Impact Funding arranged loans to clients of the solicitors Barrington so that disbursements in industrial deafness claims could be paid. Barrington broke its warranty to perform its professional duties, the loans went unpaid, and Impact obtained damages; Barrington was insolvent. The Supreme Court held by a majority that Barrington’s professional indemnity insurer need not meet that liability, because it arose under a contract for services supplied to Barrington and was excluded as a trading liability.
The claim against the insurer
Barrington Support Services Ltd pursued industrial deafness claims for clients who could not obtain legal aid or otherwise afford the financial risk of litigation. Conditional fee agreements and legal expenses insurance shifted much of that risk, but disbursements, such as medical records and reports, and the insurance premium still had to be paid during a claim.
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Impact Funding Solutions Ltd provided those funds by lending to the clients. Its relationship with Barrington was governed by disbursements funding master agreements dated 8 June 2007 and 10 March 2008, whose relevant terms were in substance the same. Barrington contracted as principal, chose the clients, and paid an administration fee, defined as remuneration for Impact’s services, and a quarterly monitoring fee. It warranted that its services to each client would accord with the conditional fee agreement. It also undertook to repay Impact if, among other events, the client broke the credit agreement or Barrington’s act or omission made that agreement unenforceable.
Barrington failed to investigate the merits adequately and in time, failed to advise properly, and misapplied the funds. It breached its duty of care to the clients and its warranty to Impact. The clients could not repay. On 30 May 2013 His Honour Judge Waksman QC awarded Impact £581,353.80, representing the principal elements of loans which would not have been made had Barrington performed the contract. That finding of breach was not challenged. Barrington was insolvent, and Impact sought to recover the loss from AIG, Barrington’s professional indemnity insurer, under the Third Parties (Rights against Insurers) Act 1930. Under that Act, Impact could enforce only a right of indemnity which Barrington itself had against AIG.
The policy and the decisions below
The policy, written for 1 October 2009 to 30 September 2010, covered loss resulting from a claim for any civil liability arising from performing or failing to perform legal services. It excluded loss arising out of, based upon or attributable to a trading or personal debt; breach of a contract or arrangement for the supply to, or use by, the insured of goods or services in the course of providing legal services; and a guarantee, indemnity or undertaking connected with finance or another benefit provided to the insured. The Law Society’s minimum terms, required by the Solicitors’ Indemnity Insurance Rules 2009 under section 37 of the Solicitors Act 1974, contained substantially the same exclusion for debts and trading liabilities. Differences of drafting did not matter, and the policy gave the minimum terms precedence.
On 13 December 2013 Judge Waksman held that the exclusion applied and that Impact’s claim for an indemnity failed. On 3 February 2015 the Court of Appeal allowed Impact’s appeal. Looking to the purpose of the exclusion, it held that the loans were inherently part of the solicitors’ professional practice and that the warranty liabilities were professionally incurred and covered.
The majority reasoning
Lord Hodge, with whom Lord Mance, Lord Sumption and Lord Toulson agreed, read the insuring clause and the exclusions together in context. He found no ambiguity to resolve against the insurer, and the exclusion reflected a limitation authorised by the Law Society. He also rejected the argument that it had to be read strictly as an exemption clause. An exemption clause limits a liability arising by operation of law, such as liability for negligence. This clause instead helped to define the contractual cover. It had to remain consistent with the purpose of the insurance, but it did not need to be narrowed to preserve that purpose.
The statutory scheme was intended principally to protect clients. The policy also protected third parties to whom solicitors owe a duty of care or give professional undertakings. It did not insure every liability connected with legal work. If Impact’s claim was for breach of a contract under which it supplied services to Barrington, the exclusion applied even though the loss could also be traced to Barrington’s failures towards its clients.
Lord Hodge held that the master agreement was such a contract. The loans were financial services to the clients, but they were also a service to Barrington. Barrington dealt as principal and received a direct benefit: a solicitor must pay people instructed on a case whether or not the client provides funds. The funding avoided that burden, could pay both disbursements and insurance premiums, and enabled the firm to take on otherwise unaffordable claims and earn fees and success fees. Barrington paid for the arrangement and accepted the obligations which Impact had enforced. The benefit was therefore part of the service, not a side effect, and Impact’s claim arose from breach of that contract.
No limiting term was to be implied. Implication required business efficacy or a term so obvious that it went without saying, and neither test was met. Impact’s cause of action was independent of a client’s claim. Contributory negligence might answer a client who had carelessly described an injury, but it would not arise in the same way against Impact, whose entitlement might in some cases be larger. Excluding that separate commercial claim left the policy coherent and fitted its purpose.
Agreement and dissent
Lord Toulson, with whom the other majority judges agreed, would allow the appeal and restore Judge Waksman’s judgment. He treated the exclusion as marking the boundary of the compulsory cover, rather than as a clause to be narrowed in order to preserve an unexpectedly broad insuring clause. Impact was not a client or quasi-client. The promise enforced by its judgment was part of a commercial bargain between principals, not a solicitor’s professional undertaking as ordinarily understood. It was a trading liability which the minimum terms were not intended to cover.
Lord Carnwath dissented. He agreed that Barrington’s liability fell within the general cover, but not that the agreements were contracts for goods or services supplied to or used by Barrington in its practice. In his view the clause asked what the contract was for. The essential service was lending to the clients. The opportunity to earn fees and the protection against a client’s default were incidental benefits, not services comparable to goods used in the practice. He would have dismissed the appeal and upheld the Court of Appeal.
Verdict: The Court allowed AIG’s appeal by four votes to one and restored the trial judge’s decision. The policy exclusion applied to Impact’s contractual claim against the solicitors. Impact could not recover the award from AIG.
