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Doing the dirty deed
Law Society Gazette – 1 November 2002

Becoming a partner at a law firm may include unexpected difficulties. Mark Smulian looks at the systems here and abroad and warns that dangers can lie in the small print

Few solicitors would take on office premises without reading the lease, or work for clients who claimed the right to stop payment without notice.

But the usual professional caution is not always exercised when solicitors become partners in a law firm. Those quaint old documents, partnership deeds, are in the news following the case of Malkinson v Trim , in which the Court of Appeal considered a clause in a firm's deed which meant the partners were not charged for legal services provided to them by their colleagues unless costs were recovered from elsewhere.

While the main issue concerned the right of a partner to recover those costs (which he had), the court also said in obiter that it did not believe such an arrangement constituted an illegal contingency fee agreement, as had been suggested.

It was a novel argument, and with issues such as limited liability and overseas mergers arising in large firms, solicitors who advise other solicitors on partnerships are urging extra care with partnership deeds.

The takeover of Stephenson Harwood's Madrid office by DLA two weeks ago has highlighted that professional partnership regulation is one area where the European Commission has not harmonised rules across member states.

Richard Turnor, a partner at City firm Allen & Overy and chairman of the Association of Partnership Practitioners, says: 'With foreign mergers there are legal, taxation and regulatory issues. Every country has different rules. Some allow corporate-style firms, some don't; some have limited liability, and some don't. You have to make sure the partnership agreement is compliant with the regulations everywhere that you do business.'

Examples of potential problems are that Germany allows multi-disciplinary practices, while the UK does not, and that restrictive covenants on partners who join a rival would be difficult to enforce in the US, he says.

The US also has limited liability, a status that is still relatively new and unexplored by UK practices. Tony Sacker, head of partnerships at London firm Kingsley Napley, advises the Law Commission on partnership issues.

He says most of the limited liability partnerships (LLPs) that have been formed so far - and there have been fewer than 100 out of the 8,300-plus law firms in England and Wales - have come about because of international constraints in mergers. Many firms say they are talking about it, but action has been sparse.

Ronnie Fox, senior partner and partnership specialist at City firm Fox Williams agrees that LLPs have spread surprisingly slowly. 'Comparatively few UK firms have gone for limited liability, certainly fewer than we expected, but it is on every firm's agenda,' he says.

'Lawyers are not good at being pioneers. They are waiting for the first sets of accounts to come out from LLPs to see what they look like and what reaction they get.'

One risk of LLPs is that the partnership itself becomes a legal 'person', and can be sued if a dispute arises, rather than proceedings being launched against only one or two partners. Mr Fox says: 'It means the whole organisation has to stand behind a partner who is being sued.'

Another issue is that the agreement needs to state who is responsible for new obligations such as filing accounts, and how partners' reserves will appear in the balance sheet.

Among the large firms there is an increasing trend towards tough measures in partnership agreements to require partners to leave if they are seen as contributing too little, and to prevent them from joining a rival and taking clients, or entire staff teams, with them.

Mr Turnor says: 'It is all highly controversial and some agreements are incredibly Draconian. Increasingly, today in partnerships we see these Draconian provisions.'

Young lawyers who are invited to join partnerships can tend to see this as akin to a job promotion rather than entering a business relationship.

Mr Turnor strongly urges them to seek legal advice, even if they are in no position to negotiate changes. 'They can find that if they are asked to leave that they get no compensation, and because of a restrictive covenant they cannot earn their living in the market for two years,' he points out.

One solicitor, who wished to remain anonymous, was removed from a partnership with neither notice nor compensation. She admits that she should have sought advice at the outset, but says: 'I was offered a partnership, and saw it as a big promotion but was given no chance to negotiate as all the other partners had joined on the same basis.'

In this case, a partner could be expelled for a period of absence shorter than a normal period of maternity leave. Mr Turnor says: 'There is lots of ghastly old stuff left in agreements that are outdated. But it is a buyer's market at present so it gets accepted.'

Mr Sacker says that outdated provisions survive because when agreements are revised 'someone will produce the old document and ask what people want to change. It is very rare that they tear it up and start again with a blank sheet.' The bigger the firm, the less likely it is that negotiation over a partnership agreement will be allowed, he says.

'I do a lecture to solicitors who are offered partnerships, and I am amazed at how little due diligence is done before they sign up,' he says.

'People don't seek to negotiate when they are a bright assistant offered equity. They tend to treat it as a step to earning some seriously exciting money, and just want to know where to sign.'

However, solicitors who join the partnership at well-known trade union firm Thompsons with this in mind will be disappointed. Its partnership deed famously includes the words: 'The principal object of the partnership shall be to assist trade unions and their members. It shall not be the object of the partnership to earn for the partners the maximum income which in general practice they are capable of earning.'

Only with lateral hires, where partners join and bring business with them, is there normally scope for individual bargaining, Mr Sacker says.

Things are different in smaller firms, where earnings are lower and the negotiating balance is more even. However, Mr Sacker says: 'Every agreement I know has a "we can fire you for no reason" clause and sometimes with no notice either.

'But there is also a cultural thing. Anyone becoming a partner would know how the firm operates and they go in with their eyes open, as they have probably been there six or eight years.'

Firms that operate the 'lock-step' points system for distributing bonuses will today have rules to prevent partners from sitting back and watching their earnings ratchet upwards. 'Firms that run it sensibly have internal rules. If a partner is not delivering, they have to go elsewhere,' he says.

Richard Godden, a corporate partner at City giant Linklaters, maintains that partnership still means more than either a job promotion or a simple business arrangement.

He says: 'It is wrong to think that the original ethos of partnership has gone, even in the largest firms where the balance between the individual and the collective lies varies. But in the current climate, most partnerships will think that they cannot offer hostages to fortune and so terms for departing partners may be less favourable.'

Mr Godden is sceptical about the effects of even the most rigid restrictive covenants. 'We lawyers can write what we like, but you come up against the commercial reality. If the client wants to continue to work with Mr X, who has left, it takes two to tango and you cannot force the client to keep their business with you.'

However, Mr Fox maintains that the concept of partnership for life has gone. 'We are seeing more effective measures in partnership deeds to prevent partners leaving and taking clients with them.

'If they wish to leave they cannot take clients, and if they are asked to leave they may still be unable to take clients, but there will be a bit of negotiation over compensation. That is a bit analogous to employment rights.'

Certainly the days of partnerships operating entirely on trust, with neither deed nor agreements, do seem to be over.

'I would be very much surprised if there are firms with no partnership deed, though ten years ago there might have been,' says Mr Sacker.

But there could be one very large firm in this untypical situation. Mr Turnor says: 'One does hear rumours that even quite large firms don't have deeds. One of those is phenomenally successful so maybe they always sort things out. But the risk is that it could all go pear shaped.'

Mark Smulian is a freelance journalist