Welcome to the two-stop shop

There are now more than one million lawyers in the US, a ratio of one lawyer to every 260 people, according to Ramon Mullerat, senior partner at leading Spanish practice Bufete Mullerat.

And, he adds, if the rate of growth continues, by 2020 there will be no one left in the US but lawyers.

Alongside this disturbing trend is another. Speaking at the recent International Law Congress in Cyprus, Mullerat claimed that the legal world of 2020 will comprise just 50 global law firms and a few regional players.

Given that 38 out of the 50 largest world companies, for which read ‘clients’, have their headquarters in the US or the UK, British firms are in a prime position to cut themselves a slice of this new global market.

However, there is no consensus that the commonly espoused one-stop-shop strategy will guarantee leading law firms a place in the premier league of the future. Ralph Kroner, a partner with leading Dutch corporate practice Trenité van Doorne, told the conference: “Law firms will have to make a choice between litigation and transactional law.”

In Kroner’s vision of the future, one far more imminent than 2020, the full-service firm will fail because litigators will not be able to work in partnership with transactional lawyers.

“The work ethic of lawyers on the transactional side is so different,” says Kroner. “There are a different set of conflict rules for the litigation and transactional sides.”

The initial reaction from most magic circle firms is that this is an “absurd notion”, “complete balls” or just “plain wrong”, and some feel that, as a continental transactional lawyer, Kroner’s statement is merely a reaction to the invasion of UK and US firms into Europe.

“In the Benelux jurisdictions there is a great sense of personal hurt resulting from this process of globalisation as some of those great traditional law firms are taken over. There is an understandable feeling that some violence has been done to them,” says Christopher Style, head of litigation and arbitration at Linklaters.

But support for Kroner comes from one surprising quarter.

“There is certainly a case for it. I could see it happening – Clifford Chance worldwide litigation firm – why not? The litigation practice is a $300m (£192m) business. It could survive on its own,” says John Potts, managing partner of litigation in London and Asia for Clifford Chance.

But Potts still believes that, for now at least, the benefits of being in a full-service firm – developing integral working relationships with other teams and having experience on hand – outweigh the disadvantages.

“It’s a pretty close-run thing. You are probably freer [if you split] – you don’t have the baggage. But the benefits, certainly so far – though I may change my mind next year – outweigh the disadvantages,” he says.

Despite the initial condemnation of Kroner’s vision, there is a widespread acceptance that conflicts are a major issue.

“Conflict issues are difficult to manage but I don’t believe the answer is to hive off litigation departments,” says Style, echoing the sentiments of partners at both Allen & Overy and Freshfields.

“Of course it is true that litigation and arbitration raise difficult conflict issues. I don’t think it is easy to combine acting as an arbitrator with acting as a partner in a big law firm,” he says.

“As an arbitrator acting for a company, you are effectively conflicting yourself out [of acting for it in transactional matters]. That is okay if it’s a two-bit company but if it’s a household name you would hope it would become involved in an IPO, M&A activity or some project financing. You can’t gear as an arbitrator because there’s no money in it.”

But many firms maintain that conflicts do not prohibit the successful operation of a full-service firm and question whether a leading practice could survive without a litigation arm.

“We don’t look for ways of fudging the conflict rules,” says Paul Bowden, litigation partner and head of Freshfields’ environment group. “We certainly don’t regard the professional conduct rules as a yardstick. We operate a much higher standard. While there may be no technical abuse of conflict rules, you have to be alive to real commercial conflicts that can arise.

“The experience of this firm is that double-handling of cases is very much an exception and not a role we seek or relish,” he says.

Calum Burnett, a partner-elect at Allen & Overy who specialises in banking and finance litigation, goes one step further, saying: “I don’t see how you can say to clients that you are equipped to do M&A work without it [litigation capability].”

But Potts says that it is an issue that has been raised several times and the choice between remaining a full-service firm and hiving off the litigation element remains “a close-run thing”.

