Neutral Citation Number: [2015] EWCA Civ 31
Case No: A3/2014/0103
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
HIS HONOUR JUDGE WAKSMAN QC (Sitting as a High Court Judge)

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Tuesday 3rd February 2015
Before:

THE RIGHT HONOURABLE LORD JUSTICE LONGMORE
THE RIGHT HONOURABLE LORD JUSTICE PATTEN
and
THE RIGHT HONOURABLE LADY JUSTICE GLOSTER
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Between:

	IMPACT FUNDING SOLUTIONS LIMITED	Appellant/
Claimant	
	- and -		
	BARRINGTON SUPPORT SERVICES LIMITED (FORMERLY LAWYERS AT WORK LIMITED)
-and-
AIG EUROPE INSURANCE UK LTD
(Formerly known as Chrtis Insurance UK Limted)	Defendant

Respondent/Third Party	
			
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 (Transcript of the Handed Down Judgment of
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No:  020 7404 1400, Fax No: 020 7831 8838
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Mr Timothy Dutton QC (instructed by Ozon Solicitors Ltd) for the Appellant
Mr Mark Cannon QC (instructed by Mayer Brown LLP) for the Respondent

Hearing dates: 9th December 2014
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Judgment
Lord Justice Longmore: 
Introduction
1.	The withdrawal of legal aid for personal injury cases and the consequent arrival on the scene of Conditional Fee Agreements (“CFAs”) and After the Event (ATE”) insurance, combined with already existing Claims Management Companies (“CMCs”) and Legal Expenses Insurance (“LEI”) have given rise to many novel legal problems such as those arising from coal-miners’ diseases, considered by this court in Greene Wood v Templeton Ins. Co Ltd [2009] 1 WLR 2013
2.	This appeal concerns a company, Impact Funding Solutions Ltd (“Impact”) which makes itself responsible for disbursements incurred in actions to be brought by claimants; the claimants in the present case asserted that they suffer from deafness as a result of their working environment.   Such claimants need, for example, to obtain and pay for expert reports before such claims can hope to succeed and Impact provides funds to cover disbursements of this kind by way of loans made to the claimants.  If the claim is successful, such costs can be expected to be recoverable from defendants; but if the claims fail or are settled on unfavourable terms, the loans made by Impact together with interest have to be recovered in some other way.  If the claimants have LEI or ATE, the loans may be recoverable from insurers.  But if the insurers do not pay for any reason e.g. valid avoidance of the policy or denial of liability under the policy, the solicitors (rather than their clients) will be the secondary party to which Impact will look for recovery.  Solicitors will, of course, carry professional indemnity insurance and the question on this appeal is whether those professional indemnity insurers are obliged to indemnify solicitors who are liable to reimburse the loans made to their clients in order to defray the disbursements made by those clients.
3.	The solicitors in the present case are a limited liability company called Barrington Support Services Ltd (“Barrington”).  It is now in liquidation but has been successfully sued by Impact who has obtained judgment in the sum of £ 581,353.80.  Impact has now brought proceedings against Barrington’s insurers, AIG Europe Ltd (“AIG”), pursuant to the Third Parties (Rights Against Insurers) Act 1930 (“the 1930 Act”).  AIG is entitled in those proceedings to rely on any defence which it would have had if it had been sued by its insured, Barrington.
4.	AIG’s policy covering Barrington provided that the “Minimum Terms and Conditions” take precedence over any terms in the policy.  These Minimum Terms are those required by the Solicitors’ Indemnity Insurance Rules during the relevant policy period.  Clause 1 of the Minimum Terms provides:-
“Civil Liability
The insurers must indemnify each insured against civil liability to the extent that it arises from private legal practice in connection with the insured firm’s practice …”
Private legal practice is defined as:-
“… the provision of services in private practice as a solicitor or Registered European Lawyer including, without limitation:
a)	providing such services in England, Wales or anywhere in the world, whether alone or with other lawyers in a Partnership permitted to practise in England and Wales by rule 12 of the Solicitors’ Code of Conduct 2007; and
b)	the provision of such services as a secondee of the Insured Firm; and
c)	any Insured acting as a personal representative, trustee, attorney, notary, insolvency practitioner or in any other role in conjunction with a Practice; and
d)	the provision of such services by any Employee; and
e)	the provision of such services pro bono publico.”
