REGULATING THE MARKET FOR LEGAL SERVICES IN ENGLAND: ENFORCED SEPARATION OF FUNCTION AND RESTRICTIONS ON FORMS OF ENTERPRISE

REGULATING THE MARKET FOR LEGAL SERVICES IN ENGLAND:

ENFORCED SEPARATION OF FUNCTION AND RESTRICTIONS ON FORMS OF ENTERPRISE

THE Law Society has long advocated that solicitors be allowed audience rights in the higher courts, at least in a range of matters. More recently it has been grappling with problems posed by multi- disciplinary partnerships.’ The Office of Fair Trading has examined critically restrictions on, iriter alia, the way in which law firms are organised.2 These events have raised once again the question whether the division of the United Kingdom’s legal profession and various other self-regulatory requirements are or are not soundly based in public policy. The object of this paper is to sketch the basic economic considerations relevant to those debates.

PART I REGULATION BY BIFURCATION OF FUNCTION

Why Regulate Legal Services at all? Neither the Law Society nor the Bar Council has proposed that anyone be allowed to appear in courts or to practise law in other ways. These organisations are firmly in favour of some regulation of the market in legal services, not a completely unfettered free market. They are hardly alone: almost no one seriously advocates complete elimination of all aspects of professional licensing and regulation. We are, then, concerned with the question not of free competition versus regulation, but with a quite different question: the comparative efficacy of two different types of regulation.

We may pause for a moment to ask the question that no one in the legal services industry (understandably enough) cares to ask: why regulate legal services at all? We do not regulate most services by means of entry-licensing of personnel. Why do we do it for legal services?

The broad consensus that the legal services industry needs to be regulated is usually thought to rest on the nature of those services. The standard argument runs like this. The lay client consults a lawyer because he knows neither the law affecting him nor how to handle his legal affairs to best advantage. The client finds it difficult to assess accurately the quality of the services he gets. Even if he receives bad services he may never discover the fact. Here the usual market mechanism breaks down. In the usual case we leave the regulation of the quality of goods and services largely

’ “Multi-Disciplinary Partncrships and Allicd Topics,” Thc Law Socicly: discussion

“Rcstrictions on thc Kind of Organization Through Which Mcmbcrs of Professions papcr prcparcd by J. W. Haycs, Sccrctary Gcncral, (April, 1987).

May Offcr Their Scrviccs,” OFr, August 1986. 326

MAY 19891 REGULATING THE MARKET FOR LEGAL SERVICES 327

to the market since we assume that the ordinary consumer is the best judge of the value to him of the goods and services on offer. The assumption is not true, or at least not usually true, in the market for legal services.

In fact this standard argument for regulation is not at all strong. The market provides mechanisms to cure such problems. Reputation is the key. In an unregulated market some firms would invest in a reputation for providing good quality service. In such conditions a firm’s reputation becomes its most valuable asset. It would not depreciate this asset by cheating clients or serving them poorly, especially those clients with a continuing need for legal services. The problem of poor information is not peculiar to the legal services market and in the absence of regulation would be solved just as easily as in (say) the market for dry-cleaning, estate agency services or motor repair services.

Even if regulation is needed at all, less restrictive forms than the present could be used. Why not allow anyone to offer legal advisory or advocacy services, but prohibit h im-on pain of severe penalty-from calling himself a solicitor or barrister unless he has fulfilled the licensing requirements? That way the public could take a conscious decision to risk employing non-certified persons. This would provide a market test of the value of regulation. Certification would then work as a signal to customers, not as a barrier to competitors.

It is hard to believe that all present restrictions in the legal profession everywhere in the industrialised world are justified. The kinds of restrictions we find around the world vary enormously. For example, the average age for qualification as a lawyer in Germany is 30 years and eight month^.^ In England it is about 25. Do the Germans need those extra five years? Does England need its (approximately) seven years? Does the customer really need to have uniformity imposed?

Careful students of regulation have concluded that regulation, though invariably justified as being in the interest of the public, is frequently operated in the interest of the people supposedly being r e g ~ l a t e d . ~ Whether the legal services industry is an exception to the general rule is by no means clear.

But that is not the main issue here. For the purposes of the rest of this paper it will be assumed that there is some sound reason for regulation by certification.

’ The 1986 figurc. ‘ Gcorge Stigler, “Thc Thcory of Economic Regulation” 2 Bell J Econ. 3 (1971); Richard Posner, “Thcorics of Economic Rcgulation” 5 Bell J. Econ. 335 (1974); Sam Peltzman, “Toward A More Gcncral Thcory of Rcgulation” 19 J. Law & Econ. 21 (1976).

328 THE MODERN LAW REVIEW [Vol. 52

Market Failure Through Agency Cost Economists characterise the market in legal services as one beset by severe problems of agency cost.5 Agency costs arise when the principal (the consumer) is not a good judge of either the quantity or quality of services and relies for advice on his agent (the lawyer), the very person who stands to gain financially from providing that advice. Regulation of the market is designed (inter alia) to ensure minimum quality standards on entry into the profession and to police unduly self-serving behaviour-in price, quality or quantity-in the supply of services.

The agency problem is widespread. It is dealt with in different ways in different industries. The Stock Exchange, for example, used to follow the route of the legal services industry in prohibiting dual capacity as between jobbers and brokers. It has recently abandoned that. There are many everyday examples of agency cost: garages are accused of doing unnecessary repairs; dentists are accused of “ear-to-ear dentistry”; stockbrokers are accused of “churning” their clients’ portfolios.

In important areas the common law seeks to cure or mitigate agency problems.6 In the law of trusts a trustee or fiduciary must not profit from his office except as specified in the trust instrument. In company law a director must not divert to himself a “corporate opportunity.”

A particular buyer of legal services will often have a variety of needs, not all of which can be provided at the appropriate quality by one lawyer, or even by one firm of lawyers. Here we find a severe form of agency cost, and one to which entry licensing and general policing provide no ready cure. They cure only the grossest kinds of agency cost: they are good at ensuring minimum standards, but do little to encourage high quality. The primary mechanism for ensuring appropriate quality is the customary one: competition between lawyers in the market place. Yet, in so informationally- impaired a market, competition is necessarily only an irregular and defective cure. Is there anything better? In the English market for legal services there is an institution which minimises agency cost in one crucial area. The area is advocacy and the institution is the divided profession: the forced separation of advocates from providers of general legal services.

Vertical Integration and its Prohibition

(a) The Basic Cost lo be Offset In the eyes of economists the key question is this: why should we prohibit vertical integration in the legal services industry? Vertical

M. Harris & A. Raviv, “Some Rcsults on Incentive Contracts” (1978) a(1) Am. Econ. Rev. 20-30; S. Ross, “Thc Economic Theory of Agency: The Principal’s Problem” (1973) 63(2) Am. Econ. Rcv. 134-139; S. N. S. Chcung, The Theory of Share Tenaticy (1969); S. Shavcll, “Risk Sharing and Incentive in the Principal and Agent Relationship” (1979) lO(1) Bell J . Econ. 55-73.

W. Bishop & D.D. Prcnticc, “Some Lcgal and Economic Aspects of Fiduciary Remuneration” (1983) 46 M.L.R. 289.


integration means the organisation of several successive stages of production within a single enterprise: here, broadly, the preparation of the case and its prosecution through advocacy in the courts. Vertical integration may have both advantages and disadvantages in this, as in any other, industry. Why do we not do in the legal services industry what we do in general: rely on the market place to decide? If there are cost economies to be achieved by vertical integration, sufficiently large to offset the costs of managing a larger and more complex organisation, then vertical integration will emerge naturally; otherwise it will not. The evidence of most jurisdictions where it is allowed is that vertical integration tends to emerge naturally in the market for legal services. So, prohibiting it does generate some cost to our economy. Is that cost offset by some larger gain?

