LAW FIRMS INCORPORATED: HOW
INCORPORATION COULD AND SHOULD MAKE
FIRMS MORE ETHICALLY RESPONSIBLE
In 2004 Queensland has become the latest Australian state to reverse the
traditional prohibition on incorporation of legal practice. Incorporated legal
practices (ILPs) are now allowed in New South Wales, the Northern Territory,
Queensland and Western ~ustralia,' as well as under the National Legal
Profession Model Bill ('Model ~aws').' The introduction of ILPs,
multidisciplinary practices (MDPs), and other new legal forms (such as the
limited liability partnerships that are increasingly popular in the US and UK) for
legal practice are seen by their critics as a structural threat to ethical practice in
law. This paper argues that those threats are already here because large law firm
practice is already big business, and because big business already employs
scores of lawyers in-house in corporations.' The danger with allowing ILPs and
MDPs (and other new legal forms) for law firms is that current practices that
* BA (Hons), LLB (Hons) (Qld), PhD (ANU);
Senior Lecturer in Law, University of Melbourne, Victoria. I am
grateful to Melanie Tan for thorough research assistance in the preparation of this paper. I would also like to
thank Scott Baker, Elizabeth Chambliss, Adrian Evans, Linda Haller, Kim Krawiec, Steve Mark, Reid
Mortensen, Joanna Shapland and Rob Rosen for helpful materials, comments, and conversation. The author
alone is, of course, fully responsible for all mistakes and misjudgments. Research for this paper was made
possible by funding fiom Australian Research Council Discovery Grant DP0344638 'Meta-regulation and the
regulation of law'.
'
Legal Profession Act 1987 (NSW) ss 47B-47T; Legal Practitioners (IncolporatedLegal Practices and
Multidisciplinary Partnership) Act 2003 (NT) amending the Legal Practitioners Act (NT)inserting Pt 4AA
(modelled on New South Wales provisions); Legal Practice Act 2003 (WA) ss 45-74; Legal Profession Act
2004 (Qld) ss 84-1 11. (Note that the relevant sections of the Queensland Act have not yet commenced
operation although most of the Act came into operation on 1 July 2004: Queensland Subordinate Legislation
2004 No. 106). However it should be noted that while solicitors' firms may be getting larger and larger,
barristers in Queensland will now be legally required to operate as sole practitioners by the new Legal
Profession (Banisters) Rule 2004 (Qld) r 85 (requiring that a barrister 'be a sole practitioner' and not practise in
partnership, as an employer or employee of any person or be a legal practitioner director of an incorporated
legal practice or a member of a multidisciplinary partnership). (The rule does not apply to government or legal
aid lawyers: Legal Profession (Barristers)Rule 2004 (Qld) r 140.) Previously banisters need only be a sole
practitioner if they chose to be a member of the Bar Association of Queensland.
Standing Committee of Attorneys-General, Legal Profession -Model Laws Project: Model Provisions
(2004) Attorney-General's Department
<http://www.ag.gov.au/agd/www/Agdhome.ns~age/RWP4B55623E
1E4CF96DCA256E85000958EO?OpenD
ocurnent> at 21 September 2004. ILPs are provided for in Pt 13 of the Model Laws. The Model Laws were
agreed by the Attorneys General of the states and territories of Australia, as well as the Law Council of
Australia, the peak organisation representing Australian legal professional associations and lawyers. The bill
sets out core model provisions for state legislation governing the legal profession. One of the main purposes is
to facilitate national practice. It is one of the outcomes of the National Competition Policy review and is already
proving influential as state governments reform their legislation governing the legal profession.
This is not to say that small and sole practice does not have its own equally worrying dangers of unethical
practice. While the organisational and commercial pressures in large law firm practice can lead to poor
decision-making, sole and small practice can also lack internal quality controls and ethical checks, and
practitioners may be particularly vulnerable to emotional or financial pressures that lead to unethical behaviour.
348
Law Firms Incorporated
lead to unethical behaviour will become further entrenched, and the enforcement
of lawyers' duties to the courts and public fiuther relaxed.
The introduction of reforms that permit and regulate ILPs provides an
opportunity to reconsider two assumptions behind traditional ethical regulation
of the legal profession.4 Firstly, legal ethics mostly sees the individual lawyer as
the focus of responsibility for ethical behaviour, and the only agent that should
be regulated.5 Law firms are rarely held responsible for unethical conduct.
Secondly, traditional legal ethics artificially assumes that since the practice of
law is a profession, it cannot also be a business. Both these assumptions make
for a short-sighted and potentially dangerously ineffective regulatory regime and
ethical culture for legal practice. This is because agents that significantly
influence and have the power to either prevent or encourage unethical behaviour
(ie the firms themselves) are not the subject of the regulatory system, nor of
ethical discussion. Furthermore the business aspects of legal practices are denied
and deemed illegitimate, rather than acknowleged and addressed.
The opportunity in allowing ILPs is that we can develop new models for ethical
practice in the business of law, and better models for regulating law firm
practice, whether the firm is incorporated or not, and whether its dominant
purpose is the provision of legal services or not. The model adopted in
Queensland and other Australian jurisdictions does seek to make sure that
incorporated law firms put in place appropriate management systems to ensure
professional obligations are met - it does not rely purely on admission and
disciplinary requirements directed at individual practitioners. However the
Australian regulatory regime still fails to hold the ILP as an entity responsible
Moreover the management
for actual misconduct to which it has ~ontributed.~
systems that are put in place are llkely to be ethically 'thin' and focused on
meeting client needs and expectations, not broader ethical responsibilities to the
administration of justice.
The first part of the paper outlines the reasons for the traditional prohibition on
the incorporation of legal practice and the reasons why that prohibition is being
reversed. The second part uses two cases of law firm ethical irresponsibility,
Law Sociew of New South Wales v or ern an^ and McCabe v British American
I use the term 'ethical regulation' to refer to the disciplinary and regulatory system for the legal profession that
seeks to enforce the principles of professional conduct (the law of lawyering) as well as to inculcate ethical
principles of lawyering amongst lawyers and law f m s . Obviously there is a sense in which law can never
regulate people's ethics. But it can help set up the conditions in which certain ethical principles are more or less
likely to be put into practice. See Christine Parker, 'A Critical Morality for Lawyers: Four Approaches to Legal
Ethics' (2004) 30(1) Monash UniversityLaw Review, forthcoming.
See Elizabeth Chambliss and David B Wilkins, 'A New Framework for Law Firm Discipline' (2003) 16
Georgetown Journal of Legal Ethics 335; Ted Schneyer, 'Professional Discipline for Law Firms?' (1991) 77
Cornell Law Review 1,4 (Schneyer comments that the focus on individuals is probably because of the system's
jurisdictional tie to licensing which the state requires only for individuals and because the system developed at a
time when solo practice was the norm).
Rather an individual legal practitioner director is generally held responsible. See discussion below.
(1 994) 34 NSWLR 408.
(2004) 23 The Universityof Queensland Law Journal
349
Tobacco Australia Services ~ t d , 'to show that the ethical dangers of ILPs are the
same as the ethical dangers already existing in legal practice. The third part sets
out the Australian regime for regulating ILPs and assesses it against the
possibilities for 'meta-regulating' law firm internalisation of responsibility for
ethical c o n d ~ c t . ~
A The Traditional Prohibition on Incorporation of Legal Practice
Traditionally, legal practice in common law countries has been carried on only
by single practitioners or partnerships of legal practitioners. Incorporation of
legal practices10 has been banned by professional regulation for two main
reasons.l1
Firstly, the limited liability that goes with incorporation as a company is seen as
inconsistent with personal responsibility and accountability for professional
legal and ethical obligations towards clients, the community and the courts.
Under partnership legislation in all common law jurisdictions, partners have
joint and several liability for each others' fiauds, fiduciary breaches and
malpractice. This is supposed to provide an incentive for partners to monitor the
quality and honesty of one another's work, to assist one another in working well
and to train and mentor new recruits.12
Secondly, legal practices incorporated as ordinary companies would be free to
offer shares to the public, to hire managers and other service-providers who are
not legal practitioners and to reward non-lawyer officers and employees with
shares in the company. This would breach the traditional prohibition against
legal practitioners sharing fees with non-lawyers - a prohibition that outlaws
lawyer participation in MDPs, as well as non-lawyer ownership and investment
in legal practice.13 This is supposed to ensure that the purity of legal
practitioners' ethical responsibilities are not adulterated by the competing
[2002] VSC 73 (Unreported, Eames J, 22 March 2002).
'Meta-regulation' refers to the regulatory strategy of using standards and enforcement mechanisms that force
firms to put in place effective internal controls that make sure they comply with public regulatory goals or
.
standards (in this case the professional conduct standards applying to legal professionals) and inculcate an
ethical culture within the organisation: See Christine Parker, The Open Corporation (2002) ch 9.
lo The term 'legal practice7is used to indicate that either firms or sole lawyers could seek to incorporate.
" For a good summary, see Jeff Shaw, 'Incorporation of Legal Practices Under the Corporations Law7(1999)
37 Law Society Journal 66,68.
l2 See Nora Schneider, 'Comment: Incorporated Lawyers - The Veil Rises and Falls7(1987) 55 University of
Cincinnati Law Review 785; but compare Ian Ramsay, 'Should Law Firms be Permitted to Incorporate?' (1994)
10 Australian Journal of Law and Society 245 (arguing that partnership provides an incentive mainly only to
monitor the wealth of other partners and that monitoring of quality either cannot be done or involves excessive
costs).
l 3 See, eg, Legal Practitioners Act 1970 (ACT) s 196; Legal Practitioners Act (NT) s 136; Legal Profession Act
1987 (NSW) ss 48F, 48G; Legal Practitioners Act 1981 (SA) s 23; Legal Practice Act 1996 (Vic) s 3 17; Legal
Practitioners Act 1993 (WA)s 79(4). For ease of reference, throughout this paper I will use the term 'nonlawyer ownership and participation7in legal practice to refer to MDPs as well as sharing profits with nonlawyers.
Law Firms Incorporated
350
interests of non-lawyer investors or partners who are not bound by the ethical
obligations of the legal profession.
The prohibition on law firm incorporation assumes that as professionals, lawyers
should not be allowed to operate like ordinary businesses that can take
advantage of corporate status:
The practice of law is not a business open to all, but a personal right, limited to
a few persons of good moral character, with special qualifications ascertained
and certified after a long course of study . .. No one can practice law unless he
has taken an oath of office and has become an off~cerof the court, subject to its
discipline, liable to punishment for contempt in violating his duties as such, and
to suspension or removal ... As these conditions cannot be performed by a
corporation, it follows that the practice of law is not a lawful business for a
corporation to engage in. l4
Over the last 30 years, throughout the common law world, the prohibition
against corporate structures for legal practice has come under pressure.
Firstly, lawyers, particularly large firm lawyers, have wanted to limit their
vicarious liability for the wrongs of their partners. While most legal practices are
still solo practices, there are also more and more very large law firms with multistate, and even multi-national, partnerships.15For those firms risk management
to protect 'innocent partners' from liability for frauds, breaches of fiduciary duty
and negligent advice or representation cases has become a major management
challenge.16 In 2000 the Law Council of Australia argued that 'the size of the
claims being made against law firms has reached alarming proportions ... are
beyond the protection of available insurance' and are making insurance cover
unaffordable.
'
-
--
-
From a 1910 New York Court of Appeals judgment explaining why the court believed incorporation laws did
not authorise law f m s to incorporate: In re Cooperative Law Co 198 NY 479,483,92 N.E. 15, 16 (1910).
Quoted by Schneider, above n 12,786-7.
l5 While legal practices with 10 or more principals or partners made up only 1.2% (9 1) of allpractices in
Australia in 2001-2, they employed 35.8% (10 43 1) of the practitioners in private practice: Australian Bureau
of Statistics, 8667.0 Legal Practices Australia 2001-2002 (2003) 2 1. By contrast practices with one principal or
proprietor accounted for the vast majority of practices (69.2% ie 5234 practices) but only 25.6% of employment
in private practice, with most of the rest of practices of between two and five principals or partners.
l 6 Paraphrasing the managing partner of Australia's largest law finn, Allen Allen and Helrnsely, as quoted in
Andrew Burrell, 'Allens Episode Spurs Law to End Personal Liability', The Australian Financial Review
(Sydney), 3 September 1999,26. In 1999 partners of Allen Allen & Helmsley were ordered to pay $26 million
in relation to fraud and dishonesty by a partner based in London. A number of multi-million dollar frauds and
losses by partners of major Australian law f m s have probably encouraged large f m solicitors to advocate for
limited liability incorporation. In the US the collapse of accounting f m Arthur Andersen in the wake of one
section's inadequate audit reports on Enron apparently made large law f m partners realise how vulnerable
their partnerships could be to malpractice liability that would not be covered by insurance. Baker and Krawiec
found that many large New York law firms only took advantage of the possibility of limited liability partnership
status in that jurisdiction after Arthur Andersen's collapse: Scott Baker and Kimberly D Krawiec, 'The
Economics of Limited Liability: An Empirical Study of New York Law Firms' (2004) Illinois Law Review,
forthcoming.
I' Law Council of Australia, Submission to the Commonwealth Ministerfor Financial Sewices and Regulation
and the Commonwealth,State and TerritoryAttorneys-General on Federal Professional Standards Legislation
(2000) 9-1 0 <http://www.lawcouncil.asn.au/get/policies/l96058110711> at 17 November 2004. Since then,
l4
(2004)23 The University of Queensland Law Journal
Secondly, competition policy reform, in Australia at least, has put incorporated
and multidisciplinary legal practices on the agenda. As the then New South
Wales Attorney-General, Jeff Shaw, put it in 1999, it is no longer seen as
appropriate to use business structures as a way to regulate legal practice.
Responsibility to maintain professional and ethical rules should be placed
solely with individual solicitors, who should be fi-ee to choose the business
structures which suit them.''
The competitive advantages of corporate structures for legal practice could
include opportunities to reduce tax on law firm profits (by the firm paying tax at
the corporate rate rather than partners paying at the personal income rate),
building a capital base for expansion (through offering shares to the public,
listing on the stock exchange or fundraising through debt and other securities),
and creating a more efficient and effective management structure (by
differentiating between the duties and powers of partners and management,
allowing non-lawyer managers to participate in the profits of the firm through
share ownership and formalising decision-making powers in an appropriately
accountable board of directors and corporate officers).19 The corporate form is
also a more flexible way of dealing with admission and resignation of partners,
since ownership interests in the firm are easily transferred and the firm has its
own continuity of existence not dependent on its individual members. This
makes it easier to enter into contracts and other commercial relationships
including groupings of practices (eg through franchise type arrangements or
corporate groups).20
legal professional associations in various states have indeed found it difficult to negotiate appropriate and
affordable insurance packages for their members. Note that there are some alternative mechanisms for limiting
liability in Australia, for example under professional standards legislation which caps liability for professionals
participating in approved schemes: see, eg, Profesional Standards Act 2004 (Qld) (not yet proclaimed).
