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The credit crunch and its impact on law firms
The credit crunch and the recent collapse of global companies, such as Lehman Brothers have left
international financial markets in turmoil. The effects have also been felt by companies reliant on the stability
of these markets to continue to trade, develop and grow their businesses. In the UK, reports suggest we are
heading for a recession with house prices in sharp decline, we have witnessed a slump in the stock
exchange, a squeeze on consumer spending and disposable income, which has in turn been aggravated by
unprecedented rises in the cost of living, with huge increases in energy and food prices, have all contributed
to mounting losses, which have weakened the banking sector considerably. There have been mass job cuts,
and dwindling company profits. The credit crisis has affected many countries in many types of markets, as the
problems are global in their origin. Any solution has to be a global one, as a single country trying to mend one
part of its banking system will not work if we are to avoid a world-wide recession.
What is a credit crunch?
The term relates to a period where the availability of loans/credit (debt) is significantly reduced. Since 1992,
the British economy had enjoyed sixteen years of uninterrupted growth, with low unemployment levels, job
creation coupled with low inflation and interest rates. However, this phase of growth in the financial markets
had been founded on unsustainable borrowing, investments, and spending, which eventually caused a
financial meltdown, and was the root cause of the credit crunch. The economic climate had previously
consisted of high-volume money-lending on favourable terms for borrowers, which created a climate of
increased spending and debt. The world’s financial market became volatile, which led to unstable credit
markets and prices falling on global stock markets. This resulted in economic uncertainty, which led to banks
increasing interest rates and becoming more risk averse and less willing to lend large amounts of money to
fund business deals, loans, house purchases and consumer spending. The result is the boom period has now
gone bust.
Q. How did we get there: What caused the credit crunch?
The UK has a strong reputation as a capital market, and the affects of the credit crunch hit the City of London
hard. The underlying problem is that Britain’s economy was vulnerable even before the credit crisis struck.
Much of the UK’s recent growth had been driven by the City, which had been based on unsustainable growth
where people were borrowing more than they could afford, in a climate of soaring house price values.
In the US, mortgage companies made hundreds of billions of dollars in inappropriate loans available to highrisk ‘sub-prime’ borrowers in the US residential mortgage and consumer loan sectors. Banks offered cheaper
loan terms (facilities) to individuals who had poor credit ratings and who presented a considerably high risk of
defaulting on their loan repayments. The origins of the market turbulence were a consequence of the underpricing of credit risk and weakening of lending standards in the US financial market. The risk on the loans,
were then shared amongst global financial institutions by the trading of the loans and other forms of
Securitised debt. The lending banks ‘syndicated’ (a very large loan made to a borrower by a group of banks
who share the risk of the debt on identical terms) their debts in order to help protect their risks by
repackaging the debts and selling them on to global financial institutions, which then sold the debts on to
hedge funds and pension funds. Many of these syndicated debts from the higher-risk borrowers were put
together and were the trigger and catalysts for the credit squeeze.
The sub-prime crisis
In the US, many of the high-risk mortgagees defaulted due to rising interest rates, which depressed the
American housing market and led to house prices falling sharply. The slide in US property values led to
negative equity in many properties. The knock-on effect meant thousands of people had their homes
repossessed. Banks made huge losses as a result of their exposure to the sub-prime mortgage market. This
caused a loss of confidence and a drying up of available cash that led to turmoil in the money markets. Banks
are increasingly reluctant to lend to each other, and investors are suspicious of the health of the global
economy, as they are uncertain of the financial risk they would be taking on in any future investments.
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What were the global implications of the sub-prime crisis?
Most of the sub-prime lending was carried out by companies that sold their loans on to other banks. These
financial institutions viewed the risks as fixed and they failed to see the risks had in fact been soaring, as
lending was gradually extended to people who had less chance of being able to keep up their repayments.
