The Supreme Court decided how far claims by investors in two failed property developments against their solicitors could be aggregated under the compulsory professional indemnity insurance terms. It held that claims arising from similar acts or omissions may be treated as one claim where the underlying transactions have a real connection and fit together. On the facts as they appeared, that connection existed within each development but not between the two separate projects.
Under section 37 of the Solicitors Act 1974 the Law Society may require solicitors to maintain professional indemnity insurance satisfying Minimum Terms and Conditions. Clause 2.5 of those terms permits claims to be regarded as one claim where they arise from similar acts or omissions in a series of related matters or transactions. The insurers’ liability was limited to £3 million in respect of each claim. The investors’ claims amounted in total to over £10 million.
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The developments and the allegations
Two actions were brought by 214 investors against two successive firms of solicitors. The claimants in one action had invested in a project to develop holiday resorts on a plot near Izmir, Turkey, known as Peninsula Village. The claimants in the other had invested in a similar project at Marrakech, Morocco. Both developments were promoted by companies in the Midas group. Some Peninsula Village investors later transferred their investment to Marrakech because of planning delays and were described as crossover investors.
In 2004 the developers instructed the solicitors to devise a mechanism for financing the developments while giving private investors security. A trust was created for each development, initially with the solicitors as trustees, so that the trust would own or hold a charge over the development land. The investors were the beneficiaries. Their funds were held in escrow and were not to be released unless the value of the trust assets satisfied a cover test in the trust deed. The solicitors also acted for the developers on each investor’s loan or purchase agreement and escrow agreement. They released tranches of Peninsula Village funds in April 2007 and October 2008, and Marrakech funds on five occasions between November 2007 and March 2008.
In May 2008 the Financial Services Authority prohibited the developers from receiving further investment. The developers could not complete either purchase and were wound up in November 2009. All the money in the escrow accounts had been paid out. The investors alleged breach of contract, breach of trust, breach of fiduciary duty, misrepresentation and negligence. The essence of the claims, which were due to be tried in the Chancery Division, was that the solicitors had failed properly to apply the cover test before releasing the funds, with the result that the funds were released without adequate security.
The insurance proceedings and the courts below
The solicitors were insured on terms corresponding with the Minimum Terms and Conditions. The insurers sought a declaration that the claims in both actions were to be considered as a single claim. The trustees of the two trusts were joined as representatives of the beneficiaries. The insurers’ case was that all the claims arose from similar acts or omissions in a series of related matters or transactions. The trustees’ primary case was that none of the claims should be aggregated. Their secondary case, which was also the insurers’ alternative case, was that the claims should be aggregated by reference to the two developments, producing two pots of indemnity.
Teare J accepted that the claims arose from similar acts or omissions, but rejected the argument that they were in a series of related matters or transactions. He interpreted those words as referring to transactions which, by reason of their terms, were conditional or dependent on each other. Because the transactions with the individual investors were not mutually dependent, he dismissed the insurers’ claim. The Court of Appeal held that he had gone too far in requiring dependence. It accepted that there must be an intrinsic relationship between the transactions rather than an extrinsic relationship with some outside connecting factor, even a common one, and remitted the action for determination in accordance with that guidance.
The Supreme Court’s construction and its application
Lord Toulson, with whom Lord Mance, Lord Clarke, Lord Sumption and Lord Reed agreed, said that aggregation clauses should not be approached with a predisposition towards either a broad or a narrow interpretation. They may operate in favour of the insurer by capping the total sum insured, or in favour of the insured by capping the deductible. A neutral approach was also appropriate because the Law Society is a regulator setting minimum terms, and must balance reasonable protection of the public with the cost and availability of insurance.
The requirement that similar acts or omissions occur in a series of related matters or transactions prevents aggregation whenever similar negligent conduct is repeated in different settings, which would make the scope for aggregation almost limitless. There must be a real connection between the transactions in which the acts or omissions occurred, rather than merely a similarity in the type of act or omission. The word related implies some interconnection, so that the matters or transactions in some way fit together. After market negotiation, the Law Society did not circumscribe that phrase by any particular criterion. Determining whether transactions are related is therefore an acutely fact-sensitive exercise of judgment, not a reformulation of the clause.
The Court of Appeal’s further requirement of an intrinsic relationship, rather than an extrinsic relationship with a third factor, was neither necessary nor satisfactory. Intrinsic is an elusive description of a relationship between transactions, and the formulation risked excluding situations which the additional wording was intended to address.
The relevant transaction was not simply the payment of money out of an escrow account. That payment was an act giving rise to a claim, but it occurred in the course of a wider transaction: an investment in a particular development under a contractual arrangement of which the trust deed and escrow agreement were part and parcel, being the means designed to provide security. The transaction was principally bilateral, but it had an important trilateral component because of the solicitors’ role as escrow agents and trustees, and a multilateral element because the investors were co-beneficiaries.
The application of the clause is to be judged objectively, taking the transactions in the round, rather than exclusively from the viewpoint of the investors or the solicitors. The Peninsula Village transactions were connected in significant ways, as were the Marrakech transactions. The members of each group invested in a common development, and the money advanced by them was intended in combination to provide the developers with the necessary capital. Notwithstanding individual variations, they participated in what was in overall terms a standard scheme and were co-beneficiaries under a common trust. Those factors led to the firm conclusion that the claims of each group arose from acts or omissions in a series of related transactions.
Aggregation of the Peninsula Village claims with the Marrakech claims was much weaker. The transactions bore a striking similarity, but similarity was not enough. Although the development companies were related members of the Midas group and the legal structures were similar, the projects were separate and unconnected. They concerned different sites, and the different groups were protected by different deeds of trust over different assets. On the facts as they currently appeared, the insurers therefore had no right to aggregate the two groups.
The parties had not addressed the court fully on the facts and wished to reserve the opportunity of analysing them in greater detail if the case was remitted. If any party wished to argue that the characterisation of the transactions was defective on a fuller analysis, it should have that opportunity. The court also heard no detailed argument about the crossover investors. Each entered a new Marrakech loan agreement and a new escrow agreement. The fact that some investors switched did not appear to affect those who did not, but entering one investment and then switching to another would obviously make those transactions related. On the facts as they appeared, a crossover investor’s claim in respect of the first transaction would fall to be aggregated with the other claims in that group, and a claim in respect of the second transaction would fall to be aggregated with the first claim, although the point had not been argued.
Verdict: The Court unanimously allowed AIG’s appeal. On the available facts the claims within each development could be grouped together, but the two developments formed separate groups. The Court invited submissions on where any remaining factual issues should be resolved. The trustees’ costs cross-appeal no longer arose.
Source: AIG Europe Limited v Woodman and others [2017] UKSC 18
