SAKURA Law Office has published a new column, “The UPL Risk Companies Cannot Afford to Overlook - Article 72 of Japan’s Attorney Act and Legal Outsourcing,” explaining the risk of unauthorized legal practice under Article 72 of the Attorney Act when companies outsource work to agency service providers, consultants, and other external specialists, and discussing how corporate legal work can be outsourced lawfully and efficiently.

Services supporting companies and individuals from outside the organization have become increasingly diverse, including resignation agency services, debt-collection support, leasing and tenant-vacating support, contract review, dealings with financial institutions, and M&A support. Many of these services are useful. However, once the service moves into specific legal analysis or legal negotiation on behalf of the client, Article 72 of the Attorney Act may become relevant. In recent years, bar associations have continued to issue warnings regarding unauthorized practice of law in connection with resignation agency services.

Using the First Petty Bench decision of the Supreme Court dated July 20, 2010 as a starting point, this column explains how companies should understand unauthorized-practice risk and examines practical situations in which the issue frequently arises, including debt collection, restructuring negotiations with financial institutions, M&A, employment matters, and real estate. It also introduces SAKURA Law Office’s Legal Outsourcing service, under which attorneys undertake, as an external corporate legal function, the legal analysis and representation that should properly be performed by attorneys.

The full column appears below.

The UPL Risk Companies Cannot Afford to Overlook

Article 72 of Japan’s Attorney Act and Legal Outsourcing - Turning Legal Analysis and Representation That Should Be Performed by Attorneys into Corporate Execution Capability

There is, of course, nothing inherently wrong with a company outsourcing legal-related work. Management consultants, M&A advisers, certified public accountants, tax accountants, certified social insurance and labor consultants, real estate companies, property managers, and other specialists support corporate activity through their respective areas of expertise. The problem arises when outsourced work, often gradually and without clear recognition, moves into specific legal analysis or legal negotiation with a counterparty.

For the company itself, this issue is not simply a question of whether the service provider is acting unlawfully. If the provider’s conduct becomes the subject of a criminal case as unauthorized legal practice, the commissioning company may also suffer serious consequences affecting its credibility, financing, transactions, project execution, and reputation. When deciding how to outsource corporate legal work, companies must consider not only price and convenience but also a more fundamental question: who is legally permitted to perform the work in question?

1. A Real Case - Suruga Corporation and Tenant-Vacating Negotiations

To make the issue concrete, it is useful to begin with a well-known precedent. Suruga Corporation was established in March 1972 under the name Suruga Kensetsu Co., Ltd. and initially focused on construction. It later expanded its real estate business and, from the late 1990s, developed a real estate solutions business involving the acquisition of properties with complex rights relationships, the restructuring of those rights to increase asset value, and subsequent disposition. According to contemporaneous insolvency reports, the company operated an integrated model covering land research, comprehensive planning, selection of buyers, design and construction, and after-sales maintenance.

This type of business may require existing tenants to vacate acquired buildings so that the underlying rights relationships can be reorganized. According to the company’s external investigation committee report and contemporaneous media coverage, Suruga outsourced tenant-vacating negotiations for multiple properties to external real estate service providers and others. In March 2008, persons connected with the outsourcing arrangement were arrested on suspicion of violating the Attorney Act, and the corporation and certain individuals were subsequently prosecuted.

One of the cases arising from that series of tenant-vacating negotiations reached the Supreme Court in the First Petty Bench decision of July 20, 2010 (2009 (A) No. 1946, Keishu Vol. 64, No. 5, p. 793). The decision anonymized the parties, but the facts found by the Court showed that Company A, engaged in real estate transactions and related businesses, had acquired a building for redevelopment and disposition, and 74 tenants were leasing units in the building for business purposes. Company B, retained by Company A, had no attorney qualification but nevertheless spent approximately ten months negotiating with the tenants toward agreed termination of the leases and surrender of the premises.

The Supreme Court held that, because the tenants were still operating their businesses during the lease terms and had no intention of vacating, the matter was one in which it was “almost inevitable” that legal disputes would arise over whether an agreement to vacate would be reached, when the tenants would vacate, and the amount of relocation compensation, and that those disputes would have to be resolved through negotiation. The Court treated the work as legal services concerning “other general legal matters” within the meaning of Article 72 of the Attorney Act and upheld the lower court’s finding of criminal liability under that provision.

What matters is that the Supreme Court did not look only at whether litigation had already begun. The Court focused on the nature of the matter itself - namely, that legal disputes over the existence and terms of the tenant-vacating arrangement were almost inevitable. In corporate practice, this means that it may not be enough to wait until negotiations have fully developed into a dispute before moving the matter to an attorney. At the stage of outsourcing, companies should consider whether the work is of a nature that enters the territory of legal services concerning a legal matter.

