Hilary
Term
[2017] UKSC 18
On appeal from: [2016] EWCA Civ 367
JUDGMENT
AIG Europe Limited (Appellant) v Woodman and
others (Respondents)
before
Lord Mance
Lord Clarke
Lord Sumption
Lord Reed
Lord Toulson
JUDGMENT GIVEN ON
22 March 2017
Heard on 10 October 2016
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Appellant
Colin Edelman QC
Ben Lynch
Peter Morcos
(Instructed by
Mayer Brown International LLP)
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Respondents
Tom Leech QC
Edward Risso-Gill
(Instructed by Royds
Withy King)
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Intervener (The
Solicitors Regulation Authority)
David Edwards QC
Tim Jenns
(Instructed by
Russell-Cooke LLP)
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LORD TOULSON: (with whom
Lord Mance, Lord Clarke, Lord Sumption and Lord Reed agree)
Introduction
1.
Under section 37 of the Solicitors Act 1974 the Law Society may make
rules requiring solicitors to maintain professional indemnity insurance with
authorised insurers and specifying the terms on which indemnity is to be
available. As the House of Lords explained in Swain v Law Society [1983]
AC 598, the power is intended to be for the protection of the public as well as
the premium-paying solicitor. The rules made by the Law Society require such
insurance to satisfy certain Minimum Terms and Conditions (MTC). There is a
prescribed minimum figure for which solicitors must be insured for any one
claim, but clause 2.5 of the MTC permits the aggregation of claims in the
following circumstances:
“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.”
2.
Sub-clauses (iii) and (iv) were added in 2005 in circumstances to which
I will refer. The dispute in this appeal arises from sub-clause (iv). More
specifically, it is about the meaning of the expression “related matters or
transactions”.
The claims against the solicitors
3.
In 2013 two actions were begun in the Chancery Division (EWHC 13E01675
and EWHC 13C02077) against two now defunct firms of solicitors. One of the
firms, the International Law Partnership LLP, was the successor in practice of
the other, John Howell & Co. It is unnecessary for present purposes to
distinguish between the two firms, and I will refer to them as the solicitors.
The actions were brought by a total of 214 claimants. The claimants in 13E01675
were all investors in a project to develop holiday resorts on a plot near
Izmir, Turkey, referred to as Peninsula Village. The claimants in 13C02077 were
all investors in a similar project at Marrakech, Morocco. A certain number of investors
in the Peninsula Village development subsequently transferred their investment
to the Marrakech development because of planning delays. They have been
referred to as the “crossover” investors. I will refer to the investors
collectively as the investors or, where appropriate, as the Peninsula Village
investors, the Marrakech investors or the crossover investors.
4.
The developers were a UK property company called Midas International
Property Development Plc, which operated through subsidiary Midas companies for
each development. The precise details of the companies’ interrelationship do
not matter and I will refer to them as the developers. In 2004 they instructed
the solicitors to devise a legal mechanism for the financing of foreign
developments by private investors who would have security over the development
land. The investments would take the form either of loans, at an attractive
rate of interest, or of purchase of holiday properties. A trust was created for
each development with the object of providing security for the investors. The
solicitors were the initial trustees. The trust would either own or hold a
charge over the development land as security for the amounts invested. The
beneficiaries were the investors. The funds advanced by the investors would
initially be held by the solicitors in an escrow account. They were not to be
released to the developer unless and until the value of the assets held by the
trust was sufficient to cover the investment to be protected, applying a “cover
test” set out in the trust deed.
5.
As well as devising the scheme, the solicitors acted for the developers
in relation to the individual investments. For each investment the solicitors
would open a file, which would include a loan or purchase agreement between the
investor and the developer and an escrow agreement between the investor, the
developer and the solicitors.
6.
The developers signed an agreement for the purchase of the Peninsula
Village site in April 2007. They did not enter into a similar agreement for the
Marrakech site, but instead they entered into an agreement in November 2007 to
buy the shares in the local company which owned it. The solicitors released
tranches of Peninsula Village investment funds to the developers in April 2007
and October 2008. They released tranches of Marrakech investment funds on five
occasions between November 2007 and March 2008.
7.
