The Supreme Court has rejected a funder’s attempt to recover around £581,000 from an indemnity insurer after the law firm it was working with went bust.

Impact Funding Solutions was awarded damages in 2013 after Barrington Support Services entered insolvency, and sought to recover the money from Barrington’s insurer, AIG.

Impact lost the claim in the High Court but successfully challenged that ruling in the Court of Appeal.

In Impact Funding Solutions Limited v AIG Europe Insurance Ltd (formerly known as Chartis Insurance (UK) Ltd) the Supreme Court yesterday came down in favour of the insurer after ruling the company’s funding arrangement fell within the scope of an exclusion clause in the PII contract.

Impact had entered into a disbursements funding master agreement (DFMA) by reaching loan agreements with Barrington’s clients, providing funds to Barrington to hold on behalf of its clients and to use for disbursements to run industrial deafness claims.

When Barrington, now in liquidation, failed to investigate the claims correctly, and misapplied the funds, Barrington’s clients were not able to repay the loans and sought to recover their losses.

The crucial exclusion clause provided that AIG would not cover any loss arising from a breach of contract ‘in the course of providing legal services’.

Supreme Court judges opted by a majority of four to one to favour AIG after resolving that the DFMA and the resulting loans to Barrington’s clients were a service which Impact provided to Barrington.

The court ruled Barrington contracted as a principal with Impact and not as an agent for its clients, Barrington clearly obtained a benefit from the funding of its disbursements, this was not an incidental benefit, and it was a service for which Barrington paid an administration fee.

Giving judgment, Lord Toulson said the promise by Barrington was part of a ‘commercial bargain struck by them. Barrington and Impact made a commercial agreement as principals for their mutual benefit, as well as for the benefit of Barrington’s clients’.

‘It did not resemble a solicitor’s professional undertaking as ordinarily understood, and it falls aptly within the description of a “trading liability” which the minimum terms were not intended to cover.’

Dissenting from the majority judgment, Lord Carnwath backed the ruling of the Court of Appeal, saying the obligations arising out of the loans made to cover disbursements were part and parcel of the obligations assumed by a solicitor in his professional duties, and therefore outside the scope of the exclusion.

In the introduction to the ruling, Lord Hodge said that appeal raised questions of general public importance, as it was similar to the terms in all PII policies for solicitors in England and Wales, and is important to the business model of many firms funding litigation since legal aid for civil cases was significantly reduced.