However recently a major national firm, Clayton Utz, announced it would be leaving the New South Wales
professional standards capped liability scheme because it was not flexible enough to allow it to contract out of
capped liability with particular clients: Chris Merritt, 'Clayton Utz to Desert Capped Liability Scheme', The
Australian Financial Review (Sydney), 30 July 2004,6 1.
ls Shaw, above n 11,68. The regime introduced in New South Wales to allow ILPs discussed below was
introduced as a direct result of the 1998 review of the Legal Profession Act 1987 (NSW). See New South Wales
Attorney-General's Department, National Competition Policy Review of the Legal Profession Act 1987: Final
at 17 November
Report (1998) < http://www.lawlink.nsw.gov.au/report%5Clpd~reports.ns~pages/ncpf~toc~
2004. See also Trade Practices Commission, Study of the Professions: Legal (1994).
l9 See John Story, 'Incorporation of Legal Practices' (1999) 19(10) Proctor 16. One law firm management
expert suggests that there is a natural limit on the size of a fully effective partnership because of the need to
monitor against the risks of moral opportunism and moral hazard and the need for the partnership to be built on
trust and susceptibility to peer pressure. 'Thus' he concludes 'the condition which, in general business, would
give rise to incorporation probably exist in the legal profession, too ... the partnership structure as we know it
may not be able to sustain itself economically or socially beyond a certain size.' However the same author also
says that he actually prefers partnership for legal practice and does not see why a partnership could not have the
management maturity to remain a partnership without needing to incorporate: Stephen Mayson, Making Sense
of Law Firms: Strategy, Structure and Ownership (1997) 138-9.
20
According to 'Hearsay' Australian Financial Review (Sydney), 16 April 2004,57, in New South Wales
'[olne medium-sized law firm has now incorporated its Sydney office, and then franchised its regional legal
practices. Another legal practice incorporated and created several subsidiary companies.' For general discussion
and analysis of the advantages of incorporation, see Philip King, 'Should Your Firm Incorporate?' (2001) 39(2)
Law Society Journal 44, and Law Society of Western Australia, Position Paper: Flexible Practice Structures
for Lawyers (1999) <http://www. lawsocietywa.asn.au/public~discuss.html>at 7 June 2004.
Law Firms Incorporated
352
B The Development of Incorporated Legal Practice
Around the common law world, a number of jurisdictions have responded to the
arguments for and against incorporation of law firms by providing for 'phoney'
forms of law firm incorporation. For example, in the US most states have passed
incorporation legislation that applies to legal practice. But this legislation
generally states that lawyers cannot practice for profit in a corporation (or any
other association) if a non-lawyer owns any interest in the business, is a director
or officer, or has the right to direct or control the professional judgment of a
lawyer. Whether the provisions effectively limit liability of practitioners for
~'
in Singapore, all shares in a
other principals of the firm is not ~ l e a r . Similarly,
'law corporation7must be held by solicitors, and the directors must be solicitors
who are entitled to practise on their own or in partnership.22 In the UK,
incorporated practices must be managed and controlled by solicitor^.^^ In
Australia, several States (New South Wales, South Australia, Tasmania and
Victoria) allowed incorporation of legal practices in the early 1990s, but the
legislation preserved unlimited liability for all members of the corporation
(except non-voting shareholders), stated that all directors had to be legal
practitioners and prohibited non-lawyer members (except for relatives and
persons approved by a regulatory body - these could only become non-voting
shareholder^).^^
Not surprisingly this 'phoney7 incorporation - which either does not allow
limited liability or prohibits membership of the company by those who are not
legal practitioners - has not attracted many legal practices to incorporate.
Phoney incorporation seems to have been used mainly by sole practitioners for
tax minimisation purposes. By and large it has not been taken up by the larger
21 See Dirk G Christensen and Scott F Bertschi, 'LLC Statutes: Use by Attorneys' (1995) 29 Georgia Law
Review 693.
22
Cyrus Das, 'Should Law Firms Restructure: Is the Trend Towards Incorporation or Limited Liability or
Multi-disciplinary Practices?' (Paper presented at the 1lthMalaysian Law Conference, Kuala Lumpur,
at 8 June 2004.
Malaysia, 8-10 November 2001) available at <http://www.mlj.com.my/free/articles/c~
23
See Law Society UK, Solicitors 'Incorporated Practice Rules 2004 and Rule 3.1 7 Professional Conduct
Guide Online (2004) <http://www.lawsociety.org.uk> at 8 June 2004. Incorporated practices must be
'recognised bodies' registered with the Law Society under the Administration of Justice Act 1985 (UK).
Incorporated practices may be companies incorporated under ordinary companies law or limited liability
partnerships, a new form of body corporate created by the Limited Liability Partnerships Act 2000 (UK).Note
also that the regulation of legal services in the UK is currently under review (the 'Clementi review') and that
new rules allowing non-solicitor members of incorporated practices may be introduced as a result: see
Department of Constitutional Affairs, Review of the Regulatory Frameworkfor Legal Services in England and
Wales:A Consultation Paper (2004) <http:llwww.legal-services-review.0rg.uW at
17 November 2004.
24
This continues to be the regime in South Australia, Tasmania and Victoria: Legal Practitioners Act 1981
(SA) ss 16(2), 24-30 (company must have a practising certificate),Legal Profession Act 1993 (Tas) ss 3, 148162 ('legal practitioner corporation' must have a practising certificate), Legal Practice Act 1996 (Vic), ss 20,
22,289-297 ('incorporated practitioner' must apply to Legal Practice Board for registration). Parts of Canada
use a similar model for professional corporations: see The Law Society of Upper Canada, Professional
Corporations: Overview (2004) <http://www.lsuc.on.ca/ services/profc~overview.jsp>at 30 May 2004. On the
previous 'phoney incorporation' regime in New South Wales and its disadvantages, see Shaw, above n 11.
(2004) 23 The University of Queensland Law Journal
353
firms who might be expected to find incorporation helpful for the purposes of
fundraising and more efficient management structure^.^^
In the US, UK and Canada, the limited liability partnership (LLP) is becoming
the more popular form with both law firms and legislators for law firms wishing
In the US and Canada,
to adopt some of the characteristics of incorp~ration.~~
the LLP is generally an ordinary partnership except that partners are not
vicariously liable for liabilities arising from negligence or misconduct unless
they were involved in the negligence or misconduct (in some cases they are also
shielded from ordinary contractual or trading debts of the firm), except to the
extent of their partnership assets.27In the UK, the LLP is a completely new type
of body corporate without shareholders or directors (only members) but not a
partnership. It is regulated under the same rules as legal practices that
incorporate as ordinary companies.28Neither the American nor UK LLP models
allow the fundraising and management advantages of incorporation. Their only
advantage (albeit a considerable one) is the provision of limited liability.
Now however, in Australia, the States of New South Wales, the Northern
Territory, Western Australia, and, most recently, Queensland have all introduced
legislation that allows for 'true' ILPs, that is ILPs with both limited liability and
The Model Laws also provide for
non-lawyer shareholders and directo~-s.29
incorporated legal practices, following the same model as Queensland and the
other states.30These schemes allow for the ILP to be incorporated under the
ordinary corporations law with all the usual flexibility. That flexibility includes
few restrictions on the business that can be carried out, and access to a range of
fundraising activities such as offering shares to the public. All legal practitioners
continue to retain their personal unlimited liability (at general law) and
responsibility (in relation to disciplinary proceedings) for all matters in which
25
There were 468 incorporated legal practices (including both companies and LLPs) in the UK as of 14 January
2004, and approximately 155 LLPs as of June 2004: Law Society figure of incorporated practices quoted by
George Bull, Incorporatedpractices (2004)
<http://www.bakertilly.co.uk~junctionbox.asp?querytype=500&menuid
=1001654> at 8 June 2004. Figure for
LLPs from Interview with UK Law Society (Personal Communication, 10 June 2004). Professional
corporations in Canada are reportedly used mainly by sole practitioners for tax minimisation purposes: R Daren
Baxter, 'Limited liability partnerships', Baxter Harris Neonakis, Nova Scotia, 19 January 2004.
26
Note that by definition only a partnership (ie a firm) can become a LLP, not a sole practitioner.
27
See R Daren Baxter, above n 25,9 (stating that by 1997,48 US states had enacted LLP legislation and that
from 1998 onwards all Canadian provinces have passed LLP legislation). See also Canadian Bar Association,
'Limited liability partnerships' (January 2001) EPIIgam
<http://www.cba.org/cba~epiigram/january2OOl/default.asp>
at 30 May 2004. This appears to have been very
popular in US: Ted Schneyer, 'A Tale of Four Systems: Reflections on How Law Influences the 'Ethical
Infrastructure' of Law Firms' (1998) 39 South Texas Law Review 245,273 refers to a 'stampede' by law firms
to utilise that organisational form, although Baker and Krawiec, above n 16, are more circumspect, noting that
contrary to their expectations 'a sizeable number of firms' (13%) in their sample of large law firms in New
York remained general partnerships rather than taking advantage of LLP or other incorporated status.
28
See above n 23. Members are not liable for acts and defaults of their fellow members and employees but
continue to be responsible for liabilities they incur personally in contract and tort in the course of their work:
Limited Liability Partnership Act 2000 (UK). See Das, above n 22; Stuart R Cross, 'Limited Liability
Partnerships Act 2000: Problems Ahead' [2003]Journal of Business Law 268; Vanessa Finch and Judith
Freeman, 'The Limited Liability Partnership: Pick and Mix or Mix-up' [2002] Journal ofBusiness Law 475.
29
See above n 1. Taking into account those states that have 'phoney' incorporation legislation, this leaves only
the Australian Capital Territory with no incorporated legal practice legislation at all: See above n 24.
30
See above n 2.
354
Law Firms Incorporated
they are personally involved." Thus, the joint and several liability of partners for
each other's liabilities are erased, but not the unlimited liability of each
practitioner for their own liabilities, nor of the firm as a whole. Furthermore, the
responsibility of legal practices to insure to cover any malpractice liabilities is
also restated.32
In New South Wales, where the true incorporation model has been in place the
longest (since 2000), there are now more than 300 incorporated legal practices,
about 10% of the total practices in that state.') However, the large national law
firms have not yet taken advantage of becoming companies, and most of the
practices that have incorporated are small firms.34One reason for the failure of
large multi-state law firms to incorporate to date might be that true incorporation
was available only in New South Wales until very recently.35With ILPs now
allowed in the Northern Territory, Queensland and Western Australia and other
states likely to follow suit (with the inclusion of ILPs in the Model Laws), the
large law firms that lobbied for the ILP regime are more likely to take advantage
of it.
Certainly the experimentation with different corporate and limited liability forms
for legal practices around the world suggests that the traditional partnership is
unlikely to be the dominant form of legal practice for long, and that even though
true ILPs may not dominate, other more commercially oriented entities for legal
practice will be developed. Regardless of the arguments for and against
incorporated legal practice, lawyers are increasingly likely to want to make their
practices as much like companies as possible, simply because that is the
accepted way that business is carried on. They advise their clients to incorporate
31 All models for limited liability legal practices always preserve each lawyer's personal unlimited liability for
any breach in which they are personally involved. See Schneider above n 12 and especiallyAmerican Bar
Association Commission on Professional Ethics, Formal Advisory Opinion 303, 1961.
32
This means that the only situation where clients or other victims of lawyer misconduct or malpractice would
not be compensated under limited liability (where they would have been compensated under a partnership
structure) would be where the claim was so big that insurance did not cover it all and neither did recourse to the
wealth of the individual lawyer responsible. See Jennifer Payne, 'Limiting the Liability of Professional
Partnerships: In Search of this Holy Grail' (1997) 18 Company Lawyer 81, 82 (arguing that the limited liability
of companies should be curtailed for the protection of third parties and the public at large).
33
Office of the Legal Services Commissioner, 'OLSC Adopts an "Education for Compliance" Strategy With
Incorporated Legal Practices' (2003) 27 Without Prejudice 2.300 ILPs is 10% of the total 2894 practices in
New South Wales: Australian Bureau of Statistics, 8667.0 Legal Practices Australia 2001-2 (2003) 20. One
firm,
Noyce Legal has not only incorporated but also listed its 'spin-off mortgage and documentation
processing business, National Lending Solutions, on the Australian Stock Exchange: Australian Legal Eye,
Noyce legal lists mortgage and documentationprocessing business on ASX(2004)
<http://www.practicesource.com~ale/blog/
standard-458> at 3 June 2004.
34
But it is reported in Office of the Legal Services Commissioner, 'OLSC Adopts an "Education for
Compliance" Strategy With Incorporated Legal Practices' (2003) 27 Without Prejudice 2, that '. . . ILPs
comprise mostly small practices with up to three directors (formerly partners) . .. Most ILPs are providing
traditional consumer and small commercial legal services . .. with only very few operating as multidisciplinary
practices that provide services beyond just legal services.'
35
Another reason might be that the transfer of the business of a law firm to a corporation can attract capital
gains tax: See Philip King, 'Should Your Firm Incorporate?' (March 2001) Law Society Journal 44,46-47. On
the other hand, Baker and Krawiec, above n 15 conclude that large New York firms were slow to become LLPs
because 'law firms are extremely conservative and are reluctant to take actions that may distinguish them in a
negative manner from their competitor f m ' : see n 37 for discussion of how the demise of Arthur Andersen
changed their thinking.
(2004) 23 The University of Queensland Law Journal
355
and hence they advise themselves to do so: 'if we let our clients run a $200
million business on a capital base of zero we'd be totally irresponsible, and yet
. ~ type
~ of institutional pressure is likely to be
it's what we all have to d ~ ' This
irresistible in the long term.37 To date, however, the incorporation of legal
practices is an insignificant phenomenon restricted to a small percentage of legal
practices, and those mostly very small.38Nevertheless, the growth of lawyering
in large firms and other organisations, by contrast, is overwhelmingly the most
significant development in contemporary practice.39Apart from the growth of
employment of practitioners in large law firms, there are also many more
lawyers (with and without practising certificates) working inside business,
accounting and consultancy firms as well as in government agencies and other
organisations -both incorporated andlor multidis~i~linary.~~
C Ethical Pressures on Incorporated Legal Pracfices
The nature of true incorporated legal practices (ie limited liability and nonrestricted ownership and participation) sets up a series of economic, social and
institutional pressures that make legal practice more like ordinary business and
more difficult to fulfil specific legal professional conduct obligations. Some
commentators have argued that for that reason ILPs are so ethically dangerous
that they should not be allowed.41
Firstly, it is feared that the corporate structure will replace professional
collegiality with managerialism.42The management structure of ILP will break
Quote from the managing partner of Minter Ellison, one of Australia's largest firms, reported in Andrew
Burrell, 'We Only Want to Join the Club' The Australian Financial Review (Sydney), 17 September 1999,52.
