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RUSSELL COCKS[*]
Any consideration of professional ethics in the context of corporatised legal practice must commence with an analysis or definition of ‘profession’, either in the singular, in the sense of ‘a profession’ or in the generic, in the sense of ‘the professions’. This paper considers ethical issues from the point of view of one profession – the law, but it is worthwhile to begin with a consideration of the professions generally, so as to gain an understanding of the concept of professional ethics in a wider context.
In Western society the professions generally arose out of a relationship between a group of individuals and society that had at its core an element of service by those individuals to society. The four traditional professions (medicine, religion, law and military) can be seen to be serving the needs of society in terms of physical and spiritual wellbeing of the society, law and order within the society and protection of the society from external forces. This creates the perception of service by the professions of society’s needs, although a more cynical view explains the motivation of the professions in terms of self-preservation rather than a desire to serve.
The professions were the bastions of the ruling class. By serving society, the professions were merely perpetuating their elite position in society. Serving the needs of society merely served to maintain the domination of that society by the members of the ruling class. This is, however, more a political, rather than ethical, debate. It appears that, irrespective of the true motivation of the professions, if indeed one motive can be imputed to such a disparate group, the relationship between society and the professions was either based on, or grew into, a relationship involving a commitment to service of society by the professions.
This may be contrasted with the relationship between Western society and another large group represented by the Guilds. Tradesman, like professions, ‘serviced’ the needs of society in that the trades provided society with the means by which natural and agricultural resources were converted to use by society. They provided the doorway for the introduction of these resources into society. Just like the professionals, tradesmen organised themselves into industry groups and the Guilds were the precursors to modern trade unions and industry associations. These groups, however, were never traditionally regarded as having any special relationship with society, rather they were motivated by a desire to advance the position of their members within society. Certainly they were bound by the normal restrictions imposed on all members of society, but there was no additional concept of ‘service’ to society, as was typical with professional groups.
The key elements that have been identified as typical of a profession are :
organisational structure;
education or skill requirements;
self-regulation; and
public service.
When compared with the Guilds, only the latter two elements create a distinction. Modern society has created many groups in business and commerce that aspire to be accepted as professions and they too satisfy the first two requirements.
Thus it is self-regulation and public service that may create the difference, but society itself is moving against self-regulation. Professional disciplinary procedures are becoming far more susceptible to public supervision and it is common to find lay involvement with profession regulatory functions. In the end it would appear that the only point of difference between a profession and other industry bodies is the element of public service. That this has always been an important point of differentiation is illustrated by the following quote from Roscoe Pound :
There is much more in a profession than a traditionally dignified calling. The term refers to a group of persons pursuing a learned art as a common calling in the spirit of public service – no less a public service because it may incidentally be a means of livelihood. Pursuit of the learned art in the spirit of public service is the primary purpose. Gaining a livelihood is incidental, whereas in a business or trade it is the entire purpose.[1]
Whilst the gender-specific nature of the quote indicates that it is indeed half a century old, nevertheless the element of public service identified in the quote remains the one true identifier of a profession in modern society.
The ethical constraints applying to lawyers are now largely found in formal restrictions in legislation, rules and regulations. These formal restrictions, however, have their basis in the informal rules that developed over a period of centuries and the fact that they are now formalised merely reflects modern society’s penchant for precision and transparency.
The legal profession faces a continuous fundamental ethical conflict as a result of two competing special relationships. A lawyer is first and foremost an Officer of the Court and has a duty to uphold the law. This is a duty owed to society as a whole. On the other hand, the relationship between lawyer and client is equally special and creates a fiduciary responsibility on the part of the lawyer to protect the interests of the client. In this regard, the client is a representative of the individual citizen. Thus the lawyer is faced with the task of balancing the needs of society as a whole against the needs of the individual. This conflict is most pronounced in the area of criminal law where the protection of society is balanced against the freedom of the individual, but it extends into all areas of legal practice.
As a result of these two special relationships various rules have developed. Some are concerned with the relationship between the lawyer and the court, such as the duty to ensure that all available information is before a court, and some are concerned with the relationship between the lawyer and the client, such as the duty of confidentiality. Some indeed developed in response to the need to balance these two potentially competing duties, such as the duty not to mislead the court even if to do so would be in the interests of the client.
