Impact Funding Solutions Ltd v AIG Europe Insurance Ltd [2016] UKSC 57

Solicitors Barrington breached warranties to litigation funder Impact under a disbursements funding agreement. When Barrington became insolvent, Impact sought to recover from its professional indemnity insurer AIG. The Supreme Court held the claim fell within the policy's exclusion for breaches of contracts supplying services to solicitors.

Facts

Impact Funding Solutions Ltd (“Impact”) entered into Disbursements Funding Master Agreements (“DFMAs”) with solicitors Barrington Support Services Ltd (“Barrington”). Under this arrangement, Impact made loans to Barrington’s clients to cover disbursements (including medical reports and after-the-event insurance premiums) in industrial deafness litigation funded by conditional fee agreements. Barrington failed to investigate the merits of claims adequately and misapplied funds, breaching its duties to its clients and warranties given to Impact under the DFMAs (notably clauses 6.1 and 13.1). The clients could not repay the loans. Impact obtained judgment against Barrington for £581,353.80. Following Barrington’s insolvency, Impact sought to recover from Barrington’s professional indemnity insurer, AIG, under the Third Parties (Rights against Insurers) Act 1930.

The Policy, written in accordance with the Law Society’s Minimum Terms under the Solicitors’ Indemnity Insurance Rules 2009, provided broad cover for civil liability arising from the performance of legal services, but contained an exclusion for losses arising from breach of “any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of providing Legal Services”.

Issues

The principal issue was whether Impact’s claim against Barrington fell within the policy exclusion – specifically, whether the DFMA constituted a contract for the supply of services to Barrington in the course of providing legal services. A secondary issue was the proper approach to construing exclusion clauses in professional indemnity insurance policies of this kind.

Arguments

Appellant (AIG)

AIG argued that the DFMA was a contract for the supply of services to Barrington and that the exclusion clearly applied. Barrington received valuable benefits including payments to third party suppliers, funding into its client account for disbursements, and the ability to take on cases and earn fees without having to fund disbursements itself.

Respondent (Impact)

Impact submitted that exclusion clauses should be construed strictly. The DFMA’s essential purpose was to provide loans to clients, not services to Barrington. Any benefit to Barrington was incidental. The wide terms of cover should prevail and the exclusion narrowly read.

Judgment

The Supreme Court allowed AIG’s appeal by a majority (Lord Mance, Lord Sumption, Lord Toulson and Lord Hodge; Lord Carnwath dissenting).

Lord Hodge’s reasoning

Lord Hodge held that the contra proferentem doctrine had no role where there was no ambiguity, and the general doctrine that exemption clauses are construed narrowly did not apply because the relevant exclusion did not exclude a liability arising by operation of law – it formed part of the delineation of cover. The cover and exclusions must be read together against the regulatory background.

The DFMA was a contract for the supply of services to Barrington for four reasons: (1) Barrington contracted as principal, not as agent for its clients; (2) Barrington obtained a clear benefit from the funding, since solicitors are personally liable for disbursements; (3) the benefit was not incidental but part of a wider commercial arrangement enabling Barrington to take on otherwise unfundable claims and earn fees; and (4) Barrington paid an administration fee, undertook to repay Impact in certain circumstances, and gave the warranty on which Impact succeeded.

Applying Marks and Spencer plc v BNP Paribas, no term restricting the exclusion could be implied as it was not necessary for business efficacy. Impact’s claim under the DFMA was an independent cause of action, distinct from the clients’ claims, and excluding it caused no incoherence in the Policy.

Lord Toulson’s reasoning

Lord Toulson emphasised that the Minimum Terms used a broad insuring clause combined with a list of exclusions to delineate the liabilities against which solicitors must be insured for public protection. The exclusions identify liabilities not requiring compulsory cover. The arrangement between Impact and Barrington was a commercial bargain between principals for mutual benefit; Impact was not a client or quasi-client and the warranty was not a professional undertaking. It fell aptly within “trading liabilities”.

Lord Carnwath (dissenting)

Lord Carnwath would have upheld the Court of Appeal’s decision. The clause directed attention to the purpose of the contract, and the composite phrase “goods or services” implied services supplied to or used in the practice comparably to goods. The DFMA’s essential purpose was lending to clients; benefits to Barrington were incidental.

Implications

The decision clarifies the proper approach to construing exclusions in solicitors’ professional indemnity policies issued in accordance with the Law Society’s Minimum Terms. The Court confirmed that such exclusions are not to be construed with a presumption of narrowness; instead they form part of the overall delineation of cover, reflecting policy decisions about what liabilities must be compulsorily insured for client protection.

The decision is significant for solicitors who fund litigation through arrangements with third-party funders: commercial obligations to such funders, even where connected with legal services provided to clients, may fall outside the protection of professional indemnity cover where they constitute trading liabilities. The case draws an important distinction between professional liabilities owed to clients (and third parties such as disappointed beneficiaries or recipients of solicitors’ undertakings) and commercial liabilities arising from arms-length agreements with suppliers of services to the practice.

The judgment also confirms that the contra proferentem doctrine has limited application where the contractual language is clear, particularly where the exclusion replicates terms approved by a regulator. The boundaries of professional liability cover are matters of contractual construction in their regulatory context, and the courts will not imply restrictions on exclusions absent necessity for business efficacy.

Verdict: Appeal allowed. The Supreme Court (by a majority, Lord Carnwath dissenting) held that Impact’s claim fell within the policy exclusion for breaches of contracts for the supply of services to the insured in the course of providing legal services. The judgment of Judge Waksman QC was restored.

Source: Impact Funding Solutions Ltd v AIG Europe Insurance Ltd [2016] UKSC 57