The sub-prime loans were grouped into portfolios, and the risk in those portfolios were then split into tranches
and sold to investors around the world. The vehicles used to share the risk into tranches, known as
collaterised loan obligations (CLOs) which, represents a form of loan securitisation. As a result of this
worldwide repackaging and selling-on of risk, the consequences of defaults in the US market created losses
all over the world. It had become clear that many asset prices were over-inflated and people/institutions had
increasingly borrowed money when they presented a high risk of defaulting on these loans. There was a lack
of transparency in the disposal of the investments, and the losses mounted to billions of dollars. US banks,
European banks and Asian banks were all affected. And it snowballed from there, because financial
institutions lost trust in the midst of high uncertainty in the money markets, which led to a liquidity squeeze.
This caused a great deal of concern for banks as they became increasingly panic-stricken about becoming
overexposed as a result of lending to non-creditworthy people and institutions. This led to a complete shift in
the approach of many banks to lending.
Northern Rock saga
In the UK last summer, Northern Rock, ran into trouble, as it became over reliant on cheap debt to finance its
mortgage lending. The sub-prime crisis made it much more difficult to offer mortgages as borrowing and interbank lending became a lot more expensive1. Banks no long trusted each other – they didn't know who had the
worst problems. So interest rates for banks went up sharply, and that led to difficult times for the lender. The
subsequent run on the bank forced the government to step in and guarantee all deposits. The US sub-prime
crisis certainly increased the difficulties for Northern Rock, but its problems were directly caused by a flawed
business model of borrowing cheaply from the wholesale markets, a strategy which had fuelled the bank’s
rapid growth by relying on world markets to borrow most of the cash it loaned as mortgages. This meant that
when the credit crunch hit, sparking fears over potential losses linked to high-risk US sub-prime mortgages,
the banks which Northern Rock had relied on, were less willing to lend money to the struggling lender.
Instead, they chose to keep their money2. Those who would loan did so at higher rates, meaning that
Northern Rock's borrowing costs sky-rocketed. Other mortgage lenders were less badly hit because they
were less reliant on money markets; instead drawing heavily on savers’ deposits to fund their mortgage loans.
Northern Rock got itself into financial difficulties because its approach left it ill-prepared for the global credit
crunch. As a result, it was nationalised by the government [See our case study on Northern Rock ]
The global Banking crisis
More recently, banks around the world have been pushed to the brink of collapse. Bear Stearns, the fifth
largest US bank collapsed. In September, Bradford and Bingley posted losses of £26.7m for the first half of
2008, blaming surging mortgage arrears. On 29th September, the ailing mortgage lender was nationalised.
The British government took control of the bank's £50bn mortgages and loans, while its savings operations
and branches were sold to Spain's Santander. This coincided with the great fall of Lehman Brothers, a
leading Wall Street bank. Lehman’s posted a loss of $3.9bn for the three months to August. On the 15th
September, the bank filed for Chapter 11 bankruptcy protection. America’s decision to let Lehman Brothers
collapse—and the losses that flowed to money-market funds that held its debt—prompted a global run on
wholesale credit markets. Another US bank, Merrill Lynch, had also been stung by the credit crunch, and
were forced to agree to being taken over by Bank of America for $50bn3. In Iceland, the Icelandic
government took control of the country's third-largest bank Glitnir after the company had faced short-term
funding problems.
1 In the inter-bank market the prices banks pay to borrow money from each other are still near record highs. There is a vicious circle because the banks that will lend
insist on a premium (which is why LIBOR is trading well above the Bank of England base rate) and good borrowers try to avoid this, meaning that the market is populated
with more bad borrowers, increasing the premium charged by lenders and perpetuating the cycle.
2 Banks are also worried about who ultimately will incur the losses from the sub-prime market, which meant they held reserves against their own potential losses and did
not lend to other banks that might be suffering losses. Many banks were careful about holding on to their cash. The majority of banks are facing liquidity problems
(because of their own obligations and potential losses). Many banks have reported financial losses and a disinterest in lending to other banks, and this is the root of the
credit crunch.
3 Wachovia, the fourth-largest US bank, is bought by its larger rival Citigroup in a rescue deal backed by the US authorities. Under the deal, Citigroup will absorb up to
$42bn of Wachovia losses.
