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National Competition Policy Review of the Legal Profession Act 1987
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10.1 Principle 8 of the COAG Working Party Report stated that flexible business arrangements are an important feature of a more responsive legal services market. In particular, combined practices, such as multi-disciplinary partnerships, may reduce transaction costs.[36] The Trade Practices Commission recommended that rules preventing profit sharing by lawyers with other professionals should be repealed and that multi-disciplinary and incorporated practices should be permitted, including practices involving non-lawyer equity holders or partners.[37] However, the COAG Working Party acknowledged that some jurisdictions had concerns about how incorporated practices would affect limited liability, the costs which this might impose on consumers, and the consumer risks relating to multi-disciplinary partnerships.[38] Both the COAG Working Party and the Trade Practices Commission recommended that sole practice rules of Bar Associations be abolished.[39]
10.2 The COAG Working Party resolved that this matter should be referred to the National Competition Council for further evaluation. New South Wales has supported the referral of this work to the NCC. However, to date, such a referral has not taken place.
I. THE CURRENT SCHEME
Position prior to 1994
10.3 Traditionally, solicitors could form partnerships with other solicitors, but were not permitted to practise in any other kind of business arrangement. Barristers were required to practise as sole practitioners. In the case of solicitors, the rules were justified on the basis that the unlimited joint and several liability of partnerships ensured that clients could receive compensation from other members of a firm for losses caused by negligence or defalcations. In the case of barristers, the sole practice rule has been retained on the basis that it ensures the independence of barristers and that the duty of a barrister to the client and the court overrides other obligations.[40]
10.4 The Legal Profession Reform Act expressly reserved the power of the Bar Association to require that its members to operate as sole practitioners. The object of the retention of this power was to allow an independent Bar to continue.[41]
Changes made by the Legal Profession Reform Act 1993
10.5 The Act introduced reforms which gave solicitors greater choice in their business associations. The Government recognised the diverse preferences of lawyers as to their mode of practice and recognised that freedom of choice would encourage flexibility, diversity, competition and innovation. Section 48G of the Act provides for solicitors to form multi-disciplinary partnerships (MDPs), subject to the Solicitors' Rules.[42] Limited sharing of receipts was permitted by section 48G(3)(d).[43] However, the Solicitor Rules restrict the ability of solicitors to practise in multi disciplinary partnerships. Rule 40.1.1 requires that solicitors have majority voting rights in the affairs of the partnership, and Rule 40.1.6 requires that at least 51% of the net income of a partnership must be received by solicitor partners, their relatives or trustees.
10.6 Part 10A of the Act provides for solicitor corporations. The Law Society Council may approve the incorporation of solicitor corporations, subject to certain restrictions. The companies must have unlimited liability: section 172E. Voting shareholders must be solicitors holding unrestricted practising certificates and shareholders must be approved persons, including solicitors and their relatives: section 172G. Solicitor corporations are incorporated under the Companies Code.
II. EVALUATION
Analysis of current limitations
10.7 Increasingly, commercial clients are demanding a broad based, integrated service from professionals. The formation of multi-disciplinary structures will enhance the ability of the profession to adapt to changing markets.[44] An assessment of the current restrictions on business organisations of barristers and solicitors must consider whether they are justifiable in the interests of protecting the public or whether they unnecessarily restrict the capacity of lawyers to compete in the modern legal services market. 10.8 As noted above, the traditional justification for partnerships as the principal mode of practice was that the unlimited liability of the partners protected consumers. It may be thought that the restrictions on competition are justified because of the public interest in protecting consumers. However, the public interest in maintaining unlimited liability partnerships has been lessened by the introduction of compulsory professional indemnity insurance, which now provides other means of compensation for clients. In addition, the partnership structure may not even provide effective protections for clients, as partnerships may now limit liability in New South Wales in certain circumstances by adopting a scheme registered under the Professional Standards Act 1994.
10.9 The Act continues to impose acute restrictions on the business arrangements of solicitors and barristers. Restrictions on sharing receipts within multi-disciplinary practices restrict the ability of solicitors to raise capital and to form business alliances with other professionals, such as accountants, estate planners and management consultants. In addition, despite the changes to the Act, few solicitor corporations have emerged. While it is difficult to accurately assess the reasons for this,[45] it is significant that the provisions in Part 10A remain very restrictive. The effect of the restrictions in the Act appears to be that most solicitors (apart from corporate solicitors and Government solicitors) practise as members or employees of partnerships of solicitors and other business structures are not widely used.
