DTIs presentation

5. The two documents on LLPs have erred on the side of brevity in setting out the origin of, and basic justification for, the proposal to set up limited liability partnerships as "a new form of business association for professions". The decision announced in a written answer in November 1996 to bring forward such legislation referred to the Government's determination to maintain a competitive and up-to-date legal framework for business in the UK, and to "recent developments in partnership law in other jurisdictions such as the United States of America and Jersey". It noted that " responses to a recent consultation were strongly in favour of dealing with this issue" and that it intended to bring forward legislation at the earliest opportunity.[8] Although the written question to which the answer was given referred to the passage of the Jersey law , there was no further indication of the origins of the proposals. The February 1997 paper did little more than paraphrase the written answer, emphasising the competition offered by the efforts of an increasing number of overseas jurisdictions to attract registrations from businesses whose home jurisdiction did not offer limited liability partnership. The September 1998 paper, while providing a thorough summary analysis of responses to the February 1997 paper, merely emphasised that the purpose of the legislation was "to add to the choice of legal organisations available to businesses in Great Britain", as "the first fundamental innovation in this respect this century", and referred to the "widespread demand to bring legal entities available in Great Britain up to date with good international practice...".[9] The general impression conveyed by the DTI papers, deliberately or not, has been that the proposal is a technical measure intended to bring British commercial law up to date.

6. In oral evidence, DTI officials were somewhat more forthcoming, referring to the threat of litigation hanging over professional partnerships: to the abortive attempt to reform joint and several liability: and specifically quoting the somewhat confusing reference in the Labour business manifesto to "review[ing] the laws on joint and several liability so that incorporation in this country provides accountancy with adequate protection".[10] There has however been no public document seeking to explain or justify the proposals in any detail; no account of the trends and events which produced the demand for such a new entity; no public analysis of the experience of other jurisdictions with LLPs; and no extensive discussion of alternative means of producing the desired results. There is no shortage of such documentation in the public domain, including a number of academic articles, conference proceedings and suchlike, some of which we have used in drawing up this Report. In the absence of any official account, it has been easy for sceptical or hostile observers to suggest that the Bill is in effect a favour being thrown to the big accountancy partnerships, in return for the profession's acceptance of a limited scheme of independent supervision; that as a result the professions, particularly accountants and lawyers, will be free to enjoy all the benefits of partnership without the usually associated liabilities; and that the Government was forced into action by the passage of the Jersey LLP Law, procured for that very purpose by the efforts of several large firms. We heard oral evidence from a principal proponent of this view, Profesor Sikka of the University of Essex.[11] In our view, DTI Ministers of both administrations have failed to set out a convincing and detailed case for the introduction, without evidence of much prior analysis, of potentially far-reaching legislation. While we believe that there is a good case to be made, it could and should have been more fully and openly exposed in departmental papers. We have therefore sought to fill at least some of this gap in context.

19th Century

7. In 1837 a Commission was established on to inquire into the law of partnership, under Mr Bellenden Ker, and particularly into the prospects for the introduction of the equivalent of the European partnership en commandite, which provided for a degree of limited liability. Its Report revealed that opinions on the subject were equally divided, and included an Appendix with an outline of a proposed law drafted by Mr Baring. In 1851 a Select Committee was established to consider the expediency of facilitating the limitation of liability in relation to the law of partnership, at a time when incorporation of companies with limited liability was a labourious and expensive process. After hearing evidence from more than a dozen expert witnesses, including the secretary of legation at the American Embassy on experience in the United States, and written submissions from, among others, John Stuart Mill and Charles Babbage, this Committee also concluded that "the best authorities are divided on the subject, and that it would require great care to devise the checks and safeguards against fraud, necessary to accompany such a general relaxation or change in the law." It therefore proposed an expert Commission to consolidate and review the law, considering that "a more matured consideration of this most important subject will be well purchased by a short delay necessary for this purpose".[12] No such Commission was established.

