Exclusion Clause Fails
Written by Mark Reed on 17 March 2017« Return to Reading Room
Impact Funding Solutions Ltd v Barrington Support Services Ltd  A.C. 73
Impact Funding Solutions Ltd took action against a firm of Solicitors over claims that they were obliged to indemnify them after they went into liquidation, even though it was the professional negligence on the part of the solicitors which led to them misapplying funds provided by the finance company.
It was considered that the firm had breached their duty towards their clients, and a warranty in the contract with Impact Funding Solutions, so why should they have to indemnify the firm for their negligence. The issue was whether their claim would succeed to recover losses of their loans provided through the solicitors, because of an exemption clause set out in the contract between the solicitors and their indemnity insurers. The clause stated that no losses would be covered ‘arising out of, based upon, or attributable to any breach of terms of any contract or arrangement for the supply of the insured goods or services in the course of providing Legal Services’. The case was initially thrown out because it related to the ‘supply of goods and services’ and so did fall within the exclusion clause provided by the insurers.
Solicitors did not, as a general rule, owe a duty of care to third parties, but it was widely accepted that indemnity cover extended to protecting third parties to whom solicitors owed duties of care in their performance of legal services, and to whom they had incurred liability in negligence. Lord Carnwath found that the funding agreement was an arrangement for the supply of services for four reasons. First, the firm had contracted as principal with the finance company, not as agent for its clients. Second, the firm obtained a benefit from the agreement because it would otherwise have been personally responsible for paying the disbursements, even without funds from its clients. Third, that benefit was not an incidental or collateral benefit derived from a service provided by the firm to its clients, but was part of a wider arrangement enabling the firm to take up claims which their clients might otherwise have been unable to fund, and to earn fees and success fees. Fourth, it was a service for which the firm paid an administration fee and undertook onerous repayment obligations.
Essentially, the claim arose out of the firm's breach of that contract. The facility provided by the finance company was not a service comparable in any way to the supply of goods or services for use in the practice. The finance company should have been entitled to an indemnity under the insurance policy.
This case shows that although a standard indemnity clause will in the majority of cases suffice, it is always worth questioning the terms regarding a third party involvement and whether they do fall within an exclusion clause.
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