AIG Europe Ltd v Woodman & Ors [2017] UKSC 18

Investors in failed Turkish and Moroccan property developments sued solicitors for releasing escrow funds without adequate security. The Supreme Court interpreted the aggregation clause in solicitors' professional indemnity insurance, holding claims by each development's investors could be aggregated, but not across both developments.

Facts

Two now-defunct firms of solicitors devised a legal mechanism for financing foreign property developments by private investors. A total of 214 investors advanced funds to develop two holiday resort projects: Peninsula Village near Izmir, Turkey, and a development at Marrakech, Morocco, undertaken by Midas group companies. For each development, a trust was created with the solicitors as initial trustees, with investor funds held in escrow and only to be released once a ‘cover test’ showed sufficient security existed.

Following the Financial Services Authority’s prohibition on further investment in May 2008, the developers could not complete the purchases and were wound up in November 2009. All escrow funds had been released. The investors sued the solicitors for breach of contract, breach of trust, breach of fiduciary duty, misrepresentation and negligence, contending that the solicitors had failed properly to apply the cover test before releasing the funds.

The solicitors held professional indemnity insurance with AIG on terms corresponding to the Law Society’s Minimum Terms and Conditions (MTC), with a £3m limit per claim. Total claims exceeded £10m. AIG sought a declaration that all the claims should be aggregated as one claim under clause 2.5(a)(iv) of the MTC, which permits aggregation of claims arising from ‘similar acts or omissions in a series of related matters or transactions’.

Issues

The principal issue was the proper construction of the phrase ‘in a series of related matters or transactions’ in clause 2.5(a)(iv) of the MTC, and whether the investors’ claims fell within that wording so as to be aggregated as a single claim.

Arguments

Insurers (AIG)

AIG accepted that ‘related’ required some identifiable substantive link beyond mere similarity, but argued the Court of Appeal had introduced an unwarranted qualification by requiring an ‘intrinsic’ (as opposed to ‘extrinsic’) relationship. The words were unspecific by design, given the wide range of factual situations they had to cover, and required a fact-sensitive exercise of judgment.

Trustees and Law Society

The trustees argued that none of the claims should be aggregated, or alternatively that the Peninsula Village and Marrakech claims should not be aggregated together. They, with the Law Society as intervener, supported the Court of Appeal’s ‘intrinsic relationship’ formulation.

Judgment

Lord Toulson (with whom Lord Mance, Lord Clarke, Lord Sumption and Lord Reed agreed) allowed the appeal in part.

Approach to the MTC

The court emphasised that aggregation clauses can operate for or against either party and should not be approached with any predisposition towards a broad or narrow construction. The MTC is set by the Law Society as a regulator balancing public protection against the cost and availability of insurance, justifying a ‘neutral’ approach to interpretation.

Rejection of the Court of Appeal’s ‘intrinsic’ test

Lord Toulson rejected the Court of Appeal’s formulation that the matters or transactions must have an ‘intrinsic’ rather than ‘extrinsic’ relationship. The word ‘intrinsic’ was ‘elusive’ when used to describe a relationship between two transactions. Using Lord Hobhouse’s example from Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2003] 4 All ER 43 (mis-selling of a pension scheme through the same document), the Court of Appeal’s formulation could produce the result that there was no ‘intrinsic’ relationship merely because the connection was through a third party — a result unlikely to have been intended when sub-clauses (iii) and (iv) were added in 2005.

Correct approach

The word ‘related’ implies that the matters or transactions must in some way fit together, but the Law Society deliberately did not circumscribe the phrase further. Determining whether transactions are related is an ‘acutely fact sensitive exercise’ involving an exercise of judgment. The court must begin by identifying the relevant transactions, viewed objectively in the round rather than from the perspective of one party.

Application to the facts

The Court of Appeal had taken too narrow a view in characterising the relevant transaction as merely the payment of money out of escrow. The transaction properly understood was the investment in a particular development scheme, comprising the loan/purchase agreement, trust deed and escrow agreement together.

Within each development, the investors were participants in a standard scheme contributing capital to a common project and were co-beneficiaries under a common trust. The connecting factors drove the firm conclusion that the claims of each group of investors arose from acts or omissions in a series of related transactions and could therefore be aggregated.

However, the Peninsula Village and Marrakech claims could not be aggregated with each other. Although the developer companies were related and the legal structures similar, the projects were separate and unconnected, related to different sites, and protected by different deeds of trust over different assets.

As for the ‘crossover’ investors who switched from Peninsula Village to Marrakech, entering into one investment and then switching obviously created related transactions, though this had not been fully argued.

Implications

The decision provides authoritative guidance on the construction of clause 2.5(a)(iv) of the MTC, rejecting both the trial judge’s strict ‘dependency’ test and the Court of Appeal’s ‘intrinsic relationship’ test. The Supreme Court favoured a fact-sensitive, judgment-based approach which neither expansively nor restrictively interprets ‘related matters or transactions’.

Key principles emerging include: (i) aggregation clauses are to be construed neutrally without predisposition; (ii) the relevant transactions must be properly identified before considering whether they are related; (iii) transactions must be viewed objectively in the round; and (iv) ‘related’ requires the transactions in some way to fit together, whether through a common underlying objective, common legal structure, or otherwise.

The decision matters to solicitors, professional indemnity insurers and claimants pursuing solicitors. It affects how the £3m minimum cover under the MTC operates where multiple similar claims arise out of a common scheme: investors in a single development with shared trust security may find their claims aggregated against them, but claims arising from genuinely separate projects, even with similar structures, will not be.

The judgment leaves the precise position of crossover investors and other factual analyses for further determination, indicating that the answer in any case will depend significantly on the particular factual matrix.

Verdict: Appeal allowed in part. The Supreme Court held that the claims of investors within each individual development (Peninsula Village and Marrakech respectively) could be aggregated as arising from ‘similar acts or omissions in a series of related matters or transactions’ under clause 2.5(a)(iv) of the MTC, but the two groups of claims could not be aggregated with each other. The case was to be remitted to the Commercial Court or transferred to the Chancery Division, with the parties invited to make written submissions on the appropriate course and on costs within 28 days.

Source: AIG Europe Ltd v Woodman & Ors [2017] UKSC 18