In these declaratory proceedings brought by AIG against a firm of solicitors (“ILP”) and others, the Court of Appeal has provided guidance on the construction of the aggregation wording in the Minimum Terms and Conditions annexed to the Solicitors Indemnity Insurance Rules 2013 (the “MTC”), which must be incorporated into all solicitors’ professional indemnity policies in England and Wales.
ILP was approached in 2004 by a UK property development company, Midas International Property Development Plc (“Midas”), to provide property law advice in relation to the financing of property development schemes abroad. ILP was instructed to devise a mechanism whereby Midas could solicit investments in the property developments, by way of loans or direct purchase of holiday homes, and those investments could be held on security for the investors.
ILP proposed a structure whereby investment funds would be held in an escrow with ILP as escrow agents, and a Deed of Trust would be granted in respect of each scheme in favour of the investors as beneficiaries. Funds were to be released only when the value of the security held in the Trusts was at least the same as the total amount of the investments to be protected (the cover test).
Midas successfully attracted investors to the scheme, and signed agreements in 2007 for the purchase of development land in Turkey and also for the purchase of a Moroccan-based company which owned a large area of land near Marrakech. ILP authorised the payment of monies from the relevant escrow accounts in 2007 and 2008. However, Midas was unable to complete contracts for the purchases, and went into liquidation in 2009, whereupon it was discovered that all invested monies held in the escrow accounts had been paid out and that the security established over the property developments was inadequate to protect the investors.
The Trustees of the two Trusts issued proceedings against ILP on behalf of the 214 investors in 2013, alleging that ILP had failed to apply the cover test and was liable for negligence, breach of fiduciary duty, misrepresentation and breach of escrow agreements. The Trustees claimed over £10 million.
ILP had professional indemnity insurance for the relevant period with AIG (with a limit of £3 million), which, of course, was subject to the MTC, clause 2.5 of which provides that:
“(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”.
AIG issued proceedings against ILP and the Trustees in the Commercial Court in March 2014, seeking a declaration that the underlying claims against ILP should be considered to be one claim, on the basis that they arose from “similar acts or omissions in a series of related matters or transactions” (in line with clause 2.5(a)(iv) of the MTC).
At First Instance in August 2015, Teare J found for the Trustees, holding that, although the claims arose from “similar acts or omissions”, they were not “in a series of related matters or transactions” because the transactions in question were not “dependent” on each other.
AIG was granted permission to appeal this decision. In addition, while the Trustees’ primary case remained that each investor’s claim was a separate claim and that the claims did not aggregate (in line with the First Instance decision), they were granted leave to argue on appeal, in the alternative, that there were two claims (one in respect of the development in Turkey and one in respect of the development in Morocco).
Court of Appeal decision
On appeal, AIG argued that the wording, “series of related matters or transactions” did not require a degree of inter-dependence between the matters or transactions in question. The Solicitors Regulation Authority, who intervened in the appeal, submitted that the wording intended to imply a “relationship” between the matters or transactions, but that the wording had a wider connotation than “inter-dependence”.
In its Judgment, the Court of Appeal reasoned that the word “series” implied a connection between the events or concepts which constituted the series, and that the word “related” made it even more obvious that there must be such a connection. The Court held also that this relationship must be “intrinsic”, i.e. in this case, there needed to be some inter-connection between the circumstances of the escrow payments in question – extrinsic factors such as geography or the identity of the solicitor involved would not suffice. Indeed, the Court noted that, had the clause intended to aggregate claims with any degree of relatedness, however remote, it would have been worded more widely (in line with the broad and widely used “originating cause” aggregation wording). The Court referred to the speech of Lord Hobhouse in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd  UKHL 48, which noted that aggregation clauses come in different and well-established forms and, if the widest wording is not chosen, the parties’ choice must be respected.
Importantly, however, the Court found that Teare J had gone too far in finding that the aggregation wording in question required an inter-dependence between the relevant transactions.
The Court did not make any findings of fact as to whether the escrow payments made by ILP were intrinsically related (and therefore whether the claims aggregated), and remitted the case to the Commercial Court for such findings to be made.
Interestingly, the Court also set aside Teare J’s finding that the claims arose from “similar acts or omissions” (i.e. the first part of the aggregation clause in question), deciding that the new trier of fact should not be inhibited in reaching its own decision on this point.
We await the Commercial Court’s decision with interest. In this regard, while the Court of Appeal did not wish to inhibit the Commercial Court in reaching its determination on the facts, it did indicate that:
- if the contracts in respect of one investor referred to the contracts or escrow accounts of other investors there might be an “intrinsic relationship” between the transactions sufficient to aggregate the claims; but
- if there was a requirement that investors’ funds were to be held in separate accounts, that might militate against the finding of such an “intrinsic relationship”.
In the meantime, the Court of Appeal’s Judgment serves as a reminder that, when drafting aggregation clauses (outside of the context of the mandatory MTC), parties must be mindful of the range of wordings available and the nuances between these, which can significantly alter their scope. Indeed, the Court will not look at aggregation clauses in a vacuum but in the context of a factual matrix in which parties are expected to have paid keen interest to questions of limits, layers and aggregation at the drafting stage.