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Powerful economies such as China and India are grappling with the possible consequences – both good and bad – of liberalising legal markets, writes Andrew Godwin.Asian law firms are facing the biggest shake-up to their markets in many years as they deal with the prospect of opening up their highly protected markets to foreign lawyers.The forces of liberalisation have gathered quite a bit of steam in recent years as a result of ongoing reforms under the General Agreement on Trade in Services (GATS), a treaty of the World Trade Organisation that seeks to extend a multilateral system around the world for trade in services. Countries that have not yet opened their markets to the import of legal services – and the list includes a number of prominent Asian nations – are under increasing pressure to do so.Reaction to the push for liberalisation broadly falls into two camps – first, supporters cite economic benefits that are likely to flow from the move along with advances for the local profession; and second, detractors cite concerns over sovereignty issues and the erosion of local protectionism.Pros and consIn terms of economic benefits, there is a belief that open markets will attract greater foreign investment and increase the confidence that foreign investors have in the market by allowing their lawyers and other professional advisors to operate.This factor has been of particular relevance in markets such as mainland China. Tax revenue is a significant issue, too, that has brought benefits. This has been an especially sensitive issue for international firms in relation to India, which has previously tried to levy tax on India-related work by international firms, irrespective of whether the work was physically performed in India. Ongoing legal proceedings involving Magic Circle firm Clifford Chance over claims that it owes the Indian Government tax for work it performed on power projects in the 1990s are being closely watched. The case is important in determining international firms’ income tax liabilities while billing for work in India.Some analysts contend that opening the doors to the Indian market will allow it to stand alongside major legal centres such as New York and London while also contributing to the development of a broader-based services economy.Concerns remain strong, however, within Indian legal circles over the possible impact of liberalisation. Critics raise concerns over sensitivities associated with the work that lawyers do in areas such as litigation and claim that allowing foreign lawyers to operate in the market could infringe concepts of sovereignty.Fears are also held within the Indian profession about the impact of competition from foreign law firms and the risk that overseas firms could quickly monopolise the market or swallow up smaller domestic firms.Such concerns are not unique to Asia. They were also voiced in countries such as Germany about a decade ago when a wave of mergers with international law firms occurred.How GATS worksThe GATS agreement came into force in 1995 as a result of the Uruguay round of negotiations within the WTO. All members of the WTO are signatories to the deal, but disputes often occur over particular national requirements under the deal.Four modes of supply are recognised under GATS that shape the way services are regulated.cross-border supply – this occurs where, for example, a law firm provides advice by fax or email to a client in another countryconsumption abroad – this occurs where the nationals of one member state travel overseas to consume legal servicescommercial presence – this is the most sensitive area as it involves allowing foreign lawyers to establish a commercial presence in the jurisdictionpresence of natural persons – this applies where, for example, a foreign lawyer provides legal services in the relevant market on a fly-in, fly-out basis. Within the WTO, examples of markets that are liberalised to varying degrees include Australia, Japan, Singapore, Hong Kong, Vietnam, Thailand and mainland China. Markets that are closed – and, therefore, off limits to foreign lawyers – include South Korea, India, Malaysia and Indonesia.Asian case studiesSouth Korea provides an illuminating case study. While it committed to liberalising its services market under GATS, there was no specific pledge in relation to legal services. Although the Seoul government has been talking about this for a number of years, liberalisation has been a long time in the coming.Some progress has been made. Under the terms of the Korea-US free-trade agreement which the two countries signed in 2007, Korea has moved to open its legal market to American lawyers and firms in return for a reduction of tariffs on certain commodities such as cars.The FTA sets out three stages for liberalisation that will progressively see foreign law firms and Korean law firms collaborate in cases where domestic and foreign legal issues are involved, and open the way for foreign law firms to enter into joint ventures with Korean law firms and employ Korean lawyers.These moves have drawn opposition from the Korean Bar Association amid concerns that the nation could become more litigious and set off a ‘domino effect’ that leads to the domination of the domestic market by foreign law firms (a concern that arose in Germany a decade ago). There are also issues around differences between Western and Korean notions of the rule of law.Elsewhere in Asia, Singapore started to permit international law firms to enter into joint law ventures with Singaporean law firms in the late nineties. Under the current joint-venture model, joint law ventures are permitted to practise in commercial law areas, not including litigation, and the joint venture law firms may share profits. However, the foreign law firm cannot employ Singaporean lawyers and Singaporean lawyers may not become an equity or profit-sharing partner in the foreign firm.The joint-venture model has had patchy success to date and there are only a handful of joint ventures that could be regarded as being successful. One of the reasons for this is the cost of maintaining a joint venture. In addition, the model often represents a less than ideal halfway house in terms of career opportunities for employees. In response to the recommendations of the Rajah Report, which was issued in 2007 to look at the development of Singapore’s legal profession, the government now allows ‘qualifying foreign law practices’ to employ Singaporean