Earlier today the Supreme Court handed down judgment in AIG Europe Limited v Woodman & ors on aggregation, under the SRA Minimum Terms and Conditions of Professional Indemnity Insurance ("the MTC"), of claims arising from "similar acts or omissions in a series of related matters or transactions".
The Supreme Court has unanimously allowed the claimant insurers' appeal and rejected the "intrinsic relationship" test introduced by the Court of Appeal.
The case concerns two holiday resorts developed by a company called Midas International Property Development Plc. One was in Turkey, known as Peninsular Village, and the other was in Marrakech. The developments were financed by private investors. A trust was established for each development. The developers' solicitors were the initial trustees and the investors were the beneficiaries. The funds advanced by the investors were initially held by the solicitors in an escrow account and were not to be released to the developers until the value of the assets held by the trust were sufficient to cover the investment to be protected, applying a "cover test" set out in the trust deed. For each investment, there was a loan or purchase agreement between the investor and the developers and an escrow agreement between the investor, the developers and the solicitors. The solicitors released tranches of the investment funds to the developers for each development. In May 2008, the then Financial Services Authority prohibited the developers from receiving any further investment in relation to the developments and the developers were unable to complete the purchase of either site. The developers were wound up in November 2009.
The investors brought two claims against the developers' solicitors; one relating to each of the development sites. It was alleged that the solicitors failed properly to apply the "cover test" before releasing funds to the developers, resulting in the funds being released without adequate security. The investors' claims amounted to more than £10 million in total. However, the developers' solicitors' professional indemnity insurance was subject to a limit of indemnity of £3 million in respect of each claim.
The solicitors' professional indemnity insurers ("Insurers") issued proceedings against the solicitors for a declaration that the investors' claims should be treated as one claim under Clause 2.5(a)(iv) of the MTC on the basis that the claims arose from "similar acts or omissions in a series of related matters or transactions".
At first instance, Teare J. held that although the claims arose out of "similar acts or omissions", they were not part of "a series of related matters or transactions" because they were not dependent on each other. The Court of Appeal rejected this "interdependence" test. Instead, it concluded that the matters or transactions in question had to have an "intrinsic relationship" with each other in order to be "related".
Insurers appealed this determination on the grounds that the intrinsic relationship test introduced an unwarranted qualification into the concept of "related matters or transactions". Insurers argued that the words were unspecific as to the nature of the necessary relationship, that their application required an exercise of judgment tailored to assessing whether on the particular facts there was a substantial connection, and that it was wrong for the Court to try to create a greater degree of certainty than the natural meaning of the words allowed. The trustees and the Law Society supported the Court of Appeal's interpretation and contended that it should be upheld by the Supreme Court.
The Supreme Court Judgment
The leading judgment was given by Lord Toulson (with whom Lords Mance, Clarke, Sumption and Reed agreed).
Lord Toulson considered that the "intrinsic relationship" test was neither necessary nor satisfactory. He noted that the sub-clause in question contains two separate requirements: (1) the acts or omissions giving rise to the claims have to be similar; and (2) the acts or omissions have to be in a series of matters or transactions which are related. Each limb must be satisfied for the sub-clause to apply. Lord Toulson said:
"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."
In determining whether the transactions in question could be aggregated under Clause 2.5(a)(iv), Lord Toulson began by identifying the matters or transactions in question. In doing so, he disagreed with the Court of Appeal's view that the relevant transaction in question was simply "the payment of money out of an escrow account which should not have been paid out of that account". Whilst he accepted that this act gave rise to the claim, he observed that it occurred in the course of a wider transaction which involved an investment in a particular development scheme under a contractual arrangement of which the trust deed and the escrow agreement were part and parcel, being the means designed to provide the investor with security for his investment.
On the basis of the facts as agreed for the purposes of the appeal and as described in Teare J.'s judgment, Lord Toulson concluded that the transactions entered into by the Peninsular Village investors "were connected in significant ways", as were the transactions entered into by the Marrakech investors in that "[t]he members of each group were investing in a common development, for which the monies advanced by them were intended, in combination, to provide the developers with the necessary capital. Notwithstanding individual variations, they were all participants in what was in overall terms a standard scheme. They were co-beneficiaries under a common trust".
Lord Toulson therefore concluded that the claims of each group of investors arose from acts or omissions in a series of related transactions and could be aggregated, as they "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".
As to whether the application of the aggregation clause should be looked at from the perspective of the investors or the solicitors, Lord Toulson concluded that it should not be looked at exclusively from the viewpoint of one party or another. Instead it should be viewed objectively "taking the transactions in the round".
However, the Supreme Court was not prepared to aggregate the claim in respect of Peninsular Village and the claim in respect of Marrakech. Although they bore a striking similarity, this was not sufficient to permit aggregation. The fact that the development companies were related, being members of the Midas Group, and that the legal structure of the development projects was similar, was not sufficient, as the projects related to different sites and the investors were protected by different deeds of trust over different assets.
The only exception to this was in relation to what were termed "cross-over investors", who switched their funds from one investment to the other. In relation to those investors, the Supreme Court concluded that any claim by cross-over investors made in respect of the first transaction would fall to be aggregated with the claims of the other members of that group of investors.
The case will now be remitted either to the Commercial Court to determine in accordance with the Supreme Court judgment, or to the Chancery Division which is due to hear the trial of the underlying claims by the investors against the solicitors.
The key points emerging from the judgment are that:
- The Supreme Court has recognised that determining whether transactions are "related" is an acutely fact sensitive exercise and it is therefore unhelpful to be prescriptive as to how the words "a series of related matters or transactions" should be interpreted.
- The application of the aggregation clause should be looked at objectively rather than exclusively from the perspective of one party or another party.
- Aggregation clauses should not be approached with a predisposition towards either a broad or a narrow interpretation.
- Any attempt at aggregating claims at a high level based on the fact that claims or groups of claims share common features is, however, unlikely to be successful; there must be further features which inter-connect the matters or transactions so that they in some way fit together.The Supreme Court concluded that in this particular case the claims for each development "fitted together legally through the trusts under which the investors were co-beneficiaries".
The introduction of the "intrinsic relationship" test was an unwelcome development which did little to clarify how the aggregation provisions in the MTC should be interpreted and created an unnecessary complication in the aggregation analysis. Many will welcome the fact that the Supreme Court has now overturned this. With the "inter-dependency" test introduced by Teare J. also overturned, the position now appears to be much as it was before, in that each case must be looked at on its own facts because there is no single philosophy of aggregation.