In May 2008 the Financial Services Authority prohibited the developers
from receiving any further investment in relation to the developments. The
developers were unable to complete either the purchase of the Peninsula Village
site or the purchase of the shares in the company which owned the Marrakech
site, and in November 2009 the developers were wound up. All the money in the
escrow accounts had been paid out.
8.
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
failed properly to apply the cover test before releasing funds to the
developers, with the result that the funds were released without adequate
security. The claims were due to be tried in the next few months.
The insurance action
9.
The solicitors had professional indemnity insurance with the appellant
(“the insurers”) on terms corresponding with the MTC. The insurers’ liability
is limited to £3m in respect of each claim. The investors’ claims in total
amount 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 Chancery Division actions are to be considered as a single claim
under the MTC. The present trustees of the Peninsula Village and Marrakech
trusts (“the trustees”) applied successfully to be joined in the proceedings as
representatives of all the beneficiaries under each trust.
10.
The insurers’ case is that the investors’ 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) and therefore there is an
overall limit of indemnity of £3m. The trustees’ primary case is that none of
the investors’ claims fall to be aggregated with those of any other investor.
If that argument fails, their secondary case is that the Peninsula Village
claims and the Marrakech claims cannot be aggregated with one another and so
there are two available pots of indemnity. It was also the insurers’
alternative case that the claims could be aggregated by reference to the two
developments.
11.
The case was tried by Teare J, whose judgment is reported at [2016] Lloyd’s Rep IR 147. He accepted that all the claims arose from similar acts or
omissions, and that finding is not challenged in this court, but he rejected the
argument that they were “in a series of related matters or transactions”. He
interpreted those words as referring to transactions which were related in the
sense that, by reason of their terms, they were conditional or dependent on
each other. Since the transactions entered into between the developers and each
investor were not mutually dependent, the claims of each investor did not fall
to be aggregated with one another. The action was therefore dismissed.
12.
Teare J gave permission to appeal. The Court of Appeal ordered an
expedited hearing, confined to issues of principle. The parties agreed a list
of issues, the first of which was “what is the true construction of the words
‘in a series of related matters or transactions’?” The judgment of the Court of
Appeal (Longmore, Kitchin and Vos LJJ) is reported at [2016] Lloyd’s Rep IR 289;
[2017] 1 All ER 143. The court concluded that Teare J went too far in saying
that the transactions had to be dependent on each other. It accepted a submission
made by Mr David Edwards QC, appearing for the Law Society as an intervener,
that there must be an “intrinsic” relationship between the transactions rather
than a relationship with some outside connecting factor, even if that factor
was common to the transactions. If the relevant transaction was the payment of
money out of an escrow account, which should not have been paid out of that
account, what would be “intrinsic” would depend on the circumstances of that
payment. The court summarised its interpretation, at para 33, by saying that
“the true construction of the words ‘in a series of matters or transactions’ is
that the matters or transactions have to have an intrinsic relationship with
each other, not an extrinsic relationship with a third factor.” It allowed the
appeal and remitted the action to the Commercial Court to determine in
accordance with the guidance in its judgment.
13.
The insurers criticise the Court of Appeal for introducing an
unwarranted qualification into the concept of “related matters or
transactions”. Those words, they say, are unspecific as to the nature of the
relationship, because the clause may fall to be applied in a huge variety of
factual situations not capable of prediction; that its application requires an
exercise of judgment tailored to assessing whether on the particular facts
there is a substantial connection; and that it is wrong for the court to try to
create a greater degree of certainty than the natural meaning of the words
allows. The trustees and the Law Society support the Court of Appeal’s
interpretation.
Analysis
14.
Aggregation clauses have been a long standing feature of professional
indemnity policies, and there have been many variants. Because such clauses
have the capacity in some cases to operate in favour of the insurer (by capping
the total sum insured), and in other cases to operate in favour of the insured
(by capping the amount deductible per claim), they are not to be approached
with a predisposition towards either a broad or a narrow interpretation. There
is a further reason for adopting a “neutral” approach in the interpretation of
the MTC. The Law Society is not in a position comparable to an insurer
proffering an insurance policy. It is a regulator, setting the minimum terms of
cover which firms of solicitors must maintain. In doing so it has to balance
the need for reasonable protection of the public with considerations of the
cost and availability of obtaining professional indemnity insurance.
