Has passivity contributed to the rise of corrupt lawyers?

When China – one of the world’s biggest economic powers – applied to join the World Trade Organisation (WTO), it had to promise it would carry through root-and-branch reforms of its laws and legal systems before it was considered eligible to join.

Like it or not, the WTO coalesces national sovereign and private mercantile interests, and it has unparalleled influence. What the WTO’s members say really counts.

The demand, made and accepted in 2001, was that China apply and administer in a uniform, impartial, and reasonable manner all its relevant laws, regulations, and governmental measures. Its requisite tribunals must be impartial and independent of concerned agencies of the executive or other parties. China would commit to systemic reforms that would promote transparency, predictability and fairness in business dealings.

The US Senate Finance and House Ways and Means Committees asked the US General Accounting Office (GAO) to monitor China’s implementation of its WTO commitments. A preliminary report was given by the GAO to the Congressional Executive Commission on China in mid-2002. The rule of law, and the new WTO member’s aspirations with regard to it, were the focus. US businesses considered it very important – especially as the actual characteristics of the current Chinese legal system included subordination of law to Communist Party policy and a lack of independence of the courts.

Also reported were the “challenges” – a synonym for difficulties and obstacles – conceded by some Chinese officials consulted by the GAO. This was alongside the detected considerable progress, “on paper”, in China’s efforts to render its legal system WTO compatible. But the progress was not just on paper. As a climax of its testimony to Congress, the GAO concluded what really showed China’s substantial shift toward a rule-of-law oriented society was the recent proliferation of law schools and legal training. There would be more lawyers, in the service of business, through a sound system of justice. “Lawyers and money” is not only a chapter heading of the most cutting part of a New Yorker-style book of jokes and cartoons.

The next early 21st-century occasion for reflection on lawyers and money flows from domestic US financial scandals. The spectacular rort at Enron was merely the example of a “supposed mischief” best known to the general public. “A supposed mischief?” It wasn’t the spectacle of big business using clever accounting and innovative so-called financial products or structures that spurred the United States Congress to action. No, it was the perception of crimes and frauds – telling lies when asked to show someone the money.

And at the heart of the Congress response to the excesses of capitalist greed was a special whistleblower role for the lawyers of possibly delinquent business clients – that is, clients reasonably suspected by their own lawyers of breaking legal standards concerning corporate securities. This is not an exotic foreign frolic – it clearly has influenced the various legislative suggestions afoot now in this country.

Just as the WTO demands on China as a new member show the country’s burgeoning attachment to an internationalised concern, so too the US Sarbanes-Oxley Act of mid-2002. Governments friendly to business, at least that of their own nationals, and willing to trade reciprocal standards with other governments, are clearly persuaded of the crucial part for lawyers in the serious matter of money and moneyed exchanges.

Under section 307 of the Sarbanes-Oxley Act, the US Securities and Exchange Commission (SEC) was required to issue rules for minimum standards of professional conduct for attorneys involved in matters of issued corporate securities, most obviously equity shares. Foreign lawyers were expressly in the frame. The only explicit requirement for these new rules was stipulated to be an obligation to report – “up the ladder” – dishonest corporate conduct.

The draft rules went on to permit reporting, or dobbing, externally, to the SEC, without lawyers breaching their duties of confidentiality. The touchstone is the involvement of the attorney in suspect behaviour, presumably unwittingly until he or she forms the reasonable suspicion in question. It can be seen how much further the Americans were prepared to consider going, compared with the current and understandable Australian professional worries about privilege and loyalty to clients.

By August 2003, consultations were over, and the final rule was promulgated. Commentators from the legal profession had uttered various dire warnings, some with much substance. The requisite record-keeping was viewed askance by some, as increasing a corporate client’s (or employer’s) vulnerability in litigation by forcing reports that would be a treasure trove of selectively damning evidence. A new and glittering prize for pre-trial discovery.

But the SEC pressed on, convinced that these new responsibilities for commercial lawyers would be an early remedy of illegal behaviour. This would, in turn, boost investor confidence – itself self-evidently good, however deluded some participants in irrationally exuberant booms have surely been.