(b) Benefits Generated by the Selection Effect Agency cost arises in the provision of advocates’ services for the common reason that the client is only a poor judge and monitor of quality. So, if permitted, his general legal adviser will be able, if he wishes, to provide advocacy either himself or through a partner of his f irm-even if the quality of advocacy provided is less than the client should have and could obtain. That will be tempting for a firm wishing, as most firms do, to sell more of its services. Separation cures the problem by simple, drastic means: by complete removal of the temptation to do oneself what could be done more cost-effectively by someone else.

The division of the profession in some measure mirrors de facto divisions observable in those markets in legal services where no separation is enforced. Lawyers tend to divide within firms into litigators and non-litigators. But the forced division of the profession has an important effect on the process of choosing an advocate once business becomes contentious. In a non-divided system the choice can fall too easily on those partners of one’s own firm who also specialise in litigation-in practice regardless of their competence in the special task at hand. In a divided system the element of financial self-interest of the firm has been removed, and the potential choice is effectively widened. The eventual choice will not necessarily be a good one-it might be made not on grounds of competence but in some other way that benefits the lawyer rather than his client (personal friendships and the like). However, the greatest and most powerful kind of self-interest-pecuniary self- interest-is removed.

Agency cost in legal services extends further than selection of the trial advocate. A firm does not wish to lose clients. Suppose it says to a client: “We are not sufficiently specialised to handle your problem well. We suggest we consult a specialist on your behalf.” Then, if the specialist is in another law firm, the first firm risks losing the client on this and future matters to that other firm.


Where there exists a class of lawyers who provide, inter alia, specialist consulting services that potential danger is reduced. The first firm has much less incentive to conceal its own lack of expertise in the matter in question. Moreover, the existence of a branch of the legal services industry available only as consultants to solicitors’ firms has the side-effect of increasing the number of competitors in the market for general legal services. It permits relatively small-scale solicitors’ firms to offer relatively sophisticated services.

(c) Benefits Generated by the Specialisation Effect

Dividing the profession forces all advocates to specialise in advocacy alone. This enforced specialisation has some advantages. In law, as in other activities, there is a hierarchy of difficulty. Each specialised production unit (a set of barristers’ chambers) reflects this in its structure of Q.C.s, juniors, and pupils.

Let us suppose that a trial advocate is unlikely to be good at his job unless he goes into court frequently, that advocacy skills require frequent honing. If the supposition is true then the basic agency cost model is strengthened in the following way. Even if solicitors’ choice of advocates were imperfect, then the system of forced separation would still result in better advocacy in the court room, because only specialists would be found there.

It would also result in generally higher-cost advocacy. Solicitors have to be paid for their intermediation in the choice of advocate. The extra costs will be a dead-weight burden falling on those sophisticated buyers who do not need the protection afforded by informed intermediation. Since most such buyers will be firms, to whom legal expenses are just another business expense, the cost falls ultimately on the consumers of the goods and services these firms produce.

In assessing any of these effects the magnitude of costs and of benefits matters crucially. The value of any advantage must be measured against the cost of preventing “natural” vertical integration in the organisation of the legal services industry.

Market Failure through Externality

(a) Costly Externality: Minimising Misbehaviour

Every lawyer faces a potential conflict between the purely private interests of his client and the public interest in the administration of justice. The lawyer’s job is to help his client by refining arguments and assembling evidence. Both sides do this. As a result the court is, in theory, able to take a decision based on the best possible arguments and evidence. Yet the lawyer will often find that it is possible to do or say things which would indeed help the client, but which would not at all help the administration of justice.

MAY 19891 REGULATING THE MARKET FOR LEGAL SERVICES 33 1

One important function of any legal profession is to minimise professional misbehaviour that happens to be in the interest of a particular litigant.

Misbehaviour is minimised if there is strong self-policing amongst professionals, if standards of professional behaviour are articulated and taken seriously. All professions set up standards of behaviour designed to minimise misconduct. In practice no profession ever succeeds completely. Here lies another possible advantage from a dual legal profession. The forms of misbehaviour that are against the client’s interest (such as doing the job badly or defrauding him) appear in all kinds of legal work. The forms of misbehaviour that are in the client’s interest are mainly specific to litigation: lying to. the court, fabricating evidence, preparing and putting forward a case known to be false. The temptation to do these things for a client is most effectively overcome where there is strong group solidarity amongst the professionals-where the standards of the “club” are stronger than the commercial self-interest of the lawyer as businessman. Here we see the possible advantage of enforced specialisation in advocacy and enforced separation of advocates from providers of other legal services. The segregation of professional advocates from other lawyers creates a club’ and ensures that it remains a relatively small group having day to day contact with one another, necessarily close to the courts, and operating at one remove from the lay client.

If the club does its work well then, from the point of view of honest users of legal services considered as a whole, the legal system can be expected to function better-more reliably-than it otherwise would. This is particularly true for commercial users who tend to be repeat players. To the commercial user of the legal system the opportunity to make enforceable contracts and reliable property dispositions is an important business tool. Honest competent enforcement, in effect, lowers one of the potential “costs” of using this system. So, the honest businessman is the ultimate beneficiary of a system that usually delivers accurate, sensitive results and seldom delivers perverse ones. Again, though the costs and benefits are in principle quantifiable, quantification would in practice be fearsomely difficult.

Behaving honestly confers a benefit on others. In this sense it is a beneficial externality, and behaving dishonestly is a costly externality. It is time to focus attention on these important concepts.

’ The economic theory of clubs is well developed: see James Buchanan, “An Economic Theory of Clubs” 32 Econoniicu 1 (1965); Dennis Mueller, Public Choice (1979) p. 29 et.se9. It is a theory of local or group-based public goods, in which a club is an association of consumers. The barristcrial club is not this kind of club. Rather it is an association of producers. It produces private goods, supposedly at lower social cost, by internalising an externality (see next section).


(b) Beneficial Externality: Public Capital-Formation through High Quality Precedent

All economists agree that markets tend not to function well in the presence of “externalities”: that is, costs or benefits generated by a producer which are borne by others and so not passed on by the producer to his customers. Pollution is an example of a cost generated by some firms but not paid for by them. Bee-keeping is an example of a benefit not paid for-Farmer Jones’ bees pollinate Farmer Smith’s apple blossoms next door but Farmer Smith pays nothing. Externalities may8 call for government intervention to bring private incentives back into line with public benefits- intervention to make producers face all external costs they cause and intervention to give them the credit for all external benefits they generate.

The idea of externality is important in the debate about the regulation of the legal profession for this reason: the way the profession is organised may have an influence on substantive law. And high-quality law in turn has an impact upon several other important industries.

The parties to a dispute, naturally enough, think only of the way the court’s decision will affect them. They do not see that some decisions have a much wider impact. Mr. Hadley and Mr. Baxendale thought only of their dispute over a mill shaft: the litigation they funded created a legal standard by which over the the last 130 years countless thousands of cases have been decided or ~ e t t l e d . ~ Every year many hundreds of decisions are thought sufficiently important to be reported in published volumes. This is an extensive and never-ending process of informal updating of the law by the judiciary.

