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Is an agreement to have ‘friendly discussions’ before going to arbitration or litigation enforceable? (It can be...)
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4 December 2013
"Clifford Chance prepares for exit of top rainmaker" (The Lawyer, 11 Oct) and "DWS left shellshocked as eleven media/IP partners defect to DLA" (The Lawyer, 4 Oct) are just two of the recent headlines in the legal press.
Such headlines are now common. They illustrate the substantial amount of movement of lawyers and their teams between law firms. In the corporate world, companies are entitled to protect their confidentiality, secrets, clientele and business and deal peremptorily with disaffected employees. Such employees usually have short notice periods, limited fixed-period contracts and almost invariably binding covenants, which are usually strictly enforced, with, if necessary, appropriate injunctive relief.
In partnerships there is more difficulty because of the nature of the ‘product’. What is being sold is the skill of the individuals. These lawyers develop close relationships with clients and clients often stay with the individuals because they have confidence in them.
It is no longer the case that clients instruct solely one firm, or that staff and partners will stay at one firm for their entire careers. It used to be the case that if a lawyer applicant moved more than once there was a suggestion or inference that they had no staying power or there was another problem. Now we have almost reached the stage where if someone has been at only one firm throughout their career, there is a question mark over their dynamism or success.
Clients’ needs have changed, their paymasters may no longer be solely UK-based and have different requirements from their legal representatives. The clients have a need of expert specialised services from their lawyers. Solicitors inevitably have to be honed in a more restricted specialised area of work, for example, in litigation specialising in arbitration, IP, or white collar crime. Those specialised skills attract the client more to the individual or team than to the firm. Clients often use a number of law firms for different skills and because of that, firms focus on a particular skill area. Inevitably, that hands considerable mobility to individuals because those discrete teams are valuable in their own right and have allegiance from their clients. With highly developed recruitment agencies and headhunters now in place, these are valuable packages to be moved.
For law firms focusing on profitability, hard decisions often have to be made. If they do not make them then the partners and teams who are most mobile will leave. The financial implications for the firms involved can be significant. If a team with a turnover of £5m-£10m departs, that goes straight to the bottom line of profit, because even the most streamlined management cannot normally react that quickly to overheads. It often results in an immediate retaliatory strike in an effort to fill the gap.
Unless the management can demonstrate control of the situation and maintain profitability, others will leave, causing further inroads into profitability, and so on.
What has been demonstrated to be a vital tool in managing partnership change is an appropriately worded partnership agreement.
A word of caution – do not assume that something drafted by specialist counsel or a solicitor two or three years ago remains the effective tool it then was. A partnership agreement needs to be reviewed and adapted regularly. It should contain the necessary machinery to protect the firm’s position. It needs to incorporate not only appropriately worded restrictive covenants against soliciting clients, but also soliciting and procuring other partners and staff.
Involuntary retirement clauses with sensible and effective gardening leave provisions must be provided to give management the freedom to act quickly.
Another useful clause is to restrict the number of retirement notices that may be served within a specified period of time. That may give defecting teams pause for thought. If the appropriate clauses are in place then it will usually be a matter of negotiation as to how and when the exit of an individual or team is achieved and, significantly in terms of the partnership’s fee income, on what terms. Without the appropriate machinery in the partnership agreement, such negotiations are far harder to achieve.
It is becoming more commonplace for firms to seek to enforce the covenants in their agreements. Of course, the Law Society frowns on any attempt to restrict a client’s choice of lawyer. This does not mean that the partnership cannot look to the partner or team for lost profit in respect of the clients that moved.
A public squabble is the last thing either party, or their clients, want. To that extent, almost all partnership agreements have an arbitration clause – indeed there have been, and still are, many arbitrations that have taken place of which the public are wholly unaware. It is unfortunate that some of these decisions do not come into the public arena, as undoubtedly lawyers acting in this area would benefit from knowing how arbitrators have approached a number of issues. An effective and widely drawn arbitration clause will cause an immediate stay to be granted of any court proceedings (Arbitration Act 1986, Section 9). Normally, if a dispute cannot be resolved, the matter would proceed to arbitration. It is an unfortunate fact that at the moment that would leave each party paying a moiety of the costs of the arbitrator and usually providing either financial security for costs or regular payment. That puts a substantial burden on the individual or small team, which, unless the partnership agreement provides to the contrary, is often used by management as an effective threat. There is, of course, nothing to stop partnership agreements being worded to provide that the costs of arbitration be borne by the respective parties in accordance with their partnership shares and, to the extent that it aids resolution of the problem, it is something that could advantageously be incorporated.
In practice, what is currently happening is that the partnership agreements also provide for a binding mediation clause. That is to say, it is binding in the sense that it is a step required to be undertaken prior to the issue of arbitration proceedings. In practice, it is extremely valuable because it can usually be engineered quickly and relatively cheaply and at a time when the parties otherwise find that communication dries up.
It is unlikely that for the future, the level of change between law firms will slow and it appears that more firms are now prepared to enforce the benefit of the covenants they have, if necessary by proceedings. Damages claims would therefore appear to be part of the price that acquisitive firms may now be required to fund.
Stephen Ralph is a partner at Dawsons