5.	AIG now accepts that Barrington’s liability to repay the loans made by Impact by way of disbursements falls, in principle, within the general cover provided by clause 1 of the Minimum Terms but contends that its own liability to indemnify Barrington is excluded by sub-clause 6 of clause 6 which is headed “Exclusions”:-
“6. The insurance must not exclude or limit the liability of the insurer except to the extent that any claim or related Defence Costs arise from the matters set out in this clause 6 ….
6.6 Debts and Trading Liabilities
Any
(a)	trading or personal debt of any insured, or
(b)	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 the Insured Firm’s Practice ….”
6.	His Honour Judge Waksman QC, sitting in the High Court, held that AIG was entitled to rely on this clause broadly because Impact was providing a service to Barrington in making the loans to cover the necessary disbursements and thus enabled Barrington to enter the potentially profitable CFAs.  Barrington’s liability to repay the disbursements arose from Barrington’s breach of the contract pursuant to which this service was provided and therefore came within exception 6.6(b) of the insurance.  There is now an appeal.
Facts and relevant documentation
7.	A sister company of Impact operated a data management system called “Veracity” whereby it made available to Barrington details of potential industrial deafness claims provided to the system by CMCs.  It was then up to Barrington to decide whether it wanted to take up any particular claim and, if so, to seek instructions to pursue it.  If it did so decide, a representative of the CMC visited the chosen claimant, obtained consent to process the claim and arranged for the claimant (if he or she was willing) to sign both a CFA between Barrington and the claimant and a loan agreement between Impact and the claimant.  This loan agreement provided that Impact would advance to the claimant sums to cover disbursements during the course of proceedings and constituted a “credit agreement” under the Consumer Credit Act 1974 (“the Act”).  The claimant was also asked to sign a proposal for ATE insurance which indemnified the claimant for his liability for costs if the claim was unsuccessful and also indemnified the claimant for any disbursements made (as well as the premium under the ATE policy).
8.	Once Barrington received these documents, Barrington would arrange for the ATE to incept and would draw down the loan which Impact agreed to provide.  
9.	The relationship between Impact and Barrington was governed by a Disbursements Funding Master Agreement (“DFMA”) which recited (1) that Impact facilitated the presentation of personal injury claims through its online claims introduction and tracking service (Veracity) and provided funding for disbursements in respect of those claims and (2) that Impact and Barrington wished to enter the DFMA to record terms agreed between them in relation to their mutual work with clients.  Relevant clauses of the agreement are:-
“2. CREDIT FACILITIES
2.1 [Impact] shall offer Credit Facilities to Clients selected by the Firm in its discretion up to the aggregate sum set out in Schedule 3 (but without any obligation of [Impact] to make advances totalling such sum or at all).
2.2 The Firm agrees to pay (i) the Administration Fee to [Impact] on execution of each Credit Agreement by [Impact] and (ii) the first instalment of the Quarterly Monitoring Fee to [Impact] on execution of this Agreement.  [Impact] may adjust the amount of the Quarterly Monitoring Fee, by writing to the Firm giving three months notice, to reflect any increase in the Total Approved Facility.
2.3 The Firm may not charge Administration Fee, the Quarterly Monitoring Fee or any other fee or charge to the Customer in relation to the Credit Agreement.  The Firm acknowledges that if it were to do so it would, inter alia, render the Credit Agreement unenforceable.
2.4 The Firm shall use all reasonable endeavours to advise relevant Clients of the availability of Credit Facilities (except in the circumstances set out in Clause 8), but the Firm shall not be involved with the introduction of Credit Agreements to Clients.
3. PAYMENT BY [Impact]
As soon as reasonably practicable following execution of a Credit Agreement by [Impact], [Impact] will pay the cash price of the Disbursements as follows:
3.1 to the relevant third party suppliers (as directed by the Firm);
3.2 as to the remaining cash price of the Disbursements, to the Firm’s client account as notified by the Firm to [Impact] in writing.
All payments made by [Impact] will be accompanied or followed by a memorandum itemising the same.