Suruga Corporation filed a petition for commencement of civil rehabilitation proceedings with the Tokyo District Court on June 24, 2008. It would not be appropriate to attribute the company’s business failure solely to the tenant-vacating case. However, contemporaneous insolvency reports identified several contributing factors to the deterioration of its liquidity, including the loss of confidence caused by extensive reporting on the Attorney Act violations involving persons connected with the contractor, adverse effects on its real estate business, difficulty obtaining support from financial institutions, and financing constraints. Approximately three months elapsed between the arrests of the relevant persons and the civil rehabilitation filing.

The commissioning company itself was not a defendant in the Supreme Court criminal case. Even so, this series of events illustrates that when a company outsources legal negotiation to a non-lawyer, the resulting risk may extend far beyond the service provider’s own criminal exposure and may affect the company’s credibility and even business continuity.

2. “Support,” “Advice,” and “Negotiation” Are Not the Same Thing

A wide range of services support business activity, including rent-collection agencies, resignation agencies, contract-review services, cost-reduction consulting, sales-improvement consulting, and business-restructuring support. A management consultant who advises a company on profitability, organizational structure, workflow, finance, or similar business issues does not ordinarily raise an Article 72 issue merely by providing such advice.

But business advice is different in nature from deciding a specific legal issue and negotiating with a counterparty on behalf of the client. Suppose a company asks, “What should we do with this contract?” A consultant might properly advise, “The transaction is no longer profitable, so you should consider ending the relationship and moving to another supplier.” That is business advice. By contrast, if the adviser goes further and says, “This contract can be terminated under the Civil Code or this contractual clause,” or “This notice will legally terminate the agreement,” the adviser is making a specific legal determination. If the adviser then negotiates with the counterparty on behalf of the client over the validity of termination or liability for damages, the applicability of Article 72 must be carefully considered.

Negotiation is particularly important when assessing unauthorized-practice risk. In the Supreme Court decision discussed above, the core activities were negotiations over whether the tenants would agree to vacate, the timing of vacating, and the amount of relocation compensation. Even if a service is described as “management support,” “negotiation support,” or “consulting,” the legal characterization does not change merely because of the label if, in substance, the provider is negotiating the resolution of a legal dispute on behalf of the client.

The Tokyo Bar Association has also continued to warn that, in the context of resignation agency services, if a non-attorney service provider discusses legal issues with the employer on behalf of the individual - including unpaid overtime, resignation terms, or damages based on workplace harassment - the conduct may constitute unauthorized practice of law. When deciding what can be outsourced, companies should focus on the actual work being performed, not the service label.

3. Five Areas in Corporate Practice Where UPL Risk Commonly Arises

Article 72 of the Attorney Act generally prohibits a person who is neither an attorney nor a Legal Professional Corporation from, for the purpose of obtaining compensation and as a business, handling legal services in connection with general legal matters or acting as an intermediary for such services. Under Article 77(iii), a violation of Article 72 is punishable by imprisonment for up to two years or a fine of up to JPY 3 million. Whether a particular act constitutes unauthorized practice, however, depends on the nature of the matter, the specific conduct, the purpose of obtaining compensation, whether the activity is conducted as a business, and whether another statute grants authority to the person performing it. The following are five areas in corporate practice where the boundary is particularly important.

(1) Debt Collection

Suppose a company is owed JPY 30 million for goods sold. A consultant may review the counterparty’s financial condition and assess collectability. That is different from demanding payment of the JPY 30 million on behalf of the client and negotiating a settlement under which the counterparty will pay JPY 20 million in a lump sum. Where a provider, for compensation and as a business, negotiates the resolution of a legal dispute concerning the existence, amount, timing, reduction, or settlement of a debt, Article 72 may become relevant.

(2) Rescheduling and Business-Restructuring Negotiations with Financial Institutions

For a company seeking an extension of repayment dates on bank debt, the preparation of cash-flow forecasts, business-restructuring plans, or presentation materials for financial institutions may properly fall within financial and management advisory work. By contrast, where a provider represents the client in negotiations with financial institutions over repayment dates, repayment amounts, interest, security, guarantees, debt waivers, or other legal terms and seeks to restructure the creditor-debtor relationship, the work takes on a strong legal character. Financial support and legal representation should therefore be allocated appropriately among the professionals involved.

