The concept of professional privilege for in-house lawyers is in a mess, both in the UK and across the European Union (EU). In Europe, the European Commission (EC) and many national bars continue to oppose the extension of privilege rights to employed lawyers, while in the UK two controversial court decisions in the BCCI litigation have thrown decades of accepted practice up in the air.

On the European front at least, things are beginning to look more positive. After many years of argument, the umbrella body of Europe's bar associations and law societies, the Council of European Bars (CCBE), may finally be on the verge of coming to an agreed position on the extension of professional privilege rights to employed lawyers within the EU.

Speaking to Legal Week last autumn, the CCBE's erstwhile president Helge Kolrud said that the organisation was moving towards a compromise solution that would extend the right of privilege to those corporate counsel that are subject to the regulation of their national bars, negotiations that CCBE general secretary Jonathan Goldsmith this month said were still ongoing. The proposal is due to be debated at the CCBE's plenary session in May this year.

If the CCBE does finally reach a consensus on the issue, it will be another positive development for those such as the European Company Lawyers Association (ECLA), which has been campaigning for professional privilege to be extended to in-house lawyers for many years.

In September last year, the European Parliament voted to extend rights of professional privilege for in-house lawyers' advice in respect of EC merger control notifications, as part of wider amendments to the merger control regulations. However, while this proposal was subsequently vetoed in November by the EU's Council of Ministers, the clamour for granting privilege rights to employed lawyers, particularly with regard to EC competition investigations, has been growing in strength in recent months.

Last May, the American Bar Association (ABA) authorised its ethics committee to find an EU competition case in which it could intervene in an effort to force the EC to recognise the privilege rights of US in-house lawyers in respect of competition investigations.

And although the CCBE has yet to reach an agreed position on the issue, in September it applied to the European Court of First Instance (CFI) on behalf of Dutch chemicals company AKZO Nobel, for the return of documents and e-mails seized by the EC in the course of a competition investigation, arguing that they were privileged. Amicus Briefs were also filed by the ECLA, the American Corporate Counsel Association and the International Bar Association.

The campaign received a significant fillip in December when the president of the CFI found in favour of AKZO and the CCBE by ruling that arguments in favour of allowing in-house lawyers legal privilege should be heard by the court at a full hearing, which will take place later this year.

The president of the CFI said that there was prima facie evidence that legal privilege could be extended to in-house lawyers, a reversal of the controversial 1982 AM&S decision of the European Court of Justice which removed privilege rights from in-house lawyers in the first place, saying that the status of in-house lawyers had changed sufficiently since then and that there was now an arguable case that their activities should be covered by privilege. The EC is appealing against even this finding, but the case is still expected to proceed to the full hearing, on which much now depends.

The CCBE admits that the question remains a very difficult issue among its member bodies. Three countries are leading the opposition – France, Italy and Austria – arguing that allowing employed lawyers the same rights as their private practice colleagues will dilute the independence of the legal profession. But a positive result in the final judgment of the CFI could just tip the scales towards a compromise solution.

However, the CCBE's proposal is that privilege be extended to in-house lawyers that are members of, and therefore regulated by, their national bars. In some countries, such as Belgium, all attempts by in-house lawyers to gain admittance to national bars have failed and parallel associations of in-house lawyers, with their own code of ethics, have been set up. Therefore, even if the CCBE does finally recom-mend that privilege should be extended to in-house lawyers, those in countries where they are not allowed to join local bars would not be included in such a proposal.

Although the ECLA's focus has been on privilege in respect of European competition law, its ultimate aim is for privilege to be extended across the board – something that will not happen if national bars retain an effective right of veto by refusing to admit in-house lawyers.

"I do not understand the opposition," says Jettie Van Caenegem, vice president of the ECLA. "We are all doing the same job. From a procedural perspective, it is not helpful if different [lawyers'] organisations have different points of view."

If the ECLA and others are successful in the AKZO case, then one mechanism by which privilege could be extended throughout the EU is through the forthcoming professional services directive, which intends to introduce minimum standards for legal practice across the EU.

Ironically, just as the momentum is growing for Continental European corporate counsel to win similar privilege rights to those enjoyed by in-house lawyers in the UK (although UK in-house lawyers are in a similar position in respect of EU competition investigations), on the other side of the English Channel, the position of in-house lawyers with regard to privilege is in a state of commotion.

In-house lawyers are still trying to get to grips with the ramifications of the Court of Appeal's decision last April in Three Rivers District Council v Bank of England over the collapse of the Bank of Credit and Commerce International, which has considerably narrowed the definition of who the 'client' is for the purposes of privilege from the company as a whole to individuals within it. A subsequent High Court decision, in the same case in November, effectively withdrew the benefit of privilege for advice on 'presentational', as opposed to strictly legal, matters.

In-house lawyers will need to be very careful who qualifies as their client within their own organisations. One potential side effect is that if day-to-day communications within a company are no longer automatically covered by privilege, business executives may feel the need to consult private practice lawyers directly to protect privilege, cutting out the in-house legal department.

These decisions, combined with the present exception for European competition law matters and varying degrees of privilege afforded to in-house lawyers in different parts of Europe, mean that, in the words of one head of legal of a company with operations across Europe, "all communications have to be considered as potentially disclosable".

"It is becoming impossible to determine what is privileged and what is not," he says. "The blurring between legal and commercial advice has always been a factor, but it is much more of an issue now and it is nonsensical that there is such a difference in the privilege attached to different sorts of work.

"It needs to be simplified if it is to work in a commercial context, but the consequence of Three Rivers is to make the whole concept of professional privilege redundant because it is unworkable. The alternative, which is to channel everything directly to a law firm at £300 per hour, is not feasible. The effect will be that legal advice will not be sought because of the cost or that in-house legal advice will be so vague and caveated that it will be unusable."

An appeal on the November decision is due within the next two months, but there is considerable confusion as to the practical application of the rulings and some suggestion that the Court of Appeal did not realise the wider implications of its ruling on what was a fairly unique set of circumstances in the Three Rivers case. What is required is a case, or legislation, that will define the situations in which privilege applies once and for all.

However, the courts have already started to apply the principles set down by the Three Rivers decisions. Just before Christmas, the Commercial Court ( United States of America vs Philip Morris and Others) authorised the examination of advice given by a solicitor at Lovells to a tobacco company in Australia.

Such an application is almost unprecedented and the defence had argued that such advice was privileged, but Judge Moore-Bick held that in the light of the Three Rivers decision it was no longer sufficient to assume that all advice given is privileged. In respect of legal advice privilege (as opposed to litigation privilege), to qualify, it must be passed directly between lawyer and client, confidential and for the dominant purpose of obtaining advice in the client's rights and obligations.

The judge did, however, uphold the Balabel decision that the courts must not intervene in questioning the privileged status of 'presentational' advice contained within a continuous stream of correspondence – the dominant purpose of which is to obtain 'legal' advice.

"The Three Rivers case has stirred up a hornet's nest," says Julian Copeman, a partner in the litigation and arbitration division of Herbert Smith. "For most of the last century, legal advice privilege was invoked on a blanket basis and often went unchallenged, but now it needs a lot more thought.

"Each communication needs to be considered on its own terms – is the sender or recipient a 'client' or merely an employee of the client? Is it about 'legal rights and obligations' or is it merely 'presentational'? If it is not obviously about legal rights and obligations, does it still fall within the 'Balabel continuum?'

"My personal view is that the distinction between a client and its employees is unworkable in practice. There has probably been enough concern expressed now for the Court of Appeal to see the need for clarification."