Over Taylor Biggs

Limiting Liability

A partner under a normal partnership arrangement will be jointly and severally liable with his other partners in relation to all liabilities of the relevant partnership business.  This is obviously not particularly attractive for partners, especially where they can be liable for acts of other partners.

A limited liability partnership (LLP) is a legal entity in its own right and can own assets and incur liabilities.  The liability of its members is limited to the amount of capital that they have agreed to contribute to the business.

 Actions of Members

Each member of the LLP is an agent of the LLP and can as such represent and act on behalf of the LLP in all its business subject to certain safeguards. 

An LLP is not bound by the actions of a member where that member has no authority to act for the LLP and the person dealing with the member is aware that the member had no authority to act or did not know or believe that the member was in fact a member of the LLP. 

Transactions with a person who is no longer a member of an LLP are still valid transactions with the LLP and the LLP is bound by them unless the third party entering the transaction had notice that the person was no longer a member or notice that the person was no longer a member had been "delivered" to the Registrar of Companies.

To be protected, a third party should make a search at Companies House to check the register of members.  There is no priority period in relation to such a search so the result of the search holds good for a period of time. 

Liability to Third Parties

If an LLP is liable to a third party, it will be liable to satisfy such liability to the full extent of its assets.  If payment of damages results in insolvency, there are provisions by which withdrawals by members of the LLP can be clawed back.  This area is quite complicated but broadly it applies where members carry on a business under an LLP which is insolvent or they should know was imminently to become insolvent.  It is akin to the wrongful trading concept for private limited companies.

Clearly, for professional LLPs (for example accountancy firms, surveyors and lawyers), the vast majority will have professional indemnity insurance in place which, provided it is in place and is adequate, will provide some further protection for third parties dealing with LLPs.

Can a Member be personally liable to Third Parties?

One point that is often not considered with regard to LLPs is that, whilst the general position is that members of an LLP will not personally be jointly liable for contracts entered into by the LLP, or personally jointly and severally liable for any torts by the LLP, there are certain circumstances where members of the LLP may be personally liable for their own negligence.  This is primarily if they have assumed a personal duty of care and have acted in breach of that duty. 

The area surrounding tortious liability of individual members is complicated but the Courts have indicated they will consider a range of issues.  These include whether the member assumed personal responsibility for advice given, whether the client relied on the member's assumption of responsibility and whether that reliance was reasonable.  From a member's perspective of an LLP, they should always consider using the wording of engagement letters and/or terms of business to limit potential exposure to personal claims by the inclusion of disclaimers to prevent a duty of care arising between the individual member and the third party. 

In addition, they should be aware of anything that may be construed as an assumption of personal responsibility.  For example, members should ensure their work correspondence is always signed or written on behalf of the LLP.  In addition, members should be aware of any provision in any LLP agreement that may expose the member to personal liability, for example an agreement to indemnify the LLP or other members or former members.

It is hoped that the above is useful but if any further information on LLPs is required, please do not hesitate to contact your usual representative at Over Taylor Biggs.

This briefing note is not intended to be a comprehensive guide and does not cover every aspect of the topic and is not intended to provide legal or other advice.

Over Taylor Biggs

April 2010