All of these ethical duties arise as a result of the lawyer’s service to the public, either in the wider context of serving the needs of society as a whole, or in the narrower context of serving the needs of individual members of society. As we have seen, it is this element of service that is the defining element in the definition of a professional and it is as a result of the performance of this service that ethical constraints arise.
Pound acknowledges that the practice of law is a ‘means of livelihood’. There may be a few lawyers for whom the practice of law simpliciter is adequate reward, but the vast majority of lawyers also seek financial reward from practice. In this respect the practice of law takes on the cloak of a business. Having established that the professions in general and the law in particular have a special relationship with society that produces high ethical expectations, it is necessary to consider whether the overlay of business considerations on the practice of law will impact on these ethical standards.
It is necessary therefore to establish the standard of business ethics. The cynic might start from the point of view that the concept itself is an oxymoron and indeed it is possible to conclude from Pound’s statement that the entire purpose of a business is to make money and that there is no room for ethical considerations in such an environment. Events in the corporate world in the 1990s and indeed in more recent times would indicate that there may well be some truth in such a claim. On the other hand, the business world itself probably acknowledges that it is beneficial to have a reputation for ethical behavior, both among business colleagues and the public generally.
Conceding that ethical considerations do have a role to play in business, perhaps it is not possible to establish one standard that can be said to apply to all types of business. Establishing ethical standards for specific professions, such as medicine and law, calls on centuries of established practice in a limited area, but the bounds of commerce extend across many areas, some of relatively recent invention. What is certain, however, is that irrespective of the extent of business ethics, the ethical requirements associated with the conduct of a business will not be as stringent as those associated with the practice of law. The formal ethical constraints established by statute and regulation impose higher ethical duties on lawyers than on business enterprises, without even needing to consider the underlying informal constraints established by convention.
Thus the task becomes one of identifying those ethical constraints that are accepted as binding the practice of law and considering whether they are applicable to business practice. If such constraints also bind business, then the movement by legal practices to a business focus will not produce additional pressures. But if business is not also subject to these ethical constraints, then the introduction of a greater degree of business focus is likely to produce tension within the practice of law.
A fundamental duty owed by a lawyer to the client is the duty to maintain confidentiality. Society deems it necessary for a client to have absolute confidence that all communication with a lawyer will remain confidential. This is justified on the basis that a lawyer must have access to all information to be able to assist the client to achieve a just result. It is akin to the duty of confidentiality shared by other professions, such as doctors and religious advisers, and is fundamental to the lawyer-client relationship.
Such a duty does not attach to a business relationship. A duty of confidentiality may be part of a business relationship if included in the contract between the parties, but it is not implied into that relationship, as it is in the case of professionals and their clients. Additionally, a breach of confidentiality in a business context may lead to a contractual remedy, such as an order for payment of damages, but the party who has breached confidentiality does not suffer any criminal or quasi-criminal penalty. This is to be contrasted with a breach of confidentiality by a professional that may lead to imposition of penalties and even the loss of the right to practice.
As Officers of the Court, lawyers have an overriding duty to uphold the law. Thus the duty to maintain a client’s confidence is counter-balanced by a duty not to mislead the court. A lawyer who is provided with information by the client that indicates that the client is guilty is obliged to treat that information as confidential and may not disclose it to the court but, on the other hand, the lawyer must not mislead the court. If a client admits to the lawyer that the client was at the scene of a crime, the lawyer is not permitted to disclose that fact to the court, but the lawyer cannot advance an argument based on an alibi and thereby suggest that the client was not at the scene. Balancing these two competing duties clearly creates difficulties, but such is the role of the lawyer. Business has no higher duty to the court than any other citizen, a duty not to lie on oath. Beyond that limited duty, business is entitled to take whatever advantage of circumstances that would oblige a lawyer to honor the lawyer’s duty to the court.
As an agent or representative of the client, a lawyer has a duty to avoid being in a position where the interests of the lawyer conflict with the interests of the client. Such conflicts may arise when the interests of the lawyer directly or personally conflict with the interests of the client. A conflict may also arise when the lawyer acts for two clients whose interests may come into conflict, which is known as an indirect conflict.
Many businesses act as agents for clients and face the prospect of a conflict of interest. In a business context, the law would imply into the contract between the principal and agent that the agent would avoid conflict situations or would seek the client’s consent to continue to represent the client if a conflict should arise. The law even imposes a criminal penalty on agents who receive a secret commission arising from their agency, and so the issue of conflict of interests is not unknown in a business context.
