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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 (Incolporated Legal 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 1 1. (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 1 E4CF96DCA256E85000958EO?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 for actual misconduct to which it has ~ontributed.~ Moreover the management 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 University Law 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 University of Queensland Law Journal 349

Tobacco Australia Services ~td, ' 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 cond~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 practice7 is 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). l3 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 'non- lawyer ownership and participation7 in legal practice to refer to MDPs as well as sharing profits with non- lawyers.


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~cer of 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 multi- state, and even multi-national, partnerships.15 For 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. '

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l4 From a 19 10 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 Minister for Financial Sewices and Regulation and the Commonwealth, State and Territory Attorneys-General on Federal Professional Standards Legislation (2000) 9-1 0 <http://www.lawcouncil.asn.au/get/policies/l96058 1 10711 > at 17 November 2004. Since then,

(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 Report (1998) < http://www.lawlink.nsw.gov.au/report%5Clpd~reports.ns~pages/ncpf~toc~ at 17 November 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.


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 other principals of the firm is not ~ l e a r . ~ ' Similarly, in Singapore, all shares in a 'law corporation7 must 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 1 lth Malaysian Law Conference, Kuala Lumpur, Malaysia, 8-10 November 2001) available at <http://www.mlj.com.my/free/articles/c~ at 8 June 2004. 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 Framework for Legal Services in England and Wales: A Consultation Paper (2004) <http:llwww.legal-services-review.0rg.u W 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, 148- 162 ('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 1 1.


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 to adopt some of the characteristics of incorp~ration.~~ In the US and Canada, 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.27 In 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.28 Neither 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 non-lawyer shareholders and directo~-s.29 The Model Laws also provide for incorporated legal practices, following the same model as Queensland and the other states.30 These 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 = 100 1 654> 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' (1 3%) 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.


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.34 One 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.35 With 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 especially American 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 documentation processing 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.


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 it's what we all have to d ~ ' . ~ ~ This type of institutional pressure is likely to be 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.38 Nevertheless, the growth of lawyering in large firms and other organisations, by contrast, is overwhelmingly the most significant development in contemporary practice.39 Apart 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 non- restricted 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.42 The management structure of ILP will break

36 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 1 5. 40 According to the Law Society of New South Wales, Statistics (January 2004) <http://www.lawsociety.com.au/uploads/files/l0739684273 12-0.141 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 University Law 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 Vanderbilt Journal of Transnational Law 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, 29 October 2002) <http://www.lawlink.nsw.gov.au/sc/sc.nsflpages/spigelman~041102> at 13 June 2004. 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)

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 non- practitioner 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-director to the court and to clients will inevitably conflict with the duty of a solicitor-director to 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-directors which 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


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.46 In particular there may be difficulties with adequate safeguarding of obligations to avoid client-client conflicts and to safeguard client confidentiality and client legal privilege.47 On 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.

111 LAW FIRM ETHICS ARE 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.pd at 17 November 2004; Steven Mark, 'Harmonization or Homogenization? The Globalization of Law and Legal Ethics - An Australian Viewpoint' (2001) 34 Vanderbilt Journal of Transnational Law 1 173, 1 197 (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 Structures for Lawyers (1 999) <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 1 18, 1 19 Evidence Act 1995 (Cth); Esso Australia Resources Ltd v Federal Commisioner of Taxation (1999) 20 1 CLR 49.


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 caseS0 illustrates 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.


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 fee- charging 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 n ~ ' . ~ ~ However this aspect of the case was dropped,56 and there would have been no basis to take

52 Ann Daniel, 'Chapter Four: The Cost of Justice' in Scapegoats for 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


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,58 professional 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 Minister for 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 (1 991) 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), 1 1 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,


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 (199 1 ) . 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.