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These dramatic events led to crisis talks in the US and Europe, resulting in respective governments promising
to support the financial sector, which have been suffering steep losses in the credit market. On the 13th
October 2008, Gordon Brown tried to resuscitate Britain’s beleaguered banking system to shore up three of
the UK's largest and most troubled banks, by investing £37 billion in government money to boost the capital of
the banks businesses. In return, the government receives preference shares, which means it will get priority in
being paid dividends before other shareholders. The prime minister’s decision to inject these funds means the
state, in effect, will acquire a controlling stake (60%) in Royal Bank of Scotland (RBS), RBS also owns
Natwest bank. The government will also own a substantial interest (44%) of the merged Lloyds TSB and
HBOS, and this move amounts to a partial nationalisation of the banks. The government have attached
conditions to this deal, which includes restrictions on executive bonuses and pledges that lending to small
businesses and homeowners will be restored to last year’s levels, in order for the banks to operate more in
the interests of taxpayers.
The UK government’s injection of funds into the three banks also kick-started a £1.9 trillion global bail-out. It
prompted leaders in Germany, France, Spain, Portugal, Italy, Holland and Austria to put £1.5 trillion into their
banking systems with policymakers acting together to cushion the economic fallout. The US, also signalled it
was ready to pump in another £400 billion to its banks. The UK governments billion pound rescue intends to
revive the City and stabilise our banking system with measures to tackle the three concerns—about capital,
liquidity and funding—that have eroded confidence in the banking system. The current lack of confidence is
based on the solvency of banks, their ability to fund themselves in illiquid markets and the health of the real
economy. The bursting of the housing bubble has led to hefty credit losses: most Western financial institutions
are short of capital and some are insolvent. But liquidity is a more urgent problem. Despite the scale of the
government’s intervention, including the half-point cut in interest rates by the Bank of England, the economic
outlook is bleak. The severe stresses in the financial system have increased the risks of a bigger and more
sustained downturn. The UK may well be heading for a recession. On the 14 th October 2008, the Monetary
Policy Committee said it was more than likely that Britain would fall into a recession. A recession is where we
have two successive periods of contraction, ie negative growth in the third and fourth quarters of 2008. The
very need for such drastic measures underlines how bad things have become.
By putting its full weight behind the banks, the government has signalled its determination to avoid a worstcase outcome. But the shocks to confidence over the past month still seem bound to hurt an already wounded
economy. Confidence is everything in finance. This week, however, we have seen the first glimmers of a
comprehensive global answer to the confidence gap. Together these measures add up to the most
comprehensive response yet to the banking crisis in developed economies. According to the Economist4, this
move was much needed because if the “panic that has choked the arteries of credit across the globe is not
calmed soon, the danger will increase that output in rich economies will not simply shrink, but collapse. The
same could happen in many emerging markets, especially those that rely on foreign capital. No country or
industry would be spared from the equivalent of a global financial heart attack”.
Will the worldwide credit crunch have a knock-on effect on law firms?
How law firms address the implications of a slump in business confidence remains the principal question for
many lawyers at the moment. There have been a number of redundancies at firms around the country.
However, law firms are renowned for their resilience, and many practices are weathering the storm and
resisting the temptation of making significant redundancies. Some firms have implemented plans for practice
diversification and redeployment of their fee earners and staff, so they can concentrate on the growth practice
areas to support and sustain the firm as a whole. This will enable firms to move staff to more vibrant
departments to offset the losses of underperforming departments. In addition, it is likely that law firms will also
reduce their lateral hirers and the number of partners they appoint, in order to reduce their fixed-cost base.
There are likely to be staff cutbacks, but will these threats affect the firms’ future trainees?
Will the credit crunch affect your offer of a training contract?
Many future trainee solicitors starting their training contracts within the next year or two have raised concerns
about whether the economic doom and gloom could mean their training contracts are cancelled. We have
advised these prospective solicitors that such a position is highly unlikely. Most law firms have a broad range
of practice areas, and should be able to absorb any potential losses during the slowdown in the market. Law
firms would also be unwilling to rescind any training contract offers on the basis of market conditions, because
it would cause a great deal of adverse publicity, which would diminish the great work of their graduate
recruitment teams for very little cost gain. It could also pose potential contract law implications for the firm.
