UK: Legal fees of major law firms expected to drop despite increased regulation, IT and employment law likely to fuel commercial disputes - says new survey

The expectation of 96% of dispute resolution partners in the UK's major law firms that their fees will increase (78%) or stay the same (18%) over the next three years, may be ill founded as two thirds of in-house counsel from leading UK listed companies expect the fees they spend on dispute resolution matters to stay the same (42%) or decrease (24%), according to a new survey* conducted by Grant Thornton's Forensic and Investigation Services Practice.

"Despite an expectation by over 70% of corporates that the number of disputes will increase over the next three years, this may not result in higher profits for law firms" said Toni Pincott, partner within Grant Thornton's Forensic and Investigation Services Practice. "In-house legal staff are likely to handle smaller less profitable work with law firms receiving a lower volume of cases which are individually more remunerative but which may substantially affect the structures of their businesses", she continued.

"Law firms may become "body shops" for very large claims that cannot be handled in-house, causing their business model to change and requiring them to amend their staffing structure with greater numbers of junior staff and fewer partners. This will require law firms to reconsider their employment practices and consider how to retain talent", said Pincott. "It may also mean that less work will be available to generalists, with corporates more likely to be willing to pay for highly specialised advice on specific areas - something which is also debatable given the advent of direct access clients and public access barristers".

Investing in specialist areas is also going to be key. With litigation in freefall decline after the Woolf reforms and CPR, the expectation over the next three years by 90% of corporates and 82% of law firms is for more disputes to be resolved through Alternative Dispute Resolution (ADR). In particular, according to law firms, disputes are likely to stem from a growing regulatory environment, IT and employment legislation.

International disputes are also becoming more commonplace with 45% of respondents having dealt with an average of three international disputes in the last 12 months alone.

Overall, corporates regard regulatory disputes as generating the greatest potential risk for a business (50%) followed by insurance (32%), construction (32%), intellectual property (30%) and employment (30%) matters. White collar crime (10%) and banking (8%) are regarded as less of a concern. On the other hand 76% of lawyers expect regulatory disputes to grow the most, followed by IT (44%); employment (42%); arbitration disputes (40%); insurance (34%); and energy (32%).

"The blame for regulation becoming such a burden and leading to ever more disputes is widely apportioned. Respondents blame the government's and the EU's regulation frenzy, the impact of Sarbanes Oxley, a growing role for the FSA and the UK being influenced by US corporate practices which tend to be more accustomed to a prescriptive regime and a litigation culture", said Pincott.

"As a result of a growth in regulation disputes, law firms may need to refocus their litigation teams on non-contentious work to counteract the contraction in the traditional UK litigation market and to accommodate the growth in regulatory work particularly where companies seek to challenge regulators", says Pincott. "However, the main thrust of regulatory work is still going to be compliance", continued Pincott.

"IT is regarded as a strong area of dispute growth by lawyers because of the increasing importance technology has on everyday life, and our over-reliance on it. Sources of work may stem from the risks to intellectual property posed by ever more sophisticated hackers taking advantage of technology such as WiFi and the fact that without IT some businesses could not operate. The fact that corporates still don't regard IT as a key legal risk arguably points to their investment and expectations of IT running ahead of their awareness of litigation risk", said Pincott.

"Employment disputes are also expected to be a growing area with trade union activities reducing but individual rights increasing thanks to ever more employee-friendly legislation coming from Brussels", continued Pincott.

"Over the next few years we are likely to witness some substantial changes in the dispute resolution market. Corporates will need to strike the right balance between dealing with matters in house and availing themselves of premium advice from law firms. Meanwhile, UK and European law firms will need to adapt to a market which is set to change significantly whilst staving off the threat of competition from American law firms seeking to grow their positions in the UK", concluded Pincott.

*Grant Thornton surveyed the opinions of 100 lawyers specializing in commercial dispute resolution. Half were lawyers in leading UK corporate organisations (mainly FTSE 350) and the other 50 were dispute resolution partners working in the UK's major law firms (top 20).

Grant Thornton's Forensic and Investigation Services is one of the UK's top five advisors providing dispute resolution, expert witness, fraud investigation services, asset tracing, insurance claims solutions and matrimonial services to large, global and mid-sized businesses and their financial stakeholders. Grant Thornton Forensic and Investigation Services has 15 partners and directors and over 60 dedicated professional staff operating nationwide.

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