The Supreme Court has today handed down its judgment in AIG Europe Limited (Appellant) v Woodman and others (Respondents). Both insurers and buyers of professional indemnity insurance breathe a sigh of relief as the Court of Appeal's decision, which would potentially have caused the cost of professional indemnity insurance to rocket, is overturned.
AIG v Woodman concerned the development of two holiday resorts financed by private investors. Funds were collected for each development and held in escrow by the developers' solicitors. Tranches of money were released to the developers as the projects progressed. However, following a prohibition placed on the developers preventing them from receiving any further investments, the purchases of the development sites could not be completed.
First instance decision
The investors brought two claims against the solicitors, one in relation to each site. The allegation was that the solicitors had misapplied the criteria according to which funds could be released, resulting in funds being released without adequate security. The claims amounted to over £10m in total. AIG, the solicitors' professional indemnity insurers which provided cover limited to £3m per claim, issued proceedings seeking a declaration that the investors' claims should be considered as one claim under the aggregation provisions in its policy (and in the Minimum Terms and Conditions which govern all solicitors' professional indemnity policies).
The claim was dismissed. The court accepted that all the claims arose from similar acts or omissions, but rejected the analysis that they were part of "a series of related matters or transactions" on the basis that the transactions between the developers and each investor were not mutually dependent.
The Court of Appeal decision
AIG appealed, arguing there was no justification for the first instance decision that transactions needed to be interdependent in order to be considered "related" for the purposes of the aggregation clause. The appeal was also the subject of an intervention by the Solicitors Regulation Authority, which argued that the clause did require some sort of intrinsic relationship between the matters or transactions.
The Court of Appeal held that the judge at first instance was wrong to conclude that the aggregation provisions require the matters or transactions in question to be dependent on each other. However, Lord Justice Longmore in his leading judgment concluded that the express language of the provisions was not only imprecise but also deliberately avoided the wider forms of aggregation language. He held that there must be a restriction on the concept of relatedness, which should be achieved by implying a unifying factor from the general context. The matters or transactions in question must therefore have an "intrinsic connection" with each other in order to fall within the aggregation provisions. An extrinsic relationship (such as, for example, the same solicitor having undertaken each transaction) is not enough.
Although at first glance appearing to provide some relief for the insurance market, the Court of Appeal's decision in fact created significant uncertainty. It did not fully define the "intrinsic connection" requirement, and in practical terms did nothing to clarify the application of the key limbs of the aggregation provisions. Lawyers and insurers alike were unable to be certain what degree of connection in a series of transactions would be sufficient to trigger the aggregation clause. Leading silks offered differing interpretations of the decision, and some insurers faced the prospect of extraordinarily large exposure to claims which, on any common sense definition, appeared to be related.
The Supreme Court decision
AIG appealed to the Supreme Court. The decision has been eagerly awaited since the hearing in October 2016, and has been handed down today. Giving the judgment of the Court, Lord Toulson allowed AIG's appeal. Lord Toulson held that the "intrinsic" relationship formulation was not "necessary or satisfactory" and rejected the use of the word "intrinsic" in this context:
"It is possible to describe things or people as having certain intrinsic qualities or characteristics, but it is a more elusive term when used as a descriptor of a relationship between two transactions."
In relation to the two key limbs of the aggregation clause, which provides that claims may be aggregated which arise from "….the same act or omission in a series of related matters or transactions; or (iv) similar acts of omissions in a series of related matters or transactions…" the Court held:
"Use of the word 'related' implies that there must be some inter-connection between the matters or transactions, or in other words that they must in some way fit together, but the Law Society saw fit after market negotiation not to circumscribe the phrase 'a series of related matters or transactions' by any particular criterion or set of criteria. The absence of further prescription is not particularly surprising, considering the very wide range of transactions which may involve solicitors providing professional services. Determining whether transactions are related is therefore an acutely fact sensitive exercise."
Lord Toulson drew a key distinction between an act which gives rise to a claim (in this case, as referred to by the Court of Appeal, the improper payment of money out of an escrow account) and the wider transaction in which the act occurs (in this case, the investment in a particular development scheme under a transaction arrangement of which the trust deed and escrow arrangement formed part). The Court of Appeal's formulation, which treated the "transaction" as being the payment of money out of the escrow account, was too narrow.
Lord Toulson further held that the aggregation clause must be viewed objectively, "taking the transactions in the round". Viewed objectively, in this case the transactions fitted together "in that they 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 aggregation provisions were therefore satisfied for each development.
The Supreme Court indicated, however, that it was less likely that the claims could be aggregated into one, as the two development projects "bear a striking similarity, but that is not enough…Although the development companies were related…and the legal structure of the development projects was similar, the development projects were separate and unconnected. They related to different sites, and the different groups of investors were protected by different deeds of trust over different assets." However, Lord Toulson emphasised that this was his view on the facts as summarised in the agreed statement of facts and issues and the factual description in Mr Justice Teare's judgment, and that both parties had reserved their rights to analyse the issues in greater detail if the case was remitted to the lower courts.
This decision does not, and arguably could never, provide absolute clarity on when claims may be aggregated. Such cases are invariably factually complicated and it is right that each should be determined on its own facts. Commenting on the decision today, Richard Lynagh QC pointed out that a decision like this can only ever be "of limited assistance in construing similar clauses in other circumstances. There will inevitably be differences between the particular wording under consideration here and the wording of aggregation clauses in other policies so as to make generalisation as to interpretation impossible. Even where the same word or phrase is used, the particular context may lead to differing constructions of it."
However, imprecise as it may have been, both insurers and the profession are likely to welcome the overruling of the Court of Appeal's narrow interpretation. Commenting this morning, a claims manager at a Participating Insurer referred to the Supreme Court's decision as "a welcome confirmation of the position as insurers believed it to be before the Court of Appeal decision; the market will be pleased that the status quo has been restored." Both insurers and the profession will also no doubt welcome the Supreme Court's comment that the Law Society, in setting the minimum terms of cover which solicitors must maintain, must "balance the need for reasonable protection of the public with considerations of the cost and availability of obtaining professional indemnity insurance." It remains to be seen whether the Law Society will seek to clarify the imprecise wording of the aggregation provisions. In the meantime, it's business as usual.