lawyers directly. However, certain areas of practice, including litigation and real estate conveyancing, are still off limits to foreign law firms.Japan introduced the ‘specific joint enterprise’ model about 10 years ago. This permits foreign lawyers and Japanese lawyers to cooperate and co-handle matters in various areas, not including litigation, and to share revenues and profits. Full liberalisation occurred in 2005, when foreign lawyers were permitted to employ Japanese lawyers and to establish an enterprise jointly operated by a registered foreign lawyer and a Japanese lawyer or corporation under a partnership contract. However, business scope restrictions still apply.India stands firmIndia, on the other hand, is an interesting case because it has not liberalised at all. While in recent years the government has indicated a willingness to consider change, a couple of obstacles exist.First, the Indian bar councils are highly conservative and protectionist. Second, the legislation governing lawyers, the Advocates Act, has been interpreted as restricting the practice of law in India (whether foreign or domestic law) to enrolled advocates. Only people who are qualified to practise Indian law, and who are Indian citizens, may enrol as advocates. There is a provision for the Bar Council to recognise foreign qualifications in law, but the Act prohibits foreign lawyers from practising law in India if their home countries do not recognise Indian lawyers on a reciprocal basis. This lack of reciprocity has been interpreted to include circumstances where any restrictions are imposed on the practice of law by Indian lawyers, even where they are subject to the same rules as all other foreign lawyers.Such issues came under the spotlight courtesy of a recent case that was decided in December 2009. In the case, which started in 1995, a group of Indian lawyers filed a petition challenging the validity of licences issued by the Reserve Bank of India to permit some foreign law firms to establish liaison offices. The court confirmed that the Advocates Act covered the field and regulated both litigious and non-litigious matters, and that foreign lawyers could therefore not establish a presence and practise law in India.Interestingly, the judgment of the court reflects the prevailing view in India that the purpose of the legislation is to ‘ensure the dignity and purity of the noble profession of law’. This has been echoed in other decisions, where courts have referred to the practice of law as a noble profession rather than as a service whose purpose is to make profit. As one court put it: “The heaven of commercial competition should not vulgarise the legal profession.”The court in the Lawyers Collective case made it clear that any change to the current system would require an amendment to the Advocates Act and that the central government should make a decision in this regard as expeditiously as possible.Unfortunately for foreign lawyers, new proceedings against foreign lawyers have followed on the heels of the decision in this case. In March this year, the Association of Lawyers filed a petition against 31 foreign law firms and a legal process outsourcing business, claiming that the foreign law firms were practising law in India through various unlawful means, including flying in and out of India using tourist visas and also through legal process outsourcing businesses.The association also claims that foreign firms are unlawfully advertising their India practice. A related questions perhaps is what impact this will have on the ‘best friends’ relationship that a number of international firms have established with local Indian firms. The claim includes a number of well-known international firms.It will be interesting to read the decision in this case, although if the earlier case is any guide, it may take a few years before we learn of the outcome.What about China?An interesting question emerges as to what lessons China might learn from the experience in other jurisdictions. Mainland China is an interesting case study for a number of reasons:it should be regarded as a liberalised market in terms of permitting foreign law firms to practise foreign law in Chinait is still restricted in terms of allowing joint ventures or partnerships with Chinese law firms or allowing foreign law firms to practise Chinese lawit also features a somewhat unique bifurcated regulatory system, where foreign law firms are regulated not by the local associations but by the Ministry of Justice.The most interesting aspect perhaps is the grey area between practising foreign law and practising PRC law and the regulatory uncertainty that this involves. This results in what I described in a recent academic article as periodical tugs of war between foreign and local law firms: a controversy that will ultimately have to be resolved one way or the other.An interesting question is which model China might adopt; in other words, whether it will move directly towards liberalisation by allowing foreign law firms to employ PRC-registered lawyers, or whether there will be an intermediary position in the form of joint ventures.My own view is that China will continue to give local firms breathing space in which to become more competitive and also to develop their own multi-jurisdictional practices before it opens up the market further.In addition, I think that regulatory integration will be necessary in order to achieve a level playing field between foreign law firms and local law firms. There has been a shift in the balance of power from foreign law firms to local law firms in some areas of practice that were previously monopolised by foreign law firms.Whether it is China, India, South Korea or a number of other jurisdictions, what is clear is that the forces of change are occurring that have the potential to change the nature of the legal markets in those countries – and open the way for significant opportunities for foreign law firms. Watch this space. Andrew Godwin is the Associate Director (Asian Commercial Law) of the Asian Law Centre at the Melbourne Law School at the University of Melbourne. This article draws from his recent presentation, titled Liberalisation of Legal Services in Asia, at a seminar in Beijing jointly hosted by the European Chamber of Commerce in China, the American Chamber of Commerce in China, the Australian Chamber of Commerce in China and the British Chamber of Commerce in China.www.law.unimelb.edu.au 

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