4 The Credit Crunch: Saving the system. The Economist 09.10.08
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It will be interesting to see how well UK law firms learned the lessons from the recession of the early 1990s
recession and in 2002, when City firms were slashing jobs in the aftermath of the dot-com crash. In the last
recession, many law firms suffered as a result of not reacting quickly enough to manage the situation. There
were also instances where firms withdrew training contracts before the prospective trainee solicitors were due
to commence their training, as a consequence of a lull in the market at that time. Some firms were left to later
regret such drastic actions once the market had recovered, as they suffered a shortage of newly qualified
lawyers and junior associates. In the main, law firms believe it makes no real business sense to unilaterally
cancel training contract offers, because as with any other industry, the legal profession experiences peaks
and troughs. If law firms are forced to make cutbacks, the cull would usually fall to those approaching
qualification, as retention numbers after qualification would be reduced. Newly qualified lawyers and junior-tomid-associates would also face a precarious fate. The worst case scenario for would-be trainee solicitors is
the prospect of their firms asking whether they would be prepared to defer the commencement date of their
training contract. But the firms would not run the risk of actually withdrawing training contracts, as trainee
recruitment is viewed as a key strategic part of a law firm’s long-term strategy (planning ahead five to ten
years), and trainee solicitors are, in relative terms, cheaper labour! The risks to a law firm withdrawing their
future trainees far outweigh any benefits.
How will the credit crunch impact on City law firms?
Mergers and Acquisitions (M&A)
The magic circle law firms have reported no signs of a reduction in deals over the last six months, with feeincome growth remaining strong. Allen & Overy, Slaughter and May, Linklaters and Freshfields Bruckhaus
Deringer are among the top City firms winning roles on the UK Government’s £37bn bailout of three of the
country’s biggest banks. Clifford Chance are advising long-term client Barclays on its own £6.5billion package
to boost its capital. However, it was noted that there are fewer M&A deals in the pipeline5, which means there
may be a further slowdown in transactions over the next quarter.
Lawyers are carefully considering the effect on their clients’ businesses; if there is a further downturn in the
economy, they will be considerably affected. Overall, many City law firms are trying to remain calm, and are
monitoring what will happen in the remaining months of the year, and the year ahead. Law firms are not
immune from a downturn in the economy. In the City of London, law firms have witnessed a slowdown in
takeover activity as a direct result of credit costing more. Also, the fact that many deals are requiring some
form of credit and leveraging (debt-based) will invariably create an M&A deal flow slowdown. There is
currently a negative yield curve, meaning that interest rates for short-term debt are higher than for long-term
debt. Many companies will find it difficult to source financing, such as private equity, to carry out any takeover.
Big-ticket M&A could seize up due to lack of liquidity or appetite for large syndication in the leveraged market.
The knock-on effect for securitisation lawyers may also be grim. Corporate transactions may take longer to
finalise, as many takeovers will be under threat due to lenders constrictingraising their lending standards,
making it more difficult to source funding to finance the transactions.
However, the liquidity crisis has caused uncertainty for businesses, many companies face going bust. This is
likely to increase the appetitie for hostile acquisitions in order to keep ailing companies afloat. Troubled
companies may struggle to refinance their operations in more restrictive credit conditions, which could lead to
an increase in insolvencies. Companies in difficulty may find themselves stalked by activist investors looking
to pick up bargains or turn them around by forcing changes in management or strategy. Even successful
companies are likely to focus on increasing efficiency and cutting costs, and this navel-gazing will no doubt
prompt a boom in restructuring and reorganisation.
A further downturn in the economy may impact on the fees and profits of some firms, which may make it
difficult to survive without merging or absorbing departments of other ailing law firms. However, most firms
could seek a merger or acquisition in order to develop growth potential for the business rather than as a
defensive move for added security. Some commentators believe that merging two law firms which are in
financial troubles based on similar reasons will only compound such financial difficulties. However, law firms
are renowned for their resilience and we are confident that they will demonstrate their ability to survive.
