Limited Liability System and Compulsory Insurance: Introducing Professional Corporations for Attorneys in the Citizen-Drafted Attorney Regulation Act

Currently, the practice of law in Taiwan generally takes three forms: solo practices, partnerships, or office-sharing arrangements. However, all these models are based on individual attorneys as natural persons. To pursue sustainable development, can an independent entity distinct from natural persons be established—much like how commercial businesses can form companies in addition to sole proprietorships? Foreign jurisdictions such as the United States, France, Germany, and Japan have already established systems for legal professional corporations. Domestically, civil society organizations including the Judicial Reform Foundation and the Taipei Bar Association spent three years and held dozens of meetings, referencing international bar systems, to incorporate a dedicated chapter on "attorney professional corporations" into the citizen-drafted amendment to the Attorney Regulation Act. The author was fortunate to participate in this process and briefly outlines the drafting and deliberation process below.

As the name suggests, a professional corporation possesses legal personality; therefore, a law firm can act as a legal entity in its own right. It operates as an independent entity in terms of financial accounting and taxation, unaffected by personnel changes among its constituent attorneys, thereby maintaining continuity and stability.

In terms of legislative structure, the citizen-drafted bill initially referenced the professional corporation system amended and passed in neighboring Japan on June 1, 2001, promulgated on June 8 of the same year, and implemented on April 1 of the following year. However, Japanese attorney professional corporations are structured primarily around natural-person attorneys, exhibiting strong characteristics of an association, and bear unlimited liability externally. Compared to traditional partnerships, this offered no special incentives for attorneys to adopt the system.
Consequently, after Japan introduced the professional corporation system in April 2002, only one large firm—Oebashi Law Office—adopted the corporate firm structure, with 56 attorneys. Experts have noted that the biggest reason this system lacks appeal is that firms bear joint and several unlimited liability externally. Therefore, no matter how much the advantages of corporatization are promoted, the top 7 largest firms continue to maintain the existing partnership system (Note 1).

However, if a corporate system were to adopt limited liability externally, members of the general public utilizing legal services provided by law firms might harbor concerns. Especially with the increased passing rate of the bar examination and the growing number of attorneys, views have emerged that the quality of legal services varies, and the likelihood of attorneys being sued for negligence in handling legal matters that causes damage to clients also increases. In this light, would promoting a limited-liability corporate system compromise clients' rights and interests by reducing the damages for which attorneys are liable?

The Limited Liability System Must Be Accompanied by Compulsory Professional Liability Insurance

Regarding this aspect, Germany requires attorney professional corporations adopting limited liability to be paired with a compulsory professional liability insurance system to protect the rights and interests of legal service users. Meanwhile, Taiwan's Certified Public Accountant Act took the lead on December 26, 2007, by introducing the professional corporation system, explicitly stipulating that CPA professional corporations must obtain professional liability insurance. The minimum coverage amount is determined by the competent authority considering factors such as capital, number of shareholders, and the scale and nature of operations. If insurance is not obtained in accordance with regulations, all shareholders of the CPA professional corporation shall bear joint and several liability with the firm for any uncovered shortfall (Note 2).

In view of this, while introducing the Japanese-style attorney professional corporation system, the citizen-drafted version also referenced mechanisms from Taiwan's Certified Public Accountant Act to ensure compensation capacity (Note 3), thereby ensuring that the attorney professional corporation system not only attracts law firms to adopt it but also safeguards the rights and interests of the general public.

Notes

1. For related discussions and data, please refer to the lecture transcript by Attorney Tamashiro Tatsuhiko of the Okinawa Bar Association, Japan, entitled "Overview of Japanese Attorney Professional Corporations—Current Status of Attorney Professional Corporation Firms and Solo Attorney Firms," delivered in Taiwan on February 22, 2008. The Japanese original and its Chinese translation are published in Lawyers Magazine, No. 343, published by the Taipei Bar Association in April 2008, pp. 28-48.
2. Article 31 of the Certified Public Accountant Act
   A CPA professional corporation shall obtain professional liability insurance.
   The minimum coverage amount and implementation methods for the professional liability insurance required under the preceding paragraph shall be prescribed by regulations issued by the competent authority, taking into consideration factors such as the amount of capital, number of shareholders, and the scale and nature of the business operated.
   If a CPA professional corporation fails to obtain professional liability insurance in compliance with the preceding paragraph, the competent authority may suspend all or part of its business for six months or less, or revoke the approval of its registration.
   Article 42 of the Certified Public Accountant Act
   If a CPA causes damage to a designated person, client, auditee, or interested party due to circumstances described in the preceding article, the CPA shall be liable for damages.
   Except for attestation services for publicly listed companies, the liability for damages caused by a CPA's negligence under the preceding paragraph shall be limited to ten times the total professional fees collected from the same designated person, client, or auditee for that current year.
   Where a shareholder of a CPA professional corporation falls under the circumstances of paragraph 1, such shareholder shall bear joint and several liability for damages with the CPA professional corporation.
   If a CPA professional corporation fails to obtain professional liability insurance in accordance with the regulations of the competent authority, all shareholders of the CPA professional corporation shall bear joint and several liability with the CPA professional corporation for any uncovered shortfall in coverage.
   Where a CPA professional corporation pays compensation pursuant to paragraph 3, it shall have a right of recourse against the shareholder.
3. Paragraph 1, Article 13 of the Draft Attorney Regulation Act
   The term "professional corporation" as used in this Act refers to an association with legal personality organized, registered, and established in accordance with this Act for the purpose of practicing law.
   Article 24 of the Draft Attorney Regulation Act
   A professional corporation shall obtain professional liability insurance.
   The minimum coverage amount and implementation methods for the professional liability insurance referred to in the preceding paragraph shall be prescribed by regulations jointly issued by the Ministry of Justice and the Taiwan Bar Association.
   Article 26 of the Draft Attorney Regulation Act
   Where an attorney practicing law causes damage to a client due to negligence, the total amount of damages shall be limited to one hundred times the total professional fees collected from the client for that case.
   If a professional corporation fails to obtain professional liability insurance in accordance with the regulations of the competent authority, all members of the professional corporation shall bear joint and several liability with the professional corporation for any uncovered shortfall in coverage.
   Where a professional corporation pays compensation pursuant to paragraph 3, it shall have a right of recourse against the member.