While there are risks involved in law firm incorporation, it is worth remembering the mechanisms that protect clients, write Michael Legg and Marina Nehme.
Slater and Gordon’s bankers have thrown the troubled law firm a lifeline and it may now trade its way out of trouble. However, the near-death experience has raised a number of concerns over the listed law firm model and whether clients are sufficiently protected.
The single biggest asset on the Slater and Gordon balance sheet is work in progress, which represents case files that should ultimately deliver revenue. The company’s 2015 Annual Report stated that it was acting for about 200,000 clients, with 80 per cent of revenue derived from personal injury litigation that was performed on a conditional fee basis, ie, legal fees are not payable to the firm unless a successful outcome is achieved.
A settlement where the client makes a recovery is a successful outcome. The concern is that bankers may put pressure on the law firm to generate profit more quickly, which may result in hasty settlements being entered into even though such settlements may not be in the best interest of the client.
Clients are protected through lawyers being constrained by ethical rules, the threat of disciplinary action, including being prevented from being able to practice, as well as the general law, which includes protections against negligence and conflicts of interest. As a result, the solicitors’ primary obligations to courts and clients were included in the prospectus, constitution, and shareholder agreements when Slater and Gordon listed.
However, the concern, to quote former Chief Justice Lawrence Street of the Supreme Court of NSW is that while it is "far from the truth to suggest that, where a conflict arises between duty and self-interest, the latter will always, or even more frequently than not, prevail […] such a situation is fraught with the risk that human frailty will prove unequal to the resolution of the moral issues involved in the conflict".
The Chief Justice was speaking in 1976, well before law firms could be incorporated, let alone listed on a stock exchange. The conflicts created by an imperilled law firm being beholden to its bankers differ only in degree from conflicts that have existed for hundreds of years and been dealt with by placing strict obligations on the lawyer.
Further, an added protection is available to consumers as a result of the incorporation of the law firm, the directors of the organisation will have additional duties to those discussed above, imposed on them under the Corporations Act 2001 (Cth) and the Legal Profession Uniform Law that operates in NSW and Victoria.
The principal of a law firm is responsible not just for their professional obligations, but must also ensure that all legal practitioners in the practice comply with their professional obligations. This necessitates programs to safeguard the client’s interest by ensuring that the law firm’s lawyers are complying with their obligations under the law, in effect an ethical infrastructure, which may provide for a more comprehensive approach to culture, oversight and compliance.
Clients funds that are held on trust by the listed law firm are protected through those funds being excluded from any winding up. An external administrator appointed by the bankers cannot access clients' funds to pay debts owed to the banks. However, if the clients’ interests are endangered, the Legal Services Commissioner has the power to either intervene in proceedings resulting from the administration or to appoint a Uniform law receiver.
The appointment of the receiver will ensure that any displaced trust funds are returned to the trust account. More generally the Legal Services Commissioner has power to conduct audits and has a number of investigatory powers. The requirement for professional indemnity insurance should not be forgotten.
Protection of clients’ interests is a focal point of the laws regulating the legal profession. The fact that a law firm decides to incorporate and/or list does not absolve the organisation from considering the clients’ interests. Indeed, incorporation results in additional obligations and the larger the law firm, the greater the use of management and compliance systems to ensure clients' interests are protected.
Michael Legg is an associate professor and Marina Nehme is a senior lecturer and the director of learning and teaching at UNSW Law