In today’s world, the term “trade liberalisation” has become a familiar term. It is almost as familiar in the context of services as it is in the context of goods. This article examines the liberalisation of legal services and the terminology used. It also discusses the sensitive question of integration – namely, whether foreign lawyers and local lawyers should be permitted to provide legal services on an integrated basis – and the different models adopted in various jurisdictions. Finally, it concludes with a view as to the benefits that integration would bring to China.
In the context of legal services, liberalisation is about opening up markets to the provision of services by foreign lawyers. To draw an analogy with the trade in goods, it involves the import and export of legal services from one country to another. It is important to note that liberalisation does not automatically mean that foreign lawyers should be permitted to practise local law, i.e. to advise on local law. In all jurisdictions around the world, regulators impose restrictions on who may or may not become qualified to practise local law. At the least, however, liberalisation means that a jurisdiction should permit foreign lawyers to provide legal services and advice on foreign law to clients in that jurisdiction.
Liberalisation has generated a lot of momentum in recent years. Consequently, countries that have not opened their markets to the import of legal services are coming under increasing pressure to do so. In addition to the pressure to allow foreign lawyers to establish a presence, there is increasing pressure to allow integration between local and foreign lawyers.There are now relatively few countries that do not permit foreign lawyers to establish a presence, although some closed jurisdictions, such as Indonesia, permit local law firms to employ foreign legal consultants to advise on foreign law.
The global regulatory framework
The international market in legal services is covered by the General Agreement on Trade in Services (GATS), which was one of the agreements signed in April 1994 when the World Trade Organisation was created. It was the first multilateral trade agreement to govern the trade in services. GATT, the General Agreement on Tariffs and Trade, governs the trade in goods.
If countries included legal services in their schedule of commitments when they signed up to GATS, then they must comply with some basic principles, including non-discriminatory treatment between member states. They must also observe the most-favoured nation principle, under which any concessions agreed with one member state must be extended to other member states.
There are four modes of supply recognised under GATS (these are relevant to the way in which services are categorised and regulated):
- Cross-border supply – this occurs where a lawyer in one jurisdiction provides advice to a client in another jurisdiction on a cross-border basis (e.g. a lawyer in Australia provides advice by email to a client in China);
- Consumption abroad – this occurs where a client in one jurisdiction travels to another jurisdiction to “consume” legal services (e.g. a Chinese client travels to Australia to obtain advice from a lawyer in Australia);
- Commercial presence – this is the most sensitive area, as it involves allowing lawyers in one jurisdiction to establish a commercial presence in another jurisdiction (e.g. an Australian law firm establishes a representative office in China);
- Presence of natural persons – this applies where a lawyer from one jurisdiction provides legal advice and services to a client in another jurisdiction on a fly-in/fly-out basis (e.g. an Australian lawyer flies to China to provide advice to a Chinese client).
The pros and cons of liberalisation
There are a number of benefits in favour of liberalisation. These include: 1) increased confidence on the part of foreign investors when markets, particularly emerging markets, are opened to foreign lawyers and other professional advisers; 2) a stronger and more competitive local legal profession as a result of the interaction between foreign lawyers and local lawyers, and the introduction of international standards and best practice; and 3) increased tax revenue that comes from allowing foreign service providers to establish a presence and provide their services on the ground.
Liberalisation also has its critics, many of whom point to the sensitivities associated with the work that lawyers do, particularly in the area of litigation, and the concern that allowing foreign lawyers to operate in the market might adversely affect the legal system or the legal culture. This was a significant concern in South Korea before it opened its markets to foreign law firms pursuant to its free trade agreements with the US and EU.
There is also concern on the part of local law firms, which worry about the impact of competition from foreign law firms and the risk that foreign law firms might monopolise the market or swallow up local firms. These concerns are not unique to Asia. Similar concerns were voiced in countries like Germany when the wave of mergers with international law firms occurred in the 1990s. It is certainly true that the development of a strong and competitive local profession is of critical importance in any jurisdiction, and this is one of the main reasons why local and foreign lawyers are prohibited from providing services on an integrated basis in some jurisdictions.
However, experience indicates that if restrictions on integration between foreign lawyers and local lawyers are maintained for too long, it can have an adverse impact on both the legal system and also local law firms, particularly as they seek to develop multi-jurisdictional practices and expand in international markets.
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The different models for integration
There are many different ways in which foreign and local lawyers and law firms are permitted to provide legal services and advice on an integrated basis. The choice depends largely on two questions: 1) whether there are any restrictions on the form in which legal services can be provided by local lawyers in the local markets; and 2) whether there are any restrictions on the nature and scope of integration between foreign and local lawyers.
For example, in jurisdictions such as Japan, local law may only be practised in the form of a local partnership. As a result, local and foreign lawyers cannot offer integrated services in any other form. However, it is possible for foreign lawyers to enter into a local partnership with local lawyers to practise foreign and local law, and the local partnership may become an affiliate member of a global law firm under contractual arrangements between the member firms.