Economists have studied this process as an unusual case of public “capital formation.”” The stock of precedents is a stock of intellectual capital publicly available to all who wish to use it. Like any other stock of capital it decays over time and does its job less well if not renewed. The only attempt to quantify, by Professor Landes and Judge Posner, put the decay rate at about 4-5 per cent. per annum,” which, though only about half the decay rate of the equivalent capital stock of medical knowledge, still seems rather rapid. The estimate is based on American data and may well

* But see S. N. S. Cheung, “The Fable of Bees: An Economic Investigation” 16 J. Law and Econ. 1 1 (1973).

Hudley v. Barendale, 9 Ex. 341; 156 (E.R.) 145 (1854); and see Richard Danzig, “Hadley v. Butendale: A Study in the Industrialisation of Law” 4 J. Legal Stud. 249 (1975).

lo William Landes & Richard Posner, “Legal Precedent: A Theoretical and Empirical Analysis” 19 J. Law & Econ. 249 (1976). The authors achnowledge James Buchanan a rcccnt recipient of the Nobcl Prize in Economics, as the originator of this conceptual coupling of capital theory with public economics.

I ’ [bid., p. 219.


be higher than the decay rate of its English equivalent. High- quality decisions, then, create an important external benefit. One of the aims of regulation of the legal services industry has long been to promote this externality, to ensure that the system delivers high-quality precedents even though the particular client in each case has no motive to ensure that.

The regulatory structure aims to ensure high quality precedent- formation through two interconnected channels: by recruiting a highly skilled judiciary and by ensuring that those judges are well served by advocates who come to court with well-prepared and well-articulated legal arguments.

So far as advocates’ arguments are concerned, the analysis of enforced specialisation at page 330 above applies here in a straightforward way. Other things equal, the arguments brought before a judge are more likely to be sophisticated ones-liable to help the judge in stating the law in a way that is helpful to future users of his judgment-if they are prepared by highly skilled, experienced, specialist advocates. Similarly, the existence of a group of high-quality advocates both creates a pool of talent from which judges can be recruited and, just as important, exposes these potential recruits to prolonged critical scrutiny by their peers, so that real talent can be assessed and tested.

Note that the above model can easily accommodate the rule by which solicitors may appear as advocates in lower courts and before tribunals and arbitrators. There is an implicit cost-benefit calculation: lower average quality of legal services is required where less (at least as calculated by the measuring rod of money) is at stake for the litigants, where little “precedent value” will be produced, and where grooming of future judges is not relevant. Whether the current system weighs these costs and benefits appropriately is another matter.

(c) Beneficial Externality: Lowering the Costs of Judicial Administration It may be that the main beneficiary of a specialist bar is not the client but the judiciary. Where a case is put badly, or a procedure is ill conducted, many-perhaps most-of the costs fall not on the client but on the judges, and on counsel for the other side. No judge wants to see a case wrongly decided because of the shortcomings of the lawyer employed. Indeed, the bench and the opposing barrister have special responsibilities to an unrepresented litigant. To avoid an uqfair result a judge will have to spend more time and effort on the case to make up, as best he can, for the deficiencies of handling. This is particularly important when, for whatever reason, procedure is oral, as in England, rather than written and conducted by briefs and motions as in the United States.


Barristers can act as gatekeepers for the courts: preventing cases from coming to court in costly-to-adjudicate form. This, of course, is a form of the specialisation effect, referred to at page 330 above-but this time the beneficiary is the court rather than the client.

It is noteworthy, as will be seen in the next section, that judges are often strong advocates of a specialist bar, especially in Australia, but even in the United States.

As always, this consideration cuts deeply only where there is a lot at stake. All adjudication expenditure is, rightly, scaled to the value produced by it. So, deficient advocacy in small matters rightly causes less anxiety. This may not be how it is presented in school civics courses, but it is the way of the world.

From Economic Theory to Empirical Evidence

(a) Chief Justice Burger’s Observations Does the English system of a divided legal profession really work as pictured in the model? If so, we should observe a higher general standard of trial advocacy in England than in countries with legal systems that are otherwise similar. Quality of advocacy does not lend itself to simple quantitative measures. Evidence is liable to be impressionistic and hence subjective. There is one famous piece of evidence. Mr. Warren Burger, Chief Justice of the United States Supreme Court for 17 years, and a judge for many years before that, in an article titled Special Skills of Advocacy” said this:

“Ever qualified observer of the English system with whom

I have made, drawing on twenty ears of rather close contact

in a fraction of the time we expend in the United States for comparable litigation. This is a generalization that has a solid basis and can be readily documented.

For twenty years, I have watched advocates conduct trials in more than a dozen countries, and nowhere have I seen more ardent, more effective advocacy than in the courts of England.

My own personal observation, based on forty years of professional exposure, is that in any multiple-judge American courthouse, there are numerous daily offenses that would bring severe censure if committed by an English barrister. How many serious errors of counsel are made in trials, I would not venture to say.

Another difference is that (in England) judges of trial courts of general jurisdiction are selected entirely from the ranks of the ablest barristers. Thus, there is little or no on-the-job learning for trial judges as is all too often the case in the

I have cy iscussed this subject makes the same observation that

with the British system, namely, t K at their trials are conducted

’* Warren Burger, “The Special Skills of Advocacy: Are Specialized Training and Certification of Advocates Essential to Our System of Justice?” 42 Fordham Law Rev. 227-241 (1973) at pp. 228-229 and 234 (edited).


United States courts, both state and federal. Only the highest qualifications as a trial advocate enter into the selection of English judges. As a result, an English trial is in the hands of three highly-experienced litigation specialists who have a common professional background. Each advocate has also served an intensive “apprenticeship” before he or she is permitted to appear in court as lead counsel.

Whatever the legal issues or claims, the indispensable element in the trial of a case is a minimally adequate advocate for each litigant. Many judges in general jurisdiction trial courts in the U.S. have stated to me that fewer than 25 percent of the lawyers appearing before them are genuinely qualified; other judges go as high as 75 percent. I draw this from conversations extending over the past twelve to fifteen years at judicial meetings and seminars, with literally hundreds of judges and experienced lawyers. It would be safer to pick a middle ground and accept as a working hypothesis that from one-third to one-half of the lawyers who appear in the serious cases are not really qualified to render fully adequate representation.’’

The former Chief Justice’s simple, stark contrast between English and American advocacy is not in itself especially convincing. American law is much more decentralised and is very much affected by the constitutional status of courts as an independent-a co-equal and not subordinate-branch of government. Further, the more extensive use of juries in civil courts will tend to encourage the theatrical rather than the intellectual side of advocacy. Costs rules permit more litigation in America, some of it more speculative, even buccaneering. It is by no means uncommon for an English judge to try cases wholly removed from the area of practice to which he devoted his career at the bar. Moreover, a much simpler way to solve the problem-if it is a problem--of inexperienced judges is to institute some form of training. Fruitful comparisons are probably more appropriately made with one of the bigger industrial provinces of Canada-Ontario is the obvious choice. Even better would be comparison with Australia, the subject of the next section.

(b) Australia and North America

Australia is the great natural laboratory for the testing of rival theories of the relative costs and benefits of fusion and separation. The profession in two Australian states, New South Wales and Queensland, is divided de jure; in one, Tasmania, it is, for practical purposes, fused both de jure and de facto; and in one, Victoria, it is fused de jure but very divided de fucto. In two, South Australia and Western Australia it is fused de jure and partly divided de


fact^.'^ Of course, the interesting cases are the states such as Victoria and South Australia that are fully fused in theory, but not in practice.