15.
Clause 2.5 of the MTC authorises the aggregation of more than one claim
when each claim arises from acts or omissions falling within any one of
sub-clauses (a)(i) to (iv). Sub-clause (i) (“one act or omission”) requires no
further explanation. Sub-clause (ii) (“one series of related acts or
omissions”) was interpreted in Lloyds TSB General Insurance Holdings Ltd v
Lloyds Bank Group Insurance Co Ltd [2003] 4 All ER 43 by Lord Hoffmann as
confined to acts or omissions which “together resulted in each of the claims”
(para 27). Lord Hobhouse was prepared to go somewhat further by including the
scenario of the misselling of a pension scheme, by means of the same misleading
document, to a succession of people who brought a series of claims. The other
three judges expressed no view on the point of difference between Lords
Hoffmann and Hobhouse.
16.
In the light of that decision, and in response to market pressures by
professional indemnity insurers, the Law Society amended clause 2.5 by adding
sub-clauses (iii) and (iv). But the point of difference between Lords Hoffmann
and Hobhouse may not have been rendered academic, as I will explain.
17.
The additional sub-clauses cover multiple claims arising from the same
act or omission (sub-clause (iii)), or similar acts or omissions (sub-clause (iv)),
subject to the important limitation that the setting of the act(s) or
omission(s) giving rise to the claims was “a series of related matters or
transactions”.
18.
Looking at the matter broadly, it is easy to see the reason for such a
limitation. If insurers were permitted to aggregate all claims arising from
repeated similar negligent acts or omissions arising in different settings, the
scope for aggregation would be so wide as to be almost limitless. By requiring
that the acts or omissions should have been in a series of related
transactions, the scope for aggregation is confined to circumstances in which
there is a real connection between the transactions in which they occurred,
rather than merely a similarity in the type of act or omission.
19.
In the Lloyds TSB case emphasis was put on the importance of the
particular language used in any aggregation clause to specify the factors
permitting different claims to be treated as one. Individual words or phrases
may not carry the same meaning in different clauses of different policies.
Longmore LJ rightly said in the present case, at para 27, that the word
“related” in the phrase “a series of related matters or transactions” (with
which we are presently concerned) does not bear the same connotation as in the
phrase “related series of acts or omissions” (with which the House of Lords was
concerned in the Lloyds TSB case).
20.
Mr Edelman QC for the insurers accepted that for matters or transactions
fairly to be described as “related”, there must be some identifiable
substantive link or connection between them beyond mere similarity. But he
criticised the Court of Appeal’s interpretation of the words “a series of
related matters or transactions” as additionally requiring the matters or
transactions to have “an intrinsic relationship with each other, not an
extrinsic relationship with a third factor”.
21.
With respect to the Court of Appeal, I do not consider its formulation
to be necessary or satisfactory. My difficulty is with the word “intrinsic”
itself and what it means in this context. It is possible to describe things or
people as having certain intrinsic qualities or characteristics, but it is a
more elusive term when used as a descriptor of a relationship between two
transactions. Take Lord Hobhouse’s example of a pension scheme missold to a
group of investors in the same venture by use of the same document. On one
interpretation of the Court of Appeal’s formula it could be said that there was
no “intrinsic” relationship between the matters giving rise to the investors’
claims, because their only connection was an “extrinsic” relationship with the
third party who sold the pension to all of them. If so, the addition of
sub-clauses (iii) and (iv) will not have helped to resolve the point of
difference between Lords Hoffmann and Hobhouse; and if Lord Hoffmann’s view is
to be preferred, there would be no right to aggregate in such a case. It is
hard to suppose that the Law Society so intended when it introduced the new
sub-clauses.
22.
Sub-clause (iv) separates the requirement that the acts or omissions
giving rise to the claims should be similar and the requirement that they were
in a series of matters or transactions which were related. Each limb must be
satisfied for the sub-clause to apply. 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. The absence of further prescription is not particularly surprising,
considering the very wide range of transactions which may involve solicitors
providing professional services. Determining whether transactions are related
is therefore an acutely fact sensitive exercise. To borrow the language of Rix
LJ in Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] Lloyd’s Rep IR
696, para 81, it involves “an exercise of judgment, not a reformulation of the
clause to be construed and applied”.
