The litigation environment for Australian businesses has never been more fraught.

Media reports appear almost daily of "potential" class actions - like those recently commenced against Nufarm and ABC Learningfor allegedly breaching their continuous disclosure obligations or making misleading or deceptive statements.

In this environment, the prospect of having to defend a class action is an ever-present, and increasingly realistic, threat hanging over the head of corporate Australia.

So why would you hand ammunition to your opponents?

That is exactly what businesses risk when they refer to their legal advice in negotiations, continuous disclosure to the ASX, a media statement, board papers or other company documents – at any time.

Broadly speaking, legal professional privilege attaches to confidential communications created for the dominant purpose of either seeking or giving legal advice, or for use in actual or anticipated litigation.

Legal professional privilege is not a new concept. When and how it applies, however, is often misunderstood. And losing it can have potentially disastrous consequences.

Because legal professional privilege exists to encourage clients to talk candidly to their lawyers, and for their lawyers to give full and frank advice, it can often set out all the facts, warts and all, in relation to a dispute or issue. Some of this information may not yet even be known to the other side. It might identify weaknesses and strengths in each side's position, areas of concern about witnesses' character, demeanour or credibility, or map out legal strategy or tactics.

But legal advice is only privileged whilst it remains confidential. Once that confidentiality is lost, privilege is also lost. And losing privilege can be surprisingly easy.

For listed companies, the risk is even greater given continuous disclosure obligations. This was a lesson that one company, Multimedia Limited, learned the hard way. The Victorian Supreme Court found that the statement "the Board's lawyers have been instructed to vigorously defend the claim and have advised that the plaintiff's claim will not succeed" in a release to the Australian Stock Exchange meant Multimedia had waived privilege over that advice.

This puts a lot of businesses in a difficult situation. The natural urge to defend yourself against accusations by arguing you acted in a legally proper way can backfire catastrophically. And the larger or more diffuse an organisation, the harder it is to properly manage such risks.

The best action companies can take is to ensure they have proper protocols in place to guard against inadvertent waivers of privilege. This includes clear protocols to ensure that statements made in any forum about the company's legal position or the merits of a claim are vetted by someone who understands how legal professional privilege operates. As a priority, the corporate affairs team, directors, and others with frequent interaction with the media should be educated about the risks. The short term "high" of a public utterance about the strength of your legal position can have painful and unintended long term repercussions.

This was originally published in the Australian Financial Review on Friday 25 March 2011

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