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Partners warn that litigation risks for law firms are mounting in the global marketplace in the wake of a spate of negligence claims, but firms have beefed up their risk management procedures. Michelle Madsen reports on the latest Big Question survey

More than half of senior UK lawyers think a negligence claim could cause a major UK law firm to collapse in the next five years, according to new research.

The latest Legal Week Big Question survey, conducted in association with EJ Legal, found 42% thought it was possible a claim could sink a big firm in the coming years, while a further 9% said such an event was ‘likely’.

The survey, which drew responses from 279 UK partners, found respondents believe law firms are increasingly being targeted in negligence claims. Nearly three-quarters (72%) said the risk of large firms being targeted in negligence claims had increased in the last five years. Just 1% said the risk had decreased.

The findings come in the wake of the emergence of several large negligence claims against firms in recent months. Last month it emerged that a bankruptcy trustee of Clifford Chance’s (CC’s) ex-client DVI was bringing a $2bn (£980m) claim against the magic circle law firm for its alleged role in the collapse of the healthcare finance company. In September it emerged Eversheds is facing a £20m claim by UK building society Nationwide, and Mayer Brown is facing several claims relating to the collapse of futures broker Refco.

Commenting on the results, Philippa Hayes, head of professional indemnity at Hammonds, said: “There is an increasing tension between the pressure on solicitors to become ‘business advisers’ to their clients and the risk from negligence claims which this inevitably brings,” she said. “The wider scope of duty adopted by firms, the more exposed they are to significant claims when things go wrong.”

Ashurst litigation partner Ed Sparrow (pictured right) said: “Clients are more demanding now and they potentially see firms as targets.”

Another respondent added: “Given [Enron's now defunct auditor] Andersen’s experience, no law firm should assume it is immune from a catastrophic claim.”

Allen & Overy partnership specialist Richard Turnor (pictured left) said: “Risk is always present but risk management has kicked in these days in a much more active way than in the past. Enron and the consequent collapse of Arthur Andersen concentrated people’s minds to the issue and now the practice of good corporate governance runs right through every aspect of the economy.”

Fifty-eight percent of respondents agreed with Turnor and said that the current quality of risk management at firms – compared with that 10 years ago – had improved, with a further 33% going on to say that firms were managing risks considerably better than in the past.

However, slightly more than half (58%) also believe law firms need to prepare more for the risks associated with operating in emerging markets such as Middle East, Russia and Asia.

Only 42% said major firms are well prepared. CC general counsel and executive partner Chris Perrin agreed with the minority, arguing: “Anything is possible. It would be highly unlikely for a top firm to collapse due to a claim. Managing risks in emerging markets is the same as managing risks anywhere else. In fact, less regulated environments are easier for firms in many ways because there is less regulation to comply with and thus less risk.

“Firms are going into emerging markets to serve existing clients; risks are not made any more severe by the fact that it is an emerging market.”

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