Big four accountancy firm Ernst & Young (E&Y) has finalised its agreement with its law arm, Tite & Lewis, in a deal that will see the law firm split off as an independent five-partner operation with all its debts extinguished.

E&Y's UK managing partner of operations Robin Heath told Legal Week that the pair had severed their day-to-day financial ties last week (12 May), leaving the law firm self financing.

However, he added that for the next year the firm would brand itself as E&Y's "allied" law firm and that the accountancy firm had set aside a contingency fund- which it did not expect to use- to ensure the firm continued running until the end of the 2004-05 financial year.

"We make many decisions, some of them are successful, some of them are dogs and sometimes we have to alter [them] to get the best out of them," he said.

"At the time, [setting up a law firm] was the right thing to do," he added. "It has moved some client relationships along and if the market and regulators had not conspired against us things could have been different."

Two more Tite & Lewis partners, Jim Hillon and Chris Fellowes, have opted to leave the firm, which has been hit by a spate of senior departures in recent months in advance of the deal.

Hillon, a corporate tax partner at the firm, is moving to Dundas & Wilson and Fellowes, also a partner, is going to Manches. Both will become partners in their new firms.

The deal effectively sees E&Y write off £22m worth of investment in its law arm and comes after almost a year of restructuring at Tite & Lewis, which was set up by the accountancy firm four years ago.