Victoria has had a fused profession, de jure, since 1893. But there has always been a voluntary association, called the Victorian Bar, of practitioners who bind themselves to accept instructions from other practitioners only. Those in England who suppose that abolition de jure of the restrictions as between solicitors and barristers would lead to collapse of the independent bar will find a counter example in the history during the last 95 years of the legal services market in Melbourne and its jurisdictional hinterland.

Mr. J. R. S. Forbes in his comprehensive, though partisan, study of the fusion-division question in Australia attributes the persistence of division in parts of Australia to two causes: the social ambitions of judges and the defects of professional fee scales.14 Australia certainly was, and to a surprising extent still is, a very English place. No doubt, as we look back in time, the force of English example must be counted as very strong. That is far less true today. Yet division is alive and well, and, here and there, even expanding.

Australian judges, Mr. Forbes claims,” have persistently identified with socially ambitious barristers who think they will enjoy higher status if the legal profession is divided. This may seem to be borne out by Australian experience, but in Canada there is a counter example: an attempt in 1800 to divide the profession, though supported by most practitioners, was frustrated by the judges.l6 But even if judicial wishes are the critical determinant in generating and maintaining fusion in Australia then there arise important points about the production of precedents and the efficiency of court operations, which are examined below.

Fee scales, Mr. Forbes suggests, give solicitors no incentive to economise.’’ In the world he pictures, solicitors can just pass on costs to the client whenever counsel is retained. Perhaps. But many a solicitor will testify to cost-sensitivity amongst clients. It is hard to believe that a Melbourne or Adelaide firm, seeking a competitive advantage, would have ignored vertical integration into advocacy if that were really attractive.

I’ See generally J. R. S. Forbes, The Divided Legal Profession in Australia: History, Rationalization and Rationale, (1979 and David Weisbrot, “The Australian Legal Profession” in R. Abcl and P. Lewis (ed.) Lawyers in Society, Vol. I , pp. 251-2 (1988). This is a simplification. Even in the “fully” fused jurisdictions there are some who practise as barristers only, and in the “very” divided ones there are amalgams (the term for those who practice as both).

I‘ Mr. Weisbrot, op. cir. p. 251, suggests another: the existence of a conveyancing monopoly for solicitors. Why solicitors should wish to spend their monopoly profits kcc ing a useless barrister class he does not explain.

l6 W. R. Riddell, The Legal Profession in Upper Canada in its Early Periods (1916) at

I’ Forbes, op. cit. pp. 176, 182. Weisbrot echoes this op. cit. p. 282.

I P The claims suffuse the book, see for example, pp. 4, 33, 181, 205.

pp. 12-13, 19.


Provided its customers are genuinely as well served, a firm that is vertically integrated into advocacy will be able to produce its services at lower cost than one that is not. These lower costs will lead either to higher profits for the firm or to lower prices for its customers. In either case the vertically integrated firm will expand its market share at the expense- of non-integrated rivals, either because its higher profits enable it to attract more skilled recruits into the partnership, or simply because of the attraction of those lower prices to customers.

The South Australian history is in some ways even more interesting than the Victorian. From earliest times there were a few consultant advocates available to other lawyers. In 1963 a few senior practitioners left their firms and formed a voluntary association called the South Australian Bar-taking the same self- denying ordinance taken by the Victorian Bar after 1893. Since then it has grown rapidly and now the South Australian profession is defucro divided, at least in part. A similar process took place in Western Australia after 1959.'*

The Australian states do show us how to achieve division of function and specialisation in advocacy with much flexibility. One of the worst features of the English system of separation is the difficulty it imposes on moving between the two branches of the profession. In consequence some solicitors wish to switch to the bar, but find the cost too great, while some barristers would prefer to practise as solicitors but, similarly, find it too difficult to move. In Victoria and some other Australian states, by contrast, such moves are much easier. Moreover, in Australia a great many barristers are recruited into that profession only after having first practised as solicitor-advocates in lower courts, only later making the switch. Some of these are for a time amalgams along the way. This is a better way of matching human skills and temperaments to professional specialisation. The English system, in essence, relies on rather arbitrary choice by university students who have no experience to draw on. It is not surprising that many careers are blighted by mistakes.

De fucfo divisions have been reinforced by the support of the Australian judiciary. Judges in fused states with voluntary bars are said to be reluctant to recommend any practitioner for a judicial appointment, or an appointment as Queen's Counsel, unless he had spent some time as a full-time independent barr i~ter . '~

This leads us to the role of judges in these questions. What, in economic terms, are the private goals of a judge? The simplest hypothesis is that a judge wishes to enhance his own reputation by writing influential opinions on the cases he hears. For this purpose he needs, and therefore wants, advocacy of high quality. To a

Weisbrot op. cir. p. 251-2. l9 Forbes op. cir.

338 THE MODERN LAW REVIEW [VOI. 52

large extent the input determines the output: the argument determines the judgment.

Whether this is a substantial benefit to our society is very much more problematical. A judgment may be admired by, for example, academic jurists and yet in practice be poor law because it is too complex to be applied by the people whose conduct it seeks to regulate. Only when consumers of legal and judicial services have a choice of jurisdictions can one be sure that such potential disadvantages are fully taken into account. This matter is discussed further in the next section.

No one knows why a specialist bar never grew up in the North American jurisdictions of the common law. In colonial America each court could, and sometimes did, limit access to itself.20 But after independence an anti-British social climate, critical of the common law, combined with ever-rising populism, up to the 1840s at least. This meant that there was little chance of a dual profession emerging. Historians do record a couple of half-hearted attempts to divide the profession-but in general American lawyers had their hands full in maintaining any kind of professional status at all; and in one or two states lost even that battle.21 Even the feeble attempts to divide that did occur appear to have contemplated, as a first step, only gradations of status (of the Q.C./junior variety) and not of function.

Canadian habits, at least in common law districts, were formed in the colony of Upper Canada (now Ontario) after it was settled by the seceding “Loyalists”22 in the aftermath of the American Revolution. That a separate bar did not emerge seems to have resulted at first only from and later from the increasing influence of American example.

The habits of judicial recruitment in North America may be important. Many judges in the United States are elected. Even those who are appointed are almost invariably selected on political rather than professional grounds at all levels of the judiciary, and this was true in Canada too until twenty years ago.24 English and Australian judges have always been jealous of their possible future

Scc gcncrally Chroust, The Rise of the Legal Profession in America: A History (1965). *’ Lawrence M. Fricdman, A History of American Law (2nd cd., 1985), pp. 99-102, 315-318. Sclf-rcgulation in thc intcrcst of the regulated rather than of the public was as common then as now, but considerably more brazcn-or more frank, depending on onc’s point of view. Thus at pagc 100 Prof. Fricdman rccords the unanimous decision in 1756 of the mcmbcrs of the New York Bar-which posscsscd a monopoly on court practicc- to admit no more clcrks to training for the ncxt 14 years, except thcir own sons. Doubtlcss thc citizens of New York werc solcmnly assured that this mcasurc had bccn taken in thc public interest.

22 As they arc callcd in Canadian history books: in American history books thcy arc somctimcs called “Tories.”

z1 Riddcll, op. cir. When a former law profcssor (Picrrc Trudcau) becamc P r i m Minister and took his

rcvengc for the years of embarrassment he had suffcrcd at thc intcllcctual twaddle produced by such judges by, as he hoped, abolishing their kind forcvcr.

MAY 19891 RE *GULATING THE MARKET FOR LEGAL SERVICES 339

celebrity in the law reports as expert contributors to the development of the common law. This seems to have been a less urgent motive of judges in North America. Pro tanto the judges have not had as strong a reason as English and Australian judges for supporting separation.

