A landmark decision recently handed down by the High Court constitutes a setback for foreign law firms looking to enter India.
Just over a week before the 2009 Christmas holidays started, a 15-year long case on the future of foreign law firms in India was reaching its finale. But the judgment handed down by the Bombay High Court on 16 December certainly crushed any seasonal cheer. Law firms in the west who were hoping it would forge a path towards liberalisation of the legal market were badly disappointed. The case centered on whether the Reserve Bank of India (RBI) was right in granting permission in the early 1990s to three foreign firms – White & Case, Ashurst and Chadbourne & Parke – to set up liaison offices there. These offices were allowed to act as a base for largely non-litigious work; to foster communication between the firm’s international offices, local clients and government bodies; and to collect information and promote foreign investments, as well as for “technical and financial collaborations in India with clients and prospective clients”.
However, according to the group who challenged the decision, the Mumbai-based Lawyers Collective, the RBI should not have permitted the offices. The group said law is not a trade or business like the RBI’s other industry grantees. They also argued that even though the firms weren’t advising on litigious matters, the practice of law also constitutes non-litigious work – their ‘liaison’ activities. They contended that in order to continue carrying out ‘liaison’ activities, foreign law firms must be enrolled under the country’s Advocates Act; the three firms granted permission to practice in India were not enrolled. “This is quite a landmark judgment,” said Aparajit Bhattacharya, partner at Delhi-based Hemant Sahai Associates. “It’s going to have a significant impact on the opening up of the legal services sector.”
While the decision in favour of the Lawyers Collective was not groundbreaking, it did help reinforce the Indian legal fraternity’s opposition to international law firms. It also clarified certain issues surrounding India’s legal market liberalisation plans. Clearly, foreign firms “cannot carry on non-litigious practice in India, which includes drafting of applications, consultancy work or any legal work that does not involve appearing before the courts, unless they abide by the Advocates Act,” Bhattacharya said.
The decision led the High Court to urge the government to make a formal decree on liberalisation. “[The government must] make appropriate decisions in the matter relating to foreign law firms practising the profession of law in India as expeditiously as possible,” it said.
Setbacks
It’s two steps forward and three steps back as more issues are being raised by the judgment’s implications. Firstly, the judgment had many questioning the legitimacy of foreign firms’ establishing ‘best-friends’ status with local Indian firms. Clifford Chance, Allen & Overy, Linklaters and Clyde & Co all enjoy ‘best-friend’ agreements with AZB & Partners, Trilegal, Talwar Thakore & Associates and ALMT Legal respectively.
Many local lawyers feel that foreign ‘best-friend’ firms effectively have an avenue to bypass the prohibitions of having liaison offices. But are foreign firms falling under the definition of having liaison offices? According to a partner at one Indian ‘best-friends’ firm (who did not wish to be named) this is not the case. “Our foreign ‘best-friend’ partner was never practising local law,” he said. “This is a relationship fully compliant with the law, and the High Court decision doesn’t change anything.”
Yet that is no consolation to locals still suspicious of the internal workings of these relationships, since there is no official monitor on whether the firms involved are sharing more than just referrals. “These relationships could well come under scrutiny,” said Bhattacharya. “While ‘best-friends’ relations would not fall within the ambit of a liaison office per se, the underlying philosophy [of the decision] objecting to the setting up of liaison offices by foreign law firms would presumably also apply to entering into ‘best friends’ relationships. It could also be argued that [these] relationships are more like referral arrangements, and don’t mean that foreign law firms are practising in India or have an office there.”
The larger issue the case has highlighted is the potential for ‘best-friend’ firms to share financial systems, but as Bhattacharya says, there’s no way of finding this out. “It’s basically an internal thing – documents aren’t filed with a public office,” he explained. “If it’s a relationship where profits and losses are being shared and they’re actually funding the operation of an Indian law firm, there’s obviously an issue. The High Court decision would have an impact on those kinds of operations, because technically that foreign law firm is operating out of India.”
There’s also another way to potentially circumvent regulations, by sending lawyers on secondments. A recent poll by the Indian legal trade magazine Bar & Bench, 46% of respondents said that ‘best-friend’ firms sending partners to India are gaining access to the legal sector and bypassing restrictions, compared to 14% who felt it was simply part of the “non-monetary exchange of skills”.
Market sentiment could be explained by recent strategies adopted by foreign firms. For example, Linklaters recently made headlines after two partners quit the firm to join their Indian best friend, Talwar Thakore & Associates. And Allen & Overy sent Singapore capital markets partner Srinivas Parthasarathy to Trilegal.
While this is common practice, secondments of foreign lawyers happen “across the board” in the Indian legal industry and the firm itself brings in secondments “occasionally.” The issue isn’t that lawyers are coming into India but whether they are advising on local laws – even those lawyers coming in on a fly-in, fly-out basis. “The foreign lawyers here cannot sign off on an Indian opinion, and so long as they have a work permit on a limited business visa and not have any income generated here, they don’t get a tax status so it’s technically not official. There’s nothing stopping them [from doing that],” said Bhattacharya. Yet the recent decision hasn’t clarified whether a foreign law firm can set up an office with lawyers admitted to the Indian bar. It’s no surprise that resourceful law firms would want to find as many avenues as possible to get into the world’s second-fastest growing major economy. Recent setbacks caused by the High Court decision aside, there is no doubt that 2010 will be a year of seeing more ‘best-friend’ agreements, secondments and transfers.
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