(3) M&A

Financial analysis, EBITDA analysis, market analysis, synergy analysis, enterprise valuation, and post-merger integration planning are areas in which M&A advisers and financial professionals play an important role. By contrast, when a party determines the legal rights and obligations arising under specific provisions of a share purchase agreement, asserts claims for breach of representations and warranties, indemnification, termination, or other legal rights against the counterparty, and negotiates settlement terms, the boundary with legal work that should be handled by attorneys becomes important. In M&A, commercial, financial, tax, and legal responsibilities should be appropriately divided among the relevant specialists.

(4) Employment Matters

Certified social insurance and labor consultants and other professionals play important roles in HR system design, labor management, social insurance procedures, and related work. On the other hand, where a legal dispute arises concerning the validity of a dismissal, unpaid overtime, resignation terms, damages, or other rights of an individual employee, and someone negotiates settlement terms on behalf of the company, it is necessary to confirm the scope of authority permitted under Article 72 and other applicable laws. Certain certified social insurance and labor consultants have statutory authority to represent parties in designated alternative dispute resolution procedures, but the scope of work available to each licensed profession is defined by law. Companies should confirm, matter by matter, who is legally authorized to represent them and to what extent.

(5) Real Estate and Tenant-Vacating Negotiations

Advice such as “acquiring this property may improve profitability through redevelopment” is investment or business advice. By contrast, negotiating on behalf of the owner to obtain a tenant’s agreement to terminate the lease, determine the date of surrender, and agree on relocation compensation in exchange for payment of a specified amount approaches the precise issue addressed in the Supreme Court decision discussed above. Even where a company works with a property manager, real estate company, asset manager, or other real estate professional, it is important to structure the matter so that negotiations concerning legal rights and obligations are handled by attorneys.

4. SAKURA Law Office - Legal Work That Should Be Handled by Attorneys

SAKURA Law Office provides “Legal Outsourcing (Corporate Legal Operations & Negotiation Support),” under which our attorneys handle corporate debt collection, contract termination and amendment, employment matters, real estate, dealings with financial institutions, M&A, and other matters on an integrated basis - from legal analysis and negotiation with counterparties through preparation of notices and agreements and, where necessary, provisional remedies, litigation, and enforcement.

The purpose of this service is not to exclude consultants or other licensed professionals. Rather, we work appropriately with experts in management, finance, tax, human resources, real estate, M&A, and other fields while clearly separating out the legal analysis and representation that should be performed by attorneys, so that the company does not internalize unnecessary unauthorized-practice risk.

Nor is the service designed simply to offer the “cheapest legal fees.” If a company first retains an outside provider, later transfers the matter to counsel once a legal issue emerges, and then changes representatives again after the matter becomes a dispute, it incurs duplicated explanations, repeated document review, handover costs, and delays in decision-making. In matters likely to require legal negotiation, involving attorneys at an earlier stage can rationalize the company’s total legal cost when time, internal workload, and risk are taken into account.

Companies may consult us even before a detailed engagement structure has been decided - for example, where they want to confirm whether an existing agency or consulting service presents legal concerns, transition a matter after an outside provider has already begun negotiations, externalize negotiation-heavy matters without increasing in-house legal headcount, or establish a repeatable framework for recurring matters such as debt collection, contract termination, or leasing disputes.

For companies, the most important question is not simply, “Who is the cheapest provider?” They must also determine how far the outsourced work extends into legal analysis and negotiation, whether the provider has legal authority to perform that work, and who will remain responsible through final resolution if a dispute materializes. Legal work that should be performed by attorneys should be performed by attorneys under their professional responsibility. That is one of the most basic components of a legal framework designed to protect the company itself.

Key Laws and Case Discussed

The principal authorities discussed in this column are Articles 72 and 77(iii) of the Attorney Act and the First Petty Bench decision of the Supreme Court dated July 20, 2010 (2009 (A) No. 1946, Keishu Vol. 64, No. 5, p. 793). The discussion of resignation agency services and unauthorized legal practice also refers to recent warnings issued by the Tokyo Bar Association’s committee responsible for measures against unauthorized legal practice.

Contact

For inquiries regarding the introduction of Legal Outsourcing (Corporate Legal Operations & Negotiation Support), the relationship between Article 72 of the Attorney Act and agency or consulting services currently being used, or legal negotiations involving debt collection, contract termination or amendment, employment, real estate, dealings with financial institutions, M&A, or other matters, please contact SAKURA Law Office.

To help us review your inquiry efficiently, please include, to the extent known, a brief outline of the matter, whether any outside provider or other professional is currently involved, whether negotiations with the counterparty have already begun, and whether any response deadline applies.

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