Earlier this year, judgment was handed down by the Supreme Court in AIG Europe Limited v Woodman and others [2017] UKSC 18. The judgment, delivered by Lords Mance, Clarke, Sumption, Reed and Toulson SCJJ, provides clarification on the interpretation of aggregation clauses in the context of solicitors’ professional indemnity insurance policies modelled on the Law Society’s Minimum Terms and Conditions.

Background

Pursuant to its powers under Section 37 of the Solicitors Act 1974, the Law Society has set down rules to require solicitors’ professional indemnity insurance to satisfy certain Minimum Terms and Conditions. Clause 2.5 of the Minimum Terms permits aggregation of claims as follows: 

“The insurance may provide that, when considering what may be regarded as one Claim …

(a) all Claims against any 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
…

will be regarded as one Claim.”

The issue considered by the Supreme Court in AIG v Woodman related to the proper construction of “a series of related matters or transactions” under Clause 2.5(a)(iv).

The underlying claims

In 2013, two actions were brought against now defunct firms of solicitors. The two actions were brought by a total of 214 claimants. The claimants to the first action were investors in a project to develop holiday resorts on a plot near Izmir, Turkey. The second action related to investors in a similar project at Marrakech, Morocco. 

The funds advanced by the investors for the developments were held in trusts created for each development, with the object of providing security for investors. The solicitors were the initial trustees. The beneficiaries were the investors. The funds advanced by the investors would initially be held by the solicitors in an escrow account, to be paid out pursuant to the terms of the trust deed. 

The solicitors released tranches of funds to the developers between 2007 and 2008.

In May 2008, the Financial Services Authority prohibited the developers from receiving any further investment in relation to the developments. Consequently, the developers were unable to complete the purchases of the sites and, in November 2009, were wound up. All of the money in the escrow accounts had been paid out.

The investors’ claims against the solicitors were put in various ways, alleging breach of contract, breach of trust, breach of fiduciary duty, misrepresentation and negligence, but the essence was that the solicitors had failed properly to follow the requirements of the trust deed before releasing funds to the developers, with the result that the funds were released without adequate security. 

Decisions at first instance and on appeal

The solicitors had professional indemnity insurance on terms equivalent to the Minimum Terms. The insurers’ liability was limited to £3m in respect of each claim. The investors’ claims in total amounted to over £10m. 

In March 2014, the insurers issued proceedings against the solicitors in the Commercial Court for a declaration that the investors’ claims in the two actions be considered as a single claim under the Minimum Terms, on the basis that the claims against the solicitors all arise from “similar acts or omissions in a series of related matters or transactions” within the meaning of clause 2.5(a)(iv).

The solicitors’ position was that none of the investors’ claims fell to be aggregated or in the alternative that the two actions, relating to the two different developments, should not be aggregated with one another.

At first instance, Teare J, accepted that all the claims arose from similar acts or omissions, but he rejected the argument that they were “in a series of related matters or transactions”, on the basis that they must be inter-connected, conditional or dependent on each other.

On appeal, Longmore, Kitchin and Vos LJJ adopted a different approach. They held that “related matters or transactions” required an ‘intrinsic’ relationship between the transactions rather than a relationship with some outside connecting factor, even if that external factor was common to the transactions.

The Supreme Court

The Supreme Court rejected the proposition that there must be an ‘intrinsic’ relationship between the transactions, on the basis that ‘intrinsic’ was an elusive term that involved too narrow a view of the relevant transactions. 

The Supreme Court held that the relevant transactions were not to be viewed exclusively from the viewpoint of one or other party, but objectively taking into account all factors in the round. 

On that basis, the various transactions entered into by the investors were connected in significant ways: (a) the investors 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; (b) they were all participants in what was in overall terms a standard scheme; and (c) they were co-beneficiaries under a common trust. In addition, the transactions involved the solicitors taking a role both as escrow agents and as trustees and the trust deed created a multilateral element by reason of the investors being co-beneficiaries. 

On that reasoning, the Supreme Court held that: (1) the claims as they related to each development were “a series of related matters or transactions”, but (2) the claims as between the two developments were not so related and should not be aggregated with one another (on the basis that the two development projects were separate and each operated under a different deed of trust).

Comment

Aggregation clauses will impact significantly on an insurers’ liability. In AIG v Woodman, the potential difference in liability was more than £7m: the insurers’ liability was limited to £3m in respect of each claim, with the investors’ claims in total amounting to over £10m. As a consequence, interpretation of aggregation clauses is often highly contentious.

Whilst the judgment of the Supreme Court in AIG v Woodman provides some clarification on the meaning of “a series of related matters or transactions”, it (and each judgment that preceded it in the lower courts) highlights that it is often difficult to interpret aggregation clauses with certainty, and such analysis will require a careful consideration of all facts surrounding the relevant transactions.