Limited Liability In Historical Perspective

The sudden emergence of new limited liability vehicles -- notably limited liability companies (LLCs) and limited liability partnerships (LLPs) - suggests a revolution in the law of limited liability. When placed in historical perspective, however, the developments of the last decade can be seen as more evolutionary than revolutionary. Indeed, for as long as commerce has existed, merchants, financiers, and others associated in business activity have sought to eliminate, minimize, and shift their losses and liabilities. Often, those efforts have been reflected in the development of associational relationships, grounded in contract or law, that bear a striking resemblance to modern forms of business association, most notably the limited partnership and its cousins, the LLP and the LLC. This Article offers some historical perspective on both the quest for limited liability and the responsiveness of the law to that quest.' Its aims are modest, as is its length. No attempt is made to offer a comprehensive history of limited liability, or even to identify the earliest point at which limitations on liability were sought. To establish the point of the Article that the development of limited liability vehicles is an ancient activity in the law - it should be sufficient to sample the diverse periods in the development of law and commerce when creative efforts to limit liability have been revealed. This brief survey begins with Roman law.2 1. Roman Law Through the concept of noxal liability, Roman law recognized a form of vicarious liability for torts (delicts).3 Interestingly, Roman law also recognized a means of limiting such extended liability. Under Roman law, the paterfamilias - the head of the family - was personally answerable for the torts of his child or his slave,4 but in either case "possessed the singular privilege of tendering the delinquent's person in full satisfaction of the damage. "5 The option of turning over the offending family member or slave operated as an effective ceiling on damages and at least in theory, if not in practice, was the functional equivalent of limited liability.6 Extended liability in contract developed along somewhat different lines. Under Roman law, the essence of the contractual obligation was personal,7 which meant third parties could not be bound through contract, even if they controlled one of the contracting parties. Such a norm acted as an impediment to commerce, however, because it made conducting business through other parties (agents) difficult, if not impossible. Eventually, Roman law responded to meet the needs of the commercial environment in which it was applied. One sign of that change was the development of the actio institoria, which allowed a claim against the "principal" for acts done by the "agent" in the "course of the business."8 Although the application of the concepts may have differed, the core ideas are quite recognizable to contemporary business lawyers and merchants. Over time, relatively advanced methods were developed to limit liability in contract or for wrongful acts.9 The most important of the techniques employed the peculium, which achieved wide usage by the middle of Republican times. The peculium consisted of assets entrusted to a slave by his master or to a son by his father. io As the following description reveals, it provided a way of achieving limited liability in the conduct of business affairs. A slave or child in potestas could not own property themselves. However, where the slave, or son, traded with his peculium, as commercially minded slaves were encouraged to do by their masters, debts and liabilities incurred in such trading could only be enforced by third parties against the master or paterfamilias to the extent of the peculium, and not against all of the latter's property. Thus, any Roman seeking to invest in a business would trade through his slave or son and limit his liability by fixing the size of the peculium. …