8. In 1890, following a number of private members' bills introduced over the previous decade by Sir Frederick Pollock to codify the existing Common Law of partnership, the Government lent its support to such a measure, passed into statute as the 1890 Partnership Act. In 1907 the Limited Partnership Act was passed, providing a now little-used structure in which the liability of one or more inactive partners is limited to the level of their investment. By an irony,1907 also saw the final stage in the introduction of the private company, providing most of the benefits expected from such limited partnerships in the commercial sector. Since 1907 partnership law has remained virtually untouched. These are matters of more than antiquarian interest. Too long a delay in the introduction of a vehicle for doing business for which there are good arguments at the time can lead to commercial law structures missing the boat , with real if incalculable effects on competitiveness.

Recent reviews

9. Over the past century there have been a raft of reviews and Committees which have looked at company and commercial law, a number of which have touched on the unlimited liability and absence of legal personality of partnerships. Within the more recent past, the Government published a White Paper on Company Law Reform in 1973 which touched on the perceived case for an additional corporate form for small firms, and noted the need for some further look at partnership.[13] In 1981 a Green Paper was published, entitled A New Form of Incorporation for Small Firms, which included detailed proposals by Professor Gower on a form of simple incorporation for small firms, and the suggestion that conferring corporate personality (without limited liability) on partnerships would be advantageous, noting a precedent in the Ghanaian Incorporated Private Partnerships Act 1962.[14] Following work in the early 1990s within the Law Commission, and an internal DTI review of a wide range of company law topics, in 1994 DTI put out for consultation a Law Commission paper primarily relating to the law on private companies but which included the suggestions that giving English partnerships corporate personality and providing for a standard form of partnership agreement, might benefit small firms. [15] The responses received in early 1995 were largely in favour of giving partnerships independent legal personality, and of creation of a standard form agreement. Following delays as a result of consideration of proposals for limited liability partnerships, the Government announced in February 1997 a joint review of partnership law, to be carried out by the Company and Commercial Law Team of the Law Commission and by the Scottish Law Commission. The review's terms of reference announced in November 1997 cover the issues raised in response to the earlier paper, such as independent legal personality for partnerships and continuity of business. In the course of this review it seems likely that the potential for change in the internal liability structure of partnerships will also have to be faced. [16]

10. In March 1998 the present Government announced a fundamental review of company law, which is not expected to bear fruit until the end of this Parliament . The two reviews are not merged, but the company law review will of course pay due regard to the outcome of the partnership law review. DTI assured us in oral evidence that it was their intention that the eventual results of these reviews would be read across into the LLP regime.[17] The LLP proposal, which affects both the law of partnership and company law, and which would create an amalgam of the two, has neither emerged from nor been referred to either of the major reviews now underway. It is being proceeded with quite separately and on a fast track. This owes something to the existence of similar vehicles in other jurisdictions, and much to the perceived desirability of having such a vehicle on offer as soon as possible to firms contemplating a move offshore. The 1998 paper noted that, since any legislation resulting from the "comprehensive examination of the range of forms of legal association available to businesses in Great Britain" would not produce any legislative outcome for "some considerable time", the Government was proceeding separately with the LLP legislation.[18] It is not an ideal way to proceed. It is incumbent on DTI to ensure that the LLP proposal does not limit the scope of the outcome of the reviews underway in company law and partnership law, and that the LLP regime is designed so far as possible to be able to reflect the sort of changes to company and partnership law which may emerge from the reviews.

Proposals in outline

11. It is proposed to create a new legal vehicle for carrying on business, a Limited Liability Partnership (LLP), combining the internal arrangements of a general partnership with many of the external obligations of a company. An LLP will, unlike an English partnership, be a body corporate, with whom clients and customers can contract and to whom banks can lend, with the possibility of a floating charge .[19] An LLP's members will act as its agents and so will have no personal liability for its acts and obligations, other than those arising from their own wrongdoing of various sorts. The exact extent to which they will be exposed to personal liability for breach of duties to clients and others, including the LLP itself, has been left deliberately vague, to be decided by the courts. The broad intention as expressed in evidence to us by DTI is however that an LLP and an individual member, acting as its agent, will be jointly liable for torts.[20] Conversely, members will not, as in a partnership, be jointly and severally liable for the acts of other members. What this means in practice remains to be seen. One respondent suggested that " in reality no large firm is going to allow any of its members to be bankrupted for an error of his own that today would be regarded as one for which the firm should be responsible".[21] It also remains unclear how the courts will view wrongdoings by LLP employees: and how far successful action will still lie against various LLP members all more or less engaged in a particular task. In return for this degree of limitation on the liability of LLP members, LLPs will be under regimes of oversight, disclosure and insolvency comparable to those applied to companies.