How revealing that the most effective pressures for such radical change in professional obligations was the perceived need for honest capital raising. Congress’s charge to the SEC in section 307, after all, was put in the language of “the public interest and for the protection of investors”. If they know the business of America at all, it seems Congress members are – or at least a majority of them – persuaded of the critical, protective role of lawyers in the world of money.

Of course, it is not only big business, international trade, and the capital markets that display and need the good offices of decent lawyers. The myriad transactions and relationships of private and business dealings, large and small, have the same dependence.

Whatever else should be boasted or confessed about lawyers and money, it’s nonsense to suggest the legal profession is unproductive. Let wheat and beef growers, manufacturers of widgets and coal magnates, imagine the results of their efforts without laws of contract, punishment of theft, and enforcement of quarantine regulations. Then let them realise the essentials of government, and the integral component of government that is the part of lawyers. Even the most Luddite critic of the WTO, after all, shares its regard for the rule of law, differing only on the desirable extent of what may be called globalised jurisdiction.

The note of self-congratulation starts to falter at this point. The useful service of mercantile interests, in the public interest, poses conflicts and embarrassment for the legal profession. Traditional restraint and constraints are freshly needed, but may not be adequate in their existing forms. For example, while imitation of clients is universally rejected when lawyers represent criminals, it’s massively growing in the case of lawyers advising on and representing the interests of money.

Before elaborating on this, there is the perennial but less pressing matter of fees. Only about half of law-school graduates take up careers in private practice. The others practise law as government public servants, as corporate counsel, and in legal aid and other salaried non-profit sector positions. But public comment on lawyers and the money they get fairly focuses the emphasis on those lawyers who derive income from fees paid by clients.

Are those fees too high? Answers range from a hostile affirmative from those who regard lawyer jokes as sound sociological observations, to a righteous negative from the organised profession. Because the question is usually posed in a judgemental context, the wide range of answers can simply be noted, with a quiet rider that very similar questions could be asked about every other profession, trade and occupation – and often have been.

Regulators of the legal profession, it is interesting to learn, have not seen evidence of any major, let alone growing, incidence of genuine complaints about overcharging. Some reasons are, probably, that prior disclosure and agreement of legal fees are compelled, and that litigation fees are indirectly supervised by the courts especially through costs orders, and that commercial transaction fees increasingly are struck in competition against other advisers such as accountants and merchant bankers. And then there are, in fact, a lot of clients who observe how hard and well lawyers work to provide their services.

Sanity checks can and should be applied. If you want a New York salary, go there. If you are embarrassed by your large local fees, why not call them excessive and therefore reduce them? Should lawyers perhaps see their most expensive colleagues as, just maybe, not the best value for their clients?

But complacency, self-satisfaction and a kind of guild smugness await a legal profession content to leave issues about the level of legal fees in this neat package. Other tertiary-educated but less well-remunerated occupational groups are entitled to challenge lawyers on how much we’re paid. Lawyers can’t keep referring back to their years of study and early period of modestly paid apprenticeship. The former is not so long, and the latter is perhaps not long enough. Could HECS payments be the next form of this kind of self-justification? What multiples of annual earnings could one seriously claim on that account?

Increasingly, the pay of lawyers is justified by reference to the money offered in, say, London, New York, and Chicago. It suffices here to ask, how does the salary given for professional serfdom in those centres of commerce raise what should be paid in Sydney, Melbourne, and Perth? Sanity checks can and should be applied. If you want a New York salary, go there. If you are embarrassed by your large local fees, why not call them excessive and therefore reduce them? Should lawyers perhaps see their most expensive colleagues as, just maybe, not the best value for their clients?

Litigation currently displays aspects of a legal culture war. The Bar’s (and some solicitors’) time-honoured speculative (“spec”) briefs long ago won the High Court’s admiring approval. Almost as long ago, barristers recognised the possibilities for corruption posed by the spec representation of plaintiffs for whom the best, or only, prospect of a financial return might turn out to be a settlement – that is, a compromise less than the client wants, as compromises tend to be.