…
6. Undertakings by the Parties
Each party undertakes and represents to the other that:
6.1 It shall comply with all applicable laws, regulations and codes of practice from time to time in force (including, without limitation the Act …) and each party indemnifies the other against all loss, damages, claims, costs and expenses … which the other party may suffer or incur as a result of any breach by it of this undertaking …
7. Repayment Undertaking By the Firm
7.1 The Firm undertakes to pay [Impact] all sums payable by a Customer under a Credit Agreement on or before the repayment date specified in that Credit Agreement out of either:
a) the damages paid to a Customer under the relevant PI claim, or
b) the proceeds of any relevant Insurance Product acquired by the Customer and funded by that Customer under the Credit Agreement.
7.2 In the event of any breach of a Credit Agreement by the Customer, if any circumstances arises which entitles [Impact] to terminate a Credit Agreement or in the event of the unenforceability of a Credit Agreement against the Customer by [Impact] where such unenforceability arises as a result of any act or omission of the Firm, the Firm undertakes and agrees to pay to [Impact] immediately upon first demand an amount equal to all sums payable by the Customer under that Credit Agreement.  A certificate signed by [Impact] or other duly authorised officer for the time being of [Impact] shall, save for manifest error, be conclusive evidence of that amount payable by the Firm to [Impact] pursuant to this clause and such certificate shall be final and binding on the Firm.
…
13.The Firm’s Services for the Customer
The Firm represents and warrants to [Impact] that:
13.1 the services provided or to be provided by the Firm to the Customer shall be provided to the Customer in accordance with their agreement with the Customer as set out in the relevant Conditional Fee Agreement;
13.2 it has provided or will provide (as the case may be) each Customer with full details of the cost of the service provided or to be provided by the Firm;
13.3 it will, in discussing Insurance Products with Clients, make it clear to those Clients that it undertakes those discussions on its own behalf, and not on behalf of [Impact] or of any other third party;
13.4 it shall indemnify and keep indemnified [Impact] against all claims, damages, costs and expenses (including legal costs on a full indemnity basis), losses or liabilities incurred by [Impact] arising out of any action, omission, negligence or breach of contract by the Firm.”
10.	The Administration Fee and Quarterly Monitoring Fee were defined in clause 1 as follows:-
“Administration Fee		means a fee in respect of each Credit Agreement in the sum as notified by [Impact] to the Firm from time to time and payable by the Firm, together with Value Added Tax (if applicable), by way of remuneration for the services of [Impact].
Quarterly Monitoring Fee		means an annual fee equal to 1% of the total Approved Facility which is payable by the Firm in quarterly instalments, together with Valued Added Tax (if applicable), by way of remuneration for the Audit performed by [Impact].”
11.	The careful arrangements put in place by all this documentation fell apart because Barrington made little attempt to assess the merits of the claims which it proposed to conduct on behalf of its clients pursuant to the CFAs.  This failure was, of course a breach of duty on the part of Barrington towards its client but also constituted a breach of clause 13 (and perhaps clause 6) of the DFMA.  As a result numerous claims were abandoned for reasons of limitation or because they were intrinsically unmeritorious.  Worse, monies drawn down from Impact pursuant to the loan agreements signed by the claimants was not used for genuine disbursements but to pay introduction (and other referral fees) to the CMCs who had found the claimants in the first place and also to pay fees to a company called LCS Sprint for work that could and should have been done by Barrington.  Not surprisingly the ATE insurers declined to pay the costs of the abandoned actions or to reimburse the loans made by Impact to pay for genuine disbursements.
12.	In these circumstances, Impact looked to Barrington to repay the loans made by Impact in respect of disbursements and instituted proceedings against Barrington.  Barrington, however, went into creditors’ voluntary liquidation on 4th July 2011 and Impact has resorted to the 1930 Act in order to claim against Barrington’s professional indemnity insurers.  Initially Impact proved for the outstanding amount of the loans pursuant to clause 7.2 of the DFMA.  In order to operate the provisions of the 1930 Act, however, it was necessary for Impact to obtain a judgment against Barrington which it proceeded to do in the Mercantile Court in Manchester.  For this purpose it relied not on clause 7.2 but on clauses 6.1 and 13.1 of the DFMA.  Barrington did not appear at the trial nor did AIG seek to be joined to Impact’s action as a defendant.  Impact did appear by counsel and put before His Honour Judge Waksman a schedule of 146 cases showing how Barrington was in default of both its obligations to the claimants under the CFAs and its obligations under clauses 6 and 13 of the DFSA.  The judge was taken through this schedule which was proved by a statement of Ms Wan of Impact’s solicitors.  He was also taken through the detail of 4 sample cases which showed that Barrington had made no adequate assessment of the claims before getting the claimants to sign the CFA and had also, on occasion, used the loans for the improper purposes which I have already indicated.
