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Aggregation authority: Supreme Court confirmation of correct approach

Supreme Court Print publication

06/04/2017

Overturning the Court of Appeal’s 2016 decision, the Supreme Court has now confirmed the correct interpretation of the Law Society’s aggregation clause for professional indemnity insurance purposes. Louise Power of Walker Morris’ Banking Litigation team explain the AIG Europe case [1] and its implications for building societies and all those bringing, facing or insuring multiple claims against solicitors.

Story so far and significance

This case arose following the bringing of multiple solicitors’ negligence actions against AIG’s insured, a now-defunct law firm. The claims were issued by investors who had lost money under trusts covering two property schemes in Morocco and Turkey which had been developed by one of the firm’s clients. AIG argued that all of the claims