Note that in fact Australian law firms have access to debt capital as a matter of course.
37
In other words, legal practice for profit is likely to be the subject of the same 'institutional isomorphism' that
has been demonstrated to influence other business organisations to copy each other's structures and practices
regardless of whether there is any other good reason to do so or not: see W Richard Scott, Institutions and
Organisations(1995). This is confirmed in the empirical findings of Baker and Krawiec above n 16, who found
that one of the most frequently cited motivations behind large f m s ' decisions to become LLPs in New York
was that a sufficient number of their peer firms had become LLPs.
38 See above n 25.
39 See above n 15.
40
According to the Law Society of New South Wales, Statistics (January 2004)
<http://www.lawsociety.com.au/uploads/files/l073968427312-0.141 54000995761046.pdfi at 17 September
2004: 1935 (10.5%) of their members (ie solicitors with practising certificates) are in government practice and
25 18 (13.6%) are in inhouse corporate practice. There are likely to be many more lawyers working in
government or corporate practice without practising certificates. See also Angela Sorsby and Joanna Shapland,
Alternative Pupillage: The Issues (2001); Burnele V Powell, 'The Lesson of Enron for the Future of MDPs: Out
of the Shadows and into the Spotlight' (2002) 80 Washington UniversityLaw Quarterly 1291 (discussing the
lack of regulation of 'gray lawyering' by lawyers who practice tax advising, business consulting, economic
planning etc inside businesses and consulting firms like Enron and Arthur Andersen).
41
For a general discussion of the potential problems with ILPs see Steven Mark, 'Harmonization or
Homogenization? The Globalization of Law and Legal Ethics -An Australian Viewpoint' (2001) 34
VanderbiltJournal of TransnationalLaw 1173. For a good summary of the potential problems with MDPs see
Elizabeth Chambliss, 'MDPs: Towards an Institutional Strategy for Entity Regulation' (2002) 4 Legal Ethics
45,49-52. See also Jim Spigelman (Chief Justice of New South Wales), 'Are Lawyers Lemons? Competition
Principles and Professional Regulation' (Speech delivered at the 2002 Lawyers Lecture, St James Ethics Centre,
at 13 June 2004.
29 October 2002) <http://www.lawlink.nsw.gov.au/sc/sc.nsflpages/spigelman~041102>
42
In discussing the benefits of incorporation, King, above n 20, comments that '[tlhe significant change of
structure indicated in the above advantages [of incorporation] must bring about cultural change in the
organisation. Not only would this be seen in greater incentive and loyalty but probably in opening the minds of
principals and staff to other possibilities of business and ways of doing business .. . Incorporation could
therefore be an ideal time in which to introduce procedural and policy changes (such as quality management)
36
356
Law Fims Incoiporated
down trust, loyalty and collegial respect between practitioners. Colleagues will
no longer feel responsible for assisting each other. Nor will they have the
incentive of avoiding vicarious liability to encourage them to monitor each
others' work. The working environment in ILPs will be more competitive, and
less amenable to collegial identification, discussion and resolution of ethical and
other problematic issues in the provision of client services. More junior lawyers
will not be encouraged to think for themselves but simply to follow instructions
fiom above, while more senior lawyers' ethical sensibilities will be over-ridden
by the profit-making purpose of the firm.
Secondly, it is feared that the structure of ILPs, especially where there are nonpractitioner shareholders andlor investors in the firm, will over-comrnercialise
legal practice at the expense of its ethics and quality. As the firm takes
advantage of the corporate form to grow and seek outside investment, it is likely
to become more responsive to the profit-oriented concerns of investors and
analysts and less responsive to ethical concerns. Legal practitioners (especially
the legal practitioner director usually required by regulation - see below) may
be put in a position where their duties to shareholders and investors to maximise
the profits of the company will conflict with their professional conduct
obligations towards clients.43 ILPs that offer multidisciplinary services are
particularly likely to institutionalise conflicts of interest that operate to the
detriment of clients. For example, legal clients might be steered towards buying
other services fiom other practitioners in the firm regardless of whether those
services are really needed and who is the best person to provide them.
Furthermore the shareholders in an ILP might include businesses or other
corporations whose commercial s are at odds with those of clients.44 On the
other hand, structural incentives to produce a profit for shareholders and
investors might lead lawyers in ILPs to seek to please profitable clients and
neglect their duties to the court and to the public. 45
improving efficiency, teamwork, service to clients and staff morale.' This cultural change could easily be a
change towards increased managerialism. See also Mayson, above n 19.
43
Steve Mark, New South Wales Legal Services Commissioner, has been quoted as saying 'My tentative view
is that where an ILP becomes publicly listed, the duty of an ILP solicitor-directorto the court and to clients will
inevitably conflict with the duty of a solicitor-directorto the ILP and its shareholders. Furthermore I believe that
such conflict is irreconcilable . .. While the perceived conflict between professional ethics and profit is an
ongoing concern in the regulation of at least some present partnerships, in publicly-listed ILPs, shareholder
pressure for commercial gain will introduce a dynamic for solicitor-directorswhich was non-existent in
partnership structures': quoted by Marcus Priest, 'Hearsay', The Australian Financial Review (Sydney), 16
April 2004,57. But note s 95(4) Legal Profession Act 2004 (Qld) which allows ILPs to engage in pro bono
services without breach of duties to shareholders ('The directors of an incorporated legal practice do not breach
their duties as directors merely because legal services are provided without fee or reward by the Australian legal
practitioners employed by the practice.')
44
Adrian Evans, 'Multidisciplinary Practices' (2000) 74(11) Law Institute Journal 25,26 ('If existing MDPs
float under the NSW model, they will inevitably have shareholders with commercial interests opposed to those
of the f m ' s clients. Pressure on managing partners to sideline one or the other group will require constant and
improbable conflicts screening. Client responsibilities such as the duties of fidelity and loyalty -duties at the
heart of professional legal ethics -will in practice be traded against commercial advantage.').
45
Of course lawyers and law f m s who represent commercial interests are already widely charged with selling
out professional ideals in the interests of business clients: For evidence of this see Doreen McBarnet, 'Legal
Creativity: Law, Capital and Legal Avoidance' in Maureen Cain and Christine Harrington, Lawyers in a
Postmodem World:Translation and Transgression (1994) 73; Keith Mann, Defending White Collar Crime:A
Portrait ofAttomeys at Work (1985); R Nader and W Smith, No Contest: Corporate Lawyers and the
(2004)23 The University of Queensland Law Journal
357
Thirdly, it is feared that those non-practitioners involved in the ILP, whether as
employees, shareholders, directors or other officers, will make it difficult for the
firm to ensure that legal professional conduct obligations towards clients, the
court and the administration of justice are fulfilled. Non-lawyers may not merely
be ignorant of legal professional conduct principles, but may even owe positive
obligations to another profession or to the ILP itself that conflict with legal
professional conduct obligations.46In particular there may be difficulties with
adequate safeguarding of obligations to avoid client-client conflicts and to
safeguard client confidentiality and client legal privilege.47On the other hand, a
crucial commercial motivation for a non-lawyer professional partnership to join
a multidisciplinary ILP that includes lawyers might be access to the secrecy
potential provided by the concept of client legal privilege.48 Multidisciplinary
ILPs might extend the creation of privileged documents considerably beyond
what the public interest requires in an open system of justice.
111LAWFIRM ETHICSARE BUSINESS
ETHICS
A The Direction of Causation
This paper does not assess the supposed advantages of incorporated legal
practice against its dangers in order to come to a conclusion as to whether ILPs
should be allowed or encouraged. To engage in that assessment is to ask the
wrong question. Ethical arguments against ILPs assume that allowing ILPs will
cause problems of managerialism, commercialisation and the adulteration of
legal professional values. But that assumption gets the direction of causation
wrong: Do law firms that incorporate become more business like, or is law firm
incorporation an issue because lawyers, clients and investors are already
treating legal practice (like so many other things) as a business? This section
argues the latter. Regardless of whether true ILPs are allowed or not (and
Perversion of Justice in America (1996); Robert Nelson, Partners with Power: The Social Transformation of
the Large Law Firm (1988) 232,236; Erwin Srnigel, The Wall Street Lawyer (1964) 294-5; Roman Tomasic
and Stephen Bottomley, Directing the Top 500: Corporate Governance andAccountability (1993) 185.
46
See Law Council of Australia,Issues Paper: Multidisciplinary Practices: Legal Professional Privilege and
Conflict of Interest (2000) [3.3] <http://www.flsc.calen/pdE/AustraliaFinalOct.pdat 17 November 2004;
Steven Mark, 'Harmonization or Homogenization? The Globalization of Law and Legal Ethics -An
Australian Viewpoint' (2001) 34 VanderbiltJournal of Transnational Law 1173, 1197 (citing as an example
the possibility that an auditor's duty of disclosure to the public may conflict with a lawyer's duty of
confidentiality to the client).
47
Law Society of Western Australia, Position Paper: Flexible Practice Structuresfor Lawyers (1999)
<http:l/www.lawsocietywa.asn.au/public~discuss.html>
at 7 June 2004 points out that there is uncertainty as to
how legal professional privilege might apply to legal practice canied on in the corporate form ie would it apply
to communications made to all principals and employees of the company or only those made to legal members?
But see Law Council of Australia, above n 44, [2.4] (arguing that privilege need not be lost in an MDP as the
same principles will apply by which the court looks at the dominant purpose of the communication in order to
determine whether privilege applies. This is likely to extend the privilege to situations where non-lawyers are
working with lawyers on legal advice. There is no reason why the privilege should ever extend to
communications to lawyers or non-lawyers not for the purpose of legal advice or litigation.) Note also the Legal
Ombudsman Victoria's view that '[c]onflicts of interest arising in an MDP can be dealt with by application of
current professional conduct rules to the MDP and its members': Legal Ombudsman Victoria, Discussion
Paper: Multi-disciplinary Practices (1997) 6.
48
Privilege applies only to those communications created with a dominant purpose of obtaining legal advice or
preparation for litigation: ss 118, 119 Evidence Act 1995(Cth); Esso Australia Resources Ltd v Federal
Commisioner of Taxation (1999) 20 1 CLR 49.
Law Firms Incorporated
358
whether they proliferate or not), the ethical dangers identified with incorporated
legal practice are already rife in legal practice. This is particularly true of large
law firm practice and wherever lawyers work in organisational settings
(particularly in for-profit organisations such as in-house in business
organisations, and in accounting and consulting firms).49
This section uses two case studies of ethics scandals in (the same) large
(unincorporated) law firm practice to demonstrate that the ethical pressures said
to be caused by ILPs are really just more pressing versions of the same pressures
already faced by many lawyers in law firm and corporate practice. This is not to
deny that ILPs may make the ethical pressures on legal practice more acute.
However it is myopic to propose that banning ILPs might resolve the problem.
Paradoxically, as I will argue in the fourth section of this paper, the introduction
of true ILPs is forcing policy-makers to confront the ethical and regulatory
implications of the organisational and business aspects of legal practice.
B Case Study One: Carol Foreman - Over-charging and Falszjjing Evidence
Under Pressure of Law Firm Billing Practices
The Foreman caseS0illustrates the way that managerialist pressures can already
dominate large law firm practice. In 1994 Carol Foreman, former family law
partner at national mega-firm Clayton Utz, was struck off the roll of practising
solicitors by the New South Wales Court of Appeal for deception of other
practitioners and the court. Her deception was, in part at least, a response to
commercial pressures in her firm. She forged a law firm time sheet that was to
be submitted as evidence to the Family Court in a costs recovery action against a
client (Mrs Avidan). She forged the time sheet (without telling any of her
colleagues) in order to support her evidence that she had given the client a costs
agreement at the beginning of the retainer. Unless the court accepted that the
client had been given a written costs agreement, the firm would have been
unable to recover its very high fees (of more than $500 000) for assisting with
her divorce arrangements.5
'
Foreman was a very successful family lawyer who had been a partner at another
law firm before being headhunted to head up the family law division at Clayton
Utz. But by the time of the Avidan dispute, she had been told that Clayton Utz
was going to close down its family law practice because it was not making
enough money, and that she and another specialist family law partner would
have to work for a more junior partner in another area. She was allowed to run
49
See, eg, Robert A Kagan and Robert Eli Rosen, 'On the Social Significance of Large Law Firm Practice'
(1985) 37 Stanford Law Review 399; Robert Eli Rosen, '"We're All Consultants Now": How Change in Client
Organisational Strategies Influences Change in the Organisation of Legal Services' (2002) 44 Arizona Law
Review 63 7; see references at above n 45.
50
Law Society ofNew South Wales v Foreman (1994) 34 NSWLR 408.
5' Ultimately the Family Court (hearing the costs dispute) actually accepted that the costs agreement had been
given to the client and signed, even though it was not recorded in the relevant time sheets and client files. The
costs dispute between the firm and the client was consequently settled.
(2004)23 The University of Queensland Law Journal
359
the family law division on a trial basis for six months, at which point its
financial performance would be assessed. Her evidence to the court indicated
that during that time she was totally cost-dnven, working 12.5 hour days in the
office and close to breakdown?*
While the Court of Appeal was surely correct to strike Foreman off the rolls for
her deception, it was the charging policies and commercial orientation of the
firm that led to the high fees charged in this case, the decision to fight the costs
dispute with the client and, ultimately, Foreman's forgeries. The firm's feecharging policies derived from the firm's profit-orientation and internal business
model that expected every section of the firm to collect fees as efficiently as fees
were collected from one of the firm's best clients, the Tobacco ~nstitute.'~As
Kirby P commented, 'it seems virtually impossible to credit that legal costs in a
dispute between a married couple for the most part over their matrimonial
property could properly run up legal costs in the figures that are mentioned here
[ie half a million dollars]'. He went on to point out that 'those charges were
rendered not by Ms Foreman alone but by her firm' and that Foreman's own
'charging strategy was, to say the least, influenced by a system of time charging
and by budget requirements within the firm which were not of her individual
making' and that he was 'not satisfied that this matter has been as fully and
properly investigated as it should have been'. He suggested that perhaps the law
firm should have been held responsible for ~ v e r - c h a r ~ i n ~ . ~ ~
Originally Foreman had been charged with 'gross o v e r - ~ h a r ~ i nHowever
~'.~~
this aspect of the case was dropped,56and there would have been no basis to take
52 Ann Daniel, 'Chapter Four: The Cost of Justice' in Scapegoatsfor a Profession (1998) 71 (Daniel's chapter
is an extended case study of the case and its context). In Law Society of New South Wales v Foreman (1994) 34
NSWLR 408,414, Kirby P comments, '[a]stonishingly, the evidence revealed that she and some staff members
even slept at the office on occasion after working very late. Many, like the solicitor,were highly stressed by the
pressure under which they worked. Part of the stress would appear to have arisen from the obligation to meet
budgeted requirements of fee production established by the firm. This was allegedly done by reference to the
standards set by the Tobacco Institute, an amply funded client well able to pay its monthly accounts upon
presentation'. It is unclear why Kirby P should see sleeping at the office as 'astonishing' as it is common
practice when a very big case is on. See the judgments of Mahoney JA at 433-438 and Giles AJA at 462-463
for descriptions of the firm (the threat to close down the family law section because of its lack of profitability)
and budget (the requirement to enter into written costs agreements and to meet monthly pre-set budgets for
billing) pressures that Foreman was under.
