Invoice Finance for Lawyers
The business of law has changed significantly over the last couple of decades, ranging from significant developments in terms of the structure and operation of commercial law firms servicing business clients, to the funding models of “ambulance chasing” litigation covering a wide range of claims from alleged financial mis-selling to simple road traffic accident claims.
It is some time since we examined the topic of invoice finance for lawyers in a Briefing, and we were reminded of its significance in a recent court judgement involving a claim by a funder against a solicitor’s insurer which would have been of great interest to the invoice finance industry had it succeeded.
We will take a look at the rules governing solicitors before dealing with that case, and then move on to the position regarding both individual barristers and set of barristers chambers.
Funding of bills due from clients to Solicitors
It is questionable whether the pace of change has been matched by appropriate regulatory reform by the Solicitors Regulation Authority, and until the most recent changes to the Code of Practice governing solicitors were implemented in November 2019 we had to look back to October 2011 for the rules applicable to solicitors practices.
The most obvious scope for invoice financing of solicitors relates to the funding of bills due from their own clients or payable by the losing party in litigation, which obviously raises the issue of confidentiality. The Code of Conduct applicable until recently dealt with the question of confidentiality as follows: –
“You must achieve these outcomes:
… you keep the affairs of clients confidential unless disclosure is required or permitted by law or the client consents.”
Indicative behaviour which in the opinion of the SRA “ may tend to show that you have not achieved these outcomes and therefore not complied with the Principles” included: –
“disclosing details of bills sent to clients to third parties, such as debt factoring companies in relation to the collection of book debts, unless the client has consented.”
Discussion of the precise scope of this prohibition with the SRA exposed some interesting perceptions of the workings of the Invoice Finance industry, but all resulted in the same opinion on their side: that receivables financing whether in the form of disclosed factoring or undisclosed invoice discounting or any of the variants in between was prohibited without the express and informed consent of each individual client whose information would be revealed in the process of assigning debts.
In practice this 2011 guidance was less prescriptive than the previous 2007 version, which had appeared to impose an absolute apparent prohibition against selling book debts “because of the confidential nature of your bill.”
We pointed out to the SRA that increasingly sophisticated information was demanded from traditional funders such as banks from their law firm customers in relation to their sales ledgers, and there was in reality little difference between this process and the exposure of client information in bills to an invoice financier.
However, the SRA’s stated view its published guidance did not change until November 2019 when its new Code came into force.
The 2019 Code
Paragraph 6.3 of the Code of Conduct for Solicitors now states:
“You [must] keep the affairs of current and former clients confidential unless disclosure is required or permitted by law or the client consents”.
The Guidance accompanying the Code expresses the following opinions:
“Disclosure of information is only allowed where the client consents to it or it is permitted by law. Before approaching a client for consent, you should consider whether disclosure is necessary to proceed with a specific matter.
Consent to disclosure of confidential information must be clear, so that the client knows to whom their information should be made available, when and for what purpose. Where you have their general consent, it may still be appropriate to obtain the client’s consent to a specific piece of information being disclosed as the issue arises, for example by sending them a draft letter to the opponent to approve.
However, whatever arrangements that you make for obtaining consent, the ultimate test will be that the client if asked would say “Yes I agreed to that information being disclosed for that purpose” rather than being surprised or concerned or not having understood.
Before seeking the clients consent you should consider
- What is the purpose of the third-party access to data and can the purpose be achieved in other ways?
- Should there be limitations on the access?
- Are you satisfied that seeking the client’s consent to disclosure would not harm the client’s best interests?”
The key point is that there is no longer any specific reference to factoring or invoice finance at all, which suggests that a dose of reality has entered into the process and that the SRA recognises that solicitors are able to lawfully obtain invoice finance.
In our view it would be sensible for an invoice financier considering funding a solicitors practice to require the firm to have an appropriate provision in its Terms and Conditions authorising it to pass on financial information about client matters including bills to funders and potential funders, and provided that this is done in generic terms our view is that it would not be necessary to then seek the individual express consent of clients to that process.
Funding of costs payable by third parties to Solicitors
Are there other opportunities for an Invoice Financier to do business with solicitor’s? One area relates to the funding of costs due to claimants’ solicitors’ practices arising from litigation, normally involving personal injury or road accident claims against drivers backed by motor insurers. The costs are due as a result of an Order of the court or an agreement by the insurers to pay the costs as either agreed or assessed. The purpose of the funding is to cover the period between the award or agreement and the eventual payment, which can extend to many months in view of the court procedures for the assessment of costs.