In hindsight, it is not surprising that the noble if flawed tradition of spec briefs – no win, no pay – has flowered, or exploded, into the frankly entrepreneurial industry of litigation funding, usually associated with what are dubbed “class actions”. No-one who has advised or appeared on either side of these models of modern litigation could be unaware of the fertile soil they present for conflicts of the most venal kind.

Who are the clients? Who is the master of the case? What does it mean, socially and professionally, for litigators to spur into action those whose claims were neither pressing nor large, but who belong to a formidably large group of similarly unenthusiastic pseudo-litigants? Apparently, it produces major litigation, enthused by the money it promises for funders and lawyers. But who is to say that this kind of money for lawyers does not, in reality, provide justice where formerly access to it was too expensive? The High Court will soon be looking at these questions.

As a former NSW Bar president I can’t depart the topic of legal fees without reliving shudders about lawyers and the flouting of their taxation obligations. Because it is lawyers, not just barristers, nor New South Wales.

Lawyers have no better immunity than anyone else from the requirements to render annual returns of income and to pay the tax due. If anything, the publicly funded system in which all lawyers – not just litigators – work makes it all the more intolerable that some lawyers resist meeting such reasonable obligations.

The statutorily deemed debt that is income tax is not, contrary to a stray dictum in the Court of Appeal, indistinguishable from debts incurred in private life. Welshing on the democratically set tariff for benefiting from organised society is, as the Court of Appeal has well and truly held, a special sign of unfitness for the office of lawyer.

This, hopefully temporary, embarrassment from a dysfunctional relation between lawyers and their money has undoubtedly added to the burdens of leaders of the profession when they lobby politically for the really very modest money demands of their most vulnerable clients – those who have suffered personal injury. Lawyers are now constantly met with strident protests that they are merely engaged in lining their own pockets.

It is, of course, true that restored or enhanced rights to compensation for the injured will end up providing work for the lawyers engaged in such disputes. The same truism applies to those who provide food, shelter and health care for those who need it – but that does not disqualify providers of those social goods from being politically active in promoting fair and general access to those goods. Actually, providers quite often know quite a lot about the weaknesses of current methods of provision. But for some time to come, lawyers will be handicapped by cynical responses as they try to advocate the claims of injured people for fair compensation payouts.

Meantime, over the last two decades the legal profession has been officially told to face up to being in business. Although there has been no official rhetoric to countenance backsliding on professional ethics, there has been any number of government enquiries and statutory overhauls to enshrine, proselytise, and – to a degree – compel the observance of competition principles. In this country, the regulatory politics have gone so far as to challenge, as anti-competitive, the Bar’s prohibition against the combination in business of advocates who would otherwise be each other’s competitors. Fortunately, that challenge has yet to succeed.

Thoroughgoing reviews of the legal profession in England and Wales and in Ireland concluded that most aspects of the institutional structures and practice regulation should conform to the laissez-faire model overtly driven by self-interest for money. In the lobbying clinches, time and time again, consultants to these enquiries made clear their political economy bent – the provision of legal services is not so different from that of any goods and services, many of which also require obvious quality and honesty regulation. Lawyers and money are thus treated as amounting to legal practice as entrepreneurial business, to be encouraged to act according to the profit motive.

None of the law reform reporters or attorney-generals responsible for the slightly muted competition march in Australia has intended any weakening of the legal profession’s ethical vigour. But their failure to slow, let alone halt, the slide into legal practice as a business brings about intolerable conflicts of interest and duty.

Of course, competition principles have inspired some salutary changes to the legal profession, not least an insistence that we justify in the public interest our grab-bag of rules and customs, some of which could sensibly be thrown out or dusted off.

Lawyers and money are thus treated as amounting to legal practice as entrepreneurial business, to be encouraged to act according to the profit motive.

In parallel, the last three decades of litigation and court reforms illustrate a continuing paradox of that project. As the court system improves in the direction of “just, quick, and cheap”, one of the aims is to reduce the volume of contested cases. This is to direct the public funding and the private expense of litigation to the tiny minority of cases where compromise is either not preferable or not possible.

But as success reduces delays in court lists, and speeds up hearings and streamlines costly procedures, so the calculus that determines which cases are better settled or fought shifts in favour of fighting. In this endless circle, the relation of lawyers and money displays in its most striking fashion our dependence on government and public funding.

