April 04 2017
The Supreme Court has today handed down its judgment in AIG Europe Limited v Woodman and others  UKSC 18. The Supreme Court allowed the appeal, and remitted the case back to the High Court. It held that determining the meaning of "a series of related matters or transactions" in the aggregation clause contained in the Minimum Terms and Conditions for solicitors' professional indemnity insurance necessitated a fact sensitive inquiry to be carried out. The relevant transactions or matters are to be viewed objectively and in the round. Lord Toulson, who gave the judgment of the Court, dismissed as not "necessary or satisfactory" the Court of Appeal's formulation that there must be an "intrinsic relationship" between the transactions or matters.
Tom Leech QC, of Herbert Smith Freehills' Advocacy Unit, appeared on behalf of the trustees.
The dispute related to underlying claims arising out of services provided by a solicitors' firm, The International Law Partnership ("ILP"), whose insurance cover for the relevant period was provided by AIG Europe Limited ("AIG").
ILP was engaged by an international property development company in connection with two holiday home developments, one in Turkey and another in Morocco. Investors in the developments provided funds to ILP under a loan or purchase agreement, with those funds being held in escrow by ILP until the developer had provided sufficient security to meet the "Cover Test". The Cover Test was to be applied by ILP. On release of the funds the investors became beneficiaries under a trust (set up in respect of each development), which was intended to hold security in respect of the relevant development. On various occasions ILP authorised the release of monies out of the escrow accounts. Ultimately, the developers were liquidated without the developments having been completed. 214 investors brought claims against ILP for the value of their lost investments, principally on the basis that the Cover Test had been incorrectly applied.
ILP's professional indemnity insurance with AIG had a limit of £3 million per claim. Clause 2.5 of the Law Society's Minimum Terms and Conditions ("MTC") for solicitors' professional indemnity insurance governed the aggregation of claims under the policy. Clause 2.5 provided that:
"The insurance may provide that, when considering what may be regarded as one Claim for the purposes of the limits contemplated by clauses 2.1 and 2.3:a) all claims against any one or more insured arising from:
(i) one act or omission;(ii) one series of related acts or omissions;(iii) the same act or omission in a series of related matters or transactions;(iv) similar acts or omissions in a series of related matters or transactions
and(b) all Claims against one or more Insured arising from one matter or transaction
will be regarded as One Claim."
AIG sought a declaration that the 214 claims were to be considered a single claim for the purpose of the policy because the relevant transactions arose from "similar acts or omissions in a series of related matters or transactions". If that declaration was granted, AIG's liability would be limited to £3 million. In the absence of such declaration, AIG was potentially liable to indemnify ILP for the full amount of the 214 claims, which collectively exceeded £10 million.
Mr Justice Teare in the Commercial Court refused to grant AIG the declaration sought. Teare J accepted that all the claims arose from "similar acts or omissions" on the part of ILP, but not that those acts or omissions occurred in a "series of related matters or transactions". Teare J held that "the wording of the clause, 'a series of related matters or transactions', in its context appears to me to point to transactions which are, by reason of their terms, dependent on each other rather than independent of each other ". It was common ground that the transactions were not conditional or dependent upon each other. Teare J granted AIG permission to appeal.
Court of Appeal
Having heard the parties' and the Law Society's submissions, the Court of Appeal concluded that Teare J went too far in holding that the transactions had to be "dependent on each other" before aggregation could occur. Lord Justice Longmore, giving the judgment of the Court, considered that the word "series" usually implied some connection between events constituting the series, but the question then was what degree of connection was required for the purposes of the MTC aggregation clause. The Court of Appeal favoured the submission of the Law Society that there must be "at least some intrinsic connection between the relevant matters or transactions, not merely a connection with some external common factor".
In construing the critical words of the MTC aggregation clause, the Court of Appeal had regard to the published history and origin of the MTC aggregation clause, and the availability of both wide and narrow aggregation wording. In the latter regard, the Court of Appeal held that as the express language of the aggregation clause, "related… transactions", was both imprecise and deliberately avoided the available wide formulations, it was necessary to imply a unifying factor from the general context. That unifying factor was held to be the presence of an intrinsic relationship between the relevant transactions.
Lord Toulson, giving the judgment of the Supreme Court, agreed with the Court of Appeal that use of the word "related" implied some inter-connection between matters or transactions, "or in other words that they must in some way fit together", but stated that the Court of Appeal's requirement for an intrinsic relationship was neither "necessary or satisfactory". He stated that the term "intrinsic" was elusive when used as a descriptor of a relationship between two transactions.
The Court noted that the Law Society had, after market negotiation, not sought expressly to limit the required relationship between matters or transactions by reference to a particular set of criteria. The absence of such limitation was said not to be surprising given the wide range of work solicitors carry out. Whether transactions were related therefore required a fact sensitive inquiry. Lord Toulson adopted Lord Justice Rix's articulation in Scott v Copenhagen Reinsurance Co (UK) Ltd  Lloyd's Rep IR 696 that such an exercise involved "an exercise of judgment, not a reformulation of the clause to be construed and applied". The application of the aggregation clause was to be viewed objectively, taking the transactions in the round.
Viewed objectively, the Court concluded the claims of each group of investors arose from acts or omission in a series of related transactions. The transactions relating to the development in Turkey were "connected in significant ways", the same was said to be the case for transactions in relation to the Moroccan development. Each series of transactions "shared the common underlying objective of the execution of a particular development project, and they also fitted together legally through the trusts under which the investors were co-beneficiaries."
The Court held that the case for aggregating claims in respect of both developments was "much weaker", commenting that they "bear a striking similarity, but that is not enough".
This case will be of keen interest to those operating in the solicitors' professional indemnity market. This series of judgments provides welcome authority and judicial commentary on the construction of the MTC aggregation clause. It may be thought that the Supreme Court's conclusion that the question whether matters or transactions are related requires an exercise of judgment means that there remains some uncertainty as to how the clause will operate. However, the real guidance offered by the decision is the way in which Lord Toulson applied the clause to the facts. First, it is necessary to identify and analyse the relevant matters or transactions carefully. Then, it is necessary to identify the relevant connections between them in order to be satisfied that they are connected in significant ways. In each of the two actions the critical relationship between the claimants was that they were co-beneficiaries under a common trust. For the same reason the claims in both action were not to be aggregated together. Qualifying insurers will no doubt take some heart from this decision in dealing with multiple claims (e.g. involving mortgage fraud) but each case will involve a proper analysis and an exercise of judgment. On a more general level, these judgments illustrate the importance that parties in all markets should place on the choice of aggregation wording in their policies.
For further information on this topic please contact David Reston at Herbert Smith Freehills LLP by telephone (+44 20 7374 8000) or email (email@example.com). The Herbert Smith Freehills LLP website can be accessed at www.herbertsmithfreehills.com.
This update has been reproduced in its original format from Lexology – www.lexology.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.