5 The number of M&A deals in the third quarter fell to 2,350 globally compared with 3,400 in the second quarter of the year – but the combined value of the deals rose
from £380bn to £408bn. Law Gazette 09.10.08
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Banking and corporate finance
The lawyers specialising in structured finance have had the most to fear over the liquidity crisis. Over the past
four years, the combination of cheap credit and private equity billions provided fertile ground for UK lawyers to
be part of a global transactional boom, where M&A and private equity investments were widespread. There
was a great deal of interest in injecting as much leverage as possible into a transaction, which meant banks
were lending to the all-powerful buyout houses on cheap and very favourable terms. Many of the banks
agreed corporate finance on the basis of what will sell as opposed to traditional credit fundamentals. Many
banks’ approached transactions influenced by the prevailing market conditions rather than following sound
sensible banking principles.
In the period just before last summer’s global financial meltdown, private equity lawyers were in full control of
the negotiation process with banks. They had strong bargaining powers due to the easily available source of
finance from a litany of banks prepared to offer cheap credit on excellent terms. The terms of the loan
agreements were drafted to support the banks’ clients, demanding ‘cure periods’ that provided their client with
the right to default on covenants as much as they wanted up to 120 days after the acquisition investment. The
rationale was based on the uncertainty surrounding a company during the transition period, and the fact that
investors couldn’t possibly know how a company was going to perform for a period of time after the takeover,
as they did not have sufficient time to do their due diligence. But fast forward a few months and the business
landscape has altered drastically. Investment activity has slowed down and this has left banks in a precarious
position. Commercial law firms may face an increase in restructuring/refinancing of loans. Many banks trading
below face value could decide to cut their losses and sell their debt. Companies which face the prospect of
their bank lenders selling off their debt viewed radical restructuring as the best path out of financial difficulties.
The private equity boom has created many highly indebted companies who are likely to struggle to keep up
with payments on their debt as the economy has slowed sharply, and there has been a rise in companies
defaulting on their bank loan repayments. The knock-on effect for businesses could be scaling back functions
of the business and employee redundancies.
The economic climate in which lawyers negotiated the covenants in the loan agreements had been favourable
to the company (with ‘covenant-lite’ clauses in the contracts). Many companies will have a grace period if they
fall behind on the repayment of their debt. They will not be under immediate pressure, because their lawyers
may have negotiated wriggle room for company earnings or leverage levels to fluctuate before they come
close to breaching their covenants – the first trigger for a restructuring to take place. Tightened credit
conditions have already diminished private equity's appetite for M&A, and this will have altered the negotiating
position of banking lawyers. Banking lawyers are in a stronger position. They can now return to established
credit fundamentals: re-negotiating their clients’ (banks) previously weakened position and drafting much
tighter deals that will probably be characterised by covenant-heavy, banker-friendly terms (with stricter loan
covenants on defaults and on overall loan terms), as demonstrated in Kohlberg Kravis Roberts & Co’s recent
$26bn takeover of First Delta.
A banking solicitor at a major City firm recently informed us that he has been inundated with clients asking
whether they can be held to their obligations if the credit markets collapse. Conversely, private equity and
corporate clients have been asking whether the banks can be forced to make good on their lending promises.
In the US, investors are pursuing aggressive lawsuits against banks because of the unexpected and very
sudden decrease in value of their investments.This is opening up the possibility of high-profile legal disputes,
and class actions launched against global banks. However, in the UK many clients are seeking advice on how
to restructure and resolve deals. Generally, lenders are likely to be less keen on risk generally, and the
‘covenant-lite’ leverage deals (transactions that are mainly debt based) are likely to be out of favour for some
time, with many banking departments drafting much more narrow and restrictive covenants in loan
agreements. An investment banker friend recently summed up the present state of economy as follows.