The lawyer’s duties in this regard, however, are more demanding than in a normal business environment. The duty is said to arise out of the lawyer’s special relationship with the client, described as a fiduciary relationship. This is a relationship of trust, where one party places trust in the other party, much more than a simple business relationship. Thus the lawyer has contractual duties, but much more. A fiduciary is prohibited from making a profit from the relationship, other than a fair reward for work undertaken. Whilst an agent acting in a business environment may be able to contract with the principal to share a potential reward arising from the transaction, a fiduciary agent is forbidden from doing so. It is the element of trust in the relationship that lifts it out of a business environment into the realms of a fiduciary relationship. If lawyers want to be invested with the trust of their clients, they must be prepared to accept additional onerous duties arising from this special relationship.
The prohibition on avoiding conflicts of interest is generally limited to avoiding actual conflicts. When a conflict arises, the agent must cease to act as agent. There is no prohibition on acting in a potential conflict situation, either a potential direct conflict, involving the interests of the client and the agent, or a potential indirect conflict involving the interests of two clients.
Potential conflicts exist in many business environments but, subject to the prohibition on secret commissions, no limitations exist whilst that conflict remains a mere potentiality. Lawyers however are subject to ethical constraints even if the conflict is merely potential. Practice rules, breach of which may result in loss of the right to practice, require lawyers in certain situations of potential conflict to obtain the consent of clients before continuing to act. Acting in a situation of actual conflict is prohibited.
The concept of consent as an antidote to potential conflict raises its own set of problems. It is suggested that a client may be protected from the evils of a potential conflict situation by being informed of the potential and consenting to the agent continuing to act. But in a fiduciary relationship the client places trust in the agent. One may question whether a client who has invested the relationship with that element of trust is going to be capable of making an objective decision as to whether consent should be given. A client who trusts an agent sufficiently to enter into a fiduciary relationship is not very likely to be able to exercise that element of independence that is necessary to make an informed decision as to whether the potential for conflict ought to be accepted. This brings us to the need for clients to receive independent legal advice before providing consent to the potential conflict, which leads to the ridiculous outcome of requiring legal advice to decide whether to accept legal advice. Whatever the extent of the duty to ensure that informed consent is given, it is clear that the duty is higher in a fiduciary relationship than in a normal business relationship where the parties are presumed to be on equal footing.
From the above analysis of legal ethics it can be seen that, whether or not it is possible to clearly formulate a set of ethical principles applicable to the wider business community, ethical demands placed on lawyers far exceed the ethical expectations of society in relation to the business community. That this is so ought not come as a surprise as society has always regarded the relationship between lawyer and client as being in a special category, deserving of special protection. Indeed the legal profession has long subscribed to the importance of the relationship as justifying the virtual monopoly that the profession enjoys in relation to the legal needs of society.
What now needs to be considered is whether the apparent inevitable infiltration of ‘business principles’ into the practice of law is likely to have any effect on the ethical standards of the profession and how society might handle the apparent movement away from the practice of law as a noble profession to the conduct of a business enterprise.
There can be little doubt that the practice of law over the last half a century has embraced business principles. The structure of society has changed such that the income level of lawyers has decreased from a multiple in the region of five when compared to the average income, to a multiple of less than two. A more just and egalitarian society has resulted in lawyers moving from an assurance of deriving a handsome income simply from the practice of law, to being in a position where all professional activity must be measured against efficient business practices. There can be no complaint from a society that has imposed these changes that lawyers now apply business principles to their practices, but society is entitled to be concerned when the advancement of those business practices place new and potentially dangerous strains on the special relationship between lawyer and client. The move to corporatisation is one such danger.
Corporate entities have been part of society since the days of the South Sea Bubble in England in the eighteenth century. The law has long recognised not only humans as legal entities, but also corporations as separate legal entities to the humans who stand behind the corporations, the so-called ‘corporate veil’. The principal objective of the corporation is to provide limited liability, such that the assets of the human backers are not liable to meet the obligations of the corporation. A secondary objective is to allow for distribution of income between a number of people, rather than to one individual. Such arrangements are commonly regarded as ‘good business practise’.
