IS LIMITATION OF LIABILITY UNPROFESSIONAL?Many years ago, when life was much simpler and claims not very likely, except in the case of the most crass negligence, professional men might possibly have called it unprofessional to seek to limit their liability.

The view would have been that a professional person should stand behind the advice given.But today, when most of industry and commerce is conducted through limited companies and when expected levels of expertise are, in many professions, higher than they were, I do not think that such an argument holds water.

An adviser's professional reputation will certainly be at stake, but many would not call it unprofessional to decline to put a personal fortune at risk.KPMG's decision to incorporate its aud it practice was not criticised on the grounds that this was somehow unprofessional, as far as I recall.

It cannot seriously be argued that a professional is less likely to be careful, or less professional, when practising through an entity with limited liability.

The protection of limited liability only comes into play when the firm or company is unable to meet a valid claim, that is, when it becomes insolvent.Even if a professional's personal fortune is not at risk, the insolvency of the firm or company in which he or she is a principal must surely affect his or her reputation and future earning power sufficiently to concentrate the mind.So far as solicitors are concerned, the Solicitors Incorporated Practice Rules, made by the Law Society following the Administration of Justice Act 1985 have, since 1992, permitted solicitors to practise through the medium of a limited company.

The Society would not have made those rules if it thought practising in that manner was unprofessional.

The fact that very few solicitors have incorporated their main practices has much to do with the additional tax and other costs which would be incurred.

Another factor is that there is a feeling among some that it would be a pity to lose the partnership ethos.

However, the slowness of the move towards incorporation has nothing to do with the idea that incorporation is unprofessional.Earlier versions of the Solicitors Incorporated Practice Rules did confine solicitors seeking to incorporate their practices to doing so via an unlimited company.

This might suggest the solicitors' profession took a while to be convinced that it was not unprofessional to have limited liability.

It may just be that lawyers tend to be cautious about change.

Whatever the reason, there is no doubt about the position now.Even today, some forms of limitation of liability might be considered unprofessional.

Solicitors are required to be covered, on an 'each and every' basis, against claims of up to £1 million through the Solicitors Indemnity Fund.

The Law Society has stated that it is unacceptable for solicitors to seek, by contract, to limit their liability below the compulsory minimum level of insurance cover.

The principle, presumably, is that it is improper, or unprofessional, for clients not to have some minimum rights should they have valid claims against their solicitors.Practice through limited companies could not have been acceptable without some insurance requirement.

Solicitors who practise through such companies are required to carry top-up insurance with commercial insurers for a substantial sum over the cover provided by the Solicitors Indemnity Fund.

Many solicitors, whether or not incorporated, carry top-up insurance considerably in excess of that figure.IS CONTRACTUAL LIMITATION OF LIABILITY POSSIBLE?There is no doubt that an effective contractual limit on a professional's liability confers very great advantages.

Unlike the protection of incorporation, or of a limited liability partnership where, although private assets may be protected (except to the extent that they are invested in the firm) a successful 'wipe-out' claim will result in the insolvency of the firm, an effective contractual limitation will protect the assets of the firm itself, as the limit will operate to cap the amount that can be claimed.

One major problem is that a contractual limit can only be effective in relation to claims by a person who is a party to the relevant contract.

It gives no protection in relation to a claim by a third party and claims against professionals by persons ot her than their clients are becoming increasingly common.There is also the problem that even in circumstances where, in principle, protection could be obtained by a contractual limit on liability, there may be doubt as to whether the particular contractual provision is valid.

This is because the Unfair Contract Terms Act 1977 requires such a provision to satisfy the requirement of reasonableness.But the difficulty is that there is insufficient judicial guidance on the interpretation of this requirement to be confident that any particular contractual limitation will be held to be valid.

Another difficulty is that the test of reasonableness is applied as at the time when the contract is made.