Liabilities of partners

12. The fundamental problem which the proposed legislation addresses is the possibility that the assets of a partnership, and the personal assets of each and every partner, can be put at risk as a result of the negligence or incompetence of a single partner, over which the other partners have no control and of which they have no knowledge. Partnership is defined in the 1890 Act as "the relation which subsists between persons carrying on a business in common with a view of profit"; an agreement to share profits realised is also often imported into the definition. Part of the essence of a general partnership has also long been the unlimited liability of every partner for the debts and obligations of the firm , and the joint and several liability of each partner for the debts and obligations of other partners . Section 9 of the 1890 Act states that "Every partner in a firm is liable jointly with the other partners ...for all debts and obligations of the firm incurred while he is a partner.." and Section 10 that every partner is jointly liable for wrongful acts or omissions. One classic statement of this doctrine of unlimited personal liability arising from the firm's lack of legal personality and partners' mutual agency was enunciated in 1870, in Baird's case:

" Ordinary partnerships are by the law assumed and presumed to be based on the mutual trust and confidence of each partner in the skill, knowledge and integrity of every other partner. ..".

14. This risk arises not so much from the "business decisions" referred to in the Preface to the 1997 DTI paper - although partnerships are as prone as other commercial vehicles to experience commercial difficulties or failure - as from errors which lead to legal action by those who have suffered loss as a result. There is evidence to suggest that there has been a significant increase in the number and level of claims against professional partnerships, and against large firms of accountants in particular. Many such claims are dropped or dismissed. A further proportion are settled out of court, possibly to avoid the uncertainty, expense and publicity of court hearings, whatever the real strength of the plaintiff's case. Very few reach court.[22] One major recent case which has caused considerable concern was ADT Limited v BDO Binder Hamlyn. The plaintiffs, a large company in the electronic security systems market, were contemplating the purchase of a UK company, Britannia Securities Group (BSG). They sought and obtained — under what informal pressure cannot be fully known — an assurance from an audit partner of the defendants, one of BSG's joint auditors, that the most recently available audited accounts, on which they were relying for the purposes of the proposed acquisition, were accurate. The court found that by giving such an assurance, which was later agreed to have been misleading, the defendants assumed responsibility to the plaintiffs. The plaintiffs are reported, in return for the defendants not taking the case to appeal, to have settled for a sum of around £50 million, substantially above the defendants' insured cover, but well below the £65 million awarded by the court . Other "doomsday"claims — so called because of their potential to bankrupt those against whom they are made — have yet to be determined , including those following a number of recent collapses of corporate empires. These concerns are not limited to the large partnerships. Smaller professional partnerships, particularly in high risk areas such as many in the construction and related sectors, may also face claims which go far beyond their insured cover, discouraging them from undertaking high risk work or driving them to seek other means of restricting their liabilities.

Effects of potential liabilities

15. There are a number of consequences alleged to flow from the prospect of mega-suits against professional partnerships —

(a)  young and able professionals are unwilling to enter into partnerships, for fear that their personal assets, as well as any contribution to partnership capital, may be put at risk of catastrophic loss for reasons beyond their control, and prefer the relative security of employment:

(b)  professional indemnity insurance is either excessively expensive, thus raising the cost to clients of professional work, or simply unavailable for some classes of what is perceived to be high-risk work, driving some large firms to captive or mutual insurance arrangements:

(c)  fear of the consequences of negligence may lead to overly defensive auditing or other professional work, more with an eye to subsequent critical scrutiny than to meeting the requirements of clients: or to refusal of work which is deemed high-risk.

