or external, gave advice to further the commission of the fraud.  It is a serious allegation indeed that a lawyer would participate in a fraud or the commission of an offence.  It is not made out by showing that officers of the Bank perpetrated a fraud against Predict or Mr Zemanek.  More than that is required.  But more than that was not forthcoming.

It follows, in my view, that Mr Zemanek has not demonstrated that there has been any abrogation of privilege.

As requested by Mr Zemanek, I have examined the documents produced to satisfy myself that they indeed record communications between the Bank and internal or external lawyers for the sole or even dominant purpose of legal advice or for the purposes of litigation.  A small number of documents appear not to be the subject of privilege and I have separated these into a bundle.  I will hear argument in respect of them.  The remaining documents, in my view, are properly the subject of privilege and I would uphold the claim to privilege accordingly.

I will hear argument as to costs at a time convenient to the parties.

Associate:

Dated:              2 October 1997