Broad Reading of Exclusion Clause Overturns Award of Damages
/Impact Funding Solutions Ltd v AIG Europe Insurance Ltd [2016] UKSC 57
The Arrangement
A firm of solicitors, Barrington Support Services (Barrington), entered into a Disbursement Funding Master Agreement (the contract) with Impact Funding Group (Impact). Under the agreement Impact entered into loan agreements with a group of Barrington’s clients who were seeking damages for industrial deafness. The loans provided Barrington with funds to use on behalf of its clients and pay for disbursements in the conduct of litigation.
How the Dispute Arose
Barrington failed to perform its professional duties towards its clients in the conduct of litigation by taking on unwinnable cases (which either lacked substance or were time barred) and misapplying the funds Impact had provided for disbursements. Barrington put itself in breach of warranty in its contract with Impact for failing to perform its professional duties towards its clients in the conduct of litigation. As a result, Impact was unable to recover its loans to Barrington’s clients because of the term of an After-the-fact insurance policy which covered the clients’ litigation exposure. Barrington was found liable for breach of contract and was ordered to pay £581,353.80 to Impact. On Barrington’s insolvency, Impact then sued AIG to recover its losses.
Barrington’s Professional Indemnity Policy (with AIG) insured them “against civil liability to the extent that it arises from private legal practice in connection with the insured’s firms practice.” However clause 6.6, headed Debts and Trading Liabilities, excluded cover for loss arising from a breach of contract. Trading debts were defined as a “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 providing legal services.”
The case turned on whether the breach of contract constituted a trading debt and fell within this exclusion.
The Supreme Court’s Ruling
By a 4:1 majority the SC held clause 6.6 operated to exclude AIG’s liability in this case. The starting point was to consider the relevant terms in their commercial and factual context. The majority was satisfied that the purpose of the insurance was to protect clients and third parties to whom a solicitor owes a duty of care and to cover professional undertakings made by a solicitor. Lord Hodge reasoned if Impact’s cause of action against Barrington was a breach of this contract unrelated to the provision of legal services, clause 6.6 would exclude cover. The general doctrine when considering an exemption clause is to construe the clause narrowly. Lord Hodge commented that “an exemption clause, to which that doctrine applies, excludes or limits legal liability which arises by operation of law, such as liability for negligence or liability in contract arising by implication of the law.” However the exemption in clause 6.6 was not of this nature and instead defined a primary obligation owed by AIG. The majority held that “the extent of the cover in the Policy is therefore ascertained by construction of all its relevant terms without recourse to a doctrine relating to exemption clauses.”
The majority found that the agreement was a contract for services to Barrington and that the exclusion therefore applied. Lord Toulson commented that “Impact was not a client or quasi-client of Barrington and the promise by Barrington … was part of a commercial bargain … It did not resemble a solicitor’s professional undertaking as ordinarily understood and it falls aptly within the description of “trading liability” which the minimum terms were not intended to cover.”
In his dissenting judgment Lord Carnwath took a more narrow view of clauses 6.6. He found that the obligations arising out of the loans to pay for Barrington’s disbursements were “essentially part and parcel of the obligations assumed by a solicitor in respect of his professional duties to his client rather than obligations personal to the solicitor.” So reasoning that the provision of the loans was an essential service to Barrington’s clients and therefore part of a solicitors’ professional obligation, the contract itself did not fall within the definition of a trading liability and cover could not be excluded.
Comment
Matthew Atkinson from Fee Langstone says the Supreme Court’s decision turned on particular words used in AIG’s policy and the Court’s view of the intended cover under the compulsory insurance scheme in place in England and Wales. Its application to New Zealand policies may be somewhat limited. However, the majority’s finding that an exclusion clause should not be read narrowly if it defines the scope of cover will prove useful to local insurers.
With the growth of litigation funding in New Zealand, there may be an increase disputes between lawyers and non-parties who have an interest in the litigation. While the case turned on its own facts, it provides an indication of the likely scope of a professional indemnity policy to such disputes.