We are likely to see a deal flow slow down, with a bit more restructuring work. We do not see it as a long-term
collapse, but more akin to a correction to the financial markets, where easily available credit had been too cheap
for a long period. With credit now costing more, most M&A deals will be largely debt-based. Private equity deals
will decline significantly, and the loan applications for many businesses will be rejected when they would
probably have been accepted otherwise, because at the moment cash is king and many banks do not have the
stomach for risk.
What other issues will banking and Corporate finance lawyers have to consider?
Law firms with a strong emphasis on structured finance and private equity practices may have to adapt
quickly and shift their focus towards new and emerging markets. It is likely that re-packaging of loans will be
more challenging going forward, and we may see leverage bankers trying to repackage deals. Sales of
Structured products like conditional loan obligations are quiet, the leverage acquisition market is very quiet at
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present, and the negative yield curve suggests that longer-term borrowing (such as project finance) is likely to
be less badly hit than the banking sector. There is a ‘flight to quality’ as investors look for save investments
(traditionally government bonds), but stable cash flows may also be attractive. The burning question is
whether there will be a short-medium pause (say a year or two) or a longer down-turn. Many clients of law
firms are optimistic it will be a short pause only.
Commercial and banking litigation
Difficult market conditions always produce litigation. The nature and extent of the financial crisis is already
giving rise to complex litigious issues, and many lawyers are anticipating more contentious issues to follow
with possibly large-scale cases involving investors and major financial institutions. We may therefore see a
sharp rise in financial litigation as a result of the downturn in the economy, with banks seeking to recover
losses that they suffered through their exposure to sub-prime mortgages, and investors aiming to salvage
some of their losses.
The clients of banking lawyers may seek advice about the flexibility of their loan agreements. In the current
climate of economic uncertainty, the majority of banks may face the risk of legal action for purported missselling, miss-valuation and misrepresentation of investment products, particularly if borrowers try to argue that
banks failed to disclose the full degree of risk. However, the commercial reality is that the sheer complexity of
financial instruments could make it almost impossible to determine liability and the extent of losses in most
cases. Both banks and corporate clients are open to the prospect of commencing litigation. Clients from both
sides have been seeking legal advice to help assess the details of their actual losses (once their provisional
write-downs have crystallised) and their potential culpability, before any concrete decisions are made with
regards to launching legal action. However, many City financial institutions are unable to manage the risk
involved in high-profile and costly litigation. It is also worth noting that possible lawsuits between big banks
and their clients will ruin business relationships, damage reputations and lead to failed business deals being
exposed to media scrutiny.
The credit crunch is likely to cause clients to face the prospect of financial litigation and insolvency, which
may prove lucrative for the commercial litigation departments of some law firms. However, the issue of banks
suing other banks over bad deals poses many questions that are difficult to answer. Will law firms’ typical
approach of not suing banks continue? Will law firms turn away lucrative instructions? This area of law may
expand to become a key area of work for some commercial law firms who are willing to take on the big banks.
Many of the large City law firms will be restricted from accepting new instructions by major banks, due to their
long-standing relationships with the banks. Many of the leading litigation law firms have resisted acting in
disputes that put them in direct conflict with the investment banks, for fear of making enemies of financial
institutions that provide a great deal of instructions. Earlier this year, Clifford Chance, who have one of the
strongest litigation firms in the country, had to turn down an instruction from key client British Energy and refer
it to Barlow Lyde & Gilbert. Why? The other party (client) in the case was Credit Suisse. And Credit Suisse is
one of Clifford Chance’s major banking clients. The pre-eminent banking clients are the most lucrative and
reputable mandates for major City law firms. Winning new and extra instructions from major banks is a key
business strategy for many City law firms. A large proportion of a law firm’s business development budgets
are allocated to developing their relationships with the big banks. The ultimate prize is a better relationship
with these global power brokers in order to generate more profit for the law firm.
It is unthinkable for many of the City law firms to litigate against their major banking clients. Many of the big
global banks undertake multi-million-pound corporate transactions that generate a great deal of fees and
publicity for law firms. Some of the major banking clients are therefore cash-cow clients and many firms are
desperate to get on their panel of external law firm advisors. And if any firm on their panels ever decide to act
against them, the banks would be likely to refrain from ever instructing that particular law firm on any future
legal matters. Many City law firms would invariably refrain from going against any of the major banking
powerhouses. 6 The corporate and banking departments of major City firms therefore carefully select who
their litigation colleagues litigate against and when.
