Liberalisation and integration of legal services

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.

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.