Therefore, a situation can arise in which it would be perfectly reasonable to rely on the limitation clause but this clause cannot be relied upon because other circumstances could have arisen in which it would have been unreasonable to do so.I should also add that, in the case of solicitors, the Solicitors Act 1974 renders void any contractual provision which purports to exclude or limit the solicitor's liability to the client for negligence in relation to contentious matters.

So, although solicitors can limit their liability in relation to transactional work and general advice, they cannot do so in relation to litigation.Also, there may be a question as to whether it would be proper for the solicitor to limit liability by contract without the client having received independent advice on that aspect.The conclusion must be that a professional practising in a field that may give rise to very substantial claims can only obtain effective protection for private assets if practising through an entity that benefits from limited liability.LIMITED LIABILITY PARTNERSHIPSAnyone who is thinking of operating through a Jersey limited liability partnership (LLP) should seek advice and not rely on my personal view.

But I believe the limitation of liability would be upheld by English courts so that the private assets of a partner who was not personally responsible for the acts or omissions giving rise to the claim would be protected, even if the assets of the firm were insufficient to meet that claim.Some lawyers are doubtful about this, it has been reported.

But it seems to me that in a normal case, given that a Jersey LLP is a separate legal entity and the partners are not agents of each other, the only possible defendants to a claim would be the LLP itself and the partner or partners who were personally responsible for the relevant acts or omissions.

If there is no agency, I do not see how other partners could be called upon to answer for the acts or omissions of their partners.The LLP itself would, no doubt, have vicarious liability.

But why should its members have any vicarious liability in relation to those partners who were personally responsible for the relevant acts or omissions any more than members of a corporate body would? Nor do I see how partners could be fixed with the liability of the LLP itself (as opposed to liability for other partners).

If the LLP is a legal entity, the question whether its members have any liability for its debts must surely be determined by reference to the law of the state which created it; that is, the law of Jersey, which clearly states there is no such liability.Will we see solicitors practising through Jersey LLPs? I am sure there will be some who would like to do so, or who will think seriously about it.

The requirement for a £5 million bond will, perhaps, make it unattractive to smaller firms.

Howev er, it will only be possible to practise through Jersey LLPs if this is permitted under the Solicitors Act and other practice rules.The Society is, currently, looking at this issue but no public statement has yet been made about Jersey LLPs.Apart from one point, I do not believe there is any question of policy at stake; it is merely a question of what the legislation and rules provide.

As the existing law/rules were passed at a time when LLPs were not in contemplation, there is a possibility that they might not accommodate Jersey LLPs.There are difficult questions.

Who would be practising: the solicitor partners or the LLP? If the latter is the case, there might be a regulatory problem because the legislation does not recognise solicitor LLPs.If, however, it is argued that the former is the case, would that enable clients to bring claims against all the partners on the basis that their retainer was accepted by the partners as individuals and not the LLP? It would be unfortunate if the rationale that allowed the Law Society to conclude that the current regulatory situation permitted solicitors to practise through Jersey LLPs also made it easier to argue that the limitation of liability was not effective.

The only possible policy issue I can see arises out of the fact that the Solicitors Incorporated Practice Rules require solicitors who wish to practise through an incorporated company to do so through one which is formed under the Companies Act and has its registered office in England or Wales.

The reason, presumably, stems from doubt as to whether the rules that require such a company to be wholly owned, managed and controlled by solicitors could be effectively enforced or policed outside England and Wales.Whatever the reasons, it may be necessary to consider whether or not the rules dictate that any LLP should be established in England and Wales.

Solicitors would, if that were the case, be compelled to wait until LLPs were established here.

Personally, I cannot see any policy reason to exclude Jersey LLPs, although I would feel more comfortable practising through an entity formed under English law than one formed under the laws of another jurisdiction.

But there might be other jurisdictions, or other forms of LLP, through which it would be inappropriate for solicitors to practise.If amending legislation is required, we will be at the mercy of the government's willingness to legislate and the parliamentary timetable.

If it is only the rules that need to be modified, the timetable would be a little shorter.