The Supreme Court handed down it's long awaited decision on the case of Impact Funding Solutions limited against AIG on 26 October 2016.  The decision is relevant for solicitors and their PI insurers in providing guidance on the debts and trading liabilities exclusion contained within the SRA Minimum Terms and Conditions.

The facts - a summary

Impact Funding provided loans to clients of a Law firm. The funds were to be held by the firm on behalf of the clients to finance disbursements in the conduct of litigation for industrial deafness.

The firm had entered into two 'Disbursement Funding Master Agreements' with Impact Funding, as part of the arrangement for the provision of finance to the clients.  Pursuant to the Master Agreements, the firm undertook to repay the loans which Impact had made to the clients including in circumstances where the clients breached the credit agreement or where any credit agreement was unenforceable as a result of an act or admission by the firm. The firm also warranted to Impact that it would perform its professional duties to its clients.

The firm failed to adequately or timeously investigate the merits of the claims and also misapplied the funds provided by Impact. Impact issued proceedings against the firm and was awarded damages of £581,353.80, representing the principle elements of the loans which would not have been made if the firm had not breached its contract with Impact. Following the firm's insolvency, Impact sought to recover this sum from the firm's professional indemnity insurers, AIG, under the Third Parties (Rights against Insurers) Act 1930.

First Instance Decision & Appeal

The Court at first instance held that Impact's claim against AIG failed. The Court of Appeal found in favour of Impact on the basis that the loans were inherently a part of a solicitor's practice and that the personal liabilities incurred pursuant to the warranties were incurred professionally and therefore fell within the cover under the policy.

Supreme Court ruling

The Supreme Court overturned the Court of Appeal, finding that Impact's cause of action arose by reason of a breach of a term of the contract or arrangement by which Impact supplied services to the firm. In these circumstances, the trading debts and liabilities exclusion under the policy excluded cover. The Court acknowledged that the breach of warranty, on which Impact relied, was a breach of duty owed by the firm to its clients, but noted that Impact's claim was not derived from the clients' claims.

Implications for solicitors

In conclusion, whilst the decision will be pleasing news for insurers, solicitors will need to be conscious of their potential personal exposure in circumstances where they employ litigation funding schemes.