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Professional regulation of lawyers and law firms in Germany: Comprehensive reform on the way

  • Legal Development 07 January 2021 07 January 2021
  • UK & Europe

  • Insurance & Reinsurance

The legal framework of the legal profession in Germany is undergoing various long-awaited changes. On 3 November 2020, the Federal Ministry of Justice and Consumer Protection published a draft Act revising the current professional rules and regulations applicable to lawyers and tax advisers (the draft "Federal Lawyers' Act"). This draft proposes substantial changes to the existing landscape and new requirements for domestic and foreign lawyers and law firms doing legal business in Germany.

Professional regulation of lawyers and law firms in Germany: Comprehensive reform on the way

We summarise below the most important new features and their implications for international law firms in particular.

In particular: Foreign Law Firms

For the first time, law firms from non-EU countries are now expressly allowed to provide legal services through a German branch office by lawyers admitted to the bar in Germany (sec. 207a Draft Federal Lawyers' Act).

The new statute requires that the purpose of the business of the law firm must be the provision of advice and representation in legal matters, that the firm is authorised to provide legal services under the law of the member state of the WTO in which its registered office is located, that its partners are lawyers or members of one of the listed professions, and that the firm is licensed by the bar association responsible for its place of business.

In the conduct of its business, such a law firm will be obliged to refer to its foreign legal form in business letters and other announcements, indicating its registered office and the relevant legal system, and to explain its liability regime. The exact form/extent of the narrative required remains unclear and so law firms would be well-advised to be comprehensive.

In contrast to the UK which operates on the basis of "incorporation theory" (according to which the legal regime applicable to a company is determined by the place where the company has been incorporated), German law operates on the basis of "real seat" theory which looks at where the "central administration" is, and provides that a company will be subject to the law of the state in which the focus of corporate activity is located. As a consequence law firms organised as a UK LLP and with their administrative seat in the UK are still permitted to continue their business in Germany – provided that the aforementioned requirements are met. The scenario is dramatically different for LLPs with an administrative seat in Germany. If a UK LLP is seated in Germany, then, following Brexit, the firm will no longer have the advantages of EU law but would be requalified into a German partnership with the result of unlimited and personal liability of its members. Although the Trade and Cooperation Agreement (TCA) between the EU and the UK provides clarity with respect to market access for lawyers respectively, the TCA does not address the possibility of a continuation of a UK LLP seated in Germany. Furthermore, the German legislator has not clarified this to date.

In general: Admissible Legal Forms

Notwithstanding the possible effects of a hard Brexit and the regulation of foreign law firms, the Draft Federal Lawyers' Act also broadens the scope of legal structures open to law firms under German law. In particular, it now expressly permits law firms to use structures which were previously only open to trading companies. The Explanatory Notes to the Draft Act expressly acknowledge that lawyers will be allowed to practice together in the legal form of a GmbH & Co. KG (a form of limited partnership in which the general partner bearing personal liability is a limited company), and sec. 59i para. 1 of the Draft Act allows for one law firm to be an owner or stakeholder in another. Therefore, the options for structuring law firm business in Germany are broadened. One caveat remains – an outside or external (non-law firm) investor would still not be allowed to invest in a law firm as shareholder.

Irrespective of its legal form (except for partnerships without limitation of liability), a law firm must ensure it is entered in the register of lawyers.

As an auxiliary consequence, mandatory minimum professional liability insurance provisions have been amended to include these new structures. Therefore, it is important for law firms to review whether their insurance programme meets the new requirements and whether they maintain a sufficient statutory insurance policy in Germany.

Professional Duties and Compliance Requirements

Whereas current professional law and regulation applies solely to individual professionals, the Draft Act now introduces a dualistic approach (professional and entity) which is more in line with practice outside of Germany: In the future, the entity through which the individual professionals exercise their profession will be subject to regulatory requirements and have professional duties of its own. In addition, law firms will be capable of performing legally effective actions in their own name before German courts and may also install a company mailbox.

The other side of the coin is that, under the Draft Act, a law firm will be obliged to ensure adherence of its professionals to their individual professional duties. Law firms will have to ensure through their management bodies and, where appropriate, through their supervisory bodies, that violations of professional law are detected at an early stage. The firm has to provide appropriate mechanisms for this purpose. Thus, the new German Professional Law will follow the established practice in the market and other jurisdictions.

In cases of violations of the law firm's obligations, particularly its culpable omission to put in place appropriate organisational, personnel and technical measures, the law firm itself can be sanctioned (sec. 113 Draft Federal Lawyers' Act). According to sec. 114 para. 2 of the Draft Federal Lawyers' Act, sanctions can range from warnings to fines of up to five hundred thousand euros or in a worst case scenario disqualifying the law firm from providing legal services.

Facing such consequences, law firms will be well-advised to double-check their current compliance measures. Although law firms will not be required to nominate an official compliance officer, it seems inevitable that increased time and money will be spent on training courses, ombudspersons and (facultative) compliance officers.

Stricter Regulations on Conflicts of Interest

The Draft Federal Lawyers' Act also expressly provides for stricter regulation of conflicts of interest. Formerly, such rules were mostly impliedly taken from professional regulations. The Draft Act not only sets out the currently acknowledged rules of conduct, but also tightens the requirements.

When the Draft rules come into force, German lawyers will not be allowed to act for a client if they have advised another client with a conflicting interest in the same case. A conflicting interest is broader than a legal interest, and includes economic interests. This restriction will also apply to all lawyers who are organisationally connected to the conflicted lawyer, most notably, colleagues in the same law firm. However, the restriction will not apply if (i) the respective clients have consented after having been fully informed and (ii) appropriate precautions have been taken to ensure that confidentiality is maintained (so-called Chinese walls or information barriers).

The most important substantial amendment with respect to conflicts of interest will be the move away from an objective to a primarily subjective approach. In determining whether interests are conflicting, the interest of the client will be decisive. Objective components such as the importance of the proper administration of justice will not be dropped but will be downgraded to a rather auxiliary argument. Provided client consent and proper processes are in place, conflicts issues resulting from lawyers changing firms should be less problematic going forward.

Outlook

This major reform of the Professional Law is in line with the main recommendation of the German lawyers association. It is expected that the German Parliament will adopt the draft before the next elections in autumn 2021. It remains to be seen whether there will be any significant changes during the legislative process – in particular, with the TCA now being on the table - which might fuel efforts to recognize not only market access for lawyers but also to choose a foreign legal form such as the UK LLP in Germany.

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