Clients' bewilderment is compounded by the fact that most have never heard of LLPs and have no idea what they are. In fact, LLPs are a hybrid: they are neither a company nor a partnership but an alternative corporate vehicle established by the Limited Liability Partnerships Act 2000. Here are the main features:
- The LLP itself has a separate legal personality so it can enter into contracts, hold property in its own right and sue or be sued
- Unlike a partnership, the LLP limits liability for all of its members
- There must be at least two designated members to whom administrative duties have been delegated.
The rationale for LLPs was to allow professional partnerships to incorporate so that partners could obtain the benefit of limited liability without having to give up management control and responsibility.
LLPs are registered at Companies House and each of the designated members must be listed at Companies House. They must have a certificate of incorporation. Management of the LLP is governed by an agreement between the members in a way that is not so dissimilar from a partnership agreement. The members agreement is not registered at Companies House and is private. The designated members have specific duties, which are similar to those that would be carried out by the director of a company.
Obviously, some of the advantages of privacy of financial information available to partnerships are lost by incorporation as an LLP and it should be noted that where the LLP's aggregate divisible profit exceeds £200,000, the accounts must also disclose the income of the highest paid member of the LLP.
But the core reason why partnerships are transferring their business to LLPs relates to liability. In the old partnerships, every partner was jointly liable for the debts of the partnership and jointly and severally liable for all damages or loss arising from negligence by any partner. In contrast, an LLP itself is liable for any breach of contract or any negligence committed by any member to the full extent of the LLP's assets. But members will only be personally liable where either they have given a guarantee or have assumed a personal duty of care and have breached that duty. Otherwise, their houses are safe.
Most of the letters we have seen are not clear about the legal effect in terms of the client’s existing rights
So the issue is about limitations on individual liability. And this brings me to the response to the correspondence about limitations on liability spawned by my column on the Construction Industry Council's guidance note (8 April, page 49).
Jenny Baster wrote to suggest that my comments were unfair because Linklaters, the solicitor I work for, agrees liability caps on certain commissions, albeit not as a standard practice (21 May, page 40). Jenny should remember that lawyers have not, until recently, been permitted to incorporate as LLPs. Consultants, including her own firm Arup, have practised with limited liability for years. Plainly, this affects the approach to caps on liability.
What should a client receiving one of these letters from its professionals do? They should certainly not sign it in respect of existing appointments, since most of the letters we have seen are not clear about the legal effect of what is happening in terms of the client's existing rights against the consultant. Certainly, if the project is more than half way through, the client may feel that the status quo is to be preferred given that any collateral warranties will have to be re-executed, consents of third parties will need to be procured, accounts will need to be looked at and so on.
Ann Minogue is a partner in Linklaters