The Court of Appeal has this week handed down its decision in Impact Funding Solutions Ltd v Barrington Support Services Ltd, which is a case that has sparked a lot of interest since the first instance judgment was delivered back in December 2013.

Summary

By way of summary, this is a case involving a litigation funding company (Impact), which provided disbursement funding to solicitors that were pursuing litigation on their clients' behalves. For those that were involved in the TAG litigation back in the early 2000's, this will make familiar reading.

Essentially, the way Impact worked was to provide loans to litigants via their solicitors, so as to enable them to pay for any expert assistance that was needed to bolster their cases. If the litigation was then successful, the costs of the loan (which included sizeable interest charges) would become recoverable from the unsuccessful defendants. If, however, the litigation failed or was settled on unfavourable terms, Impact would generally have to bear the cost of the loan itself. In order to limit the chances of being lumbered with the costs of the loan itself, Impact devised a stringent set of eligibility criteria which cases had to meet before Impact would consider backing them. The criteria were passed to the solicitor to complete in each case.

In the case before the Court of Appeal, Impact were pursuing the solicitor for having failed to apply the eligibility criteria correctly in a number of cases, meaning that Impact had been forced to write off significant levels of loan finance due to cases being abandoned or lost in circumstances where the solicitor had assured them that the cases had merit. The matter fell for consideration under the solicitor's professional indemnity insurance arrangements.

Issues

At first instance, the PI insurers (on behalf of the solicitor) argued that one of the exclusions contained in the policy applied, such that "breach by any insured of the terms of any contract or arrangement for the supply to, or use by, any insured of goods or services in the course of the Insured Firm's practice" would not be covered. The Judge accepted that Impact 's claim fell within this exclusion, as the arrangement for assessing the eligibility of cases for the purpose of obtaining loan finance was deemed to be an adjunct to the role of a solicitor and not central to it.

Impact appealed this decision on the basis that the contract between Impact and the solicitor was, in fact, central to the solicitor's role in providing advice, and that the decisions regarding finance were at the heart of whether or not the solicitor's clients could pursue their cases at all.

Judgment

In determining whether the exclusion ought properly to apply, the essential purpose of the exclusion was considered. It was held that the "purpose of the exclusion is to prevent insurers from being liable for what one might call liabilities of a solicitor in respect of those aspects of his practice which affect him or her personally, as opposed to liabilities arising from his or her professional obligations to clients". The examples given were liabilities regarding cleaning services for the solicitor's offices or photocopier suppliers.

The distinction was made between those liabilities and ones incurred as part of a solicitor's professional duties. The Appeal Judges ultimately held that obligations arising out of loans (such as those made by Impact) that were made to cover disbursements intended for litigation were an essential part of the professional duties of a solicitor. The Judge stated that "they are inherently part of his professional practice". It follows that the assessment of eligibility for loan finance was deemed to be an essential part of the solicitor's duty and therefore the exclusion did not apply.

Judgment was therefore entered against the PI Insurers.

Commentary

This case is one which could have significant consequences for Professional Indemnity Insurers seeking to rely on similar exclusions in their solicitors PI wordings. It certainly appears to stretch the logical interpretation of the exclusion to its very limits and, indeed, several other recent cases have refused to go this far (click here for an example).

In the circumstances, whilst this decision will deal a blow to the solicitors PI insurance market, it cannot currently be said to be a settled area and will continue to give rise to challenges in appropriate cases.