53 Law Society of New South Wales v Foreman (1994) 34 NS WLR 408,4 14 (IOrby P).
54 Ibid 422-423.
55 Generally only the 'deliberate charging of grossly excessive' legal costs or 'deliberate misrepresentations as
to costs' can (and could at that time) amount to professional misconduct: s 208Q Legal Profession Act 1987
(NSW) (inserted in the Legal Profession Act by the Legal Profession Reform Act 1993 (NSW)). On the position
in other states and under the common law see also GE Dal Pont, Lawyers ' Professional Responsibility in
Australia and New Zealand (2001) 638439 ('in every case the relevant inquiry is whether the lawyer has
charged fees grossly in excess of those which would be charged by lawyers of good repute and competency' at
639). For a case where professional misconduct on the basis of gross overcharging was found, see Council of
the Law Society Inc v Roche [2003] QCA 469 (Unreported, de Jersey CJ, McMurdo P and Williams JA, 3 1
October 2003) [16] (the work of paralegals was charged out at $300 per hour [plus a 25% uplift when the case
was won] - 'A substantial amount of that work was of "a fairly mundane nature." The Tribunal gave examples
of that, including, as notable examples, 12 minutes of charged-for time spent wrapping a box of chocolates to be
given to a reporting doctor's secretary by way of thanks for facilitating the correcting of a report, and another 12
minutes spent discussing arrangements for the purchase of the gift -for which momentous engagements the
respondent was on my calculation billed $156').
56 Because the Family Court had held that there was in fact a costs agreement, the Disciplinary Tribunal
accepted that there could be no basis for a finding of over-charging, and this was not re-opened in the Court of
360
Law Firms Incorporated
disciplinary action against the firm as an entity if their charging was found to be
inappropriate. The disciplinary provisions and ethical conduct rules in New
South Wales, as in most other jurisdictions, are directed only at individual
practitioners, not at law
Indeed, because the focus of professional
conduct regulation is on individual practitioners,58professional regulators such
as the Law Society, may have little capacity or skill to examine the extent to
which firm management practices and cultures may have lead to misconduct
where responsibility for that misconduct is fragmented throughout the firm.
Besides, the charges and billing practices at Clayton Utz were little different to
those of most other large or medium sized law firms. Since the test for whether
over-charging amounts to a disciplinary offence is whether the lawyer has
charged fees grossly in excess of those which would be charged by lawyers of
good repute and competency, if these charging practices were considered normal
by other practitioners, then there would be no basis for disciplinary action.59
Clearly incorporation is not necessary in order for a firm like Clayton Utz to take
a 'corporatist or managerialist' approach.60 A survey of more than 2000
Appeal. Ironically one of the aims of the fum's billing policies was to ensure that all practitioners complied
with the consumer protection provisions in the Legal Profession Act 1987 (NSW) that require disclosure of
certain matters related to costs at the beginning of a retainer and to encourage lawyers to enter into written costs
agreements with clients. The firm's approach to these requirements had little to do with the consumer
empowerment purpose of the provisions and everything to do with recovering as many fees as possible from
clients. While the Legal Profession Act 1987 (NSW) does not require that lawyers enter into written costs
agreements with clients, it does provide that clients generally cannot dispute costs where they are subject to a
written costs agreement: s 208C (costs subject to a costs agreements cannot be subject to assessment) and s 185
(costs agreements to be in writing).
57 See Ysaiah Ross, 'Group Responsibility of Lawyers' (1999) 73(12) Law Institute Journal 45. This is also true
of all other jurisdictions in Australia (except Victoria) and most overseas jurisdictions: See Schneyer, above n 5;
Chambliss, above n 41,46 also reports that New York and New Jersey have changed the rules of professional
conduct to be able to apply sanctions to law firms. However I was told that one of the disciplinary authorities in
Victoria had received legal advice that disciplinary action would only be available against incorporated firms,
not partnerships: Interview with lawyer at Professional Standards, Law Institute of Victoria (Telephone
Interview, 2 1 July 2004).
5 8 A principal of a fm may be disciplined for failure to supervise staff where this results in a breach: See, eg,
Cheney v QldLaw Society Inc [2001] QSC 338 (Unreported, Chesteman J, 13 September 2001); Attorney
General and Ministerfor Justice v Delaney [2000] QCA 504 (Unreported, McMurdo P, Davies JA and Byrne J,
12 December 2000) and Law Society of New South Wales v Foreman (1991) 24 NSWLR 238 (a different
Foreman); and see generally GE Dal Pont, Lawyers ' Professional Responsibility in Australia and New Zealand
(2001) 636-638. But the cases on failure to supervise generally concern the supervision of clerical staff rather
than lawyers (but see Bridges v Law Society of New South Wales [I9831 2 NSWLR 361, where it was held that
a lawyer should have actively monitored his partners to ensure they engaged in no finther illegitimate loans
where the lawyer knew his partners had previously breached their fiduciary duties) and revolve around failures
that result in offences of dishonesty such as trust account breaches.
59 See above n 55 and Veghelyi v The Law Socieiy ofNSW (Unreported, New South Wales Court of Appeal,
Grby P, Mahoney and Priestley JJA, 6 October 1995). A definition consistent with the generally self-regulatory
nature of the legal profession. Usually disciplinary processes are aimed at finding dishonesty: see Linda Haller,
'Smoke and Mirrors: Public Health or Hazard?' (Paper presented at the First International Conference on Legal
Ethics, New Perspectives on Professionalism: Educating and Regulating Lawyers for the 21 Century,
University of Exeter, 6-7 July 2004). The fees charged in the Avidan case were likely to be consistent with
what other large law firms would charge and it would therefore be difficult to show that they were unreasonable
to the point of leading to discipline, despite public outrage about lawyers' billing practices generally: see
&chard Ackland, 'A Devastating Condemnation of Commercial Lawyers, Law Firms7,Australian Financial
Review (Sydney), 11 August 1994,16; Daniel above n 52.
60
A 'corporatist or managerialist' approach 'emphasises the development of internal management systems and
marketing, more sophisticated methods of time costing for legal work, greater standardisation and routinisation
of work outputs (particularly through information technology applications), .. . departmentalising and otherwise
streamlining working practices ... increased expectations as to productivity,reflected in long working hours,
(2004) 23 The University of QueenslandLaw Journal
solicitors in New South Wales and Victoria focusing on job satisfaction and best
practices in law firm management found that, according to solicitors, law firms
have a preoccupation with billable hours, budgetary targets and fees billed ...
there is a fixation with quantitative measurement along a single financial
dimension of a business - revenue. These findings suggest that in many
instances the profitability of a legal services business is understood and pursued
primarily in terms of getting more money in by sending out bigger and bigger
bills ... The prevailing business model of law firms, as constructed fiom these
findings, incorporates its human resources as more or less expendable
components of a revenue production machine. Workers are assumed to have
uni-dimensional lives, putting job and career first, last and everywhere in
between ... The character of the process is "recruit, exploit, and discard".61
It is not difficult to see how these managerial pressures may lead to deception of
clients about
as well as eating away at any possibility for trust and
collegiality between lawyers. It can also lead to lawyers and whole departments
within law firms being eager to loyally do what the client bids even if it treads
treacherously close to misleading the Court or the public, or otherwise acting in
a way that fails to have proper regard to duty to public and court.
pressures to bill as much time as possible, and a career structure which both rests on (masculine) assumptions
that fee earners will be almost endlessly available to meet often arbitrary and unpredictable calls on their time':
Donald Nicolson and Julian Webb, Professional Legal Ethics: Critical Interrogations (1999) 74 (describing
developments in the UK). In 2003 the Australian Financial Review reported that Workcover (the occupational
health and safety regulator) in New South Wales was inquiring into the working hours of young lawyers and
reported that a Victorian young lawyers survey in 2000 had found that 65% of those surveyed worked longer
than 10 hours every day: Marcus Priest, 'Lawyers Caught in Painful Tort', Australian Financial Review
(Sydney), 10 January 2003,lO.
61 Mark Herron, Facing the Future: Gender, Employment and Best Practice Issues for Law Firms. Volume 1:
The Job Satisfaction Study (1996) 1,60. See also Galanter and Palay's work on large law firms in the US and
UK arguing that, 'Law practice has become more openly commercial and profit-oriented -more like a
business. Firms rationalize their operations; engage professional managers and consultants; and worry about
billable hours, profit centers, and marketing strategies. "Eat what you kill" compensation formulas emphasize
rewards for productivity and business-getting over equal shares or seniority': Marc Galanter and Thomas Palay,
'Public service implications of evolving law firm size and structure' in Robert Katzmann (ed), The Law Firm
and the Public Good (1995) 19; see also Marc Galanter and Thomas Palay, Tournament of Lawyers: The
Transformation of the Big Law Firm (1991 ) . They find that large law f m s and their partners now make money
by leveraging (ie raising the number of associates (non-partners) in relation to the number of partners), with
partners expected to attract enough work to keep many salaried employees busy and charging out billable hours
at a higher rate than their generous salaries.
62
Most large law f m set targets of numbers of hours to be billed by each lawyer each year with an average of
about 6.5 hours per day being standard practice in Australia but with 8-8.5 hours sometimes required: Ibid and
Chris Merritt, 'No Case for Padding in Australian Billing Targets', The Australian Financial Review (Sydney),
1 November 2002; Marcus Priest, 'Survey Exposes Bill Extortion by Lawyers', Australian Financial Review
(Sydney), 3 1 January 2003,25. One legal management consultant was quoted as saying that average billing
targets of between 6 and 8 hours a day were unsustainable - 'That may be fine during a period of high
workload but over the long term it is unsustainable. It translates to either huge working hours or fraudulent
timesheets': Marcus Priest, 'Lawyers Caught in Painful Tort', Australian Financial Review (Sydney), 10
January 2003, 10. Some of the ways in which bills were padded out, according to her included '. ..mak[ing] 30
phonecalls when the called person is unlikely to be in. A lawyer might wait until between 12:30pm and 2pm
when they know many people will be at lunch and then charge 30 units (three hours' work) for attempted and a few successful -phone calls over the course of an hour or so.' Another was to 'leverage' time by doing
tiny tasks on a number of files in one six-minute timeslot and charge work done on each file as a separate time
unit': Marcus Priest, 'Survey Exposes Bill Extortion by Lawyers', Australian Financial Review (Sydney), 3 1
January 2003,25. The practice of using more senior lawyers (who charge out at a higher rate) than necessary to
conduct more junior work was also mentioned. See also Lisa Lerman, 'Gross Profits? Questions About Lawyer
Billing Practices' (1994) 22 Hofstra Law Review 645 for reports of similar practices in the US.
362
Law Firms Incorporated
C Case Studj Two: The McCabe Tobacco Litigation -Destruction of Evidence
at the Behest of a Corporate Client and its Inhouse Lawyers
In the Foreman case, the court mentioned that the fee targets for the firm were
set by reference to one of the firm's best clients -the Tobacco Institute. A few
years later, it was the same firm's work for the tobacco industry that raised
questions again about the ethics of large law firm lawyering. The McCabe case
illustrates the way in which both external and in-house practice as a commercial
lawyer means that professional ideals can be adulterated by lawyer identification
with clients' short-term business interest^,^^ and the need to grow profits by
malung relationships with clients as close as possible.64
In McCabe v British American Tobacco Australia Services ~ t dat .first
~ instance
~
the Victorian Supreme Court found that Clayton Utz, the solicitors for the
defendant British American Tobacco (BAT), had advised the company on a
'document retention policy' that intentionally resulted in the destruction of
thousands of documents. These documents would have been relevant and
favourable to McCabe's negligence case against the company for her terminal
cancer. The court also found that the defendant and their legal advisers had
misled the plaintiff and the Court about the fact and the extent of their document
de~truction.~~
he trial judge struck out the defendant's defence and ordered
judgment for the plaintiff, without a trial, on the basis that the destruction of
documents had unfairly prejudiced the plaintiffs chances of success.67
The destruction of documents with the purpose of making it difficult or
impossible for meritorious plaintiffs to prove their case, and the fact that the
defendants did not at first reveal the intentional destruction of those documents
during the discovery process, could both amount to a breach of the ethical duty
to the administration of justice.68 That duty is supposed to override lawyers'
duties to their clients. The law firm's apparent disregard for its, and its client's,
63
See David Luban, 'Integnty: Its Causes and Cures' (2003) 72 Fordham Law Review 279.
See Robert Eli Rosen, above n 49.
65 [2002] VSC 73 (Unreported, Eames J, 22 March 2002).
66
Camille Cameron, 'Hired Guns and Smoking Guns: McCabe v British American Tobacco Australia Ltd'
(2002) 25 University of New South WalesLaw Journal 768,773.
67
The decision that the destruction of documents should result in the sanction of judgment against the defendant
without trial was later overturned on appeal: BATv Cowell [2002] VSCA 197 (Unreported, Phillips, Batt and
Buchanan JJA, 6 December 2002). Debate continues about whether the destruction of relevant documents
before litigation is commenced but where future litigation is in reasonable contemplationshould be considered
unlawful: See Camille Cameron and Jonathon Liberman, 'Destruction of Documents Before Proceedings
Commence: What is a Court to Do?' (2003) 3 Melbourne UniversityLaw Review 273; Camille Cameron,
'Appropriate Responses to the Destruction of Evidence in Civil Proceedings' (Paper presented at Law School
Faculty Seminar, University of Melbourne, 24 May 2004); Peter Sallman, Report on Document Destruction and
at
Civil Litigation in Victoria (2004) <http://repositories.cdlib.org/context/tc/article/115O/type/pdf;/viewcontent>
17 November 2004. Note that the issue arises where there is a likelihood of future litigation from any one of a
number of potential plaintiffs, but there is no one particular plaintiff or defined cause of action that is in
contemplation.