Nor is this conclusion changed if the importance of constitutional adjudication is considered. Constitutional law judgments tend to be hortatory rather than explanatory. The reason why is well known to everyone except the Professor of Jurisprudence at Oxford2? that these decisions are exercises of political power, unfettered by any consideration save prudence. Posterity will assess them largely in terms of the social and political policies they encapsulate.

On the other hand, there is now more pressure on the separate bar in Australia than there has been heretofore. In Sydney and Melbourne, as in London, large firms have grown up which contain talent equal to that at the bar and which can deploy resources many times greater than any single barrister can manage. Some judicial appointments have been made from the ranks of solicitors. There, as in England, the separate bar seems to be going gently into relative decline.26

In summary, the evidence from Australia and North America both as to judicial perceptions and as to market behaviour is mixed, and not decisive.

Evidence from Mobile Markets in Legal Services and from the “Market for Legal Ideas” Some indirect evidence of the quality of judicial law-making is provided by the widespread use of English precedents in other jurisdictions. Throughout the English-speaking world English judicial decisions are cited for their clarity and the sophistication of their analysis. The impact of English precedent in other legal systems is enormous. On the other hand, there are easily understandable historical reasons for the influence of English judicial law-making. The common law originated in England. The long imperial sunset ensured continued influence for the mother country in the old Commonwealth. A lawyer in a Commonwealth jurisdiction who decides to ignore English developments must make an affirmative decision to do so.

More direct evidence comes from the behaviour of the market for legal services in those parts of the market where the litigants are genuinely mobile internationally. As noted above, this is the best possible test of any legal system. Here the London legal world, made up of the bar, the big solicitors’ firms, and commercial arbitrators, has consistently outraced the competition in spite of sustained challenges. It has attracted and kept international

25 R . Dworkin, Taking Rights Seriously. pp. 279 el seq. 26 Wcisbrot op. cit. pp. 297 and 302.


commercial work of many kinds: banking, shipping, construction arbitration and much else. One reason may be the advantage the London industry has in a judicial system of high quality and of unimpeachable integrity, and one that guides the development and adaptation of the law over time in ways that are acutely sensitive to commercial needs.

Law is becoming more international: a larger portion of the market for legal services is international British law. Firms competing in this market may be impeded by lack of direct in- house advocates experienced in higher courts. If so, that is a disadvantage of Britain’s having a system (or more precisely three systems) of regulation different from other industrial countries. Here there is a direct analogy with financial services such as stock markets and banking. On the other hand, the big London firms of solicitors have prospered. It seems they compete successfully with other centres for international business. Again the balance between the cost and the benefit of a divided profession is a delicate one.

English law is in fact a remarkably successful “invisible” export industry and a source of large currency earnings. But it is much more than that. The existence of a continuous supply of high- quality law forms part of the infrastructure of the economy in just the way that roads and bridges and public utilities do. It is an “input” into several other important industries, notably banking and financial services, commodity broking, insurance and shipping. All these industries compete more successfully with their foreign rivals if the supply of high quality law is sustained. Even when foreign rivals can buy these English legal services (as they do) local firms enjoy advantages in cost and effectiveness that flow from sheer propinquity.

That there is a beneficial externality in high quality litigation is widely recognised. The late Lord Reid once advocated that the cost of appeals to the House of Lords be subsidised, recognising that it was really the community generally rather than the parties who were the true beneficiaries of the second appeal.

Some surprising evidence of this variety comes from the United States. In that country different state jurisdictions sometimes compete to attract legal business. The best known and most intensely studied is the market for corporate chartering in which the tiny state of Delaware has in this century consistently dominated the market: about half the major firms in the United States are chartered in Delaware and thus have shareholder and other disputes resolved there.

Proponents of regulation, inevitably, dislike the idea of investors, promoters and managers of companies having the opportunity to substitute away from costly, useless regulation of the variety that benefits only bureaucrats and parasitic lawyers. They have attacked Delaware’s laws as a “race to the bottom,” a race to provide low- quality regulation attractive to corporate crooks.*’ But the attack

*’ Cary, “Federalism and Corporate Law: Reflections Upon Delaware” 83 ’Yale L.J. 663 (1974).

MAY 19891 REGULATING THE MARKET FOR LEOAL SERVICES 341

has been discredited by empirical evidence and by experience. There is now no real doubt among economists, that Delaware dominates the corporate chartering market for one reason only: because it provides sophisticated adjudication and efficient rules, sensitive to commercial needs, that balance the interests of business managers and investors better than the rules and adjudication services of rival jurisdictions.28

It is a little known fact that Delaware has something like a specialist bar. It is not a specialisation enforced by division of the profession as in England: there is only one Delaware profession. But a small bar has grown up that is highly specialised in corporate litigation. This bar is organised in relatively small partnerships that make their services available to other firms, or to clients directly, as consultants on corporate litigation. Judges of the Delaware Court of Chancery-the key court in corporate m a t t e r e a r e invariably selected from this small group of experienced barristers, after consultation with the judges before whom they have appeared. The bench and bar are consulted and deferred to by the state legislature on matters of new corporate legislation. The legislature defers to the experts for one simple reason. A large part of the revenues of the state government-and Delaware is one of the wealthiest states in the Union-come from fees paid voluntarily by firms to Delaware for the service of corporate charterlng, It is universally agreed-at least in Delaware-that this powerful combination of sophisticated law, expert bench and specialist bar is for the people of that state the goose that lays the golden egg.29

PART I1 REGULATION BY CAPITAL OWNERSHIP RESTRICTIONS AND BY ATOMISATION OF FIRMS

Ferment in the Legal Services Market: The Rise of Giant Law Firms and The Relative Decline of the Bar

Why then does the English Bar seem to be under pressure today? The answer lies in the growth of giant law firms in London over the last two decades. Writing in 1956, Gower and Price noted30 that in England solicitors’ (and other) partnerships were limited by

See R. Winter, Government and the Corporation (1978); D. Fischel, “The Race to the Bottom Revisited: Reflections on Recent Developments in Delaware’s Corporation Law” 76 Nw. U.L.Rev. 913 (1982); Dodd & Leftwich, “The Market for Corporate Charters: ‘Unhealthy Competition’ Versus Federal Regulation” 53 J . Bus. 59 (1980); R. Romano, “Law as a Product: Some Pieces of the Incorporation Puzzle” 1 f. Law, Econ. & Organization 225 (1985).

r, For some general information on the Delaware Bench and Bar, including the matters mentioned in this paragraph and much more, see the collection of articles in Delaware Lawyer, Vol. 2 (1984), a publication of the Delaware State Bar Association. The contribution of Mr. Sidney B. Silverman, a New York plaintiff-shareholders’ attorney (i.e. one who has made his career representing the people supposedly harmed by Delaware’s pandering to the corporate establishment), is particularly illuminatlng. )’ L. C. B. Gower & L. Price, “The Profession and Practice of the Law in England

and America” (1957) 20 M.L.R. 317.


law to 20, and that only one firm was then at that ceiling. History and commonsense alike teach us that when rules become inconvenient to powerful interests they are done away with. In 1967 the ceiling was ab~l i shed .~’ Today there are three firms with partnerships in the region of 100, each with well over 200 fee- earning lawyers on their and dozens of firms now exceed the old 20 partner maximum.

The reasons for the growth of these firms, though widely discussed, are not yet well understood. Various explanations have been advanced: increasing complexity of law, need to share risk of fluctuation of specialised business, growth in corporate and banking work which requires large teams. But none of these explanations is in itself very convincing: why has there been no parallel growth in Zurich, Frankfurt, Paris and Milan?

