In Impact Funding Solutions Ltd v AIG Europe Insurance Ltd (2016), the Supreme Court yesterday overturned the Court of Appeal's finding that a solicitor's PI insurer is obliged to indemnify a solicitor who is liable to a disbursement funder for breaches of the funding agreement.
The solicitors, Barrington Support Services Ltd ("Barrington") entered into an agreement with Impact Funding Solutions Ltd ("IFS") under which IFS entered into loan agreements with Barrington's clients and provided funds for Barrington to pay disbursements and ATE insurance premiums in connection with the clients' industrial deafness claims. The loans were to be repaid by funds received from the other parties in successful claims and from the ATE insurance in cases that failed. In the event that the ATE insurers did not pay for any reason, Barrington agreed to repay the loans to IFS.
Barrington breached its duties to its clients by not investigating the merits of the claims adequately and/or misapplying the funds provided by IFS. These breaches also amounted to breaches of undertaking and/or warranty in Barrington's contract with IFS that it would perform its professional duties to the clients. As a result, several of the claims were abandoned.
The breaches also invalidated the clients' ATE policies, which were avoided. IFS was unable to recover the loans and sought recovery instead from Barrington. It obtained judgment against Barrington for damages of £581,353.80 and the issue in this case was whether Barrington's professional indemnity insurers ("Insurers") were obliged to indemnify it in respect of that liability.
Insurers contended that the liability was covered by an exclusion in the policy for liabilities arising from any "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". Such an exclusion is permitted under clause 6.6 ('Debts and trading liabilities') of the Solicitors Regulation Authority Minimum Terms and Conditions of Professional Indemnity Insurance ("the MTC").
At first instance, His Honour Judge Waksman QC held that the exclusion applied. IFS was providing a service to Barrington by making available to it funding without which the claims would not have been pursued and Barrington would not have had the opportunity to earn fees from them.
The Court of Appeal disagreed. It considered that the "essential purpose" of the exclusion was to prevent insurers being liable for a solicitor's liabilities "in respect of those aspects of his practice which might affect him or her personally as opposed to liabilities arising from his professional obligations to his or her client". So, for example, PI insurers would not cover liability incurred by a solicitor to the supplier of a photocopier or cleaning services. However, such personal obligations were to be distinguished from obligations incurred in connection with the solicitor's duty to his clients. The loans in question here, made to cover disbursements in intended litigation, were "essentially part and parcel of the obligations assumed by a solicitor in respect of his professional duties to his clients rather than obligations personal to the solicitor". Hence Insurers were liable to indemnify Barrington.
Insurers appealed that decision to the Supreme Court.
The Supreme Court's Decision
In a majority judgment (4 to 1, with Lord Carnworth dissenting) the Supreme Court has overturned the Court of Appeal's judgment and confirmed that the debts and trading liabilities exclusion does apply to IFS' claim.
In so doing, the Supreme Court considered two questions:
- Whether the contract between IFS and Barrington was a contract or arrangement for the supply of services to Barrington in the course of its provision of legal services; and
- Whether it was necessary to imply a restriction into the exclusion clause limiting its effect in order to make it consistent with the purpose of the policy.
On the first question, Lord Hodge, giving the leading judgment, considered that IFS was providing a service to Barrington for 4 reasons:
- Barrington contracted with IFS as a principal and not as an agent for the clients;
- Barrington clearly obtained a benefit from the funding of disbursements since it enabled the claims to be fully funded;
- This was not an incidental or collateral benefit to Barrington derived from a service provided to its clients but was part of a wider arrangement by which Barrington was able to take up claims which its clients could not otherwise afford and so to earn fees; and
- It was a service for which Barrington paid an administration fee and undertook obligations under the funding agreement, such as the obligation to repay the loan if the client breached the credit agreement and the undertaking and warranty on which IFS had won its claim.
The claim therefore arose out of the breach by Barrington of a contract for the supply of services to Barrington and the exclusion applied. Lord Toulson agreed and also added that this conclusion accords well with the essential purpose of the exclusion and the scope of cover intended to be provided by the MTC. He highlighted two points in relation to the nature and scope of the policy. First, that the purpose of the statutory scheme under which the MTC were issued was to protect consumers of solicitors' services. The second, related, point was that this was a professional liability policy and was, therefore, intended to apply to the sort of liabilities which are commonly understood as being professional liabilities. He summarised these as liabilities that a solicitor might incur (i) to his client in the conduct of his retainer; (ii) under undertakings given to third parties in the course of acting for clients; and (iii) to third parties in tort as "quasi-clients".
So far as the second question was concerned, there was no basis for the implication of any additional words into the exclusion so as to restrict its scope. A term would only be implied if, on an objective assessment of the terms of the contract, the term to be implied was necessary to give the contract business efficacy or was so obvious that it went without saying. It could not be said that the policy would lack commercial or practical coherence if a term restricting the scope of the exclusion were not implied. Although the breach of duty on which IFS' claim was based was the breach of Barrington's duties to its clients, Impact's cause of action was an independent one and excluding it created no incoherence in the policy. Indeed, it was consistent with the purpose of the policy, which was to ensure protection was provided to clients of solicitors, if such a claim was excluded.
This decision provides welcome clarification of the application of the trading liability exclusion, which had been considerably narrowed by the approach taken by the Court of Appeal, and will therefore be welcomed by insurers providing cover to solicitors and potentially other professional indemnity insurance which may contain similar wording. The clarification is particularly welcome for solicitors' insurers at a time when many law firms are exploring increasingly complex business models and arrangements, particularly in relation to litigation funding.
It also provides helpful clarification of the questions of construction to be applied to the interpretation of the exclusions in the MTC, which delineates the liability against which solicitors are required to be insured by a process of elimination through the combination of a very broad insuring clause with a list of exclusions. In that context, the exclusions define the types of liability which the policy covers rather than excluding or limiting liabilities which would otherwise arise and they are, therefore, not subject to the narrow interpretation that would otherwise apply under the contra proferentem rule.