DAC Beachcroft Insurance Adviser Alert: Court of Appeal decision on meaning of 'trading debts' in MTCs reverses previous authority
Published 6 February 2015
Impact Funding Solutions Ltd v Barrington Support Services Ltd
In a departure from earlier first instance decisions, the Court of Appeal has decided that a solicitors' professional indemnity insurance policy responds to claims arising in relation to disbursement loans made by litigation funders, and such claims cannot be excluded by the 'trading debts' exclusion in the minimum terms and conditions (MTCs).
The Claimant, Impact Funding Solutions Ltd ("Impact Funding") was a litigation funder, specialising in providing loans to personal injury claimants for disbursements they would incur in litigation, such as the preparation of expert reports. Ordinarily, those disbursements would be recovered in litigation from defendants, or from legal expenses insurance/ATE policies.
The Defendant solicitors, Barrington Support Services Ltd, had contractual arrangements in place with Impact Funding, which permitted the solicitors to engage clients by referral from claims management companies, and to draw down lending on behalf of those clients for disbursements. The cases were pursued by way of CFAs.
The Court of Appeal found that the solicitors:
- Failed to assess the merits of the cases it pursued; and
- Used monies drawn down in loans from Impact Funding to pay for referral fees rather than genuine disbursements.
ATE insurers refused to pay for the costs of unmeritorious actions which were abandoned, including Impact Funding's loans. Impact Funding obtained judgment against the solicitors. These solicitors went into liquidation.
Accordingly, Impact Funding pursued the solicitors' professional indemnity insurers under the Third Parties (Rights Against Insurers) Act 1930. Insurers understandably contended that cover for the claim for repayment of loans was excluded as a trading debt or liability, under clause 6.6 of the MTCs. Insurers succeeded at first instance, and Impact Funding appealed.
In deciding the dispute, the Court of Appeal found that the purpose of the exclusion in the MTCs was to exclude insurers' liability for losses which affect the solicitor personally, as opposed to those arising from professional obligations to clients. The court found that liabilities of the nature in dispute here were part and parcel of a solicitor's professional practice, and therefore stood apart from, for example, a liability to the supplier of a photocopier.
The trading debts exclusion has been the subject of scrutiny in this context previously.
In a 2013 first instance decision (Sutherland Professional Funding Ltd v Bakewells) a very similar situation arose – loans were taken out on behalf of the solicitors' clients to fund disbursements in personal injury litigation, and the claims were pursued on a basis which caused ATE insurers to decline cover. The disbursement funders pursued the solicitors, who involved their insurers as Part 20 defendants. The claim against insurers was decided by way of preliminary issue, and the court found firmly in favour of insurers on the trading debts issue, confirming that the "practice of the law is a business as well as a profession" and drew no distinction between, for example, liabilities for rent or supplier charges and the liability for these loans. The court held that there was no link between, on the one hand, the solicitors' professional failures in the pursuit of the cases on behalf of clients, and the contractual loan liabilities on the other.
The Court of Appeal has turned the previous finding on its head, on very similar facts. One is bound to have sympathy with insurers in the Impact Funding case, since the Court of Appeal's approach stretches the interpretation of the trading debts exclusion in the MTCs. Whilst the background to the disbursement loan debts was indeed findings of professional negligence, the debts themselves arose out of breach of private contractual arrangements with the funder. If such loans used to fund disbursements are all part of a solicitor's professional practice, and as such cannot be construed as trading debts, what else falls into the same category? Salaries owed to staff, who are at least as closely involved in the firm's professional obligations, for example? Clearly, these ought reasonably to be construed as trading debts, but the Court of Appeal's decision must give pause for thought as to where the line is drawn. Notwithstanding this decision, it is important to remember that of course each case will be decided on its own facts, and in most cases whether a liability should be construed as a trading debt should be considerably more straightforward.
Insurers may also be considering whether they believed the MTCs were intended to cover this scenario and whether this is a point to be raised in reform discussions.