Cameron, above n 66,788-90.
64
(2004) 23 The University of Queensland Law Journal
duty to the court, was likely a consequence of the law firm's closeness to and
financial dependence on its client.69As the judge described the facts:
One outstanding feature of this case is the extent to which, after 1985, the terms
of the Document Retention Policy, and the implementation of a program of
destruction of documents, were the product of advice, decision and supervision
by an army of litigation lawyers, fi-om several countries, and being both
retained private practitioners and in-house lawyers. The relationship between
the defendant and its retained solicitors was so close that solicitors employed by
private firms sometimes became employees of Wills and then continued to
work alongside members of their former fm, and employees of one of the
legal firms sometimes spent months working on the premises of Wills. Private
practitioners and in-house lawyers travelled together to conferences of litigation
lawyers, organised by companies in the BAT Group, to discuss litigation tactics
... The long standing and very close association between in-house lawyers and
private practitioners had the potential for blurring the roles and responsibilities
of the lawyers.70
In 'the age of the minders', as Rosen calls it, 'outside counsel's perspective is to
become as much a part of the [client's business] team[s] as the team allow^'.^'
Nevertheless the Australian lawyers at Clayton Utz were probably not a critical
part of the team. More significant was the role of inhouse and external lawyers
for the tobacco industry in the US, and to a lesser extent the UK, who developed
the tobacco industry's legal and business approach to claims that smoking
caused addiction and cancer as an integral part of the business team for
decades.72It seems likely that the Australian lawyers in the case were essentially
following the litigation tactics developed by their client, the tobacco industry
and their lawyers in the US, and were not exercising independent judgment
about the propriety of what they were doing.73
69
Ibid 785. See also Kagan and Rosen, above n 49. Of course sole practitioners can also lack independence
from clients. In the case of large law firms, however, the structure and culture of the firm can provide additional
opportunities and incentives for this to occur.
70
McCabe v British American TobaccoAustralia Services Ltd [2002] VSC 73 (Unreported, Eames J, 22 March
2002) [62], [284]-[286].
71 Rosen, above n 49,672473 (arguing that 'minders' and client relations partners are becoming more
important than 'finders' in generating profit since increased profit is now supposed to come from increasing
work from existing clients rather than finding new clients).
72
On the complicity of lawyers for tobacco companies generally, especially US lawyers, in helping their clients
escape public accountability for the harmful and addictive impact of smoking see Martha Derthick, 'The
Lawyers Did It: The Cigarette Manufacturers' Policy Towards Smoking and Health' in Robert Kagan, Martin
Krygier and Keith Winston (eds) Legality and Community: On the Intellectual Legacy of Philip Selznick (2002)
281; Bruce A Green, 'Thoughts About Corporate Lawyers Reading The Cigarette Papers: Has the 'Wise
Counselor' Given Way to the 'Hired Gun'?' (2001) 5 1 DePaul Law Review 407; Martin H . Redish, 'The
Adversary System, Democratic Theory, and the Constitutional Role of Self-interest: The Tobacco Wars, 19531971' (2001) 51 DePaul Law Review 359. For a more detailed account see Richard Kluger, Ashes to Ashes:
America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris
(1996). For evidence that the Australian document shredding occurred at the behest of corporate headquarters of
the BAT group in the US, see Raymond Bonner with Greg Winter, 'Shredding of Smoking Data is Ruled
Deliberate', The New York Times (New York), 17 April 2002, 10, and also McCabe v British American
TobaccoAustralia Services Ltd [2002] VSC 73 (Unreported, Eames J, 22 March 2002) [63].
73
'In addition to Australian firms and lawyers, from the outset both in-house counsel and private lawyers
engaged by the parent company BATCO and by the USA affiliate, BATUS, had also been engaged in
conferences in Australia and by telephone and in advising the Australian lawyers as to questions concerning
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Law Firms Incorporated
The age of the minders makes the concern that ILPs might institutionalise
commercial conflicts of interest between clients and clients, or clients and
corporate shareholders, to the detriment of large, profitable commercial clients
seem rather naive." More worrying is how far the need to 'add value7 to client
businesses will lead commercial lawyers away fiom even considering other
ethical responsibilities. The case of tobacco industry lawyering also illustrates
the significant ethical problems that can be raised by the employment of lawyers
inside business organisations, regardless of whether ILPs are allowed or not. For
example, because of the way that lawyers were used inside tobacco firms as
managers and as managers of institutes for research on the health effects of
smoking, confidentiality and privilege was claimed over a much wider range of
documents than if a more arms length relationship between lawyers and clients
had been maintained.75 So confidentiality and privilege protection, at least
before major challenge, were not weakened by lawyer involvement in business.
Rather they were extended far beyond their public interest rationale could
justify, while lawyers7duties to the court and the public interest were adulterated
by lawyer participation in and identification with client goals.
D The Business and OrganisationalAspects of Lawyering
The Foreman and McCabe case studies show that legal practice is already beset
by structural pressures of managerialism, commercialism and lawyer
entwinement with business and multidisciplinary practice that can lead to ethical
problems, regardless of whether ILPs are allowed. These are typical problems of
ethics in business ~ r ~ a n i s a t i o n sOrganisations
.~~
often tend to destroy
individuals' integrity by tearing apart their constituent 'selves' - their
commitment to the business goals of the organisation on the one hand, and, on
the other, their personal ethical commitments (eg to family) and sense of social
responsibilities (eg environmentalism). Organisational influences towards
irresponsible behaviour are most obvious when employees feel constrained
directly or indirectly by management considerations to do unethical things in
discovery': McCabe v British American Tobacco Australia Services Ltd [2002] VSC 73 (Unreported, Eames J,
22 March 2002) [285].
74
Rosen, above n 49,675 recounts an instance of a client demanding a law fm not take on any even unrelated
representation of economic competitors. In Australia the law is being extended to protect commercial clients
from commercial conflicts. In a series of cases commercial clients have argued, and the courts have agreed, that
lawyers are prevented by a duty of 'loyalty' fiom acting against current and former clients even where the
lawyer holds no relevant confidential information about the client and the conflict of interest is merely
commercial: Village Roadshow Limited v Blake Dawson Waldron (2004) Aust Torts Reports 81-726; Spincode
Pty Ltd v Look Sofkware Pty Ltd (2001) 4 VR 501; Christopher Webb, 'Dramatic Exile on Mayne Street' The
Age (Melbourne), 18 June 2003,4. However the interests of the client as an entity and the interests of the
individualheamthat a particular lawyer might deal with can be different: Edward A. Bernstein, 'Structural
Conflict of Interest: How a Law Firm's Compensation System Affects its Ability to Serve Clients' (2003)
University of Illinois Law Review 1261 (arguing that the 'eat what you kill' system of compensating lawyers on
the basis of the amount of billings they bring into the firm gives rise to conflicts of interest in that the external
lawyer might want to please the person they are dealing with at the client firm who decides whether to keep
paying them rather than serve the best interests of the client (ie the entity) in giving bad news advice.)
75 In the end much of the privilege claim was not upheld for illegality. Yet the privilege claim protected
information for decades. See references at above n 72.
76
See Christine Parker, The Open Corporation: Effective Self-Regulationand Democracy (2002) 3 1-37. The
following comments summarise this material.
(2004)23 The University of Queensland Law Journal
365
order to balance work and family, or meet work expectations.77People who on
the whole believe in obeying the law and doing the right thing in their personal
and civic lives, can also be subtly seduced into doing unethical or illegal things
within organisational structures.78
A persuasive literature in business ethics suggests that corporate decisions are
often immoral, illegal or just bad because, although many individuals are
involved in making them, none feel personal responsibility for the ultimate
outcome.79Psychologists and management theorists have noted phenomena such
as 'risky shift', 'groupthink' and the 'Abilene paradox' in which (respectively)
people take greater risks on behalf of their organisations than they would on
their own account, act in accord with organisational norms even when they clash
with their own principles, or go along with group decisions against their better
judgment in order to avoid conflict.80 Individuals employed in corporations
allow themselves to be subsumed and socialised by organisational bureaucracies
and cultures while they are at work. They are disposable actors hired to play one
role and to use organisational resources to pursue one corporate interest by
whatever means neces~ary.~'People tend to see it as illegitimate to use
alternative extra-organisational standards to critique and test the value and
consequences of the behaviour they are hired to perform in their organisational
role. Therefore social control becomes more difficult, unless the corporation
itself institutionalises some internal ethical responsibility controls.
Traditional legal, ethical and professional regulation adequately addresses
neither the organisational nor business dimensions of legal practice for three
main reasons.82
Firstly, professional regulation sees the individual lawyer as the focus of
responsibility for ethical behaviour and the only actor that should be the subject
of discipline and regulation. Neither the law firm as an entity, nor any other
77
See, eg, Edward Petry, Amanda Mujica, and Dianne Vickery, 'Sources and Consequences of Workplace
Pressure: Increasing the Risk of Unethical and Illegal Business Practices' (1998) 99 Business & Society Review
25; Robert Jackall, Moral Mazes: The World of CorporateManagers (1988); David Ermann and Robert
Lundman (eds) Corporate and Governmental Deviance: Problems of Organisational Behavior in
Contemporary Society (1996).
78 See David Luban, 'Integrity: Its Causes and Cures' 72 Fordham Law Review (2003) 279.
79
See Mark Bovens, The Questfor Responsibility: Accountability and Citizenship in Complex Organisations
(1998).
80
M Metzger, 'Organisations and the Law' (1987) 25 American Business Law Journal 407; Ronald Sims,
Ethics and Organisational Decision Making: A Callfor Renewal (1994). On the law fm context see also
Schneyer, above n 5,8 (arguing that 'Teaming not only encourages lawyers to take ethical risks they would not
take as individuals, but also obscures responsibility, which makes it difficult for both complainants and
disciplinary authorities to determine which lawyers committed a wrongful act.')
Jeffrey Slovak, 'The Ethics of Corporate Lawyers: A Sociological Approach' (198 1) American Bar
Foundation Research Joumal 753; cf Larry May, The Socially Responsive Self Social Theory and Professional
Ethics (1996).
82
See David B Wilkins, 'Everyday Practice is the Troubling Case: Confronting Context in Legal Ethics' in
Austin Sarat et a1 (eds) Everyday Practices and Trouble Cases (1998) 68 (arguing that codes of professional
conduct wrongly assume the typical lawyer-client interaction is between a dedicated and skilled solo
practitioner advising an unsophisticated individual client).
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Law Firms Incorporated
organisation that might employ lawyers, is seen as an appropriate subject of
regulation and discipline.83
Secondly, ethical commentary and the rationale behind traditional conduct rules
wrongly assume that since the practice of law is a profession, it cannot also be a
business, let alone that lawyers might practice within other businesses. Ethical
regulation of the profession has traditionally rested on restrictive practices that
seek to protect legal professionals from market pressures and expect that legal
professionals will therefore be committed to non-market values.84Commentators
seem to presume that if the business aspects of legal practice were recognised
and legitimated, any hope for ethical conduct in legal practice would be forlorn.
Yet lawyers and law firms are unavoidably subjected to commercial pressures in
real life. Legal ethical regulation provides few answers as to how they 'should
reconcile their various responsibilities with the demands of competition'.85
Thirdly, the only way in which the organisational and business aspects of legal
practice have been acknowleged in professional conduct regulation in the past
has been by restricting legal practice to partnerships. This indirect regulation of
legal practice - regulation by requiring that legal practice take a certain legal
form - seeks to create a business structure in which individuals are highly
accountable for each other through joint and several liability. However it is very
difficult to hold the entity accountable since a partnership is not an entity in its
own right.86Indeed the focus on partnership may have stultified development of
other forms of regulation of legal practice that might promote entity
responsibility better or more appropriately (and therefore might address some of
the problems set out in the previous section). Furthermore partnership is not in
reality the only or main form of legal practice organisation for lawyers.87Many
lawyers are employed within organisations, yet these are barely recognised by
professional conduct regulation and hence are unregulated by it. This leaves the
structural pressures that cause individual ethical problems unaddressed.
The major challenge for business ethics is how to institutionalise conscience in
business ~ r ~ a n i s a t i o nSimilarly
s.~~
one of the biggest challenges for the ethical
83 See Schneyer, 'Professional Discipline for Law Firms?' above n 5; Schneyer, above n 27; Elizabeth
Chambliss and David B Wilkins, 'Promoting Effective Ethical Infrastructure in Large Law Firms: A Call for
Research and Reporting' (2002) 30 Hofstra Law Review 691; Chambliss and Wilkins, above n 5.
84
Wilkins, above n 82; Rick Abel, American Lawyers (1989).
s5 See David Sugarman, 'Blurred Boundaries: The Overlapping Worlds of Law, Business and Politics' in
Maureen Cain and Christine Harrington (eds) Lawyers in a Postmodem World: Translation and Transgression
(1994) 103; Wilkins, above n 82.
86
See above n 57.
87
See May, above n 81 (discussing the ethical implications of this for professionals in all areas).
88
See Kenneth E Goodpaster, 'The Concept of Corporate Responsibility' (1983) 2 Journal of Business Ethics 1
(arguing that 'we can and should expect no more and no less of our institutions.. . than we expect of
ourselves...' in terms of moral responsibility, at 10); Susan Wolf, 'The Legal and Moral Responsibility of
Organisations' (1985) Criminal Justice: Nomos XXVII (arguing that although organisations cannot be
'morally' responsible because they lack the emotional capacity for conscience, they ought to be 'practically'
responsible to be guided by moral goals and constraints). I have previously set out the management, regulatory
and democratic conditions in which such organisational responsibility is most likely to be institutionalised in
Christine Parker, The Open Corporation: EfSective Self-Regulationand Democracy (2002).
(2004) 23 The University of Queensland Law Journal
regulation of lawyering is to develop ways of institutionalising ethical conduct
in legal practice inside organisations. Responsible institutions like responsible
individuals must have 'an inner commitment to moral restraint and aspiration'.89
This requires organisations to regulate themselves in a way that is responsive to
legal norms and social and community concerns.90Regulators will therefore
need not only to take enforcement action when lawyers or firms break the rules.
Regulators and legislative regulation should also try to make sure that firms put
in place effective internal controls, procedures and cultures for complying
proactively with professional conduct and ethical obligations in order to avoid
the policies and pressures that might cause breaches and unethical conduct
occurring in the first place.91 This is not to say that professional conduct
breaches and unethical conduct can be completely eliminated, but at least law
firm management should be made to take responsibility for doing what they can.
