Linklaters is set to lose out on future mandates from Goldman Sachs' leveraged finance team in London following a number of deals in which the magic circle firm was appointed by financial sponsors to advise the bank.

Legal Week has been told by a senior source at Goldman that the bank's leveraged finance team will no longer work with Linklaters "unless it is forced" to do so.

The leveraged team is understood to have become frustrated with Linklaters' representation of the bank on financings where a sponsor client appointed the firm as lender counsel.

The rift is not thought to have affected other areas of Goldman Sachs' relationship with Linklaters, and several of the firm's lawyers are currently on secondment to the bank.

"We have an excellent relationship with Goldman Sachs," said a Linklaters spokesperson. "We work with them closely on a wide variety of transactions and look forward to continue doing so in the future."

A Goldman Sachs spokesperson added: "We have a constructive and close working relationship with Linklaters across a number of our businesses."

In Europe, it is common for buyout houses and other financial sponsors – or their legal advisers – to choose lenders' lawyers. The practice is different in the US, where banks exert a tighter grip over which lawyers they instruct.

Depending on the mandate, London-based leveraged finance teams within banks may have a say on instructions, and could refuse to work with a firm.

However, for deals which involve several lenders – or where sponsors ask banks to pitch – one financing team may have little say in which law firm it works with.

Another Goldman source told Legal Week that senior members of the bank's legal department continue to hold Linklaters in very high regard.

"From time to time, people do feel like those sort of commercial conflict issues can become acute, but the balance is usually well-managed," he said. "Goldman's relationships with law firms are pretty fluid, and often change."

Market sources have reported that the London offices of several investment banks have in recent months become concerned with certain UK firms' banking teams that receive instructions through referral relationships with sponsor-focused US firms.

"The issue for this sort of instruction is always going to be banks wanting you to be aggressive, and the sponsors wanting you to be even more aggressive with the banks," said one finance partner who acts for both banks and sponsors.

"There's a kind of dilemma there; you're acting for the bank, but the sponsor is paying the bill, and will be the source of the next deal."

Another structured finance partner, who receives all his instructions directly from banks, said: "In recent years, banks have become increasingly focused on the quality of representation. Pre-crunch, a lot of deals were getting done quickly, but not well enough.

"The banks are in a difficult position. On any deal, several may be asked to make a proposal to a sponsor, and argue for their financing and terms. As the sponsor shops around, the banks often don't run up their own legal bills, but are instead directed to go to one law firm.

"The reason one bank can't – or will find it hard to – veto the sponsors' choice, is because of this pooling of resources."