This article was first published in the New Law Journal.

Judges occasionally lighten their judgments with literary references. The quotation from Alice in Wonderland “Words mean what I want them to mean” is a favourite in cases involving the interpretation of contracts, and Shakespeare appears fairly regularly.

In AIG Europe Ltd v OC320301 LLP [2016] EWCA Civ 367 (decision 14th April 2016) the Court of Appeal (Longmore, Kitchin and Vos LJJ) had to decide the natural meaning of the word “series” in a case involving alleged negligence by a firm of solicitors acting on behalf of investors buying into holiday developments in Turkey and Morocco. Innovatively, in this case, the Court decided to quote not from Shakespeare or Lewis Carroll but Jane Austen’s Emma.

The context was clause 2.5 of the Solicitors’ Minimum Terms and Conditions (“MTC”), entitled “One Claim”, the aggregation clause. All policies of insurance of course have a limit of cover and aggregation clauses are clauses in such contracts which permit insurers to treat a number of separate occurrences as one event for the purpose of limiting the level of indemnity. Readers will recall the rather grim litigation following 9/11 when the question of whether the terrorists attacks on the Twin Towers were one event or two events (the answer was that they were two separate events, thus doubling the sum available from insurers to compensate for the relevant losses).

When a firm of solicitors, in this case John Howell & Co (now dissolved), act for a number of clients in similar transactions such as property investment the question of whether, in the event that negligence is alleged, the claims are aggregated as ‘One Claim’ or treated as a number of separate claims becomes of immense importance not just to the claimants, but also of course to the partners or former partners in the firm who may become personally liable if the value of the claim and costs exceeds the level of the cover. This is particularly an issue whether, as here, the Insured does not have a great deal of cover – here the limit was £3million.

Clause 2.5 of the MTC provides as follows:

“The insurance may provide that, when considering what may be regarded as one Claim for the purpose of the limits contemplated by clauses 2.1 and 2.3:

(a) All claims against 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


(b) All Claims against one or more Insured arising from one matter or transaction,

will be regarded as One Claim.”

It was in this context that Longmore LJ, giving the judgment of the Court, decided to lighten a rather technical judgment by referring to Jane Austen’s description of the mortified Mr Elton leaving Highbury “after a series of what had appeared to him strong encouragement” to explain that “series” usually implies some connection between the events or concepts which constitute the series.

What had gone wrong was this. In 2004 John Howell was instructed by a UK property development company to assist in building holiday resorts in Turkey and Morocco. The developer required "seed corn" capital to finance the development and the Insured were instructed to devise a scheme by which the investments funds were held in escrow as some form of security for the investors. There was a separate trust for each development and an agreed point at which the sum was to be released ("the Cover Test"), being the point at which the value of the security held in the trust was at least the same as the total amount of the investments to be protected. What happened, which is more or less what always happens in these schemes, is that the money was paid out in circumstances where – as was later discovered – the developer could not complete the contract and thus did not obtain good title to the land. So the 214 investors got nothing for their money.

Fairly obviously, if the claims – "the Underlying Claims" as they were defined - could be aggregated under clause 2.5 of the MTC then there would be just over £14,000 available from the insurer, AIG, for each investor to cover the value of his or her claim and costs.

The claimants in this case were not the investors but AIG seeking a declaration in the Commercial Court as to the correct construction of the aggregation clause to which the former partners in the firm and the trustees of the relevant trusts were defendants. This itself is relatively unusual because insurers tend to reserve their position on these issues, leaving the threat that losses are uninsured hanging over claimants as an incentive to settle at relatively low levels.

AIG’s submission that the Underlying Claims could be aggregated as One Claim under clause 2.5(a)(iv) was unsuccessful before Teare J at first instance. He found that the claims were not aggregated because the words pointed to transactions which were dependent on each other, not independent, and the Underlying Claims concerned a number of separate transactions by individual investors. Were this judgment to have stood then the inevitable consequence would be an increase in the level of PI cover.

The Court of Appeal disagreed. The relevant passages in the judgment is from paras. [17] – [20] and then at the end from paras. [30] – [34]. It is at this, first, point, that the judgment gets rather philosophical, for want of a better word. What the Court said, relying on Jane Austen, was that as used in the phrase “in a series of related ... transactions” there must be a connection since the transactions have to be related to one other. The question was how the connection or relationship was to be established – will any connection do, however remote?

Their answer was that there must be an intrinsic rather than an extrinsic relationship – a relationship of some kind between the transactions relied upon rather than a relationship with some outside connecting factor. The furthest the Court was prepared to go to was to say this at para. 33(i):

“the true construction of the words ‘in a series of matters or transactions’ is that the matters or transactions have to have an intrinsic relationship with each other, not an extrinsic relationship with a third factor”.

The problem that then arose, of course, was that the answer to the question of whether these 214 transactions had an intrinsic relationship to each other was fact sensitive: relevant to the answer are the question of the nature of the escrow accounts, how the funds were held and the detail of the contracts. None of these facts, it seems, had been agreed for the purpose of the action. Thus the case was remitted to the Commercial Court for further hearing. This was an unsatisfactory result for all concerned.

What is to be learned from this? First of all, from a lawyer’s point of view, that however attractive preliminary points or issues are, short cuts can often be short cuts to a swamp. Facts need to be agreed or determined before judges can sensibly be asked to construe contracts.

Secondly (and pending another hearing in the Commercial Court we do not know whether this will happen or not) if the ultimate decision is that AIG cannot treat these claims as "One Claim" then whilst that it is good news for the clients and the former partners in John Howell, it will lead to an increase in the level of premiums for solicitors’ firms unless and until clause 2.5 of the MTC is tightened up.

Finally, of course, behind this is very probably a human tragedy. At a guess most of these 214 investors, who lost their money now seven years ago in 2009, were people investing their life savings in the promise of a holiday villa which could also provide an income. These dreams often become nightmares. In my experience three good pieces of free legal advice are: don’t sign a guarantee; don’t buy a franchise; and don’t ever invest in a scheme to buy property abroad.