Avoiding collapse

By  Frank Maher, Partner, Legal Risk

The recent collapse of top-50 UK firm Halliwells puts risk management firmly at the top of the agenda for law firms. In the past, professionals feared a wipe-out from cataclysmic claims, but that almost never happened in practice.

A long list of US law firm collapses – Altheimer & Gray, Coudert Brothers, Heller Ehrman and Thelen Reid & Priest – arose from business failure. Only Jenkins & Gilchrist’s failure arose from client work – aggressive tax shelter schemes which were challenged by the US tax authorities.

While much comment has focused on Halliwells’ property deal, the trigger for its failure was the loss of real estate and merger and acquisition work due to the recession. The Solicitors Regulation Authority (SRA) is already drawing up guidelines for large firms facing administration in light of the experience. Banks are also reported to be looking in rather more detail at law firm finances now that they realise that law firms are not immune from economic reality.

Lehman Brothers is a startling example of client failures but, for law firms at all levels, it means lost work, written-off bills and threats to the fabric of the firm. Close attention to lock-up is a key management responsibility.

Also important is client selection and engagement. This is a key issue in managing risk for law firms and cannot be delegated solely to individual partners or fee-earners. It involves consideration of the markets in which the firm wishes to operate, having regard to both business development and risk, the firm’s and individuals’ core competencies, terms of business and client-imposed terms, conflicts and, last but not least, fee levels.

The number of top-10 law firms limiting liability on client engagements continues to fall, despite most recognising the need or desire to do so, according to PwC’s market survey (see page 24). Client and partner resistance is still cited as the main obstacle.

With insurers reporting increasing numbers of large claims, it is all the more important that firms address this issue. Even if liability caps cannot be agreed, there are many other aspects to address in terms, including restrictions on joint and several liability, personal liability of individuals and time limits for claims.

The SRA published on 21 October 2010 a revised consultation of its draft code of conduct. Law firms should look at this closely as it requires significant changes to governance, compliance systems and supervision, and outlines the role of the compliance officer for legal practice. More work is needed on the draft; the consultation closes on 13 January 2011.

frank.maher@legalrisk.co.uk