Why is it that in common law countries a market place in legal services seems everywhere to generate large firms-at least when the size of the market permits it-whereas that does not happen in the major civilian jurisdictions? A firm of 20 partners is huge- almost unknown-in Paris, Munich, Dusseldorf, Marseilles or Hamburg.33 Yet a firm of 20 is by no means unusual in Birmingham, Seattle, Melbourne or Vancouver-let alone in commercial London or New York where a firm of 20 is puny. Is the common law different in some way?34 Is there some difference flowing from the role of the lawyer in a legal system containing a very large judiciary? Or is it perhaps an accident of regulation?

Generally speaking, a firm will grow large only if there are significant economies of scale or of scope.35 But these seem unlikely to be different as between the various large industrial countries.

The simplest explanation, even if not very satisfactory, is that we are observing the operation of a time lag: that eventually the market for legal services in all major industrial countries will be dominated by big firms, able to field large teams of highly skilled lawyers whenever the client’s need arises. The main evidence-and meagre it is-for this hypothesis is the course of events in Belgium. There the local firms have tended to grow bigger,36 partly in response to the example of giant American firms setting up branches in Brussels to service corporate clients with EEC law problems. Certainly there are enough artificial impediments to the

A similar development took place in Australia, see Weisbrot op. cil. p. 296. Bufferworfh’s Legal Directory 1987 (Linklaters & Paines, Slaughter & May, Clifford

Chance). The largest in all Germany has only 35 partners. French partnerships are very small:

see the official report to the French government by Pierre Bellet, La Place des Jurisres Fratqais dam la Cornperition Inrernarionale. 1985. I( See John Langbein, Thc German Advantage in Civil Proccdurc, 52 University of

Chicago L. Rev. 823 (1985). Is An economy of scope results when a firm finds that combining two distinct but

associated activities results in lower unit costs than would production of one of them alone.

36 There are two local firms in Brussels with over 50 partners.


expansion of law firms in France and Germany to bolster the hypothesis of a time lag. In France audience rights in the highest courts are confined to 60 persons: admission to the club being by purchase of a place. In Germany firms are confined to each Land with cross-lander partnerships being prohibited. Time will tell us whether the time lag hypothesis is true.

The continental markets in legal services may differ from those of the Anglo-Saxon world in another way. It seems that big corporations on the continent, not having services from big law firms available, have built large expert in-house legal department^.^' This is only an impression: no data have been assembled. Even if this is true, cause and effect are hard to disentangle.

The growth of the giant law firms is the main reason for the relative decline of the bar. When firms were small there was little opportunity for a solicitor to become as expert as, or even more expert than, a specialist barrister on a particular subject. Now that firms have numerous highly specialised departments that is no longer so. It is now common for legal officers of major corporations to find the services of big solicitors’ firms to be as good as those of the bar. Moreover, on seldom-litigated subjects solicitors have become more expert than barristers. In consequence, the big firms are no longer mere processors of routine legal work. They can offer recruits not only relative security, as of old, but the prospect of rich rewards in the future and interesting work-probably more interesting than routine work at the ba r -on the way.

At the same time that solicitors’ work has grown more attractive, many barristers have become unwilling functionaries in the welfare state. The growth of legal aid work has meant that many barristers are effectively casual employees of the state, paid on a piece-rate basis. They may hate to think of themselves this way, but that is what many of them really have become. Little wonder then that in recent years talent seems-again this is impressionistic-to have been gravitating toward city firms rather than the Inns of

Managing Risks of Demand Fluctuation in Legal Services Enterprises

Conversation among lawyers about the rise of big firms often turns to something that economists characterise as risk-bearing analysis. Efficient risk-spreading is so important in understanding economic institutions that it can hardly be emphasised too much. It is the key to much of the history of business in capitalist economies in the last two centuries.39 Both the bar and the solicitors’ profession through their self-regulation impede risk-spreading, but the bar

’’ Of course large in-house legal departments are not strangers to the common law world.

yI Mr. Weisbrot, op. cif. p. 297, sees a similar phenomenon in the big states in Australia.

39 E. Furubojln & S. Pejovich, The Economics of Property Rights (1974).


impedes it far more severely. It is probably the effect of poor risk- spreading, above all, that has weakened the bar and brought it to its present defensive position.

During the last century and a half, ownership of large-scale enterprise in capitalist economies has come to be dominated by the joint-stock company. This form of ownership allows the risk inherent in any business enterprise to be subdivided almost without limit, so that the ultimate risk-bearer-typically, nowadays, the individual claimant on a pension fund-holds only a very small part of his portfolio in any one firm. This is attractive when the ultimate risk-holder is, like most people, averse to risk.

Problems arise when ownership is spread so thinly. The ultimate owners-the shareholders or principals of the company-still want their agents (managers, employees and contracting partners) to perform their contracts faithfully. Part of company law is concerned with ensuring that they do so. And many of the characteristic institutions of the modern corporate economy-takeover bids, proxy battles, outside audits-have grown up to discipline the lazy, incompetent, or fraudulent agent-manager.

The modern large-scale enterprise is essentially a collection of contracts each of which must be monitored.4u’ The cost of monitoring rises with size. Most governments of modern capitalist economies- wisely-do not try to determine in advance the appropriate size of business enterprises. Rather they allow the market to determine it. The interplay of scale economies against monitoring-cost yields an ultimate answer about efficient size that is far more efficient-far more sensitive to the practical realities of cost and benefit-than any political or bureaucratic decision could ever be.

Now to this general laissez-faire attitude the legal services industry presents a sharp contrast. The solicitors’ profession prohibits the corporate form of ownership. Moreover, and much more extreme, the bar prohibits even partnership.

Partnership is a form of ownership intermediate between solo producer and the joint-stock ~ o m p a n y , ~ ’ It allows considerable risk-spreading. It does not allow the workers, in this case the working lawyers, to eliminate risk completely. The partners still bear risks of fluctuation in demand for their services. This contrasts with the workers in the joint-stock company-for example lawyers employed in the legal department at ICI-who have a fixed salary and normally bear no risk at all (short of the remote risk of job loss on corporate bankruptcy). But partnership is often the naturally dominant form of business in labour-intensive service industries

A. Alchian & H. Demsetz, “Production, Information Costs & Economic Organization” 62 Amer. Econ. Rev. 777 (1972); M. Jcnsen & W. Meckling, “Theory of the Firm: Managerial Behaviour, Organization Cost & Ownership Structure” 3 J. Finance Anal. 305 at p. 311 (1976). “ Ronald Gilson and R. Mnookin, “Sharing Among the Human Ca italists: An

Economic Inquiry inta the Corporate Law Firm and How Partners Split Proits” 37 Stan. L. Rev. 313 (1985).


(law requires no machines; only a few books, a telephone and an office) precisely because it involves the workers as sharers in the success of the enterprise. Thus, to the profit-sharing firm, monitoring costs may be lower than they are to a firm that tries to get all its work done by employed lawyers. So partnership, all things considered, may be the most advantageous way of doing business.

This is not to say that corporate form should be prohibited. The conventional arguments advanced in opposition to corporate form amongst solicitors-accepted by the OFT42-are not convincing. It would be a very simple matter to stipulate personal liability for misconduct on the part of senior managers of incorporated law firms, and an obligation on firms to obey professional rules.