23.
In considering the application of the phrase “a series of related
matters or transactions” it is necessary to begin by identifying the (matters
or) transactions. The Court of Appeal appears to have taken a narrow view of
the transactions when it spoke, at para 19, of the relevant transaction being
“the payment of money out of an escrow account which should not have been paid
out of that account.” That was an act giving rise to a claim, but the act
occurred in the course of a wider transaction. The transaction involved an
investment in a particular development scheme under a contractual arrangement,
of which the trust deed and escrow agreement were part and parcel, being the
means designed to provide the investor with security for his investment. The
transaction was principally bilateral, but it had an important trilateral
component by reason of the solicitors’ role both as escrow agents and as
trustees, and the trust deed created a multilateral element by reason of the
investors being co-beneficiaries.
24.
The transactions entered into by the Peninsula Village investors were
connected in significant ways, and likewise the transactions entered into by
the Marrakech investors. The 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.
25.
There was some debate about whether the question of the application of
the aggregation clause was to be viewed from the perspective of the investors
or the solicitors. The answer is that the application of the clause is to be
judged not by looking at the transactions exclusively from the viewpoint of one
party or another party, but objectively taking the transactions in the round.
26.
Viewed objectively, the connecting factors identified above drive me to
the firm conclusion that the claims of each group of investors arise from acts
or omissions in a series of related transactions. The transactions fitted
together in that they shared the common underlying objective of the execution
of a particular development project, and they also fitted together legally
through the trusts under which the investors were co-beneficiaries.
27.
The case for aggregating the claims of the Peninsula Village investors
with those of the Marrakech investors is much weaker. They bear a striking
similarity, but that is not enough. Once again, the proper starting point is to
identify the relevant matters or transactions: see para 23 above. On the basis
of that characterisation of the transactions, it is difficult to see in what
way the transactions entered into by the members of the Peninsula Village group
of investors were related to the transactions entered into by the members of
the Marrakech group of investors, leaving aside for the moment the particular
position of the crossover investors. Although the development companies were
related, being members of the Midas group, and the legal structure of the
development projects was similar, the development projects were separate and
unconnected. They related to different sites, and the different groups of
investors were protected by different deeds of trust over different assets.
Accordingly, on the facts as they currently appear, the insurers have no right
to aggregate the claims of the Peninsula Village investors with those of the
Marrakech investors.
28.
In saying “on the facts as they currently appear”, I am conscious that
although I have taken the facts from the agreed statement of facts and issues
and the factual description in Teare J’s judgment, which has not been
challenged, the parties did not address the court fully on the facts and wished
to reserve the opportunity of analysing them in greater detail if the case is
remitted to the Commercial Court, as the Court of Appeal ordered. If any party
wishes to argue that on fuller analysis of the facts, the characterisation of
the transactions in this judgment is somehow defective, they should have that
opportunity.
29.
Understandably, the parties did not go into detail about the position of
the crossover investors, but each crossover investor entered into a new
Marrakesh loan agreement and a new escrow agreement. I do not presently see
that the fact that some investors agreed to switch their funds from one
investment to the other has any bearing on the position of those who did not,
but I do see that entering into one investment and then switching to another
would obviously be related transactions. On the facts as they currently appear,
the logical analysis would seem to be that any claim made by crossover
investors in respect of the first transaction will fall to be aggregated with
the claims of other members of that group of investors, and that any claim made
by them in respect of the second transaction will fall to be aggregated with
their first claim, but we heard no argument on the point.
Disposal
30.
I would allow the appeal and either remit the case to the Commercial
Court to determine in accordance with this judgment or order its transfer to
the Chancery Division so that any outstanding matters can be dealt with by the
judge who tries the investors’ claims against the solicitors. I see practical
advantages in the second course but would invite the parties’ written
submissions within 28 days. The trustees had a cross-appeal against the Court
of Appeal’s order on costs, but that is no longer relevant. The parties’
submissions on costs should also be made within 28 days.
