The Supreme Court has unanimously allowed the claimant insurers' appeal in interpreting "similar acts in a series of related transactions"
The case concerns two holiday resorts developed by Midas: one was in Turkey, the other was in Morocco. The developments were financed by private investors. A trust was established for each development. The developers' solicitors were the 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 Midas 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. When Midas was wound up 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 insurers issued proceedings against the solicitors for a declaration that the investors' claims should be treated as one claim 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 "inter-dependence" 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".
The Supreme Court has now allowed the appeal from that decision. It held that the "intrinsic relationship" test was neither necessary nor satisfactory. Lord Toulson, giving the leading judgment said that: "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".
In determining whether the transactions in question could be aggregated, 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, Lord Toulson concluded that the transactions entered into by the Turkey investors "were connected in significant ways", as were the transactions entered into by the Morocco 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. 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.
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".
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.
COMMENT: 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 and aggregation clauses should not be approached with a predisposition towards either a broad or a narrow interpretation. The introduction of the "intrinsic relationship" test was an unwelcome development 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.