How could lawyers discharge that social responsibility and honour that dependence if the standing of individual lawyers is measured by how much revenue they generate? What chance of litigation reform if the profession, metamorphosed into business for profit, explicitly disapproves of a lawyer devising the least costly option for the client? Imagine if medical practitioners took the approach that professional kudos should go most to the doctor who performs the most procedures for the largest fees on a particular patient?

It is not as if all competent and hard-working doctors and lawyers make inadequate incomes. Or has that observation lost its force, by the much closer proximity of commercial lawyers, in the service of big-business clients?

Lawyers are frequently parts of multi-disciplinary teams helping big business do business or government sell public assets. Other members of those teams are accountants. Accountants are well paid, too, and it may be that some are so well paid that they have encouraged commercial lawyers to feel their own value is under-appreciated by their common clients.

But perhaps the star turns are the merchant bankers. Scarcely merchants, although very mercantile. Usually not really bankers, but rolling in money – with pieces of the action, capitalist venturers, and people the lawyers briefly knew at university. No wonder the published aspirations of many big law firms have much more in common with large accounting combines and dazzling millionaires factories, than with their legal colleagues in small firms, in the country and in sole practice.

So too, it may appear, much of the work of commercial lawyers has a diminishing connection with justice, let alone an involvement in its administration. The wrong fork in the road was taken when the profession determined to specialise and sub-specialise its brightest graduates almost as soon as they had obtained their generalist law degree and practical legal training.

In many cases, the commercial lawyers are really part of the clients’ entourage, being served with the client by the litigators and counsel. Perhaps it is time for that division to be recognised formally. The lawyers closest to the big money of their business clients, having nothing really to do with the general corpus of law and no real interest in the administration of justice, might leave the legal profession and join with the management consultants, accountants, finance brokers and merchant bankers.

Much of the work of commercial lawyers has a diminishing connection with justice, let alone an involvement in its administration.

Excessive proximity to business clients, and their money, seems to have produced elements of imitation unlikely to enhance professionalism. The phenomenon of the big – and bigger and bigger – law firm should not simply be witnessed as if it were a force of nature. If we pinch ourselves, it will be remembered that not long ago the leading firms in this country, big by the standards of their times, had so few partners and staff that, by the standards of our time, they would not even be considered as mid-tier firms.

Yet were they able to conduct the largest and most complex litigation, minister to the most important property and commercial transactions, that their clients required? Could they carry out the legal research and inculcate the scholarship needed to advance the law and win the hardest cases in the highest courts? Were they good lawyers? Did they live in penury? The answers to those questions certainly do not support the truth of slogans such as “grow or die”. They do not substantiate the claim that only mega-firms have the capacity, whatever that means, to provide the services required by mega-cases.

One of those mega-cases being fought at the moment caused a press commentator to wonder whether, even for the magnates involved, it was so expensive that it might be the last hoorah for such major litigation. For some, this would be wishful thinking, for others an appalling downturn in their market. It is as unlikely as the death of the novel.

Yet very large pieces of litigation should not be deplored. Especially in commerce, very large forces do have disputes with each other, sometimes on a tectonic scale. Of course this jurisdiction and its lawyers are the best place and people to help resolve such disputes. Mega-cases are not really the problem. But thinking that the possibility of them occurring from time to time means that mega-firms need to exist constantly – that is a problem.

Competition theorists frequently talk up the promises of economies of scale. The idea is that a mass-produced motor car will be much cheaper and perhaps better than a custom-made one. Everyone wins (apart from the custom-builders). If that analogy held good for the provision of legal services in private practice, the biggest firms would have the lowest fees. But they don’t. If it held good, the biggest firms would provide legal services to the broadest range of willing clients. But they don’t.

Motor car manufacturers don’t incur fiduciary and other obligations like confidentiality which prevent them from selling their models to all comers. Lawyers do. The economy of scale is not a useful concept to justify more and more lawyers becoming less and less available to more and more clients – which is an inexorable effect of big firms, demanding business clients and reliable registers of conflicts.