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 d . ~ ~ at 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. 64 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 Wales Law 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 contemplation should be considered unlawful: See Camille Cameron and Jonathon Liberman, 'Destruction of Documents Before Proceedings Commence: What is a Court to Do?' (2003) 3 Melbourne University Law 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 Civil Litigation in Victoria (2004) <http://repositories.cdlib.org/context/tc/article/115O/type/pdf;/viewcontent> at 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.


duty to the court, was likely a consequence of the law firm's closeness to and financial dependence on its client.69 As 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.72 It 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 Tobacco Australia 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, 1953- 1971 ' (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 Tobacco Australia 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


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 lawyers7 duties to the court and the public interest were adulterated by lawyer participation in and identification with client goals.

D The Business and Organisational Aspects 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~an i sa t i ons .~~ Organisations 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 individualheam that 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-Regulation and Democracy (2002) 3 1-37. The following comments summarise this material.


order to balance work and family, or meet work expectations.77 People 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.79 Psychologists 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 Corporate Managers (1988); David Ermann and Robert Lundman (eds) Corporate and Governmental Deviance: Problems of Organisational Behavior in Contemporary Society (1 996). 78 See David Luban, 'Integrity: Its Causes and Cures' 72 Fordham Law Review (2003) 279. 79 See Mark Bovens, The Quest for 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 Call for Renewal (1 994). 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' (1 98 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).


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.84 Commentators 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.86 Indeed 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.87 Many 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~an i sa t i ons .~~ Similarly 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' (1 983) 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-Regulation and Democracy (2002).


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.90 Regulators 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 Wihns 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. 90 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 (1 988); Chnstopher Stone, Where the Law Ends: The Social Control of Corporate Behaviour (1 975).

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 Analysis7 13 Bond Law Review (200 1) 1, 13 (Table 3). 92 See Parker, above n 88. The 'open corporation' is internally responsible for its own actions through self- management, yet externally accountable through 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.


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 LAW FIRM RESPONSIBILITY FOR ETHICS

A 'Meta-Regulating ' Law Firm Ethics

The analysis in the&previous section 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.96 In 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 (1 999) 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 compliance with 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 f ie 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.98 Chambliss and Wilkins' empirical research on the evolution of in-house compliance specialists (including law firm general counsel, loss prevention and risk management partners, and in- house 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.L01 Similarly 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 Self- Regulation' (1995) 23 International Journal of the Sociology o f law 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 Standards Under 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 World Medical Manufacturing Corp v Phillips, Orrnonde & Fitzpatrick Lawyers (2000) VSC 196 (Unreported, Gillard J, 18 May 2000).

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encouragement and incentives to do so provided by insurers.lo2 Certainly many firms have implemented quality assurance programs mainly in an attempt to avoid or manage malpractice liability.lo3 In 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 meta- regulating law firm management of professional responsibilities. This sub- section 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 Guide for Lawyers (1 993). 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).


must ensure that appropriate management systems are implemented and maintained to enable the provision of legal services by the practice -

(a) under the professional obligations of Australian legal practitioners and other obligations imposed under [the legal profession legislation and regulation]; and

(b) 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) the breaches do not happen; and

(b) 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 imposed under the ~ c t . " ~ This New South Wales addition signals something 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 13 10. Similarly, Legal Profession Act 1987 (NSW) s 47E(3)-(4). '09 Legal Profession Act 1987 (NSW) s 47E(4).

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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 decision- making 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 over- ridden.

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.' l2

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.


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, 131 1, 1321. 11s 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 (1 998) <http://www.lawsocietywa.asn.au/pl-cornmi at 14 June 2004.

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.121 Even 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, 10-1 2 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 in- house compliance efforts by firms7 at 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,


This puts an incentive on non-practitioner directors, employees, and even investors,128 to 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.131 The 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 tu4 (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 whether the firm is allowed to stay in busine~s."~ I have argued above that it 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.135 Others 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 self- assessment form.'13' Only six of the firms notified failed to return a self- assessment. 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.sai- global.corn/assuranceservices/certificatio Law9000/> at 21 July 2004). The QL system required only a self- assessment 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/olsc 1 .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~~ectat ions . '~ ' 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.143 One 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-assessment process from Steve Mark, above n 127. I4O Ibid. 141 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 objectives plus 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.


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 appropriately regulate 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-Regulation and Democraq (2002) 227-233 (on a proposal for companies to be required to have 'justice plans').

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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.148 It 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.