Lovells, one of the City's biggest law firms, defied gloomy expectations for the UK legal market today by reporting a 15 per cent increase in first-half revenue.

The firm announced fee income of £260 million for the six months to October 31, up from £225 million during the same period last year, making it the standout performer among firms that have released half-year results so far.

The surprisingly strong performance, largely a result of its strength in litigation and financial services regulation, will encourage other firms suffering from a decline in transactional work since the credit crunch began.

David Harris, Lovell's managing partner, said: "The firm's undoubted strengths in counter-cyclical areas, such as litigation and restructuring, mean we are well-placed to handle work emerging from the credit crisis and economic downturn."

Lovells has been instructed on more than 30 matters relating to the liquidation of Lehman Brothers, the investment bank, and has also been called in to advised the Icelandic Government on the legal fallout of the nationalisation of its leading banks, which some believe could be a prelude to a lawsuit against HM Treasury.

Although Mr Harris conceded that the second half of the year would be tougher for all firms, Lovells will be hoping that an increase in litigation will allow it to close the gap on the so-called "magic circle".

Last year, its revenue of £479 million was less than half that of the top four of Allen & Overy, Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters, each of which generated over £1 billion in fee income.

Litigation departments at the City's leading law firms have grown significantly busier as investors turn to legal action to recover losses suffered as a result of the financial crisis.

Although lawyers have been predicting an upturn in litigation since the credit crunch began last summer, it had yet to emerge as investors were reluctant to admit to holding negative positions. But Jonathan Kelly, a partner at Simmons & Simmons said that financial institutions, hedge funds, municipalities and other investors have begun considering legal action in recent weeks as the market showed signs of settling.

Among other leading firms to announce their half-year results so far this week, Ashurst reported an increase of 7.5 per cent to £158 million despite its traditional strength in private equity and structured finance — two of the areas worst hit by the credit crunch. Geoffrey Green, the senior partner, warned that law firms face a "very challenging" second half of the year.

Norton Rose, also strong in litigation and regulation, reported a surprisingly strong 11 per cent increase to £141.5 million, while Simmons & Simmons increased turnover 5.5 per cent to £143.5 million.

Denton Wild Sapte increased revenue 6 per cent to £78.3 million. Nabarro matched its first half performance of 2007-08 with fee income of £64 million. Simon Johnston, its senior partner, said he was "cautiously optimistic" that transactional work would pick up when banks resume lending.

But firms with more of a domestic focus and those heavily exposed to real estate have performed poorly. Eversheds, the UK's eighth-largest firm, Addleshaw Goddard and Wragge & Co all announced a drop in revenue of up to six per cent.

Clifford Chance, the world's largest firm, and Freshfields, the third largest, have said they will not release half-year results, although Freshfields said that activity was the same as last year despite its high-profile role advising the Bank of England on the Government's bailout of the banking sector.

Ted Burke, Freshfields' chief executive, said: "We have been very busy with restructuring and regulatory work, particularly in the financial services sector, but of course some types of transactional work have slowed."

Half-year revenues

Lovells £260m, up 15%
Eversheds £188m, down 4%
Ashurst £158m, up 7.5%
Simmons & Simmons £143.5m, up 5.5%
Norton Rose £141.5m, up 11%
Addleshaw Goddard £94.7m, down 2.8%
Clyde & Co £83.6m, up 10%
Denton Wilde Sapte £78.3m, up 6%
Nabarro £64m, no change
Wragge & Co, £56m, down 6%
Halliwells £44m, up 4.8%
Trowers & Hamlins £42m, up 16%

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