This case1 involved the proper construction of an exclusion clause contained in a series of Financial Guarantee Indemnity (“FGI”) policies issued by the Insurer to the Insured, as part of a wider litigation funding scheme for personal injury solicitors. In determining the issue, the Court had to weight competing textualist and contextualist interpretations of the clause.
The funding scheme was structured as follows:
- A lender (“C”) provided loans to the solicitors to fund their recoverable and irrecoverable costs;
- The Insurer provided: (i) Legal Expenses Insurance for clients entering into conditional fee arrangements with the solicitors; and (ii) FGI insurance for the solicitors themselves, in respect of their irrecoverable costs.
The Insured was a firm of solicitors which participated in the funding scheme. This involved:
- An umbrella agreement with C, setting out the general terms applying to the loans.
- An Irrecoverable Costs Loan Agreement (“ICLA”) with C, in respect of each individual loan.
- An FGI policy written by the Insurer in respect of each funded case.
The Insured encountered financial difficulties. C terminated the umbrella agreement, leaving large sums due from the Insured to C. Under a refinancing agreement, C advanced significant further sums to the Insured, which were used to repay the existing loans.
The Insured claimed under a number of the FGI policies with the Insurer. The claims were disputed, and were ultimately the subject of proceedings. At first instance, the court found in favour of the Insured.
On appeal by the Insurer, the central issue involved the proper construction of an exclusion clause in the FGI polices, providing that the FGI polices would not respond:
“where the terms and conditions of the Loan have not been strictly adhered to, including but not limited to any agreement entered into by [the Insured] and [C] to repay a Loan.”
The Court of Appeal had to determine whether or not the refinancing agreement constituted an “agreement entered into by [the Insured] and [C] to repay a Loan.” The Insurer argued that it did, such that the exclusion operated. In particular, the Insurer argued that:
- The words were to be taken as meaning what they said, so as to extend the exclusion for breach of the Loan itself to breach of any agreement to repay that Loan; and
- The refinancing agreement was just that: an agreement to repay the loans advanced under all the extant ICLAs.
The Court of Appeal, however, held that the refinancing agreement did not constitute such an agreement. In doing so, the Court held that, in order properly to understand the clause, one had to have regard both to the context of the litigation funding scheme, and, in circumstances in which the meaning of the clause was ambiguous, to business common sense.
The litigation funding scheme was a highly structured arrangement, with detailed provisions. However, nothing in the financing documents, nor in the FGI policies themselves indicated that future global refinancing was in the contemplation of the parties.
For these reasons, in the Court’s view the Insurer’s construction of the policies did not accord with the context and background of the FGI Policies or with business common sense. Properly construed, the disputed part of the clause instead referred only to any replacement agreement entered into as part of the same litigation funding scheme to repay the individual loan under the ICLA in question. The appeal was accordingly dismissed.
The case is an interesting illustration that, following recent Supreme Court judgments in cases such as Arnold v Britton  UKSC 36 and Wood v Capita Insurance Services Ltd [2017 UKSC 24, the courts will still give significant weight, in appropriate circumstances, to the underlying commercial arrangements and to business common sense, in construing contractual provisions. Notably, the Court took such an approach in this case, even in circumstances in which it found the Insurer’s more textualist (but ultimately unsuccessful) argument “beguilingly attractive for its simplicity and for the fact that it neatly gives meaning to every aspect of the exclusion clause.”