I have previously called this type of strategy as applied to business f m s in
general, 'meta-regulation' - the regulation (by public regulators) of internal
self-regulation by firms.92
As Chambliss and W i h n s argue:
Because lawyers increasingly practice in large, multi-jurisdictional firms,
professional regulation increasingly depends on structural controls within firms,
such as conflicts avoidance systems, internal reporting procedures, billing
guidelines and the like.93
Similarly, Schneyer argues that:
... in an era when the majority of lawyers work in sizable law firms or other
group-practice settings, the authority to proceed against practice entities may
bear heavily on the overall effectiveness of professional regulation. One reason
89
Philip Sehick, The Moral Commonwealth (1992) 345, emphasis in original.
This is part of the influential theory of 'responsive regulation' (Ian Ayres and John Braithwaite, Responsive
Regulation: Transcending the Deregulation Debate ( 1 992)) which is designed to maximize self-regulatory
possibilities by strategic use of legal sanctions: see Sehick, above n 89; Jay Sigler and Joseph Murphy,
Interactive Corporate Compliance: An Alternative to Regulatory Compulsion (1988); Chnstopher Stone, Where
the Law Ends: The Social Control of CorporateBehaviour (1975).
The Queensland Law Society's previous 'Client Care Rule' (effective as of 5 April 1993; rescinded 16 July
1998) was a beginning in this direction (it required that a firm inform a client at the beginning of the retainer
that complaints could be referred to a nominated Client Care Officer within the firm or to the Law Society's
Client Relations Centre) and may have contributed to the dramatic drop in the number of written complaints in
1994: See Linda Haller, 'Solicitors' Disciplinary Hearings in Queensland 1930-2000: A Statistical Analysis713
Bond Law Review (2001) 1, 13 (Table 3).
92
See Parker, above n 88. The 'open corporation' is internally responsible for its own actions through selfmanagement, yet externally accountablethrough the requirements of disclosure, dialogue, exposure and
enforcement. For firher analysis of this idea of meta-regulation, see also Robert Baldwin, 'The New Punitive
Regulation' (2004) 67 Modem Law Review 35 1,374-38 1.
93
Chambliss and Willcins, above n 5. See also Schneyer, above n 5 (arguing at 11 and 12 that '[gliven the
evidentiary problems of pinning professional misconduct on one or more members of a lawyering team, the
reluctance to scapegoat some lawyers for sins potentially shared by others in their f m , and especially the
importance of a f m ' s ethical infrastructure and the difhse responsibility for creating and maintaining that
infrastructure, a disciplinary regime that targets only individual lawyers in an era of large law firms is no longer
sufficient. Sanctions against firms are needed as well' and ' . .. in view of emerging governance patterns that
make law firms comparable to corporations, a system of law firm discipline should supplement individual
discipline for lawyers'). See also Chambliss, above n 4 1,4749.
90
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Law Firms Incorporated
for this is that the quality and probity of a lawyer's work may depend crucially
on the 'ethical infiastructure' or internal controls her workplace deploys.94
Yet Chambliss and Wilkins' own review of the empirical research indicates that
most law firms have inadequate structural controls.9s
The introduction of ILPs in Australia has provided an opportunity to begin to
solve problems of law firm ethics. With the introduction of ILPs, regulatory
policy-makers have been forced to recognise the law firm as a separate entity, to
consider what its ethical responsibilities should be, and how it should be
regulated. In the final section of this paper I describe and assess the Australian
model that is developing for the ethical regulation of ILPs.
IV REGULATION
OF LAWFIRMRESPONSIBILITY FOR ETHICS
A 'Meta-Regulating' Law Firm Ethics
The analysis in the&previoussection suggests that one of the primary aims of law
firm regulation should be meta-regulatory - ensuring that law firms have in
place intemal systems and cultures that ensure compliance with professional
conduct obligations (and, obversely, to make sure they do not have in place
systems and cultures that are likely to discourage employees' and officers'
ethical conduct). As Chambliss and Wilkins argue, the primary purpose of law
firm discipline should be to promote compliance efforts by firms because firm
policies and procedures create economic and social incentives for individual
conduct that are distinct from and prior to individual bad acts.96In other words
law firm regulation should firstly and most importantly relate to law firm's
formal and informal policies and procedures, rather than law firms only being
held responsible for individual misconduct.
This type of 'meta-regulation' of organisational self-regulation of ethics and
compliance responsibilities is becoming common in other areas of business
94
Schneyer, 'A Tale of Four Systems' above n 27,246. On the same page he also argues that the disciplinary
system in US generally has neither legal authority to proceed against f m s nor capacity in fact to proceed
against supervisory lawyers when others in their organisation commit ethics violations. See also above n 25,
276 (arguing that '[wlithout the power to influence intemal controls, professional discipline runs the risk of
becoming increasingly irrelevant to the overall scheme for regulating lawyers').
95
Elizabeth Chambliss and David B Wilkins, 'Promoting Effective Ethical Inhtructure in Large Law Firms:
A Call for Research and Reporting' (2002) 30 Hofstra Law Review 691,697-699 on US law fums. See
similarly Christine Parker, Just Lawyers: Regulation and Access to Justice (1999) 2 1-22, 153 (reviewing
research showing lack of firm compliance with Australian, English and Scottish conduct regulation aimed at
requiring f m s to implement 'client care' systems, such as complaints handling systems).
96
Chambliss and Wilkins, 'A New Framework for Law Firm Discipline' above n 5,338. They see this as an
end in itself: 'Policies and procedures that explicitly promote compliancewith ethical standards make a
statement about firm values to fm members and to the broader ethical community. Within the firm, such
policies and procedures provide guidance for well-meaning lawyers and may help them resist informal pressure
to lower their practice standards. [they cite some empirical evidence on this] ... A firm's creation of specific
types of ethical infiastructure also sends an important signal to the managers of similar f m s , who may feel
institutional pressure to follow suit': Ibid 343.
(2004)23 fie University of Queensland Law Journal
369
regulation.97 Indeed lawyers, as individuals at least, should be more
accustomed than people in other businesses to regulation that expects them to
shoulder heavy ethical responsibilities. But there is also some precedent for
meta-regulation directed at the law firm.98Chambliss and Wilkins' empirical
research on the evolution of in-house compliance specialists (including law
firm general counsel, loss prevention and risk management partners, and inhouse ethics advisors) in US law firms shows that firms are beginning to
develop internal controls to manage firm compliance with professional
regulation.99
In Australia, since McCabe and other ethics scandals, legal professional
associations have been encouraging law firms to voluntarily appoint ethics
partners, and institute ethics programs and other internal controls.10o
Throughout the common law world, case law concerning lawyer and law firm
responsibility in conflicts of interest cases also already sets out clear internal
procedures and controls that law firms need to follow if they want 'Chinese
walls' to be upheld.L01Similarly negligent liability has prompted much activity
in improving law firm internal quality management, especially in response to
97
See Christine Parker and Olivia Conolly, 'Is There a Duty to Implement a Corporate Compliance System in
Australian Law?' (2002) 30(4) Australian Business Law Review 275.
98
The management structures and socialisation processes of large f m s may actually 'provide ethical
obligations, expectations .. ., information channels and social norms' that are particularly well suited to
institutionalising responsibility within the firm: Bruce Arnold and Fiona Kay, 'Social Capital, Violations of
Trust and the Vulnerability of Isolates: The Social Organisation of Law Practice and Professional SelfRegulation' (1995) 23 International Journal of the Sociology o f l a w 321,339.
99
Elizabeth Chambliss and David B Wilkins, 'The Emerging Role of Ethics Advisors, General Counsel, and
Other Compliance Specialists in Large Law Firms' (2002) 44 Arizona Law Review 559. See also Robert
Nelson, 'Uncivil Litigation: Problematic Behaviour in Large Law Firms' (1996) 7 Researching Law 1 (on the
development of ethics committees, mentoring schemes and policies that decisions to take ethically uncertain
actions should always be approved by a senior lawyer in order to curb sharp practice among a firm's own
litigators); Richard W Painter, 'Rules Lawyers Play By' (2001) 76 New York University Law Review 665,732
(reporting that the New York provisions for discipline of law firms means that now 'fums are required to have a
policy for conflicts checks. Many law firms voluntarily adopt formal policies on issues like assumption of
corporate directorships, new clients and new matters, opinion letters, client conflicts, firm and personal
investment, firm audits and client funds, record retention etc')..
100
See, eg, Kim Cull, 'Ethics and Law as an Influence on Business' (2002) 40(9) Law Society Journal, 50-5 1
(President of New South Wales Law Society encouraging law firms to introduce 'ethics partners' and for the
legal profession to protect whistleblowers within the legal profession); John Cain, 'Good Ethics Requires
Constant Vigilance' (2002) 76(8) Law Institute Journal 4, Fergus Shiel, 'Push for Ethics Advisers at Law
Firms', The Age (Melbourne), 6 September 2002,7 and Katherine Towers, 'Ethical StandardsUnder Attack',
The Australian Financial Review (Sydney), 7 March 2003,56 (launch of a program by the Law Institute of
Victoria for law f m s to appoint 'ethics advisers' as a point of first contact for all solicitors in the fum with
ethical questions with the Law Institute providing ongoing training for the ethics practitioners). The fact that the
legal professional associations are responding to corporate scandals embroiling lawyers in this way may well be
empirical evidence that Chambliss' institutional argument (that organisations are motivated by a need for
cultural legitimacy and will therefore copy other apparently successful organisations) is correct -Australian
law firms may well be following the example of US law firms in putting these structures in place: Chambliss,
'MDPs' above n 41,56.
lo' See Prince JeJi.i Bolkiah v KPMG [I9991 2 WLR 215 (House of Lords) (finding that the court may look for
evidence of (a) physical separation of various departments in order to isolate them including separate dining
arrangements and other details; (b) recurring educational programs within the firm that emphasise the
importance of not improperly or inadvertently divulging confidential information; (c) Strict and carefully
defined procedures for crossing walls and records when it does occur; (d) monitoring of effectiveness of the
wall by compliance officers; (e) disciplinary sanctions imposed on staff who breach the procedures). Cited
approvingly in WorldMedical Manufacturing Corp v Phillips, Orrnonde & Fitzpatrick Lawyers (2000) VSC
196 (Unreported,Gillard J, 18 May 2000).
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Law Firms Incolporated
encouragement and incentives to do so provided by insurers.lo2Certainly many
firms have implemented quality assurance programs mainly in an attempt to
avoid or manage malpractice liability.lo3In the UK Greenebaume's summary
of the direct of legal professional regulation has a distinctly meta-regulatory
flavour:
the direction is to delegate to law firms authority and responsibility to
develop goals and strategies for developing and maintaining practice quality
and client care .. . leaving to the Law Society the maintenance of baseline
standards and requiring the Society's complaints mechanisms to step in only
in instances of system breakdown. Evidence of this approach may be found in
the Society's authorizing firms to maintain in-house continuing education
programs and maintain records of solicitors' compliance with CPD
requirements, in The Law Society's Solicitors' Practice Rules, Rule 15 to
establish systems of complaint of which clients must be appropriately
informed, in a new scheme regulating firms taking trainee solicitors in
training contracts, and in the Society's encouraging firms to establish systems
of quality maintenance.lo4
B Australian Model for Ethical Meta-Regulation of ILPs
The Australian legislative provisions for ILPs are significant because they do not
merely allow for legal practices to incorporate as companies. They attempt to
engage with the business and organisational aspects of lawyering by metaregulating law firm management of professional responsibilities. This subsection sets out those requirements and the following one assesses them.
Each ILP is 'required to have at least one legal practitioner director' who is (for
the purposes of the legal profession legislation only) 'responsible for the
management of the legal services' provided by the 1~p.l'' It is the legal
practitioner director's role to make sure that the company, its directors and its
employees comply with all their legal and professional obligations in relation to
the carrying on of legal practice. Importantly for the argument in this paper, they
must also ensure that there are 'appropriate management systems' in place to do
so. Thus, according to the legislation, the legal practitioner director:
102
Ronwyn North and Peter North, Managing Client Expectations and Professional Risk (1994); Schneyer,
above n 27,272-275.
103
GE Dal Pont, Lawyers' Professional Responsibility in Australia and New Zealand (2001) 63-68; A Lockley,
The Pursuit of Quality: A Guidefor Lawyers (1993).
104
Edwin H Greenebaum, 'Development of Law Firm Training Programs: Coping With a Turbulent
Environment' (1996) 3 International Journal of the Legal Profession 3 15,32&1.
105
Legal Profession Act 2004 (Qld) s 92(1H2); Model Laws s 1309(1)-(2). In NSW, they are 'solicitor
directors': s 47E Legal Profession Act 1987 (NSW). The Queensland, Model Laws and New South Wales
provisions are each cited throughout this discussion. The Queensland and Model Laws provisions are essentially
the same. The New South Wales provisions differ slightly. The Western Australia and Northern Territory
provisions follow the Queensland and Model Laws model (and are not cited here).
(2004) 23 The Universityof Queensland Law Journal
must ensure that appropriate management systems are implemented and
maintained to enable the provision of legal services by the practice (a)
(b)
under the professional obligations of Australian legal practitioners and
other obligations imposed under [the legal profession legislation and
regulation]; and
so that the obligations of the Australian legal practitioners who are
officers or employees of the practice are not affected by other officers
or employees of the practice. lo6
and
If it ought to be reasonably apparent to a legal practitioner director of an [ILP]
that the provision of legal services by the practice will result in breaches of the
professional obligations of an Australian legal practitioner or other obligations
[imposed by legal profession regulation], the director must take all reasonable
action available to the director to ensure that (a)
(b)
the breaches do not happen; and
if a breach has happened - appropriate remedial action is taken in
relation to the breach.lo7
It is the legal practitioner director, and not the ILP as an entity, who is liable for
disciplinary action if the provisions quoted above are breached. Moreover the
legal practitioner director can also be liable for disciplinary action for:
(a)
disciplinary breaches by any legal practitioners employed by the ILP;
(b)
conduct of another director of the ILP, who is not a legal practitioner,
that adversely affects the provision of legal services by the practice;
(c)
the unsuitability of another director of the ILP, who is not a legal
practitioner, to be a director of a corporation that provides legal
108
services.
The New South Wales Act (alone of the States) also provides that it can be
professional misconduct for a solicitor-director to remain as a director if it
becomes apparent that the ILP's provision of legal services will result in
breaches of the professional obligations of solicitors or other obligations
~ New South Wales addition signals something
imposed under the ~ c t . "This
important about the way these provisions might operate in practice. In any
particular case it seems unlikely that a solicitor-director would actually be held
106
Legal Profession Act 2004 (Qld) s 92(3); Model Laws s 1309(3).Similarly, Legal Profession Act 1987
(NSW) s 47E(3).
