UK: Protecting The Position Of LLP Members

While an ever increasing number of law firms are converting to LLP status, the potential remains for claims in tort against individual members and employees. The question of when a personal duty of care is owed raises issues that are of general application to all professionals providing advice and services to clients.

This article looks at the position of solicitors and discusses:

• the personal exposure of LLP members
• whether Claimants are likely to pursue individual members
• the use of disclaimers
• the application of UCTA; and
• practical steps that can be taken in order to minimise any personal exposure

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Full Article

While an ever increasing number of law firms are converting to LLP status, the potential remains for claims in tort against individual members and employees. The question of when a personal duty of care is owed raises issues that are of general application to all professionals providing advice and services to clients.

LLP status may not be a panacea for all the personal liability risks facing solicitors, but where firms do decide to convert, their members will enjoy a substantial level of protection if they adopt certain practical measures, reports Peter Maguire.

A single undetected lapse of concentration at 3a.m. on a large transaction could bring financial ruin to all partners of a traditional law firm.

In the face of such danger, an increasing number of firms are responding by converting to limited liability partnerships ("LLPs"), with CMS Cameron McKenna, Herbert Smith and Watson Farley & Williams among the latest to make the change. Many more firms are expected to convert during the next twelve months as the move towards LLP status gathers pace. However, whilst LLP members will be protected from claims in contract, an individual member may still, in certain circumstances, incur a personal liability in tort. To what extent then will members remain personally exposed after conversion and what practical steps can be taken in order to minimise that residual exposure?

There can be no doubt that there is a greater risk of a court finding that a member has assumed a personal responsibility where the members are professionally qualified and engaged in the provision of a professional service than where the LLP is an ordinary trading entity. There is, in particular, scope for misunderstanding as to whether a member was assuming a personal responsibility or merely acting as agent for the LLP. See generally the House of Lords decision in Williams v Natural Life Health Foods [1998] and the Court of Appeal decision in Merrett v Babb [2001].

There is no simple test for determining when a personal duty of care is owed, but a court is likely to consider whether, on all the facts, there was:

• an assumption of personal responsibility by the member to the client or third party so as to create a special relationship. This will, in accordance with Williams, be determined objectively and the principal focus will be on things said or done by the defendant in his personal dealings with the claimant;
• reasonable reliance by the client or third party on such an assumption of personal responsibility; and
• reasonable forseeability of loss.

The first and second elements are likely to be critical; the third is unlikely to be in contention.

The principles enunciated by the House of Lords and the Court of Appeal were starkly illustrated last year in the Hong Kong decision of Yazhou Travel Investment Company Limited v Bateman Starr and Others [2004]. In that case, the claimant investment company sued their solicitors for negligent advice in connection with a substantial property transaction. In addition to the firm, the claimant sued both the assistant solicitor who handled the matter and the consultant who had overall supervisory responsibility.

The claim succeeded at trial. There was no dispute that the firm was vicariously liable for the acts and omissions of the solicitors handling the matter and the court also had little difficulty in concluding that the assistant solicitor and the consultant had assumed a personal duty of care and that the claimant had reasonably relied upon that assumption of responsibility.

It followed that all three defendants (including the two employed solicitors) were jointly and severally liable for the Judgment of just under HK$100 million.

The judge took the opportunity to discuss the personal liability of individual solicitors in more general terms and made the following observations:

"I venture to suggest that, in most cases, simply because of the personal nature of the solicitor-client relationship, there will be such a special relationship. The solicitor deals directly with the client, takes instructions from him and gives him advice. The client sees the solicitor as "my solicitor" and relies on him as such, whether he is a member or an employee and, indeed, may continue to instruct the same solicitor if he moves to another firm, whether as member or employee. It is reasonable for him to rely on the solicitor with whom he deals. The solicitor sees the client as "my client" and knows that the client will suffer injury if he makes a mistake in his professional work … Necessarily the solicitor assumes responsibility and even if he is an employee, the special relationship comes into being … In the common case where the client deals with an employed solicitor directly, there should be no difficulty in proving a relationship which gives rise to personal liability" (emphasis added).

Whilst the law remains in an uncertain state and cases of this nature are fact sensitive, members are likely to be at risk for a number of reasons:

• in the majority of cases, members are likely to have extensive personal dealings with clients (this being the principal focus of the courts in determining whether there was an assumption of responsibility);
• instructions from clients are usually sent to specific members in whom they repose trust and confidence. It will not, therefore, be difficult for clients credibly to contend that there was, in existence, a special relationship of the type referred to above. Indeed, the development and nurturing of such relationships is a cornerstone of the strategy of all law firms;
• in practice, firms market themselves by promoting the individual expertise of their lawyers;
• a judge is more likely to recognise the existence of a personal duty of care whether the individual in question is a senior representative of a firm (particularly a member);
• in the case of routine work which is undertaken by more junior staff, clients will rely upon members’ supervisory responsibilities.