6 Many banks have clauses in their panel contracts expressly stating that if any of the law firms on their panel threatens litigation against them, that firm will not receive
any future work from them. Given that every firm in the top 20 or so law firms is on the panel of one bank or another, it will be interesting to see how the major City firms
respond in the post credit-crunch legal services market and banking sector.
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Property
The UK had witnessed a property boom over the last few years. The housing market became over-valued,
fuelled by cheap credit and low interest rates. Asian and Arab sovereign investment funds injected billions of
pounds into the commercial property sector. However, the credit crunch made investors much more risk
averse, which caused an adverse impact on the UK residential and commercial property markets. There has
been a slowdown in conveyancing and commercial property deals. The share value of large property
developers has fallen. Construction is wilting as homebuilders put projects on hold and lay off workers.
The property industry is so intrinsically linked to the wider economy that property departments have been
severely effected more than any other area of a law firm. The conveyancing and commercial property
departments of many City law firms face a period of financial difficulties because of fewer instructions from
clients. The credit crunch has made the lending criteria of banks more stringent. House prices have started to
fall after several years of robust growth, and there has been a significant increase in the repossessions of
houses. The residential and commercial property market is clearly feeling the knock-on effect of the credit
crunch. The residential and commercial property practice areas are clearly facing uncertain times. Some
property lawyers are being made redundant in both the US and the UK. Further interest rate reductions would
be welcomed by the sector, but most mortgage lenders are failing to reflect such interest rate cuts on their
deals for customers. The property industry mirrors the UK economy: investment will slow down, and the
question is whether this will be due to a recession.
Employment
Employment lawyers are likely to see an increase in instructions; from advising companies on the prospect of
collective redundancies or advising the employees who face being made redundant. There are likely to be a
large number of lay-offs in the conveyancing departments of law firms around the country. In addition, many
firms are likely to strive to re-deploy staff in suitable alternative employment to weather the storm and
circumvent any potential employment liabilities.
Conclusion
The UK economy has experienced a slowdown during 2008 – the only question is - will this move into a
recession? The economic uncertainty looks likely to continue, and we have yet to see the true impact of the
credit crunch on law firms. At present, the clients of many law firms are in the process of reviewing their
budgets and deciding which contracts, plans and strategies will be postponed or abandoned. We will have to
wait and see the true knock-on effect on the law firms in the final months of 2008, and early next year.
Whatever impact the credit crunch has on the legal market, we are confident that commercial law firms will be
able to absorb the difficult climate and recover, because law firms have counter-cyclical practice areas and
are therefore dependent on the long-term nature of each practice area. For example, in an economic
downturn, there tends to be more work for litigators – particularly for commercial, banking and insolvency
litigators.7. Traditional project finance practices – such as M&A, insurance, hedge funds, and banking, may
help to protect a firm’s viability more than in other sectors, such as, construction and commercial/residential
property which are generally more reliant on fluid credit markets and are therefore departments that are likely
to continue to struggle in the fourth quarter.
What is clear is that, the effect of the credit crunch is likely to continue well into 2009; we just have to wait and
see the intensity and duration of the economic downturn. Confidence counts for everything in markets and
loss of confidence in an industry sector can affect the largest commercial law firms. Last year’s huge profits at
the leading law firms will be hard to match, but many leading firms remain positive that they will benefit from a
flight to quality as the market contracts. If the legal market as a whole enters a quieter period, lawyers will
have to polish their business cards and increase their efforts to spot business development opportunities and
bring instructions in from their clients.
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Note to reader: The article above is intended for educational purposes only.
7 Notwithstanding, some practice areas – such as criminal, tax, wills and probate, and other private client areas – appear resistant to economic downturns, where there
always remains a steady flow of work for lawyers advising on areas of law that are independent of economic cycles.
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