Inaction or delay

16. There are a number of ways in which these problems, and the underlying issue of partner liability, could be addressed, in addition or as alternatives to the introduction of the legislation now proposed. It would be possible to do nothing, taking the view that these risks are part of the price to be paid for the perceived advantages of operating as partnerships. There are already remedies, such as incorporation as a limited liability company, in the hands of those who seek relief. Larger partnerships are not obliged to retain that form of organisation if they find it unduly onerous. There are also a range of other adjustments to the current regime of company and commercial law which could be considered at leisure: for example, endowment of partnerships with corporate personality without altering partners' mutual liability. In this respect however the UK is not an island. Other jurisdictions offer attractive vehicles for those seeking a change in their liability exposure. If nothing is done, we cannot but share the candid assessment in the Government's draft Regulatory Impact Assessment that —

"it is likely that some of the major professional firms, in particular large accountancy firms, will register under similar regimes to that proposed but offshore."[23]

Nowhere to our knowledge however has the Government set out the implications for the UK public interest were that to happen. It is by no means a foregone conclusion that there would be massive economic loss. Nor is it clear how clients would choose to operate their freedom of choice in seeking professional services if some of the providers were registered offshore and others were not. Publication of an objective assessment of the consequences of major professional services firms registering as Jersey LLPs could help justify the relative fast-tracking of the proposed LLP legislation. We accept however that competition from other jurisdictions means that the real problems which require addressing cannot wait for much longer.

Avoidance of error

17. In the campaign waged by the professions for something to be done, one simple fact should not be lost sight of: that a professional will not bear any liability unless a court finds that a failure on his or her part was both negligent and an effective cause of loss to a third party, or there is judged to be a sufficient risk of such a finding to persuade a firm and its insurers to settle out of court. In the Binder Hamlyn case referred to above, there would have been no case had there not been an undeniably negligent audit, in which the defendants "submitted to pressure from their client to certify accounts whose profits in particular did not show a true and fair view of the state of affairs of the group".[24] The simplest ways to reduce the risk of such liability are to improve professional standards of performance such that they do not make serious errors, and to change the prevailing perception of what can and should be expected of a professional in particular cases. As the ICAEW notes in its 1994 guidance on managing the professional liability of accountants, "sometimes claims arise not because of any inherent defect in the professional work performed but due to misunderstandings regarding the scope of or responsibility for that work or parts of it".[25] There is also much to be said for partners being aware of a high degree of direct personal accountability when signing off an audit or giving an opinion to a client. It is essential that the introduction of a new corporate vehicle limiting the liability of individual professionals should lead not to a slackening but to an intensification of efforts already underway in many professions to minimise negligent work and to produce a more realistic understanding of what can reasonably be expected from a professional adviser.

Likierman Report

18. The problem is not a new one . In May 1988 the then Secretary of State for Trade and Industry appointed three fact-finding study teams to look into the problems faced by three selected professions "in the light of current concern about the cost and availability of professional indemnity insurance and the extent of professional civil liability for negligence", under a steering group chaired by Professor Andrew Likierman, then of the London Business School. The Report produced in April 1989 noted the fears expressed about the increase in litigation, the rise in the number of claims and awards, and the rise in insurance premiums. It discussed a number of ideas put forward, including statutory or contractual capping of liability, and amendment of the law on joint and several liability. The Steering Group's Report suggested that the issue of joint and several liability, raised in the reports of all three study teams, should be referred to the Law Commission for detailed study.

Joint and several liability

19. Where a plaintiff wishes to pursue a case for damages, the easiest and potentially most rewarding "targets" are well-insured and well-heeled professionals, regardless of the proportionate share of the damages for which a court may hold them responsible. In the absence of other parties, who may have no resources, no insurance or have gone out of business, the professional firm may be left, under the prevailing legal doctrine of joint and several liability, to meet the claim in full. The argument of those who seek change in the law of liability is that a defendant can be called on to provide 100 per cent of the damages even if only 1 per cent at fault. Those who support the status quo suggest that each defendant may be 100 per cent negligent, whatever their comparative responsibility in relation to other defendants: in order to be held jointly and severally liable a defendant must have been found by a court to have been causally responsible for the whole of a loss.

