To be clear, it’s not so much the lawyers who are cheap, just legal fees, at least compared to the U.S. and EU. This is the topic of “Asia’s Low Legal Stakes,” a recent article in The Asian Lawyer. Now wait, I know what you’re thinking. During this busy time of the year (for me), I’m barely managing to bang out a post once a fortnight, and this is what I consider to be important news?

Perhaps not news, but I did find it thought-provoking. Although I have problems with some of the generalizations in the article, the discussion does tell us a lot about business in Asia and how different cross-border deals are over here.

Let’s take a look at some of the explanations thrown out there by Anthony Lin, the writer of the piece:

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.

Absolutely true, and this is the case for quite a lot of legal activity, not just M&As and IPOs  (the article seems to be aimed in that direction). You rarely hear of litigation against lawyers, although you can be sure that us Asia-based lawyers have committed our fair share of malpractice. One explanation, and there are other reasons as well, is that the damage that lawyers can do by screwing up is simply less significant.

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.

OK, this is also true, but the focus on huge, high-end deals is unfortunate. The legal press often focuses on the big boys and big deals (that’s who pays the bills), but there are a lot of other lawyers out there who work on much smaller projects. What about them?

I’d say it depends. I’ve been involved in many deals where the parties had very little deal experience, which tends to magnify the contribution of the lawyer with respect to things like deal structure. If a lawyer screws up and no one is around with the knowledge or experience to steer clear of the danger, things can go wrong in a hurry. Moreover, if it’s a cross-border deal and the foreign side cannot translate potential risk into terms it understands, mental walls tend to come down (“No, no, we can’t accept that! I don’t care if it’s standard practice over there!) and deals are abandoned.

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.

Is there more competition in Asia than in the U.S. or Europe? I don’t know any numbers here, but surely the U.S. still has more lawyers chasing each deal than is the case over here in China. That being said, the nature of the competition is different, as it is with business in general over here. Many clients over here have little experience with choosing a lawyer and will often go with a personal relationship or perhaps simply the cheapest alternative (at a given quality level). And yes, part of the answer here to Why Are Asia Lawyers Cheap? is that some countries in Asia are cheap/more competitive. A shocking conclusion.

I don’t want to drag this out, so one final point, or perhaps two. First, the assumption here (lawyers in Asia are cheap) should be looked at critically. The assertion holds for some countries, and some kinds of deals, and some kinds of lawyers/firms. Just one example: for many years of my career in China, even when I was just starting out, my hourly rate for general commercial work was usually much higher than many of the U.S. lawyers I dealt with. It’s tough to make accurate generalizations.

Second, while it’s true that bad lawyering rarely scuttles deals over here, it doesn’t really follow that the value of legal advice should therefore be discounted. Risk is an issue, certainly, but I’ve seen deals salvaged that should have been allowed to die. In other words, just because a deal goes through does not mean that it was a success. Bad lawyering can lead to a lot of negative consequences, including broken deals, but there is also a great deal of added value to good legal advice, and this goes far beyond ensuring that deals are closed on time.

© Stan for China Hearsay, 2013. |
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