https://orcid.org/0000-0003-2605-9396
Introduction
Inhouse counsel, also called corporate counsel, are a growing component of the legal profession. Inhouse counsel perform important roles in ensuring that corporations are able to receive timely advice to comply with the law, resolve disputes and to facilitate commerce. Inhouse counsel may also be in the media when allegations are made about corporate misconduct. Questions are asked about why the lawyer did not stop the alleged misconduct: after all, they are lawyers and must know what the law is. The inhouse counsel role is one of the most complex and difficult of any position occupied by lawyers.Footnote1 Yet legal education may not give sufficient prominence to the professional responsibilities, ethical conundrums and skills that the inhouse counsel needs, even though many students will pursue that career. Moreover, the inhouse counsel that is found to have contravened their ethical responsibilities may bring the entire profession into disrepute.
The rise of inhouse counsel
There are thousands of inhouse counsel around the world: in many jurisdictions they are the fastest-growing segment of the lawyer population.Footnote2 The growth of the inhouse counsel sector is directly linked to corporations and government seeking to reduce the amount of legal costs incurred through reliance on external lawyers.Footnote3
The role of the inhouse counsel is also broadening: in addition to giving legal advice and managing relations with external law firms they are likely to be involved in compliance, corporate governance and risk management. In some cases they will perform functions and have titles that are non-legal, such as Company Secretary, Chief Risk Officer, Chief Compliance Officer or Head of Human Resources. This broader remit arises because it permits the corporate client to again save costs, but also because of the role of law in these areas which equips the inhouse lawyer with relevant skills.
Ethics
The ethical and professional obligations of lawyers to promote the public interest is what sets the legal profession apart from businesses and commercial interests – “the world of commerce has different imperatives”.Footnote4 The lawyer’s duty to the court and the administration of justice are paramount,Footnote5 and to the benefit of society more generally, as they provide institutional protections that support the rule of law and a democratic society. Equally a lawyer has a duty to act in the best interests of a client.Footnote6 Indeed a lawyer has a duty to follow his or her client’s lawful instructions.Footnote7 However, the obligation to the client is subject to a lawyer avoiding any compromise to their integrity and professional independence.Footnote8 Independence means adopting a perspective of detachment or objectivity in relation to what the law requires and how advice is provided to the client. It necessitates being aware of actual or attempted client control or influence and working to prevent that shaping the advice that is given.
The inhouse lawyer is subject to the same duties as lawyers in private practice.Footnote9 But this raises novel concerns as the inhouse counsel works for only one “client”, and this client is also the lawyer’s employer.Footnote10 The inhouse counsel represents the organisation but must identify who can give instructions on behalf of the company, while also being careful to ensure those instructions are in the corporation’s interests.Footnote11 The inhouse lawyer is also expected to know the business, to “be commercial” in their advice, and to “add value” by assisting the business and its corporate leadership in achieving the company’s commercial objectives.Footnote12
Two modern examples of inhouse counsel from Australia attracting criticism for professional responsibility failures can be found in the Robodebt Royal Commission and the Star Casino inquiry.
Robodebt
The Robodebt Royal Commission was established on 18 August 2022 and inquired into the automated debt assessment and recovery scheme adopted by the Department of Human Services (DHS) between 2016 and 2019. The Robodebt scheme was conceived by employees of DHS to give effect to a government policy of recovering social security payments made to citizens that should be repaid due to the person earning income that made them ineligible for the payment. The scheme raised more than half a million inaccurate Centrelink debts through a method of “income averaging”, which was subsequently ruled unlawful.Footnote13
The Royal Commission’s final report was delivered on 7 July 2023. The role of the lawyers in the Legal Services Division attracted its own chapter in the final report. This chapter – chapter 19 – commenced with a recitation of professional independence as a fundamental ethical duty for lawyers.Footnote14
The legality of Robodebt, and in particular the use of “income averaging”, was raised with the DHS Legal Services Division at various times and by various people. Moreover, there was discussion as to whether external legal advice should be obtained, but it was not. The Chief Legal Counsel for DHS was criticised for failing to advise DHS executives of the weakness of the DHS position that income averaging was legally permissible and the associated legal risk if it was not.Footnote15 The Chief Legal Counsel was found to have “a tendency to accommodate DHS’s policy position in the face of conflicting advice and to advocate for the department’s position rather than independently considering it”.Footnote16 Further, the Chief Legal Counsel referred to her role as entailing acting on instructions, which she offered as a reason for her not giving DHS senior executives advice as to the weakness of DHS’s legal position. This description downplayed “her professional obligation to be independent and the need to independently form her own view about matters where she was providing advice”.Footnote17
