Clifford Chance is at risk of being knocked off its pillar as the world’s biggest law firm by an American rival as the balance of power in global legal services shifts from London back to the United States.

The British firm, which generated record fee income of £1.33 billion in 2007-08, is expected to announce a slump in revenue of about 5 per cent for the latest full year, which would mean that it was overtaken by Skadden and Baker & McKenzie, its American rivals.

David Childs, Clifford Chance’s managing partner, hinted in recent weeks that profit would fall even more sharply, with industry observers predicting that it could be down by up to a third, falling below the benchmark £1 million-per-partner level.

Other members of the “magic circle” of top British law firms, which includes Allen & Overy, Freshfields Bruckhaus Deringer and Linklaters, are also expected to release their results for the 2008-09 financial year, which ended on April 30, in the next two weeks. Last year all four surpassed £1 billion in turnover, while only two American firms — Skadden and Latham & Watkins — achieved that distinction.

British firms surged ahead of their American rivals in recent years, expanding their billings into markets such as Russia, China and the Middle East, and their profits rose to more than £1 million per partner, closing the gap on Wall Street.

However, American law firms are holding up better in the recession than their British rivals. Skadden, which had revenue of $2.2 billion (£1.33 billion) in 2008, and Baker & McKenzie, which billed $2.18 billion — a 20 per cent rise — are set to claim the top two spots, pushing Clifford Chance into third place in the world rankings.

Michael Ellenhorn, a director at Fox Rodney, a legal recruiter, said that the American firms were better positioned to weather the downturn than their City rivals because of their large litigation practices as well as huge restructuring and insolvency deals, such as General Motors. British firms have been hit hard by the recent weakness of sterling against the US dollar.

Clifford Chance is likely to be the worst affected among the UK’s big four because of the size of its banking practice; among its key banking clients was Lehman Brothers, the investment bank that suffered a spectacular collapse last summer. The other “magic circle” firms will also be hit by the sudden contraction in financial sector activity and Allen & Overy and Linklaters are expected to report a decline in profits as they absorb significant restructuring costs.

Like Clifford Chance, both firms reacted swiftly and aggressively to the financial crisis, cutting hundreds of jobs and shedding underperforming partners. Allen & Overy has cut about 450 jobs this year, including 47 partners, at a cost of £44 million. Linklaters has cut about 270 lawyers and support staff, although its bottom line will be bolstered by its work on the administration of Lehman’s European division, which generated more than £30 million in fees in the first six months.

Freshfields, which undertook a £40 million shake-up before the credit crunch began, has avoided the large-scale job losses of its competitors and appears to be in the most robust shape of the four firms. Other leading City firms to have announced their results for 2008-09, such as Herbert Smith, Lovells and Norton Rose, reported small gains in turnover but a decline in profit of up to 20 per cent. That is in contrast with the double-digit growth experienced by firms across the City in the previous four years.

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