Lawyers have traditionally practiced in partnerships: legal arrangements consisting of duly qualified individual lawyers responsible to and for other partners. Liability is shared, but not unlimited, and income can only be divided between legally qualified practitioners. Unlike most other professions that have adopted the corporate structure in whole or in part, lawyers have continued to practice in partnerships and indeed until recently were prohibited from adopting a corporate structure. Changes in the 1990s allowed limited corporatisation, but prohibited limitation on liability and sharing of income with non-lawyers and were thus not widely embraced.
The corporatisation argument has been recently reinvigorated by the push for Multi-Discipinary Practices (MDPs). Lawyers enjoy a monopoly on the supply of legal services. Other professions, notably accountants, have been widening their sphere of influence and see value in merging the advice they provide to their clients on accounting matters with legal advice, resulting in the establishment of legal practices within accounting firms. As a result, legal firms fear a drift away from lawyers to accountants and the accountants wish to integrate the legal practices completely into their business. Both sides therefore favor MDPs, the lawyers as a way of securing work and the accountants as a way of developing their business. Whilst it is this link between lawyers and accountants that is currently driving the MDP debate, it is suggested that lawyers may link up with other ‘professions’ to create MDPs designed to meet the needs of other clients.
The MDP is assumed to be have a corporate structure with directors and shareholders, some of whom may be lawyers, but many of whom will not be. Liability will be limited and income shared amongst all owners. Indeed it is suggested that a corporate structure is necessary to allow MDPs to seek financial backing from investors generally and it is anticipated that MDPs will list on the Stock Exchange as public companies. Provided that at least one of the ‘controllers’ of the MDP is a lawyer, the corporation could provide legal services to a vast number of ‘clients’. How, though, would such arrangements impact on the special relationship between a lawyer and client?
A lawyer’s client is entitled to expect that all information received by the lawyer in relation to the client will be treated as confidential. Indeed some of that confidential information, being information entrusted to the lawyer for the purpose of obtaining legal advice or in relation to litigation, is so confidential that it is protected by the law of ‘professional privilege’ and must not be divulged, other than in the most extreme of circumstances.
A lawyer practicing in a MDP may be subject to even greater pressures in relation to client confidentiality than a lawyer in a traditional practice. The lawyer will be part of a large business anxious to promote the success of the business. Non-lawyers, not subject to the same ethical constraints as lawyers, may hold positions of power within the organisation and may not have the same commitment to client confidentiality as a lawyer. In relation to professional privilege, privilege may be lost if the confidential information is shared with non-lawyers within the business and this may lead to a loss of public confidence in this important principle.
Any conflict between a lawyer’s duty to the client and the duty to the court must be resolved in favor of the court. Apart from recently introduced rules governing some expert witnesses, no other profession shares this duty. A lawyer practising in a MDP will be faced with a further duty that may add to this conflict – the duty to the company as representative of its shareholders. Much has been said in recent times of the duty of a director of a company to the shareholders. If the lawyer is simply one of a number of directors then the lawyer alone will be required to put the interests of the court and the client before the interests of the company and other directors may be inclined to favor the interests of the company, or the client.
A lawyer also has a duty to ensure that a client’s interests do not come into conflict with the interests of the lawyer, or with the interests of another client. The involvement of an MDP as the provider of those legal services again adds another factor to the equation that creates difficulties for the MDP lawyer. The interests of the MDP may well be improved at the expense of a client, or by favoring one client over another. The non-lawyer participants in the MDP will not be subject to the same constraints as the lawyer, who may therefore face greater conflicts than in traditional practice. The interests of the shareholders in the MDP will be best served by making a profit, but that profit may be derived in a manner that is not in the best interests of the individual clients and the lawyer has a duty to those clients.
The advent of MDP is likely to add further pressures on the delicate balancing act that lawyers are required to perform when juggling the competing interests of all participants in the legal profession. Whilst regulation of MDPs may provide some of the answers to the potential conflicts, it must be remembered that many participants in MDP will not be subject to the special rules that guide the lawyer-client relationship.
MDP are favored by the legal profession in the United Kingdom but have been rejected in the United States. In Australia, they are accepted in New South Wales, proposed for Queensland and under discussion in Victoria. Given that the notions of fidelity, independence and confidentiality are defining characteristics of the relationship between lawyer and client, anything that places additional strain on that relationship must be viewed cautiously.
[*] Lecturer, School of Law, Deakin
University.
[1] Roscoe Pound, The Lawyer
from Antiquity to Modern Times (1953).
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