13.	A proper assessment of the merits of a claim was important not merely because Barrington had a duty of care to its clients but also because ATE insurers required such an assessment to be made.  There were two insurers in this case, Templeton and Hansell, each of which required that no claim should be accepted by Barrington from the relevant CMC unless the prospect of success was 55 per cent or 51 per cent respectively.  There was no sign that any proper assessment was ever done.
14.	Having set out the evidence the judge proceeded to analyse it.  He concluded that the claims had been abandoned because they had not been adequately assessed at the outset.  He also concluded that the loans were largely, if not entirely, used for improper purposes not authorised by the DFMA and were not chargeable to the clients.  He held, further, that these breaches of duty constituted breaches of clause 6 of the DSFA which caused loss in the amount of the loans made for disbursements and not repaid.  He held further that the improper use of the loans and the inadequate assessment of the claims invalidated the ATE insurance policies.  The ATE insurers were, therefore, not obliged to reimburse the loans pursuant to their policies which required both a proper assessment of the claims and that the claims, once accepted, not be abandoned without the ATE insurers’ consent.
15.	He accordingly gave judgment against Barrington for the sum claimed (£581,353.80) and interest after a two day hearing on 30th May 2013.
16.	Impact then pursued AIG who have contended that, pursuant to exclusion clause 6.6 of the policy, they are not liable to indemnify Barrington in respect of its liability to repay what the insurers refer to as “commercial loans” since professional indemnity insurers are not in the business of helping Impact to obtain repayment of loans to solicitors for the purpose of carrying on their practices.  The judge accepted this argument and, in the second action, gave judgment for AIG.
Submissions
17.	Mr Timothy Dutton QC for Impact submitted:-
i)	it was (now) common ground that Barrington’s liability to Impact fell within clause 1 of the insurance cover as being “civil liability” arising “from private legal practice in connection with the insured firm’s practice”;
ii)	that the judge was wrong to characterise the DFMA as a “contract or arrangement for the supply to … any insured of … services in the course of” Barrington’s practice because it was no more than a facility provided to, and for the benefit of, Barrington’s clients; and
iii)	if it was necessary to categorise the DFMA it was a contract designed to regulate the conduct of Impact’s provision of loans to Barrington’s clients and Barrington’s provision of legal services to those clients. 
18.	Mr Mark Cannon QC for AIG submitted:-
i)	the DFMA was a contract for services made with Barrington in the course of its practice because the offer of the facility in clause 2 (in return for the Administration Fee and the Quarterly Monitoring Fee), together with the expectation that the offer would not be revoked before Barrington caused the relevant documentation to be executed by a relevant client, was the offer of a service accepted on the terms of the DFMA.  It was similar to an insurance agent acting as a coverholder being able to commit underwriters to insurance agreements made with potential insureds;
ii)	it was Barrington which provided the consideration for this service by agreeing to pay the Administration Fee and, when relevant, the Quarterly Monitoring Fee;
iii)	the service Impact provided was to take from Barrington the burden of funding disbursements which otherwise Barrington would have to assume (or arrange for somebody else to assume); and
iv)	this was the way in which Barrington obtained the ability to conclude CFAs with their clients and enabled it, if things went well, to generate profit for itself; if it could not be done this way it would have to be done in some other way or Barrington would be unable to earn profit at all.
Discussion
19.	In order to assess these rival arguments, one has to stand back from the detail and ask oneself what is the essential purpose of the exclusion clause 6.6 in the Minimum Terms and Conditions of the solicitors’ professional indemnity insurance.  To my mind the essential purpose of the exclusion is to prevent insurers from being liable for what one might call liabilities of a solicitor in respect of those aspects of his practice which affect him or her personally as opposed to liabilities arising from his professional obligations to his or her clients.  Thus if a solicitor incurs liability to the supplier of, for example, a photocopier, insurers do not cover that liability nor would they cover obligations to a company providing cleaning services for the solicitor’s offices.  If the office premises are leased by the partnership or held subject to a mortgage to a bank, the obligations under such lease or mortgage (or any guarantee of such lease or mortgage) would not be covered either.  It is these sort of personal obligations (which may nevertheless be part of a solicitor’s practice as a solicitor) which are not intended to be covered.  These obligations are to be distinguished from the obligations which are incurred in connection with the solicitor’s duty to his clients which are intended to be covered.
