Editors' Blog

Magic circle reticence on capping is a real liability

Posted 24/01/2007 by Deal Comment

For once it seems that the magic circle is trailing the rest of the UK top 50. London's five elite firms are refusing to take the initiative on the issue of capping their liability on individual deals, despite a rise in the practice among other top UK firms.

Legal Week has discovered that more and more firms are capping liability in their standard terms and conditions. Research released in the magazine this week shows 86% of major UK firms use liability caps these days. National and mid-tier firms seem to be the most happy to do it as a matter of course.

Others – including partners at Lovells, Ashurst and CMS Cameron McKenna – also report capping is becoming much more widespread, especially in practice areas such as project finance, where mega-buck transactions often dwarf individual mandates. Some firms even report that clients respect them for raising the touchy subject.

Accountancy firms have been doing it for years and lawyers believe that, if caps are kept to a reasonable level, there is no reason for the legal market not to follow suit.

Maybe the magic circle is not that far behind. One magic circle outfit says it recently turned away a piece of minor tax work on a deal because the client would not accept a cap. In addition, Allen & Overy is now agreeing caps on a significant proportion of its project finance transactions.

Yet the majority of partners at the top five firms say that when it comes to the most valued clients - such as FTSE 100 companies, investment banks and clearing banks including Barclays and the Royal Bank of Scotland – the topic is still practically off-limits.

Of course, the problem at the top is that firms are afraid to be the first. Until one of them takes the plunge, however, the problem will remain.

caroline.grimshaw@legalweek.com