One explanation frequently offered for the recent growth of big law firms is that large size is essential in order to spread risk (“If aircraft leasing or corporate takeovers are quiet in one period, then we need not worry too much, since there is a good chance that commercial property or insolvency will be active.”) One reason why risk-spreading is seen by City firms as important may be that, unusually in a capitalist economy, they are required to be workers’ co-operatives-at least so far as the partners are concerned. Pure capital participants are prohibited. One arresting possibility is that some of the current merger-enthusiasm in the legal services industry may be an artifact of bad capital-ownership rules.

But when we turn to examine the bar’s restrictions on ownership we find rules that without any doubt impose severe costs on the conduct of business. Very strong reasons are needed to justify the restrictions inherent in the solo-practitioner rule. The rule drastically limits risk-sharing. Not only is a pure capital participant-a shareholder-prohibited, but even the formation of workers’ co- operatives is prevented (except in the dilute form of cost-sharing within chambers).

Nor is it easy to see any clear benefit-ven a small one- flowing from such restrictions. The usual argument is that, if firms were allowed, then in some localities or in some specialties competition might be reduced. But the argument has almost no force. Litigation is inherently adversarial: both sides must be represented. So any monopoly necessarily can be only temporary. A new, rival firm must be instructed and will learn quickly from its first case in a new area. The advocacy industry-uniquely-contains an automatic mechanism to ensure rival entry should services ever become concentrated in too few hands. Advocacy really Is an industry with very low entry barriers-the paradigm of a “contestable” market.43 If reform should one day come, fears about lack of competition will be seen to have been illusory.

4* See note 2 abovc at pp. 84-86, whcrc no conclusion is drawn, dcspitc carlicr discussion of thc matter.

43 In a contestable market a singlc supplier-who, supcrficially, looks likc a monopolist-may have no market power at all, since any attempt to garncr above-normal profits will attract rival entry.


Moreover, the conventional argument about competition leaves wholly out of account the ambiguous role of English barristers’ chambers. In most specialties there are only one or two chambers offering established practitioners. The fee for each is set by a clerk who is the common agent for all the barristers in the set. In many cases the prices of all relevant services are controlled by one person. The clerk is unlikely to be an assiduous counter-bidder of lower prices when he is himself the potential loser on the other side. In the eyes of the O W , 15 individuals with one common selling agent represents competition, whilst a differently organised industry of the same size-(say) five firms of three specialists each, with no common agent-represents less competition. This really is a remarkable conclusion. It is one thing for two men to compete in the sense of representing different sides on a case and quite another for them to compete in the sense of offering rivalry on both price and quantity to all comers in the market. It may well be that, contrary to the usual argument, the demise of the solo practitioner’s rule would increase effective competition.

The relative rise of the solicitors’ profession and the relative decline of the bar is probably largely a consequence of the solo- practitioner rule. For potential recruits to the bar, the rule creates a career structure with severe and largely non-diversifiable risks; risks which continue over most of a man’s typical working life.

Observation of social institutions suggests that in the modern world no important restrictive practice can indefinitely resist pressure for reform unless it can present clear justification by way of general social advantage. The bar cannot afford for much longer to rely mainly on tradition. If it is to maintain the key regulatory restriction-on audience rights in the higher courts-it needs badly to meet the challenge posed by the rise in power and prestige of the solicitors’ profession. Probably it can do that only by allowing freer rein to market forces in shaping the structure of advocacy firms.

Restricting Multi-Disciplinary Firms

It is in the nature of self-regulation to induce sclerosis in the organisation of a profession. In one economic epoch a normal form of organisation emerges: then the regulators move to make the normal compulsory. So it has been with solicitors, auditors, surveyors, optometrists and many more. Thus, solicitors may form partnerships only with other solicitors, regardless of customer wishes or of commercial convenience.

Such restrictions stem from a mixture of interests. It is easier to define and maintain an ethos and a standard of public service if all solicitors work under broadly similar arrangements. That is the public interest motive of the public-spirited regulator. It makes life

See note 2 abovc at pp. 78 & 84.


easier for most practitioners if disagreeable entrepreneurial types are prevented from doing business in ways that might upset the market for the less venturesome crowd. That is the private interest of the managers of the guild. In self-regulation, the two are not, and can never be, sharply separated.

Regulation of this kind is challenged only when fear or opportunity intervene. Both have begun to stalk the Law Society on the question of multi-disciplinary enterprises. Fear of action by the OFT and fear of losing business to accountants and licensed conveyancers are plainly visible in the Law Society’s discussion paper on the question. Opportunity too is sensed: there are two ready examples in the accounting profession’s success in capturing tax advice and management consulting, and in the huge profits realised in London by the recent formation of multi-faceted financial services enterprises.

In all of these cases the restrictions on multi-disciplinary enterprises are said to turn on the public interest in obtaining services that are impartial and independent. But in the case of solicitors it is not at all clear what this independence consists of. This is most easily seen by comparison with accounting firms in their role as auditors of public companies.

The (theoretical) role of the auditor is clear: he is a watchdog over the management of the public company. He acts as policeman for the shareholders, to prevent or detect self-serving behaviour on the part of the management against the shareholders’ interests. It is perfectly clear whom the auditor should be independent of: the managers he is watching. Hence the angst in the accounting profession over the fundamental problem in the modern regulation through audit of public companies: the “policeman” is selected and paid by the potential “crook.”

This problem is constantly discussed by accountants. And by others. The European Commission has suggested the providers of public audit be barred from selling other services to their clients.45 As recently as May 1988, the House of Lords debated legislation to make selection of auditors more independent of corporate executives. When three of the most famous senior managers in the United Kingdom-Lords Hanson, Weinstock and King-succeeded in persuading their peers to vote it down, there was palpable relief in the corporate boardrooms of the country.

In pursuit of “independence” the accounting profession imposes a strict rule on its member firms. No firm is permitted to derive more than 10 per cent. of its fees from any one client. The fear is clear: the threat of loss of fees would, as a practical matter, seriously compromise an auditor’s power to resist overreaching by managers.

‘I Noted by the Law Society, note 1 above at p. 4.


This story is the principal-and-agent story once again. The principals are the passive shareholders; the agents are the managers; and the independent auditors are the monitors-employed by the shareholder-principals to minimise the obvious potential for severe managerial agency costs. In this set of relationships it is clear who principals and agents are, and what exactly the agency cost is that the institution seeks to avoid.

Now let us try to apply all this to legal services generally and to solicitors’ services in particular. First, we notice that it is not very clear who the principal is whose interests are being protected. The prohibition on mixing legal with other work applies only to those solicitors who offer their services to the public generally. It does not apply to employed solicitors who do work for their employer.

Here is a sharp contrast with audit. The idea of a wholly employed auditor as an effective monitor of his senior management would be risible. The idea that a wholly employed solicitor can be an effective agent of his senior managers is accepted as normal.

The notion of protecting the client-public, then, is of a quite different, lower order in legal services from that in public audit. The agency cost sought to be avoided by prohibiting employed solicitors from serving third parties is the one outlined in Part I. This restriction seeks to avoid provision of services to the client where a concealed interest of the solicitor influences those services, or some related ancillary service, either in quality or quantity.

No case can be made for these restrictions as devices to protect the courts or the administration of justice generally. If such protection were truly the object, the Law Society would: (1) ban any solicitor from being employed to give legal services to his employer; (2) prevent dependence of solicitors’ firms on a single client-for example, by a fee restriction on the accountants’ 10 per cent. model.

Indeed, such protection of the bench and of the administration of justice as may be needed is already provided by the enforced separation of bar from solicitors-at least so far as major46 litigation is concerned.