'07 Legal Profession Act 2004 (Qld) s 93(4); Model Laws s 1309(4).
log Legal Profession Act 2004 (Qld) s 93; Model Laws s 1310. Similarly,Legal Profession Act 1987 (NSW) s
47E(3)-(4).
'09 Legal Profession Act 1987 (NSW) s 47E(4).
Law Finns Incorporated
372
liable for the conduct of employed solicitors, because this would not fit very
well with the disciplinary system's usual requirement that a practitioner only be
responsible for misconduct where 'there is an element of wilfulness or at least
reckless disregard of the consequences'. lo Nevertheless, as Steve Mark (New
South Wales Legal Services Commissioner) points out, the provisions are really
designed to help the solicitor-director take a strong ethical stance in decisionmaking on the board of directors. The New South Wales provision gives the
solicitor-director a sound basis for threatening to resign if appropriate decisions
and actions are not taken.' l1 The solicitor-director's resignation would mean that
the company would need to find another solicitor-director very quickly, or no
longer be able to engage in legal practice. Therefore the provisions can be used
to somewhat increase the solicitor-director's bargaining power in board
decision-making about matters (and internal systems) affecting the firm's ethical
performance, making it (at least a little) less likely that ethical concerns are overridden.
'
The various regulatory requirements on ILPs and their officers are to be
supervised and enforced by the ordinary professional conduct regulators (such as
the Legal Services Commissioner, Legal Practice Tribunal, and self-regulatory
professional associations). These regulators are given powers to audit the
compliance of ILPs, their officers and employees with their regulatory
obligations, as well as their management of the provision of legal services
(including the way they supervise officers and employees). These audits may be
conducted whether or not a complaint has been made about the ILP's provision
of legal services. They may be taken into account in disciplinary proceedings
against a legal practitioner director or other persons, and in decisions about the
grant, renewal, amendment, cancellation or suspension of a practising
certificate.' l 2
In Queensland and in the Model Laws (but not in New South ~ a l e s ) ' the
' ~ ILP
is responsible (ie penalties are available against the entity) for giving the Law
110
Mark, above n 41, 1205. Consider also the clause which states that the lawyer-director must '. .. take all
reasonable action available to the director ...' to prevent breaches of professional obligations. This phrase
seems unlikely to lead to successful prosecutions for failure to act because of the scope for arguments as to the
meanings of 'reasonable and 'available'.
"I Ibid.
112
Legal Profession Act 2004 (Qld) s 107; Model Laws s 1322;Legal Profession Act 1987 (NSW) ss 470,47P.
Note that there is no provision for the ILP as an entity to have or need a practising certificate, only individuals
who provide legal services.Provision is also made in the legislation for cooperation between the general
corporate regulator, the Australian Securities and Investments Commission, and the legal profession regulators.
The legal profession regulators generally only have authority in relation to professional obligations: see Legal
Profession Act 2004 (Qld) s 110; Model Laws s 1326.
113
There is no provision under the New South Wales Act to give notice before engaging in legal practice, but
the regulations seem to assume that in practice the Law Society will require it. The New South Wales
legislation does put a number of obligations on ILPs but does not provide for any penalties against ILPs. The
only possibility of a penalty would be under s 47P which allows a review of compliance by the ILP with the
requirements of Act. But this only has effect for disciplinary proceedings under Part 10 and Part 10 is only
relevant to individual practitioners. See Mark, above n 41, 1204 (pointing out that the rules appear to place
restrictions on MDPs and ILPs themselves but there is no provision for them to be regulated or disciplined as
firms). Note that the New South Wales provisions being the earliest, probably do not represent the 'best
practice' of the later provisions in the Model Laws and other State legislation.
(2004)23 The University of Queensland Law Journal
373
Society notice of its intention to engage in legal practice, not representing or
advertising that it is an incorporated legal practice unless notice has been given,
having a legal practitioner director as required by the legislation, and not having
a legal practitioner director who is a disqualified person.'14 The sanctions for
failure to have appropriate management systems in place to ensure compliance
with professional responsibilities, as well as responsibility for any misconduct
that does occur, all fall onto the legal practitioner director as an individual and
any other legal practitioner personally involved in the on duct.''^ The only
sanction available against the firm for failure to have appropriate management
systems in place or for substantive breaches of professional responsibility
requirements is the possibility that the relevant Supreme Court can disqualify a
corporation from providing legal services in the jurisdiction. The Court can also
disqualify a particular person from managing an ILP. l 6
C Limitations of the Australian Model
The Australian ILP provisions are certainly a step in the right direction in
requiring (incorporated) law firms to have management systems for ensuring
compliance with professional responsibility obligations and a designated person
or persons responsible for the system. However there are at least three main
limitations to the approach set out in the Australian legislation and its likely
operation in practice. These limitations are relevant not only to regulation of
incorporated legal practices, but also to the potential use of this model in
regulating all law firms and other organisations in which legal services are
provided.
Firstly, the current provisions continue to focus too narrowly on individual
responsibility at the expense of entity responsibility.l17 An incorporated legal
practice will be effectively unaccountable for professional disciplinary purposes,
as an entity.' (Ironically, however, the incorporation of a law firm will make it
possible for general business regulators such as the Australian Competition and
Consumer Commission or Australian Securities and Investments Commission,
'*
114
Legal Profession Act 2004 (Qld) ss 89,90,94, 106 and Model Laws ss 1306, 1307, 1311, 1321.
In as much as the Australian legislative provisions put responsibility on an individual practitioner to have in
place appropriate management systems, they are consistent with Chambliss and Wilkins' recommendations for
law firm regulation to require firms to have inhouse compliance specialists: Chambliss, 'MDPs' above n 41;
Chambliss and Wilkins, 'A New Framework for Law Firm Discipline' above n 5. However these provisions go
considerably fh-ther than Chambliss and Wilkins in requiring that person to have a certain status -director and to be liable in disciplinary proceedings for failures.
116
Legal Profession Act 2004 (Qld) ss 108, 109; Model Laws ss 1324, 1325.New South Wales does not have
such provisions.
117
As described above, the ILP as an entity is generally only responsible for appointing a legal practitioner
director, not for professional conduct breaches or for having an appropriate management system in place: see
above n 114.
118
The Western Australia Professional Liability Committee thought that ILPs should be licensed as entities
'because licensing would allow for the disciplinary authority (the Legal Practice Board), through reports to it
and investigations it could conduct, to learn about and act quickly against such matters as practice cultures that
caused systematic failures in proper service': Law Society of Western Australia Position Paper [ l 1.121. This
model was rejected in WA in the interests of remaining consistent with New South Wales and other
jurisdictions in Australia. See Law Society of Western Australia, Professional Liability Committee, Freedom of
Practice Subcommittee, Report to the Full Committee (1998)
<http://www.lawsocietywa.asn.au/pl-cornmi at 14 June 2004.
11s
374
Law Finns Incorporated
to prosecute the law firms as entities.'19) The new ILP regime is aimed at
appropriate management of law firms, but responsibility rests almost solely on
an individual - the practitioner-director - who is made personally responsible
for any management failures. This is consistent with the profession's traditional
insistence that good professional ethics are essentially a matter of individual
moral character.120 The requirement for a legal practitioner director who is
responsible for the misconduct of other directors and employees could be read as
an attempt to mimic the partnership structure of individual partners being liable
for each others' breaches. The focus on individuals is apparently seen as
necessary in order to make an ILP as an entity fit into the regulatory system
governing legal professionals as individuals without having to change the
current regulatory system and its underlying philosophy too much.121Even Steve
Mark, the New South Wales Legal Services Commissioner, and therefore the
regulator with the most experience of regulating ILPs, states on the one hand
that complaints should be able to be lodged and accepted against firms not just
individual practitioners, but still says that he agrees in principle with the
proposition that the focus of regulation should be on the conduct and standards
of individuals not business structures.122
It seems odd that there is no possibility for a penalty against the ILP as a whole,
even where inappropriate management systems might contribute to professional
misconduct by practitioners. Consider one of the very few cases in which a law
firm as an entity has been disciplined. Mills Oakley, a medium-sized Victorian
incorporated law firm, was fined $40 000 (with seven of its partners fined $10
000 each in addition) for late payment of barristers' fees.12' The money for the
barristers' fees had been collected from clients and paid into the firm's office
account instead of the trust account, and then only paid out to the barristers
when it suited the firm's cashflow, a clear breach of trust accounts regulation.
Reportedly, 'the managing partner of Mills Oakley gave instructions that the
payment of creditors - including barristers - be delayed after pressure from
119
In 2003 the Australian Competition and Consumer Commission (ACCC) took enforcement action against an
incorporated law firm in the Northern Territory for allegedly misleading and deceptive billing practices that
resulted in overcharging: ACCC, 'ACCC Takes Action Against Lawyers for Alleged Misleading Conduct in
Relation to Fees' (Press Release, 1 July 2003).
120
The main way the profession ensures good moral character among its practitioners is to make sure they go
through a long period of training and socialisation into the profession before admission: See Christine Parker,
'Regulation of the Ethics of Australian Legal Practice: Autonomy and Responsiveness' (2002) 25 Universiq of
New South Wales Law Journal 676; Wilkins, above n 82.
121
The Australian Model Laws and state legislation are all based on the principle that ethics should not be
regulated by prohibiting certain business structures to lawyers, but by regulating individual practitioners see
above n 18. The Law Council of Australia states that: 'In accordance with the hdamental tenet of the Law
Council's policy that regulation of legal practice should focus on ensuring that individual lawyers comply with
ethical standards and professional duties rather than on the regulation of business entities, the Law Council does
not support the separate licensing of incorporated legal practices, but considers that the regulatory regime
should be directed to individual lawyers': Law Council of Australia, Policy Statement on Lawyers 'Business
Structures, principle 12.
122
Mark, above n 41, 1206 and 1204 respectively. This is because of the difficulties of defining when law firms
should be responsible in disciplinary proceedings as entities. In other words it is because of the lack of fit
between entity responsibility and the traditional disciplinary approach.
123
Mills Oaklq Lawyers Pty Ltd (Unreported, Legal Profession Tribunal, Victoria, 3 1 October 2003) (charge
referred by Victorian Lawyers RPA). Law firms as entities can be disciplined in Victoria.
(2004) 23 i%e University of Queensland Law Journal
375
the banks to reduce its overdraft and the introduction of [a new high profile]
salaried partner."24 These are precisely the sort of commercial pressures and
temptations that we might expect law firm management to come under, and even
more so where the firm is incorporated or has non-practitioner members who
may not fully understand the onerous duties on solicitors to swiftly deposit client
money in trust accounts and send it on to the rightful place. In a situation like
this, where the management of the firm initiates or concurs in the wrongful
conduct, it is very appropriate to be able to sanction both the individual partners
involved and the whole firm, since the management and practices of the firm as
a whole were at fault. In general the corporate entity, non-lawyer directors and
the legal practitioners in an ILP should all be mutually responsible for making
sure each other comply.
In Queensland one of the factors that led to the current reforms to regulation of
the legal profession (including incorporated law firms) was the billing practices
of a whole firm, Baker and Johnson lawyers. These were said to include
overcharging, misleading 'no win, no fee' agreements and the provision of legal
services by inappropriate and unqualified people. Firm management practices
relating to billing, costs agreements and supervision of staff must have been at
least partly to blame for this misconduct in addition to the unethical conduct of
at least one member of the firm who was subsequently suspended from
employment in legal practice (for falsely holding himself out as a qualified
soli~itor).'~~
In his report on the Law Society's mishandling of the matter the
Ombudsman commented that 'there is a need to identify where a complaint is
similar in nature to previous complaints about the same Jirm.'lZ6 But in the
reforms firms have not been made subject to disciplinary action.
Surely one potential outcome of any disciplinary investigation of misconduct
within a firm or ILP ought to be the possibility that the entity as a whole will be
held accountable if its structures encouraged any misconduct that occurred.127
124
Katherine Towers, 'Case highlights issue of late pay', The Australian Financial Review (Sydney), 12
December 2003,5 1.
125
In the Matter of Dean Phillip B m (Unreported, Solicitors Complaints Tribunal, 10-12 March, 19-2 1 May,
27 June and 17 September 2003). A partner of the firm had previously been struck off for witnessing a
backdated Deed of Loan and Bill or Mortgage and making false representations about their dates at a meeting of
creditors: Queensland Law Society v Craig Stephen Bax [I9991 2 Qd R 9. See also Baker Johnson v Jorgensen
[2002] QDC 205 (26 July 2002) in which the magistrate had described the same firm's attempts to recover costs
against a 'no win, no fee' client as 'misleading and inequitable and bordering on unconscionable' (at [2]).
126
Legal Ombudsman, The Queensland Law Society and Baker Johnson Lawyers (2002) 6; emphasis added.
127
In contrast to Chambliss and Wilkins I am arguing that law firms as entities ought to be accountable not
merely for whether they have internal controls in place regardless of whether misconduct occurs, but also for
not having appropriate controls in place where that failure contributed to the misconduct: Chambliss and
Wilkins, 'A New Framework for Law Firm Discipline' above n 5 (arguing that all that should be required at
present is designation of an in-house compliance specialist 'to be responsible for monitoring the quality of the
firm's ethical infrastructure; and that firms be encouraged to compensate partners directly for this service' at
345; and 'even token compliance would provide a significant impetus for the development of meaningful inhouse compliance efforts by firms7at 350). Note also Elizabeth Chambliss and David B Wilkins, 'Promoting
Effective Ethical Infrastructure in Large Law Firms: A Call for Research and Reporting' (2002) 30 Hofstra Law
Review 69 1 (arguing for greater research on effectiveness of internal ethical controls in law f m and reporting
of controls put in place both by individual law f m s and at an aggrcgatc level). However I agree with
Chambliss and Wilkins' reasoning that failure to put in place appropriate systems is distinct from and prior to
misconduct occurring. The difference in approach may be one of timing. It may well be appropriate, as
Chambliss argues, to take a gentle approach in the first instance to requiring such internal controls. However,
376
Law Firms Incorporated
This puts an incentive on non-practitioner directors, employees, and even
investors,128to ensure an appropriate ethical infrastructure is in place. Perhaps it
may be considered too onerous on the corporation to impose such obligations.
However it is normal that any business face various specific regulatory
requirements (on the firm as an entity and sometimes on individual officers and
employees as well), some relating to generic things like environmental
protection, occupational health and safety and consumer protection, others
relating to specific areas of business such as consumer health for pharmaceutical
companies or employee safety for mining companies. Why should a corporation
(and its officers) that provides legal services not have a special regulatory
responsibility-for ensuring it does so in compliance with legal and ethical
standard^?'^^ Indeed, it could equally be argued that it is unduly onerous to put
all the responsibility for law firm compliance with professional standards on an
individual legal practitioner director alone."' Why should only one person be
blamed or scapegoated for failures of firm management?
