Do institutional clients threaten lawyer independence?

Steve Vaughan
Steven Vaughan

Last night I gave a talk at the Centre for Ethics and Law at University College London. Titled “Do Institutional Clients Threaten Lawyer Independence?” the short answer was a simple “yes”.

Professional independence is conventionally considered both a hallmark and bulwark of professional practice, with collective independence – the idea of self-regulation – and individual independence – the idea of detached, unbiased judgment – being indelibly entwined. As a principle, the independence of solicitors is seen in the Legal Services Act 2007, and in the Solicitors Regulation Authority’s Handbook. But what does it mean to be independent? And why is it important that solicitors are independent?

My talk was based on research I’ve been undertaking over the past two years: 133 interviews with transactional lawyers, COLPS (compliance officers for legal practice) and risk officers from 33 of the UK’s top 200 law firms. Funded mainly by the Economic and Social Research Council, but also part by the Solicitors Regulation Authority, and working with Claire Coe and Emma Oakley, I’ve been interested in exploring the nature of the lawyer-client relationship in global firms.

Independence is often characterised as a simple three-way relationship between the lawyer, the client and the state. A lawyer should be free to advise a client without state interference, and a lawyer should be independent of their client. An independent legal profession is said to inculcate and foster the independence of individual lawyers.

This independence (in theory) helps individual lawyers to push back against inappropriate influences which might seek to distort the legal advice they give. As such, the independent lawyer acts in an unbiased and detached fashion and can (again, in theory) serve both the public interest and their client’s interests at the same time.

I asked my interviewees about how they saw their relationships with their clients, and what they thought clients wanted from them. All spoke about the importance of being “close” to the client. This played out in a variety of ways: for most, closeness was in knowing the client’s business inside and out, and having a level of trust that meant the client would come to them for advice. For others, closeness was also seen in personal relationships: drinks, dinners, sporting events, and even joint family holidays.

What is of concern is when a lawyer’s closeness with their client becomes what other academics have termed “client capture”; when the lawyer is unable to stand back from the client relationship and say “no” to client demands. This presents somewhat of a paradox, and one might argue that the level of influence that makes independence useful is not mutually exclusive from closeness sought for commercial purposes.

As this corporate partner said: “We are here to give commercial legal advice and if one was to think that commercial legal advice could be in some way altered because of the proximity of a relationship, that wouldn’t be right. That said, the proximity of a relationship on a commercial level, and understanding your client, is extremely important, because that does help you to shape the commerciality of the advice that you are giving.”

All of my interviewees spoke of a shift in the balance of power from large law firms to their clients. “We are pinpricks compared to some of the clients we have and the relationship is entirely biased one way,” said one COLP.

This shift played out for a variety of reasons (increased competition in the legal services sector, greater numbers of in-house counsel, the push towards ‘more for less’, unbundling etc) and was seen in a variety of ways. Most keenly, it was felt in how clients commonly imposed their own terms of engagement on their lawyers, often without room for negotiation. Several partners also talked of being put under pressure to deliver legal opinions that they were not wholly comfortable with.

I asked my interviewees whether they thought they had become service providers to their clients. Most agreed, and many saw it as a fait accompli. Only a handful thought this shift was, or should be, of concern.

Many of the interviewees believed that professional independence was important while simultaneously possessing only a limited understanding of the concept. A handful rejected the relevance of the concept altogether, showing an alarming lack of knowledge of (or regard for) the SRA Handbook. Some expressed ignorance:

Q               “How you would describe professional independence?

A               Crikey, I’ve never even heard the expression. Is that as an individual or a practice?”

One particular issue from the interviews struck me as potentially very problematic, and a significant threat to independence. This is the use of designated lender counsel: borrowers appointing the lawyers to act for the lender they will borrow from, often well before the lender has itself been chosen. In the report Claire Coe and I prepared for the SRA, we termed these borrowers “shadow clients” because they have significant influence over the appointment and remuneration (and potentially the scope and substance of the work) of the law firm acting for the lender.

There is the risk that the law firm acting for the lender is motivated more by satisfying the borrower on the other side of the table – because that is where the next deal will come from – than by satisfying his or her client.

This is not a problem confined to the UK. Only last week, Andrew Ross Sorkin, author of Too Big to Fail, wrote about these practices in the New York Times: “Think about it this way: It is, in effect, the equivalent of your employer giving you an employment agreement and telling you that the only lawyer who can look it over is the one the company has retained.”

I was told, and accept, that these “shadow client” practices have been around for decades. But the longevity of a practice does not guarantee ethicality. A good number of the interviewees thought these practices were of concern, and could pose real threats to independence.

“I think there is a genuine potential, I only say a potential, for ethical conflict if your fees are being paid by a third party,” said a corporate interviewee.

“Basically the lender and the sponsor clients are not actually getting the best advice because one or the other of the lawyers is concerned about a view that the sponsor or lender client will have of them in taking particular positions on points,” added a finance lawyer. “But it’s because – cahoots is an emotive word – but it’s almost like they’re in cahoots because they’re frightened to damage their reputation with someone who might be on the other side of the table who they perceive is perhaps a better work bringer. So, actually their advice is being coloured.”

Ethics scholarship tells us that actors may become particularly prone to self-deception and ethical numbing where, as in this “shadow client” situation, they are repeatedly exposed to similar ‘standard’ situations and conduct. Have designated lender counsel been around for so long that we are no longer able to stand back and see the practice as one which presents significant risks?

Being concerned about the independence of corporate lawyers in large firms means accepting the powerful potential for those lawyers to act as public service norm intermediaries between their clients and the other side of the table, and between their clients, regulators, the government and other market actors.

While the drive for commercialism is strong – and being ‘close’ to a client has a variety of upsides – it is equally important to remember that being a legal professional (and all the benefits that come with that label, like legal privilege) has the corollary expectation of the highest conduct, including independence.

My research shows pockets of client capture here and there, in a number of lawyers in a number of firms. I am also convinced that many of those lawyers don’t yet realise they have been captured, and equally confident that many think such capture is perfectly acceptable, even desirable. They are wrong.

Dr Steven Vaughan is a senior lecturer in law at the University of Birmingham