Attempts to bring HK liability laws in line with international standards stall as long-running debate continues

Hong Kong is continuing to grapple with the issue of limited liability partnerships (LLPs), with new proposals for regulatory reform discussed at a packed local Law Society meeting earlier this week (13 February).

Under current regulations, Hong Kong partnerships must be isolated from global law firms' LLPs, and the Hong Kong Department of Justice (DoJ) has long signalled its intention to bring local liability laws in line with international rules, potentially allowing worldwide integration of legal networks.

However, more than five years since discussions first began, obstacles remain.

After several rounds of negotiations – including this week's oversubscribed meeting, which saw 180 lawyers attend – two primary issues remain: the liability of designated partners and clawback provisions on member dividends.

Early DoJ proposals to allocate liability automatically placed the burden on the shoulders of the designated partner responsible for client care, while a 'constructive knowledge' clause has also been floated, which could mean any partner who handled or had knowledge of a case might be liable.

A more recent DoJ draft held that the designated partner would still be liable if a client sued, but could potentially extricate themselves by identifying another partner deemed to be 
more blameworthy.

Huen Wong, the immediate past president of the Hong Kong Law Society and ex-Fried Frank Asia managing partner, described this formula as "unacceptable", noting that in a normal lawsuit, the judge would work out and apportion blame without the need for partner "finger pointing".

In response to feedback, the DoJ recently agreed to remove this clause, but offered no details on what would replace it.

The second sticking point is over clawback periods, which the DoJ is currently seeking to set at six years for law firm members. Under Hong Kong bankruptcy rules, the clawback period for standard companies is two years. Local lawyers are petitioning for the same rules to apply to LLPs, saying it is unreasonable to have the threat of clawback hanging over ex-partners' heads years after they have left a firm.

"Initially, we thought this issue was less serious than the designated partner problem, but a number of firms have come back and said they really don't like it – retirees would have an axe over their head for years," explained Wong.

If Hong Kong's LLP rules are brought in line with international practice, global law firms will face a decision on whether to fully integrate their Hong Kong operations.

Pinsent Masons Hong Kong office chief Vincent Connor said the firm would "absolutely integrate" if the LLP rules allowed it, adding: "Consistency is very important; it could make a lot of sense."

However, Michelle Taylor, Orrick Herrington & Sutcliffe's China managing partner, said the significance for global law firms would be "hard to predict".

"They might join, but it depends on tax and other issues. Some firms have deliberately set up Hong Kong offices to practice in China and elsewhere, and this will be taken into consideration when considering liability issues there," she concluded.

Hong Kong Law Society members are hopeful the DoJ will offer concessions in response to their concerns. If agreement can be reached, the reforms could be pushed through before the end of the current legislative council in summer this year. If not, it will fall to a new council to reconsider the reforms.

Wong added: "Each time we negotiate, they seem to understand our concerns, but in the fresh drafts they always slot in something new. It has been five years already; there's no way of knowing when the marathon discussions will end."