The second limitation of the Australian legislation is the danger that although the
legislation provides that 'appropriate management systems' should be in place,
in practice this will not be checked because the legal profession regulators lack
resources and expertise to do so. Nor might it be capable of being adequately
checked since neither the legislation nor 'best practice' sets out clear standards
for those systems.131The advantage of the Australian provisions is their
flexibility in not requiring any particular management structures (apart from the
legal practitioner director) - firms are free to develop those systems that are
appropriate to their management structure and business."* But the regulatory
once internal controls are established, it is illogical not to hold firms responsible for misconduct (together with
individuals involved) where they have not established internal controls and that failure contributed to the
wrongdoing: see Valerie Braithwaite, 'The Australian Government's Affirmative Action Legislation: Achieving
Social Change Through Human Resource Management' (1993) 15 Law & Policy 327 for an example of a
successful staged approach to introducing a requirement for internal corporate compliance controls for equal
employment opportunity.
128
See Schneyer, above n 5,25 for support for the following proposition: Where law firms are incorporated,
then making the firm a target for regulation and discipline helps to overcome the potential conflict between
shareholders interests and ethical duties of legal practice by essentially giving shareholders the same interests
(ie the firm they own will suffer if ethical duties are not followed and therefore their profits will suffer).
129
Assuming that some concept of justice is the basis for legal ethics and professional conduct obligations:
Most legal ethicists would agree with this assumption, although they have competing views as to what it means:
see, eg, David Luban, Lawyers and Justice: An Ethical S t u 4 (1988); William Simon, The Practice of Justice: A
Theory of Lawyers ' Ethics (1998). See also Christine Parker, Just Lawyers: Regulation and Access to Justice
(1999) ch 5 and Christine Parker, 'A critical morality for lawyers: Four approaches to legal ethics' (2004)
Monash University Law Review forthcoming.
130
The legal practitioner director anecdotally can be referred to as the 'victim-director'. Steve Mark, New South
Wales Legal Services Commissioner, has commented that he has been told one reason why many f m s have
not incorporated in New South Wales is that it has been considered too difficult to find someone willing to take
on the heavy risk and responsibility of legal practitioner director: Interview with Steve Mark (Private
communication, 3 1 August 2004).
l3' Legal practitioner directors and their firms will themselves want some clarity about what they need to do to
comply with the requirements of the legislation (even if it is only in the form of flexible best practice standards,
rather than legislative prescription).
132
Chambliss and Wilkins argue that it is better to simply require law firms to designate an in-house specialist,
rather than requiring the firm as an entity to put in place specific internal controls, since there is 'little prospect
of defining structural standards that make sense for all firms' given variation in size, structure, management
philosophy, area of practice and jurisdiction. They also point out that since discipline is mostly reactive to
complaints and enforcement resources are limited, it is unrealistic to expect legal profession regulators to have
(2004)23 fie University of Queensland Law Journal
377
system for ILPs, particularly where the ILP is multidisciplinary (and hence
many of the individuals involved are not amenable to legal professional
discipline), relies on the idea that regulators will be able to audit firm
compliance (including implementation of appropriate systems). This audit can
have an impact on the disciplinary liability of the legal practitioner director, and
I have argued above that it
whether the firm is allowed to stay in busine~s."~
also ought to have an impact on the liability of the ILP itself to discipline, indeed
that such responsibility should be spread to all law firms.
In practice the New South Wales Office of the Legal Services Commissioner
(OLSC; the independent regulator of the legal profession in New South Wales)
is now beginning to check ILPs' management systems. For the first couple of
years that the ILP regime was in place in that State, neither the OLSC nor the
self-regulator, the Law Society, audited ILP compliance with the rules.134
Throughout February 2004, however, the OLSC asked all solicitor-directors to
undertake a self-assessment of the management systems in their practices. Those
which held a recognised quality management certification would automatically
satisfy the assessment.135Others would have to rate their compliance (on a five
point scale from 'non compliant' to 'fully compliant plus') with 10 objective^,'^^
certify their responses (presumably sign off on them) and return them to the
OLSC."~Audits by the regulator himself would be triggered by events such as
'a referral from a Law Society trust account inspector, a failure to respond to the
request for self-assessment or ratings less than "compliant" on the selfassessment form.'13' Only six of the firms notified failed to return a selfassessment. These were audited. Of those who did return a self-assessment, a
significant number were honest enough to rate themselves as non-compliant
the resources and skills to review firm compliance systems proactively: Chambliss and Wilkins, 'A New
Framework for Law Firm Discipline' above n 5,345.
'33 But on the perils of attempting to audit compliance: see Christine Parker, 'Regulator-required Corporate
Compliance Program Audits' (2003) 25 Law & Policy 22 1.
134
According to Steve Mark, New South Wales Legal Services Commissioner, this was because it took that
long for his office to consult with the other stakeholders to agree a set of acceptable standards for the audit of
firms: above n 127.
135
Up to early 2004 it seems that a local law firm specific quality management accreditation,known as QL
certification (and developed by Lawcover), had been the dominant form of quality management certification
for law firms in New South Wales, although others were available. In October 2003 it was announced that QL,
the Law Society, and the College of Law were all working with SAI Global (the main Australian
standardisation global) to develop a national, law firm specific IS09000 third party independent certification
scheme for law firm quality management: See SAI Global, News Release: New national standards to raise
legal practice management standards: Release No: 00/07 (2003) <http://www.saiglobal.corn/assuranceservices/certificatioLaw9000/> at 21 July 2004). The QL system required only a selfassessment which was reviewed by a third party evaluator. The new certification requires a third party audit of
the management system and follow-up surveillance audits, as well as internal (selQ audits. For discussion of
these certifications in context of regulation of ILPs in New South Wales see Teny Pwcell, 'Management
Systems for Your Incorporated Legal Practice' (2001) 39(2) Law Society Journal 46-48.
136
See n 141 and accompanying text.
137
The Ofice of Legal Services Commissioner 'Self-assessment and Audits for Incorporated Legal Practices'
(February 2004) Without Prejudice 1-2. See also
<http://www.lawlink.nsw.gov.au/olsc1.nsf/pages/incorporation> at 20 April 2004.
138
Ibid 2. Steve Mark, New South Wales Legal Services Commissioner, has also stated that just because a fm
filled in a self-assessment does not mean they will not be audited. Apart from the triggers quoted in the text,
they might also be audited if there were a newspaper article or other information that indicated there might be a
problem: above n 127.
Law Firms Incorporated
thereby giving the regulator the opportunity to work with them to improve their
compliance level. 39
'
The OLSC sees this as 'education for
However the standards for
the audit of required management systems are ethically thin. At best a quality
management system may help an ILP or other law firm ensure that consumer
service standards are kept up where the temptation is to short cut on customer
service in order to make more profit. But it does not deal with the situation
where the temptation is to pander to a client who is willing to pay handsomely at
the expense of duties to the Court or the community. The focus is on defining
and meeting client needs and e ~ ~ e c t a t i o n s .If' ~the
' firm does not have a quality
management certification, then it is required to self-assess on ten areas:
negligence, communication, delay, lienslfile transfers, cost disclosure/billing
practicesltermination of retainer, conflicts of interest, records management,
undertakings, supervision of practice and staff, and trust account regu1ati0ns.l~~
Again these ten objectives are all focused on quality assurance for customer
service, not fblfilling those duties to the court, the administration of justice and
the public that go with the provision of legal service.143One has only to consider
the Foreman and McCabe case studies to see how ethically dangerous this
approach can be. In Foreman, the firm's uncompromising policies on costs
disclosure and billing efficiency were surely consistent with quality management
certification standards, but were actually directed at charging clients as much as
possible and, through partners' accountability to the firm management,
effectively obligating the partners to do so. This contributed, at least in part, to
Foreman's misconduct. In the context of the conduct by lawyers in the McCabe
case and other tobacco litigation, the IS09000 requirement that firms 'identify
and implement processes required to ensure customer requirements are met from
initial instructions to customer satisfaction"" seems a ludicrously inadequate
approach to the ethical regulation of law firm behaviour.
139
Information about the results of the self-assessmentprocess from Steve Mark, above n 127.
Ibid.
Thus the law firm specific QL standard requires that firms need to '[ildentify client requirements through
engagement policy; document engagement procedures for acceptance of instructions, confirmation and
disclosure, variations, service queries and complaints; Adopt strategies to avoid conflicts of interest; Document
billings and credit policies and procedures; Document matter opening and closing procedures; Monitor client
satisfaction; Review client and work management strategies as a result of client feedback; Implement client
communication strategies; Adopt work management strategies to minimise risk and meet clients'
expectations... ' There are no requirements for meeting professional responsibility obligations owed to anyone
except clients although IS0 2000 (the Australian and New Zealand version of IS09000) does require firms to
'identify legal and regulatory requirements' as well as to '[ildentify and implement processes required to ensure
customer requirements are met fiom initial instructions to customer satisfaction.' See SAI-Global The
QL/Standards Australia (SAI) Collaboration Agreement, and the New Legal Profession Certification Scheme
(2003) <http://www.sai-global.com/assuranceservices/certification/Law9000/>
at 21 July 2004
142
See references at n 137. Website includes statement of 10 objectivesplus a more detailed self-assessment
document. The ten objectives were developed by the OLSC with the Law Society, LawCover (the insurance
provider), and the College of Law (which conducts the practical training course that all graduates must take in
order to become solicitors).
143
See Stephen Parker, 'Islands of Civic Virtue: Lawyers and Civil Justice Reform' (1997) 6 Grz@th Law
Review 1 (arguing for law firms to take responsibility for self-regulating sharp practice in litigation).
1 44
See above n 141.
I4O
141
(2004)23 The University of Queensland Law Journal
379
Third, the Australian provisions regulating ILPs specifically exclude fiom their
reach corporations that do not receive any form of fee for legal services
provided, corporations where the only legal services provided are in-house legal
services, and corporations where services provided do not require an Australian
practising certificate. Many lawyers already practise (with or without a
practising certificate) in corporations such as these (eg in business companies,
insurance companies, not-for-profit legal services organisations such as legal aid
commissions, and consulting and accounting firms). The provision of legal
services in these organisations is unregulated under the specific professional
responsibility regime, except to the extent that those individuals providing the
legal services have practising certificates. Presumably policy-makers did not
want the new ILP provisions to interfere with the status quo ante.
Yet the logic of the argument in this paper about the ethical dangers of legal
practice within business organisations would apply to legal practice in these
settings as much as to unincorporated law firm practice and ILPs. In a 1997
paper on MDPs, the Victorian Legal Ombudsman concluded that 'it is ultimately
possible to overcome all obstacles to MDPs' provided the provisions of the
legislation and conduct rules regulating the legal profession make it clear that
any legal services offered as part of a MDP are regulated by those regimes.145
That is professional responsibility regulation should apply to any situation where
legal services are provided and the definition of legal services should include
'services that include legal services'. This raises the question of whether and
how the provision of legal services by organisations other than law firms and
ILPs should be ethically regulated? A system that relies on the assumption that
most legal services are provided within the context of partnerships and ILPs that
are set up to engage in legal practice as their primary activity is likely to become
increasingly out of touch with the reality of legal practice. As I have argued
elsewhere, since all businesses interact with the law and justice system to a
greater or lesser extent, just as they impact on the environment, occupational
health and safety and consumers, why not build into their regulation specific
expectations about how they should do so justly that covers the obligations of
both lawyers and non-lawyers?146
To ask whether ILPs should be allowed or prohibited is to ask the wrong
question. The ethical objections to ILPs and MDPs are certainly convincing. But
they ought to convince us to take seriously the institutional (business and
organisational) dimensions of legal practice, no matter whether those practices
145
Legal Ombudsman Victoria, Discussion Paper: Multi-dzsciplina~Practices ( 1 997) 15-1 6. Note that this
report also included that it actually may be easier to appropriatelyregulate MDPs if they were incorporated than
if they were partnerships as it would be easy to place appropriate responsibilities on, and hold accountable, an
incorporated entity than a partnership. That way the provision of legal services by the entity could be regulated
with each individual professional continuing to be regulated by their own professional regulatory body.
146
See Christine Parker, Just Lawyers: Regulation and Access to Justice (1999) ch 8; Christine Parker, The
Open Corporation:Effective Self-Regulationand Democraq (2002) 227-233 (on a proposal for companies to
be required to have 'justice plans').
380
Law Firms Incorporated
are incorporated or not, and whether they are primarily aimed at providing legal
services or not. What ought to differentiate the ethics of legal professionalism
from other businesses and professions is the significance of the provision of
legal services to the practice of justice. We expect certain substantive values of
legal practice (adversarial advocacy, responsibility for the administration of
justice, promoting the public interest through law and care for people and
relationships) because of its relationship to justice, democracy and the rule of
law.147 Professional self-regulation, structuring practice via partnership and other
traditional distinctions of professional regulation are merely designs that, in the
past, were justified by the possibility that they might assist in ensuring that the
profession helped ensure justice. But the ethics of legal professionalism need not
be expressed only through a partnership structure. The traditional partnership
structure is already irrelevant to the ethical regulation of much legal practice.
Incorporation and the regulation of ILPs provides an opportunity to consider
how we might build appropriate values into contemporary practice settings. The
Australian regime for ILPs, although it has severe limitations, begins to
appropriately recognise the organisational features of firms. There is every
reason to treat it as a draft model for the ethical regulation of the organisational
context of all law firms.
In thinking about the ethics of legal practice, there is no justification for drawing
stark distinctions between what is a profession and business. Professional
practice is often a business, while for business ethicists, the goal is often to
encourage business to operate according to ideals and values that look more like
'professional' practices.148It is no use denying the fact that legal practices
engage in commerce. But it is worth working out how to institutionalise values
in legal practice that might operate as a bulwark against commercialism, which
is seeing profit as the only appropriate goal of legal practice. Rather than
worrying about how to make it look like we can separate the legal professional
from the corrupting influences of commerce, we might then go on to consider
how to spread those ethical standards that ought to go with the practice of law
into commerce, even where legal services have become totally immersed in
multidisciplinary consulting practice or business operations.
147
See my previous explanations of these values at Christine Parker, Just Lawyers: Regulation and Access to
Justice (1999) 85-107 and Christine Parker, 'A Critical Morality for Lawyers' above n 4.
148
Robert Gordon and William Simon, 'The Redemption of Professionalism' in Robert Nelson, David Trubek
and Robert Solomon (eds) Lawyers'Ideals/Lawyers'Practices:Transformations in the American Legal
Profession ( 1 992) 230.