There are many circumstances in which two or more separate law firms – which we will refer to as “cocounsel” for the purpose of this article – cooperate in providing legal services to clients in a matter or transaction. The most common situation is where a transaction has cross-border elements and the law firm that is acting as the international counsel or the lead law firm in the transaction instructs a local law firm in the other jurisdiction or jurisdictions to provide local law advice. Although the presence of international law firms often reduces the need to involve two or more law firms, there will always be crossborder transactions in which two or more law firms will need to be instructed. This article considers the nature of the relationship between cocounsel in such circumstances and the duties and liabilities of the lead law firm when instructing a local law firm. It also suggests some best practice tips for lawyers and law firms when they instruct local law firms.
The issues are particularly relevant in a market such as China, where the practice of Chinese law is limited to Chinese law firms, and foreign law firms are not permitted to employ Chinese lawyers and practise Chinese law. (For a discussion about the situation in China in this regard, see Liberalisation and integration of legal services inChina Business Law Journal, July/August 2013. This and other articles referenced below are also compiled in China Lexicon.) In recent times, closer integration between foreign law firms and Chinese law firms has been permitted in the Shanghai Free Trade Zone in the form of joint operations. However, the current regulatory framework governing foreign law firms makes it clear that foreign law firms should instruct Chinese law firms in circumstances where their clients need access to Chinese legal services. Article 15 of the Regulations on the Administration of Foreign Law Firms provides that the permitted activities of representative offices of foreign law firms and their representatives do not include Chinese legal matters. However, they are able to instruct Chinese law firms to handle Chinese legal matters on behalf of foreign clients and may also enter into contracts for the establishment of long-term retainer relationships with Chinese law firms.
What is the nature of the relationship between cocounsel?
In most cases, the lead law firm acts as agent for the client when instructing the local law firm. As a result, the local law firm has a direct contractual relationship with the client and there is no contractual relationship between the local law firm and the lead law firm, which acts as agent for its client in its communications and dealings with the local law firm.
Two important implications arise out of this type of arrangement. First, the lead law firm is not contractually responsible for the advice that the local law firm provides to the client, as it instructed the local law firm as agent for the client and not as principal in its own right. In such circumstances, it is prudent for the engagement letters issued by the lead law firm and the local law firm to provide clearly for the allocation of responsibilities between the two law firms so that there is no confusion as to the areas in which each law firm is advising. Second, unless other arrangements have been agreed contractually, it is the client and not the lead law firm that has the obligation to pay the local law firm’s fees. In fact, when instructing the local law firm, the lead law firm will often state expressly that it has no responsibility for paying the client’s fees to the local law firm and that it will only pay the local law firm after it has received the relevant amount from the client. This is consistent with the general principle that an agent is not responsible to third parties for acts performed within the scope of the agency, so long as the agency relationship and the identity of the principal have been disclosed. (See article 63 of the General Principles of Civil Law for a statement of this general principle.)
Alternatively, the lead law firm sometimes instructs the local law firm on a subcontracting basis. In other words, the local law firm acts as subcontractor to the lead law firm, which alone has a contractual relationship with the client and, as head contractor, is contractually responsible for the advice provided by the local law firm. Instead of having a contractual relationship with the client, the local law firm has a contractual relationship with the lead law firm in accordance with the terms of the subcontract between the two law firms. It is important to note that although the local law firm is not liable in contract to the client for any incorrect advice that it provides, it may still be liable in tort on the basis that a duty of care is owed by the local law firm to the client.
A subcontracting arrangement often arises where several local law firms are involved, the work of the local law firms is limited in scope and the client wants to deal contractually with only the lead law firm. In such circumstances, it is important for the subcontractor firm to be aware of the basis on which the lead law firm has been engaged by the client and to ensure that its own subcontracting terms are consistent with the terms between the client and the lead law firm. For example, if the lead law firm has the benefit of a liability cap vis-à-vis the client, the subcontracting firm should make sure that the liability cap covers subcontractors of the lead law firm as well as the lead law firm itself.
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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.