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Lord Sharman: I rise to support the amendment. In so doing I repeat the declaration of interest that I made at Second Reading: to wit I was a partner in a large firm of accountants for many years and I continue to act as a paid adviser to that firm.
Of late I have frequently used the words in the Explanatory Notes to explain and justify the Bill. It is very important that the issue which has been raised is specifically addressed. I do not seek to defend the Bill on the footing on which I have defended it; namely, to say that this is a necessary development of the legislation but that nothing in it will in any way change the individual responsibilities of a partner. That is widely believed to be the case outside this House. The point that the noble Lord raises is a valid one, and I support the amendment.
Baroness Buscombe: I also support the amendment. I do not seek to repeat everything that the noble Lords, Lord Goldsmith and Lord Sharman, have set out with such clarity. This is a tremendously important matter. During Second Reading there was brief debate on the clarity of the parameters of the liability of the members of a limited liability partnership. Any clause such as this, however difficult to draft, that makes clear on the face of the Bill the general parameters of limited liability, and that individuals will be liable in the same
way as they would be liable in certain circumstances as the partners in a normal partnership, can only benefit all those who seek to establish limited liability partnerships following the passing of this Bill.
Lord McIntosh of Haringey: I agree with a number of the observations that have been made. This is a very important issue and we should see to it that professional liability is not watered down by the Bill. I also agree that it is difficult to see how to achieve that. I do not believe that to apply the law of partnership, as the amendment seeks to do, is the right solution to the problem. My noble friend has highlighted our reliance on the duty of care enshrined in common law to achieve the liability of the negligent member of an LLP. He questions whether that is right or safe.
I recognise that there are concerns about the treatment of professionals and their freedom to operate with limited liability. But with this member we do not want to change the regulation of professionals. We intend to create an alternative corporate form which will be available to anyone carrying on a lawful business with a view to profit--that is, not just to professionals.
My noble friend and others have queried the statement in paragraph 10 of the Explanatory Notes that,
- "Members benefit from limited liability because the LLP is a separate legal person. The LLP and not its members will be liable to third parties. However, a negligent member's personal assets will still be at risk. By way of example, under the general law, a professional person owes a duty of care to his client. Negligent advice given in breach of that duty [of care] ... will, in general"--
- "give rise to a potential liability on the part of that member as well as the LLP".
Lord Goodhart: Will the Minister explain the alleged additional protection? The additional liability of the LLP adds nothing to what the liability would have been if it had been operating simply as a partnership.
Lord McIntosh of Haringey: The intention is for the assets of the LLP to be available to compensate the complainant--I think that that is right term, not the plaintiff--against any claim. I know that the noble Lord is sceptical about that because of the issue of joint and several liability. However, I remind him that from many points of view joint and several liability is a difficult concept to sustain.
We have approached the creation of this entity, therefore, on the basis that it will be a body corporate, and that the principles and regulations applied to companies are the most appropriate ones to apply to
the LLP. We see significant disadvantages to what is being proposed. The limited liability partnership will be an entity which can be used by professionals and non-professionals alike. It will create a choice of limited liability entity between a company or an LLP. We believe that it is important to ensure a level playing field between the two entities.Responsibility and the assumption of responsibility to a third party is a general question which runs through the law of tort. Were we to make a statutory provision, as the amendment suggests, we would be freezing the law for members of a limited liability partnership by putting it into statute law whereas common law would continue to evolve. This is particularly dangerous in the context of the ongoing company law review, to which I have referred. It would create the prospect of an undesirable disparity of treatment.
Further, we do not believe that this Bill is the right way to amend the scope and application of the law of tort. We tread on dangerous ground. Should the courts have to consider whether a member of an LLP had been negligent, they would consider, among other things, whether that member had assumed responsibility sufficient to give rise to liability for economic loss flowing from the reliance placed on that. That is the point of Williams v Natural Life to which my noble friend referred. In Williams it was found that there had been no personal dealings between the director and the plaintiffs and no exchanges or conduct between them which could have conveyed to the plaintiffs that the director was willing to assume personal liability to them. Indeed, there was no evidence even that the plaintiffs had believed that the director was undertaking personal responsibility towards them. The point here is that the assumption of responsibility was to be determined objectively so that the primary focus had to be on exchanges between the parties.
Clearly, the courts' decision cannot be forecast with absolute certainty, since their decision in any case would depend not only on the general nature of the relationship between the member of an LLP and his client, but also on the exact facts of that relationship, as is made clear from Williams.
I accept that a consequence of relying on common law is the possibility of a greater degree of evolution through the common law than where express provision is made in statute. But we see no reason to make special provision for a limited liability partnership where it does not exist in company law.
In the context of the company law review which will undoubtedly have to consider the important issues raised by the amendment, I hope that my noble friend will not pursue an amendment which would lead at least in the short term to an imbalance between the law for companies and the law for limited liability partnerships.
Lord Goldsmith: I confess to being somewhat disappointed and not persuaded by the Minister's reply. I understand that after the Bill becomes law
there will be three types of entity: an ordinary partnership; a limited liability partnership; and an ordinary company. In an ordinary company, the shareholders are liable only to the extent of their contributions--the capital--they have put into the company. In an ordinary partnership, the partners are liable for all their assets because of the joint and several liability principle.I had understood that the principal purpose underlying limited liability partnership was to provide a hybrid in which one did not have all the consequences of an ordinary company but excluded the joint and several liability principle. Therefore, the partner would not be liable for the acts of his partners save to the extent, as in a company, that he had contributed to the assets of the partnership. At present if one sues a partnership, one looks first no doubt to the assets the partnership has built up--its buildings, offices, cash balances, and insurance policies--before turning to the homes and cars of individual partners.
As the noble Lord, Lord Sharman, said, it is understood outside this Chamber that the Bill intends to keep the individual responsibility of the partner as still his personal responsibility. Perhaps that would assist towards maintaining the professionalism and ethos of partnerships to which the noble Baroness, Lady Buscombe, and the noble Lord, Lord Phillips of Sudbury, referred.
One can argue about and differ on the interpretation the courts may give. I have expressed my position in relation to that. In tabling the amendment, I have sought not to change the general law but to give the member of the limited liability partnership the same liability he would have had for his own acts--not others' acts--in those circumstances.
Lord McIntosh of Haringey: Before my noble friend concludes his remarks, I repeat the difficulty which we see. I shall be glad to meet him again to discuss the issue--and indeed any other noble Lords who would care to do so before Report stage. Of course, if we were persuaded, we would put forward appropriate amendments.
I do not know whether I am grossly oversimplifying the issue. We seem to be talking about two aspects of common law: the law of contract; and the law of tort. The law of contract applies to the body corporate; and the law of tort remains applicable to the individual members. That is where negligence comes in. That is why there is a sense in which the individual responsibility of a member is reduced: it is reduced only to obligations under the law of tort. But the important point to establish--we have to arrive there in the end--is that the protection of the clients, the customers, is not diminished in total.
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