The financial pages of serious newspapers have started to report and discuss the performance of big and aspiring middle-sized law firms in a sometimes fascinating mixture of sporting journalism, theatre reviews and gossip columns. Virtually the only yardstick of performance, equated to professional quality, is money. Very occasionally, the money won for the client, never the money saved by the client, nor the value bought by the clients’ money. Mostly just the money received by the firm, the revenue.

To rub it in, the figures are presented and re-presented to drive a message home. Whether it is the journalists or the firms who want the message sent is difficult to say – but one rarely reads of disclaimers or resistance by the firms with the glittering figures.

What is the message? That money defines the most desirable professional attainments in private practice. See the number of leveraged fee-earners per equity partner, or the revenue per head of professional staff. Marvel at the margins between revenue and costs, and especially the profit per partner. Business clients presumably put up with this perverse publicity on the part of their chosen lawyers, because imitation is understood to be the sincerest form of flattery.

It is doubtful whether the elaborate and intelligently managed businesses thast are the big law firms seriously claim they’re the only ones capable of doing what much smaller firms used to do – that is, deploy learning, integrity, imagination and loyalty in the fused service to clients in the administration of justice. What attribute necessary for that exercise may be found only in big firms? If really large teams are from time to time required, why not form ad hoc alliances?

It would be demeaning to justify big firms getting bigger so as to provide lots of IT, word processing, and photocopying. Those activities are no more professional than stationery is the business of a bank.

If all this misunderstands the way the world is, and vainly protests against progress, the path taken by lawyers imitating business clients has some interesting milestones coming up. Business outsources not only clerical drudgery but also highly skilled and relatively capital-intensive IT and document management – and outsources them to the ancient home of mathematics in India. Why shouldn’t massive mindless discovery be conducted in Mumbai. The requisite partner in charge could go there to supervise paralegals retained at much cheaper prices than permanent paralegals on staff in Sydney.

If money is the measure, who would dare to say that money for the lawyers is more important than money saved by the clients? Whenever functions or activities in the practice of law are no longer the essentially mental, personal and individual professional responsibility of lawyers, then the money spent on those other activities and functions surely should be spent as cheaply as possible in the clients’ interest.

The money necessary to keep a big firm going, to open the doors every morning (assuming they ever close during the 24 hours), is pretty scary. Decent human and social responsibilities to the many members of staff and their families mean that the partners and lawyers must generate very large sums of money by fees from clients, at a more or less constant level.

Perhaps it is time to ask if that business model presents, in the most obvious fashion imaginable, an intolerable conflict between the partners trying to do the right thing by their colleagues and staff at the firm, and doing the right thing by minimising their clients’ expenditure on legal services.

That conflict is presented in a form of dispute that very rarely reaches public attention. One of the less pleasant areas of advice work for some lawyers is partnership disputes – once upon a time dissolutions but now usually expulsions – among the partners of the larger law firms. There is good reason, from the point of view of public relations, for these disputes very, very rarely to go to court.

Increasingly over the the past 15 years, expulsions (and their precursors, downgrading of remuneration and support) have been decided on the basis of performance. What could possibly be wrong with that? Well, performance is invariably measured by money – and only money in the form of revenue.

The partnership deeds, the manuals and protocols all have commendable and sincere statements of professionalism, ethical service to clients and adherence to the requirements of law and justice. Those explicit standards of practice, not measured in money terms, only make clearer how important revenues have become. The non-mercenary standards are available to judge performance, but they are not used. Only revenue. Financial reasons are obvious and understandable. They include equally understandable grievances at partners who are not pulling their fair share of the heavy weight of paying to keep a big firm in business.

One expedient which may defer that intolerable conflict is for lawyers to join their business clients lock, stock and barrel. Not only the modest degree of corporatising already permitted, but out-and-out commercialising with publicly raised equity capital. Why should their own IPOs not become a new kind of professional achievement for lawyers?

When Teddy Roosevelt took on the Rockefellers and their ilk, Standard Oil must have appeared to be a natural growth of business conducted with appropriate self-interested vigour. There are probably still many who think anti-trust policy should never have made it into the statute books in the US or anywhere else. As you may have gathered by now, I’m not one of those. Industrialists and money need curbs and controls especially in relation to size and domination. So too, lawyers and money.