In other jurisdictions, there are restrictions on the nature and scope of integration between foreign and local lawyers. For example, before the most recent reforms in Singapore, foreign law firms could not practise Singapore law in their own right. However, they could establish a joint law venture with a local law firm to practise foreign law and local law on an integrated basis.
As in other jurisdictions, the joint venture model has enjoyed limited success in Singapore. This is partly because of the costs involved in maintaining a joint venture and partly because of the inherent limitations of the joint venture model (e.g. challenges in terms of decision making and control). Interestingly, China previously allowed the big foreign accounting firms to establish joint venture accounting firms. Under changes announced last year, however, the joint venture firms have to be restructured as local partnerships in the form of limited liability partnerships (known as “special general partnerships” – see China Business Law Journal volume 4 issue 6, page 89: Partnership). This is part of a programme to localise the accounting profession.
It is now possible for a foreign law firm in Singapore to apply for a licence, called a qualifying foreign law practice licence, to enable it to practise Singapore law. However, Singapore law may only be practised in “permitted areas of legal practice”. These permitted areas are mainly commercial areas of law, and exclude domestic areas of legal practice such as constitutional and administrative law, conveyancing, criminal law, family law and conduct of litigation.
Malaysia, previously a closed market, has also introduced reforms that would allow a foreign law firm and a Malaysian law firm to enter into a partnership called an “international partnership”, the name of which would be a combination of the names of the foreign law firm and the Malaysian law firm. As in Singapore, restrictions apply to the areas in which an international partnership may practise law.
Should China permit integration? If so, on what basis?
China is a liberalised market but does not yet formally permit integration between local lawyers and lawyers from other jurisdictions, except associations between mainland law firms and Hong Kong law firms under the Closer Economic Partnership Arrangement (CEPA). In practice, some Chinese law firms employ foreign lawyers to provide advice on foreign law. However, foreign lawyers practising in Chinese law firms are not formally recognised by the legal framework, and consequently operate in a grey area.
The reasons behind the existing restrictions include the need to allow PRC law firms to develop their competitive strength and also concerns about foreign law firms getting involved in sensitive areas of practice.
When weighing the argument for and against integration, the regulators can draw on the experiences of many other jurisdictions. These experiences reveal a number of important points:
- First, although maintaining a separation between local and foreign firms can be positive in terms of building the competitive strength of local firms in the domestic market, it can become an impediment to the development of local law firms as they seek to develop multi-jurisdictional practices and expand in international markets. It also limits the career opportunities of local lawyers. There is no doubt that the international trend is towards both liberalisation and eventual integration, as seen in markets like Japan and more recently in South Korea, where the government has laid out a pathway towards integration between foreign and Korean law firms. Countries that do not embrace this trend are likely to fall behind in the highly competitive international market for legal services.
- Second, there are sound reasons for jurisdictions to focus on regulating lawyers themselves, rather than the structures through which they practise. In other words, law firms should not be regulated on the basis of whether they are “local” or “foreign”; instead, lawyers should be regulated on the basis of their jurisdiction of admission. This allows regulators to regulate lawyers on a global basis, irrespective of the structure through which they operate, or the jurisdiction in which they practise.
- Third, if there are sensitivities in terms of the areas of practice in which local and foreign lawyers should be able to offer integrated services, these areas of practice can be reserved to local law firms.
- Fourth, integration has a positive effect, both on the choice of local law as the governing law of cross-border contracts and the popularity of the local jurisdiction as a forum for dispute resolution, particularly arbitration. This is because lawyers are much more likely to recommend local law as the governing law of cross-border contracts if the firm to which they belong is able to practise this law. Interestingly, this was one of the main reasons behind the decision in Singapore to allow foreign law firms to practise Singapore law in permitted areas. In other words, it was considered that this would have a positive effect on the choice of Singapore law as the governing law of cross-border contracts and also on the choice of Singapore as a centre for arbitration and dispute resolution.
All of these points are relevant to China as it contemplates whether integration should be permitted, and if so, on what basis. Integration would present a number of benefits to local law firms, which have now developed to a point where they can compete effectively with foreign law firms in China. Integration would enable local law firms to become part of an international practice that shares not only common branding but also common management and resources – an essential component of a truly global practice. In this way, local law firms would be able to play a much greater role in outbound investment and enjoy the benefits of both domestic and international practice. It would also strengthen the use of PRC law as the governing law of cross-border transactions because international law firms would be able to advise on contracts governed by PRC law.
Of course, there may still be people who believe that it is in the interests of the Chinese legal profession to maintain the current restrictions on integration between Chinese and foreign law firms. However, as time passes, the advantages that these restrictions have brought will diminish and will also impede the competitiveness of Chinese law firms, regionally and internationally. The time for integration is now.
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Andrew Godwin
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at law.asia.
