February 3, 2015

Impact Funding Solutions Limited v Barrington Support Services Limited  [2015] EWCA Civ 31 involved a claim under the Third Parties (Rights Against Insurers) Act 1930 by litigation funders who had obtained a judgment against a firm of solicitors in liquidation. In its judgment, the Court of Appeal addressed the scope of the trade debts exclusion in a solicitors’ professional indemnity policy. The Court of Appeal’s decision is considered by Stephen Innes of 4 New Square.

Mark Cannon QC from 4 New Square represented AIG in the Court of Appeal.

THE FACTS

A number of claimants sought to bring industrial deafness claims and instructed solicitors Barrington Support Services Limited (“Barrington”) pursuant to CFAs. In order to pay for disbursements such as expert reports, loans were provided to the claimants by Impact Funding Solutions Limited (“Impact Funding”). ATE insurance policies indemnified the claimants for any disbursements made.

The relationship between Impact Funding and Barrington was governed by a Disbursements Funding Master Agreement (“the DFMA”). Under the DFMA Barrington indemnified Impact against any liabilities or losses incurred by Impact arising out of:

(a)        any breach of its undertaking to comply with all applicable laws regulations and codes of practice from time to time in force; and

(b)       any negligence or breach of contract by Barrington in its services to the claimants.

Numerous deafness claims were abandoned as statute barred or unmeritorious. ATE insurers declined to reimburse Impact’s loans for disbursements.

Impact brought a claim against Barrington relating to 146 cases in which Barrington was said to be in default of its obligations under the DFMA by failing to undertake proper merits assessments and by using loans for improper purposes not authorised by the DFMA. Impact obtained judgment against Barrington.

Impact Funding then brought a claim in respect of that judgement under the Third Parties (Rights Against Insurers) Act 1930 against Barrington’s insurers, AIG Insurance UK Limited (“AIG”).

AIG relied upon the clause in its policy, reflecting the Solicitors Minimum Terms, excluding liability in respect of any:

“(a)      trading or personal debt of any insured, or

(b)       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…”

At first instance HHJ Waksman QC held that AIG was entitled to rely on part (b) of this clause because Impact Funding was providing a service to Barrington in making the loans to cover the disbursements and thus enabling Barrington to enter into the potentially profitable CFAs. Barrington’s liability to repay the disbursements arose from its breach of the contract pursuant to which this service was provided – the DFMA.

On appeal to the Court of Appeal, Impact Funding argued that the Judge had been wrong to characterise the DFMA as a “contract or arrangement for the supply to…any insured of…services in the course of” Barrington’s practice.

THE COURT OF APPEAL’S DECISION

The leading judgment of the Court of Appeal, with which Patten and Gloster LJJ agreed, was given by Longmore LJ.

Longmore LJ’s starting point was that the essential point of the exclusion clause in the policy was to prevent insurers from being liable for the liabilities of a solicitor in respect of aspects of his practice which affect him personally as opposed to liabilities arising from his professional obligations to his clients. Thus insurers would not cover the solicitor’s liability to a photocopier supplier or to a company which cleaned the solicitor’s offices, or to any lessor or mortgagor of the solicitor’s office premises.

Longmore LJ concluded that the solicitor’s obligations arising out of loans made to cover disbursements in litigation were part and parcel of the obligations assumed by a solicitor in respect of his professional duties to his client; those obligations were inherently part of his professional practice and were assumed as an essential part of his duty to advise his client, and a solicitor who negligently advised his client that a claim was likely to succeed and caused the client to incur disbursements needlessly, would be liable to the client for those disbursements.

The Court also considered whether cases dealing with the incidences of VAT would cast any light on whether Impact Funding provided a service to Barrington caught by the exclusion. Longmore LJ concluded that such caselaw was not helpful, because the decisions were heavily dependent on the precise facts of the individual case, and the Supreme Court had emphasised that they did not create universal rules; the facts of the present case were different from those in the reported decisions; in any event, whatever the VAT position, it was still necessary to look at the overall picture when considering the exclusion clause.

COMMENTARY

The part of the judgment giving Longmore LJ’s analysis of the application of the debts and trading liabilities exclusion of the policy is extremely brief, particularly bearing in mind that – because of the Minimum Terms – the operation of this clause is relevant to all solicitors’ indemnity policies.

Thus he did not refer to Sutherland Professional Funding Ltd v Bakewells [2013] Lloyd’s Rep IR 93 in which HHJ Hegarty QC ruled at a preliminary issue trial that solicitors were not entitled to be indemnified by their professional liability insurers against a claim by a finance company which provided interim funding for personal injury litigation, because the claim fell within the trade debts exclusion. In the present case, at first instance, HHJ Waksman QC had agreed with the earlier decision.

As noted above, his Lordship’s starting point was that purpose of the exclusion clause was to prevent insurers from being liable for the liabilities of a solicitor in respect of aspects of his practice which affect him personally as opposed to liabilities arising from his professional obligations to his clients. This was stated as a fact, without being supported by any reasoning. Since sub-clause (a) refers to a “personal” liability, but sub-clause (b) does not, it is not necessarily self-evident that in sub-clause (b) the distinction between personal and professional liabilities should be the critical one, rather than a distinction between liabilities to a service provider and liabilities to a client.

This decision would also seem likely to lead to difficulty in other cases. It was regarded as fundamental that the duties owed to funder were also owed to the client. But it is easy to imagine other cases where the agreement with the funder imposes additional duties on the solicitor which he would not also owe to the client. The logic of the Court of Appeal’s decision would seem to be that the solicitor would not be indemnified against a claim by the funder in relation to such breaches of the agreement, but would be covered in respect of other breaches which did coincide with breaches of the duty to the client.

Editorial Comment: on 26 October 2016, the Supreme Court allowed AIG’s appeal. The Supreme Court decision ([2016] UKSC 57) is addressed separately here.

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