The Court of Appeal has given the long awaited judgment in AIG Europe Limited v OC320301 LLP and Others. The Court of Appeal was asked to consider the true construction of the aggregation wording in clause 2.5 (a)(iv) of the Minimum Terms and Conditions (MTC) which governs the aggregation of claims in all solicitors’ professional indemnity policies.

Background

Between 2006 and 2009, a UK property development company attracted investment to its two new property developments in Turkey and Morocco. In a bid to protect the investors in the event that the developments failed, the solicitors instructed devised a mechanism whereby:- (1) an escrow account was established with the investors being party to the escrow agreement and the solicitors acting as escrow agents; and (2) two trusts were established in respect of which the investors were beneficiaries under the Deeds of Trust. The solicitors were only to release the funds from the escrow account to the local developer when the value of the security held in the trusts was at least the same as the total amount of the investments to be protected – this was known as the ‘Cover Test’.

By the end of 2009, the UK developer had gone into liquidation and it was found that all of the invested monies in the escrow accounts had been paid away. The monies paid away are said to be in excess of £10 million. The investors each brought claims against the solicitors alleging, amongst other things, that the solicitors had failed to properly apply the Cover Test when choosing to release the monies in the escrow account. The claims by the investors against the solicitors have not yet been decided.

First Instance Judgment

In 2015, AIG sought a declaration that the 214 claims brought by the investors could be considered as ‘One Claim’ for the purposes of assessing the limits of liability under the solicitors’ professional indemnity policy. In order to decide whether the investors’ claims could be treated as ‘One Claim’ for policy purposes, Mr Justice Teare had to consider whether the claims arose from “similar acts or omissions in a series of related matters or transactions” (per Clause 2.5 (a)(iv) of the MTC). Prior to the proceedings, the aggregation wording in the MTC had not been considered by the Courts.

At first instance, the Judge concluded that the claims should not be treated as ‘One Claim’ because, whilst the claims did arise out of “similar acts or omissions”, those acts or omissions were not “in a series of related matters or transactions” because the terms of the transactions were not conditional or dependant on each other. The Judge’s interpretation of the aggregation wording meant that each claim by each investor would be treated as a separate claim for the purposes of the policy limit. AIG appealed.

To read more on the first instance decision click here

Issue before the Court of Appeal

At the centre of the debate before the Court of Appeal was the meaning of the phrase “a series of related matters or transactions” in the aggregation clause of the MTC. Submissions were heard on behalf of:-

  1. AIG – that the Judge was wrong to read into the phrase a requirement that the matters or transactions be dependent upon one another;
  2. the Trustees/solicitors – that the Judge was correct in his conclusion; and
  3. the Solicitors’ Regulatory Authority (who were permitted to intervene) – that there had to be “at least some intrinsic connection between the relevant matters or transactions, not merely a connection with some external common factor such as the transactions were conducted by the same solicitor”.

Decision

The Court of Appeal held that the Judge was right to hold that the aggregation clause had to be approached neutrally and without any assumptions in favour of an insured or insurers but wrong to say that the matters or transactions had to be dependent on each other. Lord Justice Longmore concluded that the express language of the clause (“a related…transaction”) was both imprecise and deliberately avoided the wider forms of aggregation language. He explained that there must be a restriction on the concept of relatedness and that was achieved by implying a unifying factor from the general context. It was for that reason that the Court of Appeal concluded that the ‘matters or transactions’ in question must have an intrinsic relationship with each other, and not an extrinsic relationship with a third factor (for example, the same solicitor or a geographical area).

In the judgment, Lord Justice Longmore usefully reviewed relevant leading cases on aggregation wording generally and cited an article from the Law Society Gazette on 27 January 2005 which explained the history of the origin of the current wording of clause 2.5 of the MTC, following its amendment after the House of Lords’ decision in Lloyds TSB General Insurance Holdings Limited and other v Lloyds Bank Group Insurance Co Ltd [2003] (the clause in debate in that case had similar wording to clause 2.5 of the MTC). Lord Justice Longmore referred to the article as part of the “matrix”against which clause 2.5 had to be construed and noted that the article had not been put before the Judge at first instance.

No findings of fact were made because, as Lord Justice Longmore noted, the Court of Appeal did not want to “inhibit the trier of the facts in any way”. The case has been remitted back to the Commercial Court to determine the facts in accordance with the guidance provided in the appeal judgment.

Conclusion

The decision of the Court of Appeal is not surprising and should give Insurers some relief from the restrictive interpretation implied into the language of clause 2.5 by Mr Justice Teare. It is disappointing that the Court of Appeal did not elect to provide further commentary or clarification on the scope of clause 2.5 of the MTC more generally, given that this was the first reported consideration of the clause by the Courts.

The Court of Appeal indicated that there should be “a fresh start” and that the trier of fact should not be compelled to hold that the relevant acts or omissions of the solicitors were “similar acts or omissions”,as decided by the First Instance Judge. The Trustees were given permission to appeal the question of mixed law and fact on this issue. It remains to be seen what result the “fresh start” will bring but we anticipate further appeals and reports from this ongoing case. 

Further readingAIG Europe Limited v OC320301 LLP and Others [2016] EWCA Civ 367