Clifford Chance litigation points to urgent need for limited liability laws

Sean Farrell reports on reaction to a £54m suit against Clifford Chance and the role of LLP status internationally.

The news that Clifford Chance has been hit by a £54m negligence claim reveals the risks faced by law firms as the Government introduces its long-awaited Limited Liability Partnership (LLP) Bill.

Clifford Chance is being sued by an international consortium over advice given by the firm's Hong Kong office for the construction of a power station in China.

The claim comes only weeks before Clifford Chance becomes a New York LLP through its merger with Rogers & Wells.

One of the conditions of the merger laid down by the US firm is that it should retain its LLP status. This limits partners' individual liability in the event of a large negligence claim.

LLP status would make no difference to the claim should it succeed. The alleged error took place before Clifford Chance gains LLP status, and LLPs only protect partners' individual assets rather than those of the firm.

Partnership lawyers have raised questions about Clifford Chance's arrangements for becoming a New York LLP.

They are asking whether an English court would recognise Clifford Chance's New York LLP status when its US operation forms a relatively small part of the firm.

Garth Pollard, chief operating officer for the new global firm, says: “As a legal matter we believe it does [provide that protection].

“If you have a US incorporated company that carries on business through a branch here and there are claims against it, then limited liability would apply.

“The courts have to give effect to the corporate entity and the liability issues that go with that entity.

“There are certain countries where you can't practise through any form of limited liability, for example Hong Kong, and there would be no limited liability there.”

Another question is whether there would be Capital Gains Tax to pay on the goodwill of Clifford Chance UK if it is to be wound up and transferred to a New York LLP.

Pollard says the firm has settled the matter with the Inland Revenue.

“The short answer is there isn't any Capital Gains Tax charged on the transition. There isn't any winding up of Clifford Chance and that doesn't form a cessation for tax purposes,” he says.

Richard Linsell, head of the professions practice at Rowe & Maw, says: “The Bill had its first reading last Tuesday and is making quicker progress than anybody expected.

“The negative side is that most of the law is going to be contained in regulation.”

Firms are waiting to see details of the regulations that will be added to the enabling legislation before Parliament.

Ian Terry, managing partner at Freshfields, says: “In principle we would wish to take advantage of a limited liability vehicle. We have done that in relation to our US operation, which operates as an LLP.

“We would want to see the small details and what the implications will be.

“The broad points on disclosure we don't have a problem with because one way or another there is plenty of disclosure already.”

Pollard says Clifford Chance will also consider the Government's LLP vehicle for its UK operations. “In practice I suspect there won't be LLPs in business for 18 months because you have to get the legislation through and the infrastructure in place.

“It is coming later than we would have liked, but one issue is whether we conduct our UK business through an English LLP.”

For big City firms internationalising at breakneck pace, the LLP Bill is only a small part of a global jigsaw.

Pollard says: “If you are dealing with our French office you would discover it is run via a French entity and the same would apply in Warsaw.”

He says it is “a partnership structure in essence” but structured internationally along corporate lines.

Terry says: “With operations in so many different countries now, the issue of the role of a UK LLP in how we organise our worldwide operations is one we would have to look at quite carefully.”