20.	Where then stands a loan which is made nominally to the solicitor’s client but which is an inherent part of a set of interlocking agreements all intended to enable the solicitor to earn a professional livelihood?  Despite the complexity of the contractual arrangements, this is a question which should be capable of a comparatively simple answer.
21.	It seems to me that obligations arising out of such loans, made to cover disbursements in intended litigation, are 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.  They are inherently part of his professional practice and are assumed as an essential part of his duty is to advise the client as to the likelihood of success in the intended litigation.  Disbursements should not be incurred in litigation which is unlikely to succeed.  A solicitor, who negligently advises his client that a claim is likely to succeed and causes a client to incur disbursements which should not have been incurred, will be liable to the client for disbursements needlessly incurred.  It should make no difference, from the point of view of a professional indemnity insurer, that the disbursement has been incurred before such advice is given or without such advice having been given at all.
22.	It follows therefore that liabilities incurred by reason of clauses 6 and/or 13 of the DFMA are liabilities professionally incurred to which exception 6.6 in the Minimum Terms does not apply.
23.	The position would, of course, be different if Barrington had been operating a scam in the sense that it never had any intention of obtaining clients’ instructions and always intended to use the loans made by Impact for personal purposes.  But that has never been alleged and would not be consistent with the findings made by the judge in the proceedings at the first trial to which AIG could have been joined if it had wished to make any such allegations.
24.	At the conclusion of the argument the court raised the question whether cases dealing with incidences of Value Added Tax would cast any light on the question whether Impact provided a service to Barrington within the exception.  The court had in mind such decisions as HMRC v Amia Coalition Loyalty UK [2013] UKSC 15 and Airtours Holidays Transport Ltd v HMRC [2014] EWCA Civ 1033.  Neither party was able to tell us whether Barrington, in fact, paid any VAT on the administration or quarterly monitoring fee payable to Impact, but the fact of payment or non-payment could hardly be decisive of the question at issue between Barrington and their insurers.  We therefore invited short written submission after the close of oral argument.
25.	In the light of those submissions, I have reached the conclusion that the VAT line of authority is not helpful on the essential question that arises in this case.  That is, first, because the Supreme Court has emphasised that decisions relating to VAT schemes cannot be taken as establishing universal rules even in a VAT context because they are highly dependent on the precise facts of the case, see per Lord Reed at para 68 of Amia.  All the more can they be of little assistance in the entirely different context of professional indemnity insurance.
26.	The second reason why this line of authority is not helpful is that the detail of the scheme whereby Impact made loans to the clients of Barrington is inevitably different from the detail of the schemes considered in the VAT decisions.  In the present case it is not merely the fact that the loans were made to Barrington’s clients not to Barrington personally that is important.  Paragraph 2.1 of DFMA makes clear that Impact has no obligation to Barrington to make any loans at all.  It is difficult to see how in those circumstances Barrington can be the recipient of any obligation on the part of Impact to provide any service which Impact was providing to Barrington’s clients not to Barrington.  If one seeks to ascertain the economic reality of the transaction, as is suggested by Lord Reed to be the proper approach in para 79 of Amia, it is that Barrington’s clients were to receive the benefit of the loans made by Impact in order that they could process (and continue to process) their claims without having to make any payment “upfront” to experts or others who would customarily charge fees for which the client would be responsible.
27.	Even if that is wrong and the right analysis is, as suggested by Mr Cannon in his written response, that there can be two VAT supplies (and thus two different contracts for services within the same transaction), one must still look at the overall picture when one comes to consider clause 6.6 of the Minimum Terms.  Services provided to a solicitor for the purpose of performing his obligations to his client and which constitute an inherent part of that obligation are not, in my view, intended to be covered by this exceptions clause which is headed “Debts and Trading Liabilities”.
28.	In these circumstances my prima facie conclusion based on the wording to the Minimum Terms is not displaced by any consideration of the authorities on VAT.  I would allow this appeal and enter judgment against AIG for the sum for which Barrington was found liable in the first action together with interest.
Lord Justice Patten:
29.	I agree.
Lady Justice Gloster:
30.	I agree also.