An in-house lawyer's primary role is to manage legal risk for their employer. However, in performing this role, in-house lawyers may expose themselves to personal liability and risk. Here are some issues to consider:
1. The risk involved in wearing two hats
In the 2012 decision, Shafron v ASIC [2012] HCA 18, the Australian High Court found that Mr Shafron, who was general counsel and company secretary of James Hardie Industries Ltd, had not exercised his powers and discharged his duties with the degree of care and diligence that a reasonable person would exercise if that person were an officer of the company and had the same responsibilities as Mr Shafron. Mr Shafron had therefore breached his duty of care under section 180(1) of the Corporations Act 2001 (the Act) and was also liable under a civil penalty provision of the Act.
The High Court rejected the argument that the impugned conduct (for example, the failure to give the board legal advice on certain issues) was conduct carried out by Mr Sharon in his role as general counsel rather than company secretary and, accordingly, was not subject to the relevant 'officer' statutory duties. The High Court found that the wording of section 180(1), which refers to 'responsibilities', was broad enough to include all responsibilities that the officer had in the corporation, regardless of how those responsibilities came to be imposed on the officer. It was not possible, therefore, to wear a lawyer 'hat' and an officer 'hat' and argue that the standard of care that applied when wearing one hat should not apply when wearing the other.
2. Define your role
The Shafron decision does not mean that in-house lawyers should never hold company officer positions. However in-house lawyers should always be aware that the duties of care imposed on company officers can also apply to duties carried out as a lawyer. Given the potential liability, it is important that in-house lawyers understand their role within the company and have that role properly identified and defined in an employment agreement and company policies. If you are acting as a company officer you should ensure that you understand the standard of care required and the duties you owe to the company.
3. Officer in action but not in name
The definition of officer in the Corporations Act extends to persons who participate in making decisions that affect the whole of, or a substantial part of, the business of a company. In Shafron the High Court confirmed that in-house lawyers can fall within this definition, even if the lawyer does not ultimately make the decisions on behalf of the company. The court will always look to the responsibilities in fact held and carried out by an in-house lawyer, regardless of whether the lawyer holds an officer title. Once it is determined that the lawyer plays the requisite role in participating in making decisions affecting the company, there is no subsequent division of duties carried out in different roles when determining liability under the Act.
4. Review board papers and minutes
Do not assume that company secretary duties such as preparing board papers and minutes are merely administrative in nature. If a legal issue arises, it will likely be the duty of the in-house lawyer to bring this to the attention of the board and advise accordingly. If any of these duties are delegated to other lawyers, all work should be carefully checked and reviewed before going to the board. In ASIC v Healey [2011] FCA 717 the directors of various companies with the Centro Property Group were found to have breached statutory duties under the Act for failing to take reasonable steps to consider for themselves the content of certain financial statements and failed to have apparent errors in the financial statements corrected. The directors had relied on management and external advisors in preparing the financial statements and the Court found this was not sufficient to discharge their duties under the Act. There is a significant risk that a similar finding could be made against an in-house lawyer who is judged to be an 'officer' of the company with the responsibility of ensuring the accuracy of company accounts.
5. Check your company's insurance policy
In-house lawyers should check whether they are covered by their company's director and officer insurance. If the company does not hold such a policy, in-house lawyers should insist that one is taken out and that they are covered if it is likely that the lawyer could be considered an officer. Alternatively, in-house lawyers can consider taking out their own insurance policy.
6. Professional obligations and standards continue to apply
In-house lawyers are subject to the same professional obligations and standards as solicitors in private practice. This means that in-house lawyers owe obligations to their client (more on this at point 7 below), the court and the community. If you have any doubts regarding potential conflicts of interest you should contact your local law society which can generally provide guidance on ethical issues.
Working closely with non-legal employees of the company can make it difficult for in-house lawyers to keep track of where their obligations truly lie. This was highlighted in a 2014 decision of the English High Court, which upheld the six month suspension from legal practice of the former in-house lawyer of Times Newspapers Ltd. The High Court found the lawyer had recklessly misled the court by allowing a witness statement to be filed which stated that information had been obtained through publically available sources, when in fact it had been obtained through illegal email hacking. The lawyer knew the information had first been obtained by hacking, so the witness statement should not have been made, filed or relied upon. In its judgment, the UK High Court made clear that the lawyer had made an incorrect assessment of which obligations should take precedence and who the obligations were owed to. Although this is an English case, the same rule applies to Australian lawyers.
7. Your client is the company
As an in-house lawyer, your client is the company not the individuals who manage the company, employees of the company or the individual directors. Likewise, conflicts of interest may arise if advice is given to separate but related companies including joint venture vehicles, subsidiary companies or affiliate companies. Any other person or business should be encouraged to obtain their own independent legal advice. Failure to do this may result in a breach of your professional obligations, practising certificate and even in being sued for breaching an alleged duty of care owed to a third party.
8. Maintaining privilege
Another area which often causes a headache for in-house lawyers, and which could lead to allegations of negligence and liability if not properly understood, is legal professional privilege. Legal professional privilege will attach to confidential communications made by in-house lawyers for the dominant purpose of obtaining legal advice or for the dominant purpose of use in ongoing or anticipated litigation. In-house lawyers can expect their communications to be subject to a high level of scrutiny by the courts to ensure that the communication actually meets the requirements for legal professional privilege. Some tips on maintaining privilege are set out at points 9 & 10 below.
9. Confidentiality
In-house lawyers should ensure that privileged emails are kept confidential and only sent to people on a "need to know" basis. Recipients should be made aware of the importance of confidentiality and encouraged not to forward emails from in-house lawyers to other people. Privilege may be lost if an email has been seen by other people within the company who are not directly involved in the matter in question. Likewise, efforts should be made to keep the legal department's files physically and electronically separated from the rest of the business to maintain confidentiality and privilege.
10. Dominant purpose of the communication
A communication is only privileged if it is made for the dominant purpose of obtaining legal advice or for use in ongoing or anticipated litigation. If in-house lawyers provide commercial advice, not just legal advice, then these communications should be kept separate so as to avoid communications losing legal professional privilege because their dominant purpose is found to be commercial rather than legal advice. In-house lawyers should get into the habit of sending emails containing legal advice separately to emails containing commercial information and mark the communication "Subject to Legal Professional Privilege".