The main visible effect of the prohibition on multi-disciplinary enterprises is to impede entry into the legal services industry of new firms-especially new large-scale firms. It wholly prevents a bank, or a major corporation from deciding to compete for the major high-value-added legal work, or even for the moderately large local work arising in major provincial centres. This is a valuable barrier to entry protecting medium-to-large scale solicitors’ firms. Whether the public are protected much, or even at all, is quite unclear.

46 Recall that litigation is subject to a concealed cost-benefit test: the public resources spent to decide thc merits of a dispute are, rightly, scaled according to the value as measured by the sum in issue.

MAY 19891 REGULATING THE MARKET FOR LEGAL SERVlCES 349

It is doubtful whether the public really need protection of this kind. The Law Society’s examples do not seem to involve legal services at all. Thus, it is said that a client will not get from a non- independent solicitor impartial advice on whether his associated (or employer) bank is the most beneficial source of a loan, or whether he needs a particular endowment policy.47 Of course not. Nor does the public need, or look to solicitors for, that kind of advice. But the detriment to the public in impeding large and medium scale entry into the legal services market is a real one.

The Law Society’s consultation document considered two main ways of offering legal services combined with other services: full multi-disciplinary partnerships, and the “hiving-off” of ancillary services into separate (perhaps owned) businesses. Contrary to what the Law Society thinks,4H the latter are common in America, are fully recognised under the ABA Model Rules,4y and do not seem to have given rise to any special problems. Rules about conflict of interest (which prohibit a firm from acting for both sides in a particular matter) provide a natural limit to the popularity and growth of such enterprises (firms hate being “conflicted out” of lucrative business. Nor have lawyers become a fragmented profession in consequence of the emergence of de facto mixed- disciplinary partnerships, as the Law Society fears would h a p ~ e n . ~ ‘ ) And lawyers have not become indistinct from accountants in Germany where mixed partnerships (as the Law Society notes) are allowed. The fact is that legal services are, over a broad range of subjects, relatively distinct from other services. The legal services industry has long been, and probably always will be, dominated by firms who do only what they do best: law. This happens elsewhere without compulsion. It would happen in England too if compulsion were dispensed with.

The Law Society’s discussion document is commendably frank in noting the weakness of the agency cost argument in the context of multi-disciplinary partnerships. It notes twices’ that such problems already exist within solicitors’ firms. It might have added that the problem-if it is a problem-would be extended, as discussed in Part I above, if solicitors were to become vertically integrated into advocacy.

Harmonkation or Super-Regulation?

The European Community wishes to create a truly common market. It is often wrongly supposed that this must necessarily mean that common rules will have to be adopted for lawyers

” Law Society. notc 1 above at p. 8. ‘ri /bid., p. 10 ‘’ . . . no significant cxamplcs in the common law world”. 49 Scc Rule 5.4(a)(13) of thc ABA Model Rulcs and scc the comments in Geoffrey

5’ /bid., both on p. 9.

Hazard and W. Hodcs, The Law of Lawyering, 473 (1985). Law Society, notc 1 above, p. 8.


everywhere. Not only is this not essential, it is probably not desirable.

First, note that for free movement of labour and services to be attained, capacity to practise law need not be impeded anywhere. All that is required is that a lawyer be allowed to set up shop across the border (or channel), provided he is admitted somewhere. It might be desirable to require a lawyer not admitted in the jurisdiction in which he is operating to give notice of that fact to clients: clients can then, if they judge it prudent, vote with their feet. As far as division of function within the profession is concerned, a simple solution to the demand for free movement would be to allow any EC trained lawyer to elect to be either barrister or solicitor when practising in England. There is unlikely to be much work in (say) London for a lawyer whose training is exclusively in Greek law.

Moreover, there is a distinct advantage in multiple reg~lation.~’ One of the real strengths of the American common market is the competition between different law districts, and the often- unintended, natural experimentation that federalism brings with it.53 There is a real danger that Europe will throw this potential advantage away in an ill-considered mania for “harmonisation.” Observers would see this much more clearly if all newspapers took a resolution to drop the word “harmonisation,” for three months, and to substitute “uniform cartelisation and regulation’’ in its stead.

Fortunately the Commission had no success in its 12 year effort to harmonise lawyers’ training. Now it has switched from harmonisation to mutual recognition. This is very much a change for the better-ven if undertaken reluctantly and for the wrong reason (i.e. as a second best given that harmonisation was unattainable).

Conclusion

A case can be made both in theory and on such meagre evidence as is available in favour of some system of regulation of lawyers that separates advocates from general practitioners-at least for commercial law. A change in the existing system of regulation in the direction of unifying the profession might well lower costs significantly for users. But it is well to recognise clearly that this gain would likely come at a price. An ideal reform would aim to ensure that agency cost is overcome, that the risk of misbehaviour is minimized, and that the external benefits of high quality precedent

J2 See John Kay, “The Forms of Regulation” in A. Selden (ed.) Financial Regufafion or Over-Regufafion?, IEA (1988) at p. 42. The American literature on the subject is vast. For an introduction see references cited in notes 28 and 53.

s3 See note 28 above. For applications of the idea to government services generally, see the seminal article by C. M. Tiebout, “A Pure Theory of Local Expenditures” 64 Journal of Pofificaf Economy 416 (1956) and the literature flowing from i t , surveyed in D. C. Mueller, Public Choice, (1979) pp. 126-129.

MAY 19891 REGULATING THE MARKET FOR LEGAL SERVICES 35 1

production and court-efficient case-handling are maintained-or else that some new offsetting gain is generated. It seems unlikely that this ideal could be fashioned easily. So far, neither the advocates nor the opponents of fusion of the English professions have addressed themselves systematically to these issues. If reform does come the Antipodean evidence is that its consequences may be less drastic for the structure of the profession than many now suppose. And, in general, the organisation of the profession in Australia-with some amalgams and common recruitment into the profession with specialisation later-has many features that might represent a distinct improvement on current English practice.

By contrast, little case can be made at all for restriction on the capital ownership and employment structures of legal services enterprises, in either branch of the profession; nor for barriers to new, mixed forms of enterprise. It is difficult to see that such restrictions do anything but harm-and especially harm to the bar.

The foregoing discussion demonstrates that the various interlock- ing debates about the regulation of the legal profession can be examined with the concepts of the economics of regulated industries, of agency cost and of risk-bearing. This conceptual structure provides a framework for future analysis and for empirical inquiry. These are complex subjects: yet usually they are examined amidst cascades of special pleading and of anecdotal evidence, generated by special interest groups. The regulation of the market in legal services raises questions that are at once complex, subtle, and acutely important. They are questions that do not admit of simple answers. That makes a sound analytical framework all the more important.*

WILLIAM BISHOP*

School of Law, Gcorgc Mason University, U S A . I thank Professor B. S. Yamcy for hclp so cxtcnsivc that at onc stage his namc appcarcd as co-author. MIS. Susan Poland and Andrca Wisotsky providcd valuable rcscarch assistance and Ms. Kris Kormis cditorial assistance. I havc also bcncfitcd from discussions with, or thc comments of, Professor Gcoffrcy Hazard, Mcssrs. Richard Buxton Q.C., Robcrt Cornall of thc Victorian Law Socicty, Pctcr Freeman, Henry King, Jcrcmy Lever Q.C., David Llcwcllyn, Stcphcn Richards, Pcter Roth, Richard Taylor, William Wiggin of the Delaware Statc Bar Association. Carol Harlow and participants in a workshop at the Policy Studies Centre at Monash University.

Documents

REGULATING THE MARKET FOR LEGAL SERVICES IN ENGLAND: ENFORCED SEPARATION OF FUNCTION AND RESTRICTIONS ON FORMS OF ENTERPRISE