Where a claim exceeds (or may exceed) a firm’s available insurance resources, any additional recovery from the member(s) in question is, in reality, likely to be modest in the overall context. Be that as it may, a claimant may perceive there to be a broader tactical advantage in joining members as co-defendants with the LLP, even in cases which clearly fall within the firm’s insurance limits. Hence, this approach may be employed by a claimant:

• as an additional pressure point on the LLP, its insurers and the lawyers in question;
• to try and flush out an indication of the available insurance cover;
• in order to pursue a vindictive claim;
• to try and undermine the defence by scrutinising the respective roles and culpability of the individual lawyers involved (both at member and assistant solicitor level). This type of detailed enquiry could prove costly, divisive and damaging. It is, in certain circumstances, conceivable that individual solicitors (be they members or assistant solicitors) might require independent legal advice (even if one firm remained on record for all defendants).

Prevention Of Personal Duty – Disclaimers

In over to avoid the scenario set out above, it is necessary to take all practicable steps to prevent any personal duty from attaching to any member in his or her dealings with clients and third parties. The most effective way of achieving this objective is to utilise a disclaimer which operates to prevent the creation of a duty of care, rather than by excluding a liability which has already arisen. The position was explained in the following way by Hobhouse LJ in McCullagh v Lane Fox [1996]:

A contractual exclusion can also be utilised (by way of "belt and braces") in order to exclude the liability of members, whilst retaining a liability equivalent to the statutory vicarious liability created by section 6(4) of the Limited Liability Partnerships Act 2000.

Such disclaimers and exclusions are subject to the requirements of UCTA (or in the case of private client work, the Unfair Terms and Consumer Contract Regulations 1999). So far as UCTA is concerned, it should be possible to satisfy the requirement of reasonableness in circumstances where:

• the purpose of a disclaimer is to negative any personal responsibility of the individual, whilst confirming that responsibility attaches to the LLP through the agency of its members and employees;
• most law firms will have purchased limits of professional indemnity insurance cover which are commensurate with the size of the firm and the type of work which it undertakes. Where excess layer cover is purchased, conversion to LLP status should have no bearing upon those indemnity limits;
• to strike out a disclaimer as unreasonable would arguably undermine the policy considerations underpinning the Act;
• the courts are generally prepared to accept that large commercial clients are able to look after their own interests;
• in circumstances where the use of such disclaimers is likely to become more commonplace amongst the profession, such clauses will probably become more familiar (and acceptable) to judges.

A number of measures can be taken in order to protect the position of LLP members.

• Ensure that all clients are made fully aware that they are dealing with a corporate body and not an unlimited partnership. The new status of the firm will be reflected in its notepaper and marketing material etc., whilst all clients should be formally notified of the change.

• Seek to achieve clarity as to the identity of the contracting party and avoid any suggestion that there is, in existence, some kind of umbrella partnership or structure. Where separate entities outside the LLP are practicing in other jurisdictions (for regulatory or other reasons), care must be taken in relation to any form of words which suggests that overall control is being exercised by the LLP or that the local entity is some kind of emanation of the LLP.
• Include disclaimers and exclusions of personal liability in terms and conditions of business and in all client retainers.
• Incorporate such disclaimers into retainer letters to ensure that they are brought fully to the attention of all clients. The disclaimers can be repeated in marketing material and website notices etc.
• Consider extending proportionate liability clauses and limitations of liability to cover members, employees and (where applicable) any service company. The advantage of doing so, is that this provides a further line of defence should any disclaimer and exclusion fail to prove effective in law. Language can be used which does not cast too much doubt on the effectiveness of the disclaimer and the exclusion.
• Take care to avoid any suggestion that a member is assuming a personal responsibility, as opposed to acting solely as agent for the LLP. At the basic level, this means ensuring that all correspondence (letters, faxes, emails) is signed or written on behalf of the LLP.

• Third party disclaimers (which may be included, where appropriate, in reports or letters of advice) should be amended to encompass members (as well as employees etc.)
• Opinion letters should be signed in the name of the LLP only.
• Consider the position of international offices and how the local law may affect the personal liability of members. One option is to develop separate terms and conditions of business, with limited amendments to reflect local legal and regulatory requirements; alternatively, where a single set of terms is utilised, a severability clause can be included to guard against the possibility that one or more provisions may prove to be inconsistent with the legal, professional and regulatory requirements of the relevant jurisdiction.

Whilst LLP status will not obviate the risk of a personal liability for members, where the conversion process encompasses the type of measures referred to above, the level of residual risk will be very significantly reduced.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 17/10/2006.