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Asia's Low Legal Stakes
The Asian Lawyer
The relatively low fees paid for legal work in Asia has been a source of near-constant grumbling by law firm partners over the years. The belief—or hope—has been that over time, Asian clients would become more sophisticated and learn to value the hard work of their lawyers enough to pay fees comparable to those paid by clients in Europe or the United States. So far, it’s not happening.
But fee issues in Asia are only partly about client sophistication. Just as important is that for clients, the stakes aren’t as high, and the consequences of bad lawyering aren’t as dire.
Historically, there has been little execution risk on big deals in Asia. (Broader market risk, of course, is another story.) In America, blown deadlines, incomplete filings, or leaks can cause a deal not to close, inviting a barrage of litigation. In Asia, the risks that lawyers’ (or bankers’) mistakes will scuttle a deal are much lower.
Throughout the region, suits are generally rarer and available damages far lower than in comparable U.S. actions. Regulatory fines are also much lower. Last year the Hong Kong Securities and Futures Commission issued their highest fine ever, around $5 million against a brokerage that performed inadequate due diligence ahead of an initial public offering. By comparison, earlier this year, the Securities and Exchange Commission settled an insider trading probe with SAC Capital Advisors for over $600 million—a hefty but hardly unprecedented settlement for the U.S. agency.
“I’ve been waiting for some of these big deals to blow up so we can show our Asian clients how important good lawyers are,” says the Asia managing partner of one U.S. firm, half-jokingly. “But it’s true that very few of them do blow up, and that probably has an impact on what clients are willing to pay.”
Lawyers say execution risk is also lower because parties to Asian deals are more likely to be linked by business, political, or family ties that constrain their appetites for disputes. And since many big Asian deals involve state-owned enterprises, the most crucial negotiations—those between the company and its political overseers—often take place before lawyers enter the picture. Overseas investors, meanwhile, are so happy to break into hot Asian markets that they accept being shunted into offshore vehicles that may or may not have enforceable rights, gambling that if things go badly, they can negotiate something, anything.
When legal risks don’t loom large, clients will sometimes still pay extra for brand-name representation. They will certainly consider the level of service they receive. But in Asia, with all the competition, clients won’t pay much more for cachet and service, so fees end up being lower than in the U.S. or Europe.
Of course, risks are lower for the lawyers, too. In such an environment, deals can be staffed mainly with less experienced associates or even paralegals. High-priced specialists can be left out and overall hours capped. “It’s the only way to make things work,” says a U.S. firm’s Asia managing partner.
Outside of Singapore and Hong Kong, legal malpractice suits or major professional disciplinary actions are relatively rare in Asia, with usually only the most egregious misconduct sanctioned. “I’ve been here 20 years, and I can only think of a few malpractice cases,” says one Western lawyer in Beijing. In China, he says, black-letter law is rarely the only—or preferred—way to get things done. “You’re in an environment where the rule of law is not fully developed or enforced,” he says. “And you’re doing a lot of things on the edge of or beyond what the statute says. With all that uncertainty, how could you even say something was malpractice?”
What will change things? Overseas expansion, especially in the West, tends to make Asian companies more cognizant of legal risks. That’s one reason that many law firms have been trying to bulk up U.S. litigation practices in Asia. When the stakes are as high as in an SEC investigation or a billion-dollar patent litigation, legal fees are a lesser concern.
But much would need to change in Asia itself. The insider-based, politically connected business culture would need to give way to one where arm’s-length dealings are the norm. State power would need to devolve to the point where other parties have more equal footing. In other words, the rule of law. That kind of change would be good for lawyers and everybody else.
Growing inequality in Asia alongside economic growth has created a groundswell of public demand for greater transparency in government and business. Perhaps that pressure will eventually produce real reforms. Or it may take some type of cataclysmic event, an extreme market risk scenario, to really jolt governments and businesses in the region.
If that’s the case, the stakes couldn’t be higher.
This article originally appeared in The Asian Lawyer.