Like other professional service providers, lawyers hope that clients will request their services on the basis of various factors. These include the reputation of the lawyers, their expertise and the value that they might provide to clients (namely, the likelihood that lawyers will add value that is equal to, or greater than, the fees that clients pay).
Traditionally, in many jurisdictions, lawyers were prohibited from advertising their services. Although many of the traditional restrictions on advertising have been removed or relaxed, it is often difficult for lawyers to attract clients as a result of the fierce competition in the provision of legal services, and also the limited resources that lawyers have to advertise their services.
This column explores arrangements under which law firms pay fees to third parties for referring work to them. The column starts with an outline of referral fee arrangements and the arguments for and against such arrangements. It then examines the legality of such arrangements in common law jurisdictions and mainland China.
Referral fees: Arguments for and against
As noted above, the focus of this column is on referral fees, which arise where a lawyer makes a payment to a third party for referring a client to the lawyer. In this context, a third party may be another lawyer or a non-lawyer. Such an arrangement should be distinguished from a referral arrangement, where the lawyer refers a client to a third party in return for receiving a fee from the third party.
It should also be distinguished from a fee-sharing arrangement, where either the lawyer pays the third party a percentage of the fees that the lawyer receives from the client, or the client pays the fees in full to the third party, and the third party then pays a percentage of the fees to the lawyer who provides the legal services.
There are arguments for and against the payment of referral fees by lawyers to third parties who introduce or refer clients to the lawyers. The arguments in favour of fee referral arrangements include the following:
Access to justice. Such an arrangement helps clients obtain legal advice and services that they require.
Efficiency. Such an arrangement can achieve efficiencies in areas such as pricing and also the development of a competitive market for the provision of legal services. It can also act as a matching process, under which the needs of clients can be matched with suitable legal services providers.
The arguments against fee referral arrangements include the following:
Lack of transparency. Clients may not be aware that the lawyers are paying a fee to a third party for referring the client to the lawyer and, consequently, that the fees that clients pay the lawyer may be increased to cover the referral fee that the lawyer pays to the third party.
Unethical practices. Such an arrangement might encourage unethical practices on the part of third parties and lawyers. For example, the third party may be incentivised to refer a client to a lawyer irrespective of whether the lawyer has the necessary expertise or experience to provide the legal services to the client. In addition, the lawyer may not operate with full independence, and may not act in the best interests of the client if the lawyer has a commercial arrangement with the third party.
As legal practice is a regulated profession, lawyers in most jurisdictions are subject to professional duties, including the duty of disclosure, the duty to act independently, and the duty to act in the best interests of the client. Is there a risk, however, that referral fee arrangements undermine the ability for lawyers to comply with their professional duties? The answer to this question differs between jurisdictions. Some jurisdictions prohibit fee referral arrangements; others permit them, subject to various rules and restrictions.
Common law jurisdictions
A range of approaches have been adopted in common law jurisdictions. In Australia, a permissive approach has been adopted. The Solicitors’ Conduct Rules that apply in some states provide as follows:
12 Conflict concerning a solicitor’s own interests
12.1 A solicitor must not act for a client where there is a conflict between the duty to serve the best interests of a client and the interests of the solicitor or an associate of the solicitor, except as permitted by this Rule.
…
12.4 A solicitor will not have breached this Rule merely by—
12.4.4 acting for a client in any dealing in which a financial benefit may be payable to a third party for referring the client, provided the solicitor has first disclosed the payment or financial benefit to the client.
The above-mentioned provision makes it clear that it is possible for a solicitor to pay a financial benefit to a third party for referring the client, provided that the solicitor has disclosed the financial benefit to the client and the arrangement would not give rise to a conflict of interest between the duty to act in the best interests of a client and the solicitor’s own interests.
In the UK, the rules governing solicitors permit the payment of referral fees by solicitors subject to various requirements such as avoiding a conflict of interest and making disclosure to clients, and also subject to a ban on the payment of referral fees in criminal and personal injury matters.
There are various reasons why the UK bans the payment of referral fees in personal injury matters. These include the risk that third parties will “cold call” potential clients, the risk that personal injury claims may be brought without the authority of the client, and the risk that claims will be settled without a medical report.
In contrast, the payment of referral fees to third parties is prohibited in the Hong Kong Special Administrative Region. Rule 4 of the Solicitors’ Practice Rules in Hong Kong provides as follows:
4. Sharing with non-qualified persons
A solicitor shall not share or agree to share with any person not being a solicitor practising in Hong Kong his/her profit costs in respect of any business whether by way of paying or agreeing to pay a commission on business introduced by any such person not being a solicitor, or otherwise.
The above-mentioned prohibition is subject to various exceptions, including the situation where a solicitor’s firm is a party to an association with a foreign law firm.
In the US, the position depends on the rules in each state. Rule 7.2(b) of the American Bar Association Model Rules of Professional Conduct states that a lawyer is not allowed to give anything of value to someone for recommending a lawyer’s services. However, Rule 1.5(e) allows referral fees between attorneys subject to certain requirements such as the requirement for the client to agree in writing to the arrangement, including the share of the fees that each lawyer will receive, and the requirement for the total fee to be reasonable.
Mainland China
Mainland China adopts a prohibitive position. Article 19 of the Rules Governing the Fee Collection Procedures of Law Firms, which were issued by the Ministry of Justice in 2004 provides as follows:
Article 19
Law firms may not solicit business by improper charging methods, nor may they give kickbacks to clients or pay referral fees to intermediaries in any way or under any name.
The above-mentioned prohibition is reflected in the Measures for Punishing Illegal Acts of Lawyers and Law Firms, which were issued in 2010 by the Ministry of Justice. It is understood that the prohibition is based on concerns about the independence of lawyers and the risk that referral fees compromise their professional judgment and integrity.
Andrew Godwin previously practised as a foreign lawyer in Shanghai (1996 – 2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law. Andrew is currently Joint Associate Director of the Corporate Law and Financial Regulation Research Programme at the Melbourne Centre for Commercial Law and Honorary Associate Director (Commercial law) of the Asian Law Centre. Andrew has acted as a consultant to a broad range of organisations, regulators and governments in Australia and abroad. He served as Special Counsel and Acting General Counsel of the Australian Law Reform Commission between 2020 and 2024.