Law Commission Report

20. In May 1995 the Common Law Team of the Law Commission were invited by DTI and the Lord Chancellors Department to undertake an initial investigation into whether a full scale project of reform of the law of joint and several liability would be worthwhile. In December 1995, it concluded that such a project would not be worthwhile, since it found fundamental objections to the introduction of either full or modified schemes of proportionate liability, primarily because such schemes would shift the burden of risk onto those who had suffered loss away from those who had caused it. The team considered other means of solving what it recognised as "the very real problems faced by many professional defendants in obtaining affordable insurance", including the possibility of limiting liability by contract, and reform of joint and several liability within partnerships, noting the efforts then being made to obtain a Jersey LLP statute.

21. Unusually, the full report of this preliminary investigation was published in February 1996, and views sought by May 1996 on its conclusions, which were evidently unwelcome to some of the professions concerned, particularly those in the construction and accountancy sectors. This exercise was intended to "assist the Government in reaching decisions on whether the law of liability needs amendment and if so, in what way". It was presumably the responses to that consultation exercise to which the Minister's written reply of November 1996 referred as favouring the introduction of a law on limited liability partnerships. The emergence of the limited liability partnership proposal is therefore a direct consequence of the Law Commission's rejection of reform of joint and several liability, and in particular of the introduction of proportionate liability.

22. At the same time as the publication in September 1998 of the draft Bill DTI Ministers announced their view that "no sufficient basis had been identified, of either principle, commercial or economic interest, for a fundamental reform of the law affecting professional liability". The situation would however be kept under review and the accountancy profession were encouraged to "contribute to the fundamental review of company law ... including on the relative responsibilities of auditors, investors and directors". [26] It is not immediately obvious how this will help bring about the reform sought of joint and several liability; clarification of the responsibilities of auditors could however have the effect of limiting the scope of their exposure . There are those who still actively seek the introduction of proportionate liability and who consider that the proposed introduction of limited liability partnerships is an interim solution. Meanwhile, LLPs as well as partnerships will still feel the full effect of their exposure to joint and several liability.

Incorporation

23. One obvious solution to the problems set out is for partnerships to incorporate as limited liability companies. A number have done so, particularly in the construction and related professions.[27] It has not however proved so popular among other professions, despite their having sought changes in the law to permit such incorporation. Solicitors have been permitted to incorporate since 1992 and accountants since 1989.[28] Only around twenty solicitors firms are estimated to have incorporated, and around one hundred accountancy firms, including KPMG.[29] The reasons advanced in evidence to us and in responses to the DTI — the desire to retain the highly flexible management structure appropriate to an organisation where there is a commonality of interest between capital and management, and a shared motivation — suggest that there is real demand for a vehicle combining these features in internal organisation, with some at least of the external features of a company, including in particular limited liability.[30] There is no doubt that partnership has in the past proved to be a dynamic way of doing business, and that incorporation offers a number of challenges, including a potentially less favourable tax and National Insurance regime, and difficulties over managing within a share capital system the ebb and flow as partners come and go. Some professionals are evidently satisfied that what is often loosely described as the "partnership ethos" can be maintained within a different legal form:[31] but the reluctance of most professional partnerships to incorporate leaves no doubt that there is now, and presumably has long been, a demand, perhaps not until recently fully articulated, for a new vehicle.

Capping liability

24. There has been some exploration of the possibility of capping liability, either by statutory limits or by contract between the parties. The strong arguments in principle against statutory caps were adumbrated in both the 1989 Likierman Report and the 1996 Law Commission paper. The big accountancy firms made rather tentative efforts in 1996 to introduce contractually agreed limitations on liability in "due diligence" cases, but fell foul of strong objections from merchant banks and others . The Companies Act presently rules out such caps on liability for audit work. There are also statutory limitations on the extent to which solicitors can cap liability. It is possible that monetary caps contractually agreed in other cases might prove unenforceable under the 1977 Unfair Contract Terms Act; the party seeking to rely on the limitation would have to show that it was fair and reasonable in all the circumstances. Many professions have standard contract clauses, some of which provide for proportionate liability, or for limiting liability to the insurance cover taken out.[32] It is uncertain how far these would be upheld by the courts. Liability can be excluded by contract in respect of certain claims in the event of, for example, fraud or misrepresentation by a client, and a disclaimer of responsibility to third parties — for example, banks — is common practice. There does not however seem to be any prospect in the immediate future of a generally acceptable and universally applicable system of statutory or contractual capping of liability.

