Friday, March 2, 2007

Two Views on Analyzing the Lawyer Under the "Agency" Concept and Economic Model

Posted by Alan Childress
        Recently posted to SSRN are two articles examining the traditional "agency" model of the role of lawyers as to clients and the legal profession generally.  One, by Grace Giesel (Louisville--LawGiesel [right]), entitled "Client Responsibility for Lawyer Conduct: Examining the Agency Nature of the Lawyer-Client Relationship,"  argues that courts are unjustifiably reluctant to carry through on a strong notion of the lawyer as agent binding the client.  We have posted on this previously (nonetheless its abstract is after the jump below, for ease of comparison). 
        By contrast, another article, written by Lorenzo Sacconi (Univ. of Trento--Econ.), challenges the traditional principal-agent paradigm from a law and economics standpoint.  It is called "Good Law & Economics Needs Suitable Microeconomic Models: The Case Against the Application of Standard Agency Models to the Professions," and its abstract is:

Notwithstanding its widespread acceptance, agency theory could not be the most suitable microeconomic modeling for designing efficient and fair economic transactions. The case against the standard principal-agent modeling is made about liberalizations of professional services that introduced schemes of professionals' remuneration contingent on outcomes - i.e. “contingent fees” for lawyers. If the relationship between the professional and clients is seen according to the principal-agent model, contingency fees can be an efficient incentive for the professional's effort. The case is quite different, however, if the situation is seen as one of bounded rationality and unforeseen and asymmetrically gathered events. In these contexts they can generate pathological incentives.

The professional relationship is an authority relationship based of contractual incompleteness, which requires the reliance on trustworthiness of the authority position's holder. Hence I propose a model for understanding the professional relationship which extends the “formal vs. real authority” model proposed by Aghion and Tirole (1997). This leads to underline the essential role played by behavioral hypothesis on professionals' “endogenous” adherence to ethical standards that induces the professional's identification with her clients' interests.

A game theoretical thought experiment is then carried out. It shows that (i) in the case of a self-interested lawyer contingent fees lead to not respecting the fiduciary obligations with at least one client for only the ex post mostly remunerative cases are litigated. (ii) In the case of the lawyer's willingness to comply with deontology standards, contingent fees lead nevertheless to neutralization of the deontological motivation and to a loss of efficiency. A Pareto optimal, impartial, as well as efficient, arrangement aimed at maximizing the total volume of damage compensation is then considered. Nevertheless under a contingent fees contract, even if these motivations were available, the professional could not carry out them because of the logic of the contract.

Grace Giesel's abstract is:

Many are the court opinions stating that attorneys are agents of their clients. Traditional agency law allows principals to be responsible for actually and apparently authorized acts of an agent. Thus, one would expect courts to hold client principals responsible for authorized acts of agent attorneys. This article illustrates that some courts have exhibited significant reluctance to so hold, however. In the context of liability for torts such as abuse of process committed by attorney agents, some courts do not recognize traditional agency bases of client liability. Also, in the context of settlement, many courts do not apply traditional agency law in a traditional manner. Finally, in the context of waiver of the attorney-client privilege, some courts do not apply traditional agency principles. In each of these situations the courts deviate from traditional law to protect the client principal from liability that might otherwise occur as a result of the agency relationship. Courts appear troubled by viewing the relationship of lawyers and clients as a run-of-the-mill agency relationship. At the very least courts appear reluctant, in a paternalistic or maternalistic way, to hold a client responsible for an attorney's actions. This article concludes that such additional protection for clients is unnecessary in today's world of empowered clients. While there is no doubt that the relationship of attorney and client is a unique agency relationship, this relationship requires no special rules; the client neither deserves nor requires to be treated differently. Such a stance is more appropriate in today's environment in which user's of legal services are, in general, more sophisticated about the services provided by attorneys, and in many situations, intimately involved in the decisions made regarding the legal representation.

Abstracts Highlights - Academic Articles on the Legal Profession, Economics | Permalink

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