10.10 The Legal Profession Advisory Council recently concluded that rules 40.1.1 and 40.1.6 of the Solicitors Rules are anti-competitive and not in the public interest. The Council was of the view that the rules adversely discriminate against non-solicitor partners in a multi-disciplinary partnership and that they contravene the spirit of the Legal Profession Act and competition policy generally. The Council recommended that the Rules be declared inoperative. The Council also recommended that the Act be amended to prevent the making of Solicitor Rules which modify the provisions in the Act which deal with multi-disciplinary partnerships.[46]
10.11 In relation to corporations, the Council recommended that a practitioner should be free to organise himself or herself in any commercial manner. However, the Council recommended that corporations should not be able to be licensed. Only individual practitioners should be able to be licensed.[47] The Council was of the view that the professional, ethical and fiduciary duties of solicitors would remain unaffected by the choice of business structure if only individual practitioners could be licensed. In addition, the Council was of the view that if licensing of corporations were allowed, it could lead to the imposition of restrictive or anti-competitive practices on multi-disciplinary practices which could not be justified as in the public interest.[48]
10.12 The Council recommended that any fit and proper person be permitted to become a member of an incorporated practice, that individual practitioners be personally liable for their acts and that the corporation would be liable for the acts of its employees.[49]
Conflicts of interest, legal professional privilege and client confidentiality
10.13 Concerns have been expressed that the ethical and legal duties of solicitors to their clients could be compromised if they practised on equal terms with other professionals. In order to avoid conflicts of interest, the duty of a solicitor to their client would need to override duties to the practice. The Victorian Law Reform Commission canvassed strategies for addressing these issues, including extending privilege to all documents in a practice which has a solicitor as a partner; extending existing rules to communications of a legal nature to the practice; abolish the privilege, or extend the privilege to all matters on which a solicitor could competently advise and on which a member of another profession could also competently advise. The Commission also stated that the duty of a solicitor to the court would need to override other duties.[50[]]
10.14 An alternative approach would be the development of joint model rules to cover practices having members of more than one professional body. Rules could also be made to ensure that disclosure was made to clients of the nature of the professional services being provided, and the regulator of those services.
Insurance and Fidelity Fund cover
10.15 The widespread use of multi-disciplinary partnerships and incorporated practitioners could enhance the risk to insurers and to the Law Society (which administers the Fidelity Fund) of claims being made for acts which were primarily the responsibility of non-solicitor partners, directors or employees. It is noted that other occupational groups are not required to carry professional indemnity insurance or Fidelity Fund cover, and the 'deep pockets' of insurers of lawyers could make them a target for litigation by clients of multi-disciplinary practices.
10.16 This issue might be addressed by risk weighting premiums for solicitors practising with other professionals, and disclosure by solicitors and other professionals within a partnership or corporation of the insurance and fidelity arrangements to clients.
Provisions in other jurisdictions
10.17 The Legal Practice Act 1996 (Vic) provides for solicitors to form proprietary companies governed by the Corporations Law having limited liability. Sections 293 and 294 require the sole object of an incorporated practitioners to be to engage in legal practice or the practice of foreign law and all directors to be current practitioners. Share ownership is restricted in a similar manner to the New South Wales provisions.
10.18 The reason that the objects of an incorporated legal practice must be restricted to legal practice is unclear. Indeed, such provisions hamper the provision of a package of commercial services, which should be one of the purposes of incorporation.
10.19 Section 69 of the Victorian Act preserves the ability of an RPA to require that a practitioner must practise as a barrister only, must practise as a sole practitioner and must not share the income of the practise with any person.
QUESTIONS
A. Are prohibitions on barristers practising with other professionals warranted? Do they promote, or hamper, the efficient and competitive provision of advocacy services?
B. Should solicitors or barristers be permitted to become members of multi-disciplinary partnerships? What restrictions (if any) should be placed on such partnerships?
C. Should solicitors or barristers be permitted to form incorporated practices under the Corporations Law? Should the objects and membership of such practices be restricted? Should such practices be required to have a majority of directors who hold practising certificates?
D. How can compliance with the ethical and professional rules of solicitors and barristers be reconciled with participation by members of the profession in multi-disciplinary partnerships and companies?
Footnotes
[36] COAG Report, 5
[37] TPC Report, 133.
[38] COAG Report, 5
[39] COAG Report, 5. TPC Report, 133.
[40] Barristers Rules 81, 82 and 83; sections 48F and 48G.
[41] Honourable J Fahey, Premier and Minister for Economic development, Second Reading Speech for the Legal Profession Reform Bill 1993, 9 November 1993, Legislative Assembly 4982.
[42] Solicitors may practise within multi-disciplinary partnerships, subject to the Solicitors' Rules in Tasmania; R.79. The Legal Practice Act 1996 (Vic) permits the making of regulations which could prohibit solicitors from practising with in multi-disciplinary partnerships; s 71. Solicitors practising within multi-disciplinary partnerships is prohibited in Queensland, South Australia, Western Australia, Northern Territory and Australian Capital Territory
[43] solicitors sharing of receipts is prohibited in Victoria and Queensland, and permitted only in very limited circumstances in South Australia , Western Australia, Tasmania Northern Territory and the Australian Capital Territory; see Legal Practitioners Act 1981 (SA), s 16(2), Tasmanian Rules of Practice, R.79, Legal Practitioners Act 1970 (ACT), s 196
[44] See the discussion of the growing importance of commercial and entrepreneurial issues in practice, and the tendency of clients to seek advice from a range of experts, in (1997) 60 MLR 810-820.
[45] While the Law Society has recently begun to collect statistical information about the number of MDPs, the information may not be entirely accurate as practitioners are not required to inform the Law Society that they practise within an MDP.
[46] Report and Recommendation of the Legal Profession Advisory Council in Respect of Multi-Disciplinary Partnerships and the Solicitors' Professional Conduct and Practice Rules, NSW Government Gazette, 28 November 1997, 9589 at 9604
[47] Legal Profession Advisory Council, Report and Recommendations in respect of the Incorporation of solicitors' practices under the Corporations Law, NSW Government Gazette, p. 12
[48] Ibid.
[49] Ibid. p.13
[50] Victorian Law Reform Commission, Access to the Law: Restrictions on Legal Practice, July 1991, DP 23, 45-51. |
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