LLPs in other jurisdictions

25. The LLP concept in the USA arose in response to large suits brought against law firms in the wake of the collapse in the 1980s of many US banks and savings and loan associations.[33] The first statute was passed in Texas in 1991; virtually all US states now have LLP statutes, many providing a broader shield of limitation of the liability of partners than originally envisaged, together with some sort of minimum bond or insurance requirement. Most use has apparently been made of this corporate vehicle by law and accountancy firms, with the Delaware LLP proving attractive to a number of larger international firms. As the ICAEW noted, experience in the USA would indicate that LLP status has proved popular.[34] LLP status has also been introduced in other jurisdictions, including Australia and Canada, and has attracted international interest, as evidenced for example by the July 1997 International Bar Association seminar. Partnerships have long existed in various forms in other European jurisdictions, generally with the same principle of the joint and several liability of each partner as in Britain. It is reasonable to assume that similar strains to those described above will have arisen in Europe. We are for example aware that in 1995 a German statute was passed creating a new partnership vehicle for professions in particular, in effect permitting restriction of liability to the partner directly involved, and providing for professional indemnity insurance levels to be used as the determinant of maximum liability.[35] Given that LLPs have been in operation in business environments similar to that of the UK for some years, it would be helpful for Parliament to have available an analysis of the lessons learned in practice from US and other LLPs, equivalent to the detailed consideration given by the Law Commission to experience in comparable jurisdictions in its review of the law on joint and several liability; we recommend that such a paper be provided.

26. In 1995, two large accountancy firms, assisted by a law firm and counsel, began steps to obtain an LLP statute in Jersey. The statute received Royal Assent in November 1996. There has been much controversy over the manner of its passage in Jersey; the Jersey LLP also had certain flaws, notably as regards arrangements in the event of insolvency and disclosure. These matters are of no direct concern to us. There is of course an element of uncertainty as to whether firms would indeed register in Jersey. This uncertainty has been accentuated by the dispute between the Inland Revenue and major accountancy firms as to the tax treatment in the UK of a Jersey LLP. In late 1996 the Revenue advised one major accountancy firm of its preliminary view that a Jersey LLP would be taxed as a corporation in the UK. The matter is now before the courts, with hearings due in March 1999. By mid-1996 it was plain that the option of registration as a Jersey LLP was being very seriously considered by a number of the very large professional partnerships. It was this prospect, combined with the perceived possibility that a successful mega-claim could in due course precipitate the failure of a major firm, that led to the November 1996 decision of the then Secretary of State to bring forward LLP legislation in the UK. Whether Parliament and Ministers like it or not, what is not in doubt is the real possibility of British firms registering offshore; if the Jersey statute proves unattractive there may well be other offshore options on offer.

Will it be used?

27. In its draft Regulatory Impact Assessment, the DTI made a "tentative estimate" that around 60,000 regulated firms might eventually become LLPs.[36] If there were no limits on eligibility, the number would presumably be higher. There are around 650,000 partnerships in the UK. Many are however very small, often family businesses, including a number in agriculture. Although some may see advantage in becoming an LLP , the nuisance, cost and disclosure provisions are likely to discourage those not seeking a limitation on their liabilities. It is also possible that some companies, particularly smaller private limited companies, may reincorporate as LLPs and of course that some new concerns will start up as LLPs. It is likely to appeal particularly to professional service partnerships. Although there is no doubt that it is potentially attractive to a number of professions — accountants, lawyers, surveyors, engineers, architects, actuaries, and others — responses from some bodies suggest that for other professions, notably doctors and dentists, there are obstacles or disincentives. Partnerships in "unrecognised" professions and trades may wish to incorporate as LLPs, and so may multi-disciplinary partnerships. We suspect that the DTIs estimate of take-up is on the high side. There is however no doubt sufficient interest in the LLP as a new form of corporate vehicle to justify the time and trouble devoted to the legislation.

Will it work?

