AIG Europe Ltd v OC320301 LLP (formerly The International Law Partnership) & Ors v The Law Society of England and Wales (Intervener)
 EWCA Civ 367
The Court of Appeal has handed down its judgment in AIG’s appeal against last year’s Commercial Court decision of Mr Justice Teare in AIG Europe Limited v OC320301 LLP (formerly The International Law Partnership LLP)  EWHC 2398 (Comm). Read more on the case from last August. The Court of Appeal has allowed the appeal by AIG but has resubmitted the entire case to the Commercial Court for determination subject to some guidance given by the Court of Appeal as to the meaning of the words in the aggregation clause and the correct approach to interpretation.
Issue in First Instance decision
Mr Justice Teare’s 2015 decision was the first judicial finding on the application of clause 2.5 in the Minimum Terms and Conditions of Professional Indemnity Insurance for solicitors in England and Wales (“MTC”) relating to the aggregation of claims for the purpose of the Limit of Indemnity, which provides that:
“The insurance may provide that, when considering what may be regarded as One Claim for the purposes of the limits …..
a) All Claims against any one or more Insured arising from :
- One act or omission
- One series of related acts or omissions
- The same act or omission in a series of related matters or transactions
- Similar acts or omissions in a series of related matters or transactions
b) all Claims against one or more Insured arising from one matter or transaction will be regarded as one claim”.
The particular focus was on the interpretation of a) (iv) of this clause
In the present case, around 214 claimants had issued proceedings in relation to investments in property abroad claiming around £10 million against a firm of solicitors through two trustees in two actions in the Chancery Division (“the underlying claims”). The trial of those actions was due to take place in a window between 1 February 2017 and 30 April 2017.
AIG applied for a declaration that the Underlying Claims were to be considered one claim for the purposes of the aggregation clause,
The allegations made in the Underlying Proceedings were presumed to be true for the purposes of AIG’s application.
The SRA intervened in the proceedings only for the purposes of providing submissions as to how the clause should be construed.
Mr Justice Teare at first instance declined to grant the declaration.
AIG appealed that finding. The main points in the Court of Appeal’s judgment are set out below :
Background to underlying claims
Between 2006 and 2009 Midas International Property Development PLC (“Midas”), a UK company, offered investors the opportunity to invest in holiday home developments in two locations: Peninsula Village, Turkey, and Al Johara, Morocco. Midas engaged The International Law Partnership LLP (“TILP”) to advise on the international property law aspects of the transactions. It was intended that investors in the Turkish properties would obtain security over the land and investors in the Moroccan properties would obtain a shareholding in a local company which owned the land.
TILP devised a mechanism to protect investors’ interests in the schemes, whereby contributors would sign an Escrow Agreement with TILP as the named escrow agents. TILP were bound by the terms of the loan agreements not to release funds in the escrow account to local development companies unless a predetermined level of security was in place, thereby ensuring that investors had peace of mind.
The investors would also become beneficiaries under one of two trusts (one for each location), whose aim was to hold security over the land purchased and realise the assets for investors if the developments failed.
The Deed of Trust defined the so-called “cover test” that had to be satisfied before TILP released monies from the escrow account for the purchase of land, or to finance the development generally, designed to protect trust funds.
Unfortunately for the investors, the local development companies were unable to complete the contracts for the purchase of the sites, which led to the failure of both developments. By 2009 Midas had been wound up, and allegedly all of the money paid in to the scheme had been paid out to the local development companies.
The trusts were unable to realise the assets. The mortgage established over Peninsula Village in Turkey had a defect; while the security over Al Johara in Morocco had limited value because the trust had taken only a 16.5% share in the local company that owned the land, that was in any event subject to prior pledges in favour of other shareholders.
The judgment at first instance
The arguments at first instance and on appeal centred around limb a) (iv) of clause 2.5 MTC above i.e. “Similar acts or omissions in a series of related matters or transactions”
AIG argued that the underlying claims arose from similar acts or omissions in a series of related matters or transactions with the result that AIG’s exposure was confined to one limit of indemnity of £3 million.
The Trustees’ argument on behalf of the investors was that they did not, so that AIG’s exposure was for the full amount of £10 million.
The Trustees’ secondary position was that two limits of indemnity were available: one in relation to the Turkish development and one in relation to the Moroccan development. The Trustees argued that the alleged acts or omissions in the underlying claims were not similar (except at what was described as a very high level of abstraction), that the transactions were not a series as they did not follow each other in time or logical order and that they were not related because the individual investors were not connected and the individual transactions were not dependent on each other.
Mr Justice Teare dismissed AIG’s application, and decided that although the underlying claims arose from “similar acts or omissions”, the acts or omissions were not in “a series of related matters or transactions”. In his view the matters or transactions had to be dependent on each other to be a “series” and “related”.
The Court of Appeal’s analysis
The Court of Appeal sought first to construe the natural meaning of the relevant part of the aggregation clause.It found that the alleged liability in the underlying claims arose from negligence in relation to a “transaction” rather than a “matter” for the purposes of the aggregation clause, since the making of the contracts and the setting up of (and transfer of money from) an escrow account would more naturally be described as “transactions” rather than “matters”.
Next, the court considered the term “series”, observing it derived from the Latin “serere” which means to connect. In combination with the word “related”, it was clear that there had to be a connection between the transactions. The question was how that connection or relationship was to be established, and what degree of connection or relation was required.