Management consultants Hildebrandt International director Alan Hodgart agrees. He says that many transactional lawyers, albeit with client approval, regularly abuse the Law Society’s rules and that it is certainly more common than most will admit, which hinders the relationship between the two sides of a full-service firm.

“There are many situations where a law firm can act for both sides without infringing ethical conflict,” he says. “We act for both sides of a merger [between two law firms]. There is no conflict because we’re there to act in the best interests of the newly merged firm,” he says.

Hodgart believes that this will ultimately lead to many firms choosing to concentrate on either litigation or transactional work.

“I think there will be a few very top-end transaction firms that can live with a litigation business. However, the problem comes with the second tier. As you come down, the market becomes harder and the choice of clients and work is smaller. We will see some firms focusing on transaction and vice-versa,” he says.

Hodgart adds that by evading conflict problems both the client and the lawyer are given greater choice. An independent litigation firm will avoid losing out on high value major disputes simply because of the say-so of the corporate department; and a major multinational client will no longer be prevented from choosing its favourite Freshfields or Linklaters litigator for fear of conflict.

Aside from conflict issues, another problem for the full-service firm is that transactional working methods have developed quicker and much further into the global market than litigation practices.

A magic circle insider says: “They [litigation and transaction] are very different kinds of practice. Globalisation has gone much further in relation to corporate work. Perversely, litigation has a much older global pedigree through international arbitrations and the like which have been going on for years.

“However, if you look at the litigation departments of the largest UK law firms, in some senses they are the most traditional departments. They have not moved into international arbitrations or international litigation. Although they talk about it a lot, they mostly litigate in their own jurisdictions,” he says.

While most firms argue that they are rapidly increasing their cross-border capability and building their ADR practices, most concede that US firms still hold the ascendancy.

“Increasingly, in the European context, we are doing now the type of work that leading Wall Street firms have been doing since the Second World War,” says Bowden.

“US in-house lawyers tend to be ahead of the game. They see the EU as bearing more than a passing resemblance to their own federal system where they can adopt the same approach to case management as they do in the US,” he says. Bowden adds that today, every partner in the litigation department has at least one variant of ADR in their case load.

Style agrees, and both say that a lot of their work is “quarterbacking” – where the partner acts as a co-ordinator for the client who is conducting similar litigation in multiple jurisdictions.

Despite this recognition of the need for European-wide litigation capability, many argue that litigation departments, even in the major firms, are not moving far or fast enough.

“In US firms involved with corporate finance work there are a lot of issues that are handled in a different way than in Europe and the UK. This can’t continue. Global corporate clients and their demands will mean the litigation departments are forced to adapt the ways they resolve disputes, not necessarily through the courts,” says the magic circle insider.

“In contentious matters the parties are at arm’s length whereas there is a tendency for corporate parties to work more closely together. These two cultures can’t co-exist within a single firm.”

Cost is also a driver for separating the two areas.

“In mid to lower-value litigation work the cost base is much lower and the leverage is much higher than transactional work,” says Hodgart.

The magic circle insider adds: “Costs might be as high [in both areas] but the difference is that time scales are much longer. When the litigation departments of the leading City firms were involved in the privatisation of British Rail, teams of lawyers were tied up for years. The difficulty came when it was winding down and they had to find those lawyers alternative sources of work.”

But, should a law firm decide to go down the route of hiving off the litigation practices, will it not still fall foul of Law Society regulations?

“The Law Society has indicated that it would find some difficulty with a law firm breaking away simply to avoid conflicts,” says Potts.

But he argues that there are measures that could be taken, such as independent profit sharing, which would allow the happy referral of work between the corporate practice and the separate litigation practice.

Perhaps the answer lies in the US model, where many firms are already either exclusively litigation practices or dominated by the litigation department.

“Take Rogers & Wells, where 54 per cent of its practice is litigation. It didn’t have the same sort of conflicts as us because it didn’t have the same financial base,” says Potts.

So despite protestations to the contrary, Kroner’s views, rather than being those of a continental lawyer trying to keep pace with globalisation, are, according to the world’s biggest law firm and leading analysts, a valid strategy for the firm of the future.