28. Subject to the tying up of a number of loose ends, and in particular to a satisfactory resolution of the question of eligibility (see Part III below), the consensus among those most closely involved in discussion on the legislation is that it offers those who originally sought its introduction — the major accountancy firms — more or less what they wanted: and provides sufficient consumer and creditor protection. There are however in our view some remaining areas of concern as to the efficacy of the proposals which Ministers must address as the legislation progresses —

(a)  the principal concern is the extent to which the draft legislation, and in particular Clauses 6 and 7, succeed in their stated aim of providing for an LLP member to have liability in tort only for his or her own acts. It is suggested that courts may well "pierce the veil" of an LLP's corporate liability, and go beyond one member, to extend liability to a range of members whose involvement in a particular case, however tangental, might be shown to be relevant. A lawyer advising a plaintiff might well advise a scattergun approach; unless new provisions are put on the face of the legislation to put matters beyond doubt, only time and the courts will tell how far such action might prove effective.

(b)  Concentration on the potential liability in tort of an LLP member has perhaps obscured other potential liabilities, for example for criminal acts or breaches of trust: and in particular breaches of statutory duty or general breaches of contract. A clear statement of the intent of the legislation in respect of such liabilities, and where it is intended they should fall would be of assistance to those contemplating LLP status, and possibly to the courts as well.

(c)  As an extension of that concern, it is by no means certain that courts in other jurisdictions, particularly in non-common law jurisdictions, will accept that the corporate status conferred by statute on an LLP is other than a polite fiction: and that as a result members may find themselves exposed in such jurisdictions to the same individual liability as if they were partners, not only in tort but also in contract.[37]

 The questions raised over the potential liability of individual LLP members in tort, contract and at law more generally and the view of GB LLPs likely to be taken by foreign jurisdictions are matters of sufficient importance to require some departmental response.

Proposal: conclusion

29. We would not contemplate giving a clean bill of health to a legislative proposal intended to confer favours on one profession or groups of professionals , simply as a response to a threat that they would take their business elsewhere. But , whatever our misgivings as to some of the circumstances surrounding its conception and birth , we are satisfied that in broad terms , and subject to adequate measures of consumer protection, the proposal to introduce limited liability partnerships is well-founded .

9  1998, URN 98/874, Introduction, paras 4&5 Back

10  Qq 2-4 Back

11  See Qq 112ff & Ev, pp 47-55 Back

12  1851, (509) XVIII: for J S Mill's written evidence, p160 Back

13  Cmnd 5391 Back

14  Cmnd 8171 Back

15  Company Law Review: The Law Applicable to Private Companies: A Consultative Document Back

16  See Diana Faber, The Law Commission's Review of the Law of Partnership, June 1997, Journal of International Banking and Financial Law: DTI Press Notice P/97/759 of 24 November 1997  Back

17  Q23 Back

18  1998, I, 1.6 Back

19  Partnerships in Scotland do have corporate entity  Back

20  Qq36-8 Back

21  1998, Mark Blackett-Ord, No 21 Back

22  Q214 and footnote: Q221  Back

23  1998, V, para 2 Back

24  British Company Cases 1996 809 Back

25  ICAEW, FRAG 30/94, para 1 Back

26  DTI Press Notice P/98/699, of 17 September 1998 Back

27  Q 192ff:Q 203: Qq211-213: Ev, p81, 8; also Q65 and Ev,p 32 on vets Back

28  See Q46 Back

29  Qq47: 93-4 :160 etc Back

30  See also Qq 65 ff for human side of partnership Back

31  Eg Q 211 Back

32  See eg Q 218 Back

33  For account of this see especially an article by Robert W Hamilton, "Registered Limited Liability Partnerships: Present at the Birth (Nearly)", University of Colorado Law Review, Vol 66, 1995, pp 1065 - 1103, a copy of which has been placed in the Library Back

34  Ev, p 38 Back

35  Weber-Rey/Marlow: The Law Affecting Professional Partnerships in Germany: [1995] 10 ICCLR 340-343 Back

36  1998, V, 5 Back

37  See eg Oxnard Financing SA v Rahn and others, [1998] 1 WLR 1465 in which the Court of Appeal allowed individual Swiss partners in a limited partnership - Kollectivgesellschaft - to be sued: referred to in 1998 response from John Franks of Chethams, No. 11 Back