Legal Low: Legal Industry Revenue drops to four year low

July 25, 2020

3 min read

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What's going on here?

Revenue generated by the UK’s legal sector in May 2020 fell by 12% compared to the same month last year, marking the lowest-earning month in four years. According to figures released by the Office of National Statistics, industry revenue fell almost 30% between April and May 2020, with April’s turn over relatively unscathed by the impact of COVID-19.

What does this mean?

The legal industry in the UK had been on course for an extremely successful year, with March 2020 being the third highest month ever. April, typically one of the years more lucrative months, only saw a 5% decline in March 2020. However, the effects of lockdown are apparent in May’s figures and the true impact is thought to be worse than current statistics show. Louis Young, managing director at litigation funder at Augusta comments that this “data reflects work that would have commenced before the crisis, which is in line with how law firms operate.” Thus, the negative impact of the pandemic is arguably not reflected within this data. Comparatively, the overall UK Services sector (including legal) had been harder hit by the initial impact of lockdown and reached its lowest level in a decade. However, this grew by 2% in May 2020, while the UK’s overall economy increased by 1.8% month on month. 

Magic circle firm Linklaters is one of the many firms in the legal sector to have been adversely affected by COVID-19. It reported a fall in profit for the year ended 30 April 2020, with pre-tax profits at the firm dipping by 3% from £751.6m to £726.9m. Rival firm Allen & Overy also reported a dip in pre-tax profit and profit per equity partner. This highlights that even the largest firms within the legal sector may have to anticipate a lower turnover across the next economic year.

What's the big picture effect?

For many in the legal sector, profits are likely to take a hit due to the decline in merger and acquisition (M&A) activity, an area already struggling due to widespread business uncertainty in the build-up to Brexit. Europe’s second quarter saw its lowest deal value since the 2008 financial crisis. Only 19 deals valued above $1bn were announced between April and the end of June, down from 37 in the first quarter. In the same period, Freshfields, Allen & Overy and Clifford Chance reported reductions of 31%, 30% and 56% respectively. Proposed M&As are now at an ever-increasing level of risk as demand has fallen and stock valuations have plummeted. In the short term the M&A market is expected to remain subdued in an environment of depressed business activity, contingent upon a gradual economic recovery from the current crisis.

It is likely that there will be a steady stream of insolvency work as the full effects of the virus takes hold on the UK economy. Furthermore, force majeure related disputes have increased dramatically as global demands dipped, leaving many unable or unwilling to meet their contractual obligations. Firms with a strong presence in disputes are likely to capitalise on this growing demand. In particular, International arbitrators are enjoying an increased caseload. Last year the London Court of International Arbitration reported a case load of 406 cases, up from 317 in 2018. Moreover, the London Maritime Arbitrators Association received a total of 2,952 appointments last year up from 2,599 in 2018. This growth is expected to continue as entities explore the alternatives to litigation and opt for the cheaper and more private proceedings to tackle a potential influx in disputes resulting from the economic downturn.

Report written by Kasey Cummings

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