The method for securing the facility is the assignment of the right to receive the payment of the costs by the solicitors, including Notice of Assignment in limited situations, in exchange for payment of a discounted amount of the estimated costs. There will be provisions for recourse back to the solicitors where costs are less than the estimated amount. The assignment is with the prior written consent of the relevant claimant including to the disclosure of any client information.
Are Funding liabilities covered by Solicitors’ indemnity insurance?
Everybody knows that solicitors’ practices have to carry extensive indemnity insurance covering fraud and the like against solicitors’ clients, but few would assert that this indemnity insurance extended to trading debts incurred by solicitors.
But what if there were suitable trust provisions in a funding agreement which arguably gave rise to the relationship of solicitor and client between a solicitor and a funder? Would the “client” then be able to recover losses arising under the funding arrangements from the solicitor’s insurer?
This was precisely the question which fell to be decided in the recent case of Doorway Capital Ltd v American International Group Ltd :  EWHC 182 (Comm.)
Doorway Capital is a specialist litigation funder which entered into a reasonably sophisticated invoice finance agreement with SL solicitors. It was a whole turnover arrangement with the usual trust provisions, and it was alleged that SL had failed to transmit approximately £1.6 Million worth of receipts into the relevant trust account.
Doorway Capital sought to recover that loss from SL’s insurers AIG on the basis that the trust provisions and accompanying fiduciary duty brought it within the definition of a “client” of SL.
The insuring clause indemnified SL against “… civil liability to the extent that it arises from Private Legal Practice in connection with the Firm’s Practice.”
“Private Legal Practice” was defined as meaning “the provision of services in Private Practice as a solicitor … including, without limitation … (c) any Insured acting as a personal representative, trustee, attorney, notary, insolvency practitioner, or in any other role in conjunction with a Practice”.
Doorway argued that SL’s services fell within the definition of “Private Legal Practice.” In particular, it said that acting as a trustee, without more, was sufficient. It also argued that (i) SL exercised “professional judgment in relation to the assessment of obligations which would arise in the course of the solicitor’s practice”, because they were required to determine whether, as a matter of law, a debt was payable to Doorway; and (ii) the holding of monies in their client account showed that they were providing a service in private practice.
The Judge, Mr Justice Butcher, paid short shrift to Doorway’s arguments. He held that any liabilities that SL owed to Doorway derived from the invoice finance agreement alone; and the fact that SL were holding monies on trust was merely “a part of the mechanism” of fulfilling their obligations under the agreement:
“In my judgment the liability which SL was under as a trustee was not of such a kind as to have been covered by the Policy. This is because it did not, in my view, arise from the provision of services in private Practice by SL. SL was not providing services as a trustee to a client, or in connection with services provided to a client. DCL was not SL’s client, and it is no accident that in the RFA SL is referred to as DCL’s client. SL was to hold sums on trust for DCL, not as part of or incidentally to a service provided in private Practice, but as part of a mechanism to secure the repayment of amounts which, pursuant to a commercial agreement, DCL advanced to SL for the purposes of its business”.
The Judge came to the same conclusion in respect of SL’s use of “legal judgment” to recover the debts, as well as the use of their client account – neither were for the provision of services in private practice as a solicitor.
In the circumstances, the liabilities incurred by SL did not arise from Private Legal practice, and were therefore not covered by the insuring clause. Accordingly, AIG’s application for summary judgment succeeded.
The legal basis of the decision seems relatively straightforward, but it would have been very interesting if it had gone the other way.
Unlike solicitors, who may be sole practitioners but generally operate from law firms which can be partnerships, limited liability partnerships or limited companies, barristers are self employed as individuals and operate on that basis through Chambers which are simply a mechanism for sharing expenses and facilitating administration and marketing but which have no legal status as such.
The Bar Code of Conduct actually allows factoring and invoice discounting by individual barristers; in accordance with legal tradition the solicitor is regarded as being the client of the barrister rather than the “lay client”, and so there is no objection to a funder learning the identity of solicitors owing debts to barristers for work commissioned on behalf of lay clients.
However, whilst there are examples of individual barristers engaging in receivables financing facilities for themselves as individuals, there remains a great difficulty in invoice financiers funding barristers’ chambers as a whole. This is because the only debts owed to Chambers are not the outstanding fees from solicitors to individual barristers, but rather the sums which barristers owe to the central fund at Chambers, which is traditionally based on a percentage of the barristers’ previous earnings.
Whilst therefore there is no objection in principle to individual barristers assigning debts owed to them to a funder on the basis that the funders’ advance payments would be directed to Chambers’ administration in settlement of the barristers’ individual liability, in reality it has proved extremely difficult to devise an acceptable mechanism which would work in practice whilst providing the funder with the necessary degree of ownership or control of the debts owed to the individual barristers.
Contact our Invoice Finance team.