The failure to confront fundamental flaws in the operation of the scheme appears to have been a product of the culture within DHS at the time.Footnote18 Bad news could not be given to the Deputy Secretary of DHS. The Deputy Secretary shunned external legal advice and instead wanted internal confirmatory advice from the Legal Services Division.Footnote19 The Royal Commission inferred that the Chief Legal Counsel, despite knowing the weakness of the arguments in favour of the scheme, did not seek external legal advice because she knew that DHS executives did not want to be told they should seek independent advice because of the likelihood of its confirming that income averaging was unlawful and the professional consequences that the DHS executives would face in that event.Footnote20
Star Casino
The New South Wales (NSW) Liquor and Gaming Authority launched an inquiry into the Star Casino’s suitability to hold a casino licence in New South Wales in September 2021 based on concerns about money laundering, interference in operations by overseas organised crime and fraud. The inquiry reported on 31 August 2022.Footnote21
The Star Casino in Sydney was required to have programmes and procedures in place to ensure compliance with anti-money laundering and counter-terrorism financing (AML/CTF) laws. As part of ensuring compliance Star commissioned an independent report from KPMG that found “serious shortcomings” in Star’s AML/CTF programme.Footnote22 Much of the focus in relation to inhouse counsel has been on the Chief Legal Officer incorrectly claiming legal professional privilege in relation to the KPMG report and reliance on privilege to withhold the report from the regulator, Australian Transaction Reports and Analysis Centre (AUSTRAC) when it issued a notice requiring the report be provided.Footnote23 Two other inhouse counsel admitted they had a practice of marking documents as privileged without considering whether there was any basis for claiming the privilege.Footnote24 This raises issues of competence in relation to inhouse counsel.Footnote25 The report recommended that the Authority require the operator of Star to ensure and certify to the Authority that its inhouse lawyers had received training annually on legal professional privilege.Footnote26
However, there were broader concerns raised such as the failure to adequately focus on risk and the failure to ensure necessary information was given to the Board of Directors. One of the causes of this inadequacy was that the Chief Legal Officer, who was also the Company Secretary, had Chief Risk Officer added to her role.Footnote27 The inquiry report into Star stated “it is difficult to see how any one person could adequately discharge the broad and onerous responsibilities which were imposed on” the lawyer in those three roles.Footnote28 Compliance and risk were inadequately resourced by Star in a context where it was an entity with numerous and onerous legal responsibilities.
It also appears that the inhouse lawyer was more concerned to assist management rather than focus on what was in the interests of the real client – the Star Casino. A mid-level manager raised with inhouse counsel that one of the casino’s largest referrers of clients, Suncity, had links with organised crime according to a report by the Hong Kong Jockey Club. In the 2016 financial year, Suncity clients spent $918 million at Star and by 2019, it was $5.9 billion. The links to organised crime were not reported to the Board. Later when the links were made in the media and the Board asked for a report, inhouse counsel left out a number of matters, including that Star had previously received the Hong Kong Jockey Club report.Footnote29 Issues of independence and conflicts of interest are apparent. But overlaying these ethical issues was the culture of Star Casino where management was focused on pursuing revenue, even when the source of that revenue was high risk, rather than adopting a culture of compliance.Footnote30
Ramification for the profession and education
Law risks its professional status if lawyers do not uphold the rule of law, if they do not act in the public interest, if they do not exercise independence. If the lawyer’s relationship with the client is so close, so all consuming, that they are the mere mouthpiece of the client then it is not just independence that is lost, but also professionalism. In a very real sense, the legal profession is brought into disrepute. It is in the profession’s, and society’s, interests that lawyers adhere to their professional obligations. An important way in which professional obligations are imbued in lawyers is through education.
Independence is a key concept which requires inhouse counsel to advise against certain actions, or in some cases to say “no” to their employers. Legal education needs to not just define independence but provide examples of where it was lacking and explore why independence was lost. Moreover, lawyers need to be educated as to how to assert their independence in an effective manner.
Inhouse counsel need a skill set that ensures that they are consulted and then that they are listened to. This is about interpersonal skills. It is an ability to listen, communicate and explain. It is about building trust with the business that the lawyer is providing advice aimed at facilitating business ends but in a manner that protects the company and does not expose it to penalties, litigation or reputational harm.
To be an effective and ethical inhouse counsel it is imperative to understand risk and risk appetites as this is at the core of what businesses do. Central to this is understanding different types of risk. For example financial risks to make a profit are part of doing business. A transaction may offer the prospect of profit, but there is also a risk of loss. The product/service does not sell in the quantity or with the margin expected. However, there may also be associated legal risks, such as misrepresentations, an inability to perform or insolvency. Contractual terms can be used to allocate these risks between the parties, eg warranties, indemnities, limitations of liability and rights to terminate. Depending on risk appetite a company may accept some risks to get the deal done and negotiate contracts accordingly. The lawyer needs to identify risks but then deal with them consistent with the company’s risk appetite.
