What Makes It Unlawful to Continue Activity With Limited Liability Partner
PART I : INTRODUCTION .
PART II : SHOULD JOINT AND SEVERAL LIABILITY BE MAINTAINED?
PART III : WHAT TYPE OF LIABILITY REGIME SHOULD REPLACE JOINT AND SEVERAL LIABILITY?
APPENDIX A : WITNESSES
PART IV--Limited Liability Partnerships
One of the options outlined in the Options Discussion Paper was that in order to limit their liability at the partnership level, professionals be permitted to incorporate or form limited liability partnerships.
In Canada, professionals such as lawyers and accountants must practise largely in a partnership structure. As a result, such professionals are faced with liability at two levels – as co-defendants and as partners. Liability at the partnership level is joint and several amongst the partners and exposes the assets of the partnership and those of the individual partners to the liability of the firm. Each partner in a firm is jointly and severally liable with the other partners if a claim for damages based on negligence is made against any of the firm's partners. The personal assets of a partner can be used to satisfy a judgment against a firm even if the partner is not actually responsible for the loss.
Joint and several liability amongst co-defendants and joint and several liability amongst professional partners, however, are two separate issues. As the Options Discussion Paper noted
The second issue relates to limited liability partnerships and a reform of partnership law. ... It has nothing to do with the general common law principle of joint and several liability, it is concerned purely with partnerships. It is the principle whereby any negligence, or anything equivalent, by one partner renders the other partners jointly and severally liable.... You have to distinguish between the internal joint and several liability within the partnership, ... and the external joint and several liability, of, ... the whole partnership along with defendants outside the partnership. They are quite distinct issues.(70)
Many jurisdictions have concluded that it is appropriate for professional firms to limit their liability. In the United States, in particular, the move to professional corporations, limited liability companies and limited liability partnerships is well advanced, with most states having enacted legislation to permit professionals to operate within these frameworks. The Options Discussion Paper briefly describes each of these.
One of the most popular structures for limiting liability is the limited liability partnership (LLP). Limited liability partnerships allow firms to retain their partnership structure while protecting the personal assets of partners who have no involvement in a negligence action. The firm is liable for the acts committed by its members in the ordinary course of the firm's business, but individual members, while continuing to maintain responsibility for their own acts and for those over which they have a direct supervisory role or knowledge, will not be liable for each other's acts.
The United Kingdom may be moving toward allowing professionals to form limited liability partnerships. In February 1997, the U.K. Department of Trade and Industry issued a consultation paper, Limited Liability Partnership, which details the government's proposals for allowing LLPs for regulated professions. Among other things, the U.K. proposals would include safeguards such as
- penalties for wrongful and fraudulent trading, powers to disqualify members, and powers of investigation similar to those for companies;
- public filing of audited accounts and other information;
- measures to ensure the availability of funds on liquidation; and
- measures to ensure a minimum standard of conduct through membership in a regulated profession.(71)
The Options Discussion Paper points out that those advocating LLPs seek this structure to protect the personal assets of uninvolved partners rather than as a solution to concerns about the joint and several liability rule as it pertains to co-defendants. An LLP will neither protect the assets of a partnership or the personal assets of partners directly involved in a claim based on negligence nor affect the responsibility of defendants for compensating a plaintiff. However, LLPs and corporations will shelter the personal assets of partners not directly involved in a negligence claim and limit the potential adverse impact on those assets of a large judgment against a partnership.
In Canada, the issue of joint and several liability amongst professional partners falls under provincial jurisdiction. The provinces, for example, can legislate in the areas of tort liability and regulate most business and professional enterprises. Whether professionals would be permitted to incorporate or form limited liability partnerships is therefore a matter of provincial jurisdiction.
At present, there are no LLP regimes in Canada, but the Committee understands that some provincial legislatures are close to considering the issue.
Although limiting liability at the partnership level is not within the jurisdiction of Parliament, the Committee believes it is an issue worthy of comment in this report. The Committee has benefited from the testimony of Ms. Alison Manzer, who first appeared before the Committee in October 1996 with the delegation from the Canadian Bar Association. At that time, Ms. Manzer described the evolution of liability amongst professional partners as follows:
The traditional professions of law, medicine and accounting have historically attached responsibility and care beyond that of the provider of other services and consequently face liability for the results of their professional advice and business activities beyond that generally imposed on the businessperson. These consequences were based on a client relationship, and the importance of the services to the client who often required special protection.
Joint and several liability for members of professional firms emerged at the time when professionals had responsibility only to their clients. Professional responsibility has evolved by the imposition of tort liability, elimination of contributory negligence bars to a plaintiff's action and expanded recognition of responsibility to persons other than clients. Professionals now face potential liability from a variety of sources, including third parties, knowingly or unknowingly relying on the professional work. In addition, the size of awards has increased dramatically.
The issue is whether liability of this nature, based on a unique relationship with a learned professional, remains valid. Most occupational groups now recognized as professional do not face the liability issues of the traditional professions. They are often permitted to practice in an incorporated or other limited liability business structure, thus restricting individual liability to their direct professional activity. They are not exposed to liability for the activities of their partners.... The compulsory exposure of joint and several liability to partners and personal liability to partners (even if uninvolved in the matter), and personal liability for mere error, omission or exercise of judgment is unique to the traditional professional relationship. (72)
The Committee questions whether there remain good and sufficient reasons for requiring certain professionals to practise within a traditional partnership structure. Why should partners who are not involved in a negligent act be personally exposed to liability arising from the activities of their negligent partners? Why must the traditional professions such as law, accounting and medicine continue to face exposure to personal liability for the activities of their negligent partners while other professionals can limit their exposure through incorporation or some other limited liability structure? To avoid facing the possibility of losing their personal assets to satisfy a judgment against their firm or a negligent partner, professionals will often take steps to limit their personal liability by making themselves judgment-proof. Why should some professionals feel compelled to take these steps to protect their personal assets?
The CICA expressed its enthusiasm for limited liability partnerships as a means of protecting the personal assets of partners who are not involved in a claim before the courts. It pointed out that
[T]he one area that will help somewhat in the joint and several issue is that lawyers for plaintiffs use the threat of going to a partner's personal assets as one of the bargaining chips in getting settlements.… There is no question that lawyers for plaintiffs have threatened that they will go right through the partnership into a partner's personal assets.(73)
The Committee believes that structures such as limited liability partnerships should be available to professionals who wish to limit their personal liability. It wishes to stress that within the confines of these structures, professionals should continue to maintain responsibility for their own actions and for the actions of others over which they have a direct supervisory role or knowledge.
Recommendation
The Committee urges the provincial and territorial governments to take the necessary steps to provide for the creation of limited liability partnerships and/or corporations by professionals who wish to practise their professions within such structures.
Source: https://sencanada.ca/content/sen/committee/361/bank/rep/rep09part_four.htm
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