The court accepted the submission of Counsel for the Law Society, that there had to be an “intrinsic connection” between the transactions, rather than just an external common factor (such as the transaction were conducted by the same solicitor, or related to the same geographical area).
However, the court did not agree with Mr Justice Teare that the transactions had to be “dependent on each other”. There could be an intrinsic connection, short of the transactions being dependent or inter-dependent on each other, which would satisfy the test.
The court observed that in the case of payments out of an escrow account that should not have been made, any intrinsic connection would depend on the circumstances of payment and was fact specific.
Noting that the implying of any extra term into the aggregation clause (whether that term was “dependent” or “intrinsic”) would be controversial, the court considered that it was necessary because otherwise the clause would have the same effect as traditional very wide aggregation clauses, and the clause in the MTC was “almost ostentatiously not formulated in this way” ie the language of the widest possible aggregation clause such as all claims arising from one originating cause was not used .
Effect of Lloyds TSB decision and redrafting of aggregation clause
The court referred to the decision of the House of Lords in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd  4 All ER 43 as authority for that approach – that is, it must be assumed when construing the words of an insurance policy that the words were chosen deliberately and where an aggregation clause is not drafted in the widest possible form, this must have been a conscious decision.
Turning to the intentions of the draftsman in the case of the aggregation clause in the MTC, the court observed that the Lloyds TSB case had directly caused the re-drafting of the aggregation clause in 2005, and cited a contemporaneous article in the Law Society Gazette as evidence that this was the case, noting that this article had not been before Mr Justice Teare at first instance. Ironically, both sides sought to rely on the article, AIG citing it as evidence that the intention of the draftsman was to widen the aggregation clause to ensure that claims would aggregate in more circumstances, the Trustees arguing on the contrary that the draftsman had in mind the Lloyds TSB case and if the broadest possible clause was desired, it would have been used. The redrafting of the aggregation clause had been coupled with an increase in the compulsory limit of indemnity from £1 million per claim to £2 million per claim suggesting that it was thought at the time that more claims would aggregate as a result of the change.
Conclusion on meaning
The court concluded that there must be some restriction on the concept of relatedness and the most satisfactory approach was that the relationship must be an intrinsic relationship not an extrinsic one.
However, the court declined to apply this test to the facts in this case, remitting it back to the Commercial Court for re-trial, so that the aggregation clause could be construed in the context of findings of fact in light of the guidance issued by the Court of Appeal including that if the contracts or the escrow account of one investor referred to the contracts or escrow accounts of the other investors, there might be a relevant intrinsic relationship. Alternatively, if the contracts provided that each investor’s funds were to be held in a separate designated account, that might point in the other direction.
Finally, the court also addressed Mr Justice Teare’s finding that the relevant acts or omissions were “similar”. Because the court had adopted a construction of the rest of the relevant sub-clause which neither party had contended for, it was ordered by the court that the Trustees would be permitted at the re-trial to argue that the relevant acts or omissions were not similar.
The Court of Appeal’s judgment emphasises the fact specific nature of any interpretation of an aggregation clause; the judges stating their reluctance to tie the hands of the person who, ultimately, will try the case, make findings of fact and interpret the aggregation clause.
It will be welcome news to insurers of solicitors that the court found that to fall within the aggregation clause, a “series of related matters or transactions” do not have to be dependent on each other. This implied word proposed by Mr Justice Teare at first instance seemed to us to be an unnecessarily restrictive interpretation, particularly when the reasoning for the drafting of the aggregation clause in its present form (helpfully set out in the Law Society Gazette article referred to in the Court of Appeal judgment) and the associated increased limit of indemnity is considered.The Court of Appeal have however, potentially, substituted one implied word which must be read into the aggregation clause in the MTC for another.
It seems to us that the requirement that there be an intrinsic relationship or connection between a “series of related matters or transactions” serves to narrow somewhat the scope of the potential factors which might be taken into account, and to that extent it is helpful in construing the clause in the context of a given set of facts.
However, this reading of the clause, although consistent with the submissions made by counsel for the Law Society (and presumably therefore an accurate reflection of the intentions of the draftsman), is narrower than many have assumed to date.
The dividing line between what constitutes an extrinsic factor as opposed to an intrinsic factor will be a source of debate in every case.
While it is relatively easy to think of potential extrinsic factors (which will not satisfy the test), potential intrinsic factors (short of dependence) are harder to discern. The potential example cited by the Court of Appeal in this case i.e. references in each individual contract to other contracts in the series, seems to us unlikely to arise frequently. It implies that each in a series of related matters or transactions, in the Court of Appeal’s view, must still form part of a larger whole to have an intrinsic relationship.
It may be that the Court of Appeal’s approach may not be very much broader, in the final analysis, than that of Mr Justice Teare at first instance. Other than the rejection of Teare J’s finding that there had to be interdependence for transactions to be related, the affirmation that any interpretation of an aggregation clause had to be approached neutrally ( rather than from the standpoint of either Insurer or Insured ) and the statement that the Law Society Gazette Article of January 2005 and the increase in the Minimum Sum Insured should be referred to the trial judge responsible for determining the case at a re trial, the decision does not really advance understanding as to how the clause is likely to be interpreted and therefore is of limited practical assistance.It remains to be seen whether any appeal will be pursued and, if not, what the outcome of the retrial will be.