However, other risks need to be minimised. Harm to employees and customers, regulatory contraventions, such as cartel behaviour, money laundering or bribery, need a much stricter approach to following the law and compliance. Risk appetite is still relevant but the lawyer’s independent view must carry the day. This may mean saying “no”, but it may also be achieved through preventative measures or identifying the ultimate goal (eg a profitable product/service/transaction) and finding a compliant way forward. If profitability can only be achieved illegally then the company needs to consider whether it has a future.
It is also important that inhouse counsel understand that they operate within a corporate culture and that culture may impose situational pressure on them, and influence how legality, risk and compliance are viewed. A profit-driven culture may downplay risks and be prepared to adopt actions where unacceptable risks are tolerated, such as cutting costs on safety measures that create risks to workers or customers. Inhouse lawyers need to be alive to how culture may skew risk appetite.
By being independent an inhouse lawyer can better recognise the risk of a legal contravention, but they then need to solve the problem. In some instances, it is accepting the risk, in others it is taking ameliorating steps to cabin the risk and in others it is avoiding the risk, while recognising that not all risks are equal. Education is crucial in getting the lawyer started on the right path and then developing skills and understanding informed by professional norms that allows them to be effective and ethical.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1 Geoffrey C Hazard, Jr, “Ethical Dilemmas of Corporate Counsel” (1997) 46 Emory Law Journal 1011, 1011 (“the role of corporate counsel entails intrinsic ambiguities that must be worked through in the ordinary course of a day’s work with far greater frequency than in most other practice settings”).
2 Eli Wald, “In-House Risks” (2015) Compliance & Ethics 15. In Australia inhouse lawyers have grown from 7325 in 2011 to 14,977 in 2022 (a growth rate of 104%): Urbis, “2022 National Profile of Solicitors” (Law Society of NSW, 26 April 2023) 24, 26. https://www.lawsociety.com.au/sites/default/files/2023-05/2022%20National%20Profile%20of%20Solicitors%20-%20Final.pdf.
3 Steven L Schwarcz, “To Make or to Buy: In-House Lawyering and Value Creation” (2008) 33 Journal of Corporation Law 497; Michael Legg and Felicity Bell, “Insourcing – Implications for In-House Counsel and Private Practice Lawyers” (2018) 45 Law Society Journal 70.
4 The Hon Susan Kiefel AC KC, “Ethics and the Profession of the Lawyer” (Queensland Law Society, The Vincents’ 48th Annual Symposium 2010, 26 March 2010) 6.
5 Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015, r 3.
6 Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015, r 8.1.
7 Equuscorp Pty Ltd v Wilmoth Field Warne (No 3) [2004] VSC 164 [16].
8 Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015, r 4.1.4.
9 Alfred Crompton Amusement Machines Ltd v Customs & Excise Commissioners (No 2) [1972] 2 QB 102, 129.
10 ibid.
11 See Restatement (Third) of the Law Governing Lawyers § 96 (2000); American Bar Association Model Rule 1.13.
12 Richard Moorhead, Steven Vaughan and Cristina Godinho, In-House Lawyers’ Ethics: Institutional Logics, Legal Risk and the Tournament of Influence (Hart 2018) 50–51.
13 Royal Commission into the Robodebt Scheme, Report (Commonwealth of Australia 2023) xxiii–xxix.
14 ibid 519.
15 ibid 521.
16 ibid 522.
17 ibid 522.
18 ibid 124, 523.
19 ibid 190.
20 ibid 190–91.
21 Adam Bell SC, “Review of The Star Pty Ltd – Inquiry under Sections 143 and 143A of the Casino Control Act 1992 (NSW)” (31 August 2022) vol 1.
22 Adam Bell SC, “Review of The Star Pty Ltd – Inquiry under Sections 143 and 143A of the Casino Control Act 1992 (NSW)” (31 August 2022) vol 2, 253.
23 ibid 263–69.
24 ibid 279–82.
25 ibid 266.
26 ibid 282.
27 ibid vol 3, 189–90.
28 ibid 193.
29 ibid 190–91; Aaron Patrick, “Lawyer at Heart of Star Scandal” Australian Financial Review (14 December 2022) 36.
30 Adam Bell SC, “Review of The Star Pty Ltd – Inquiry under Sections 143 and 143A of the Casino Control Act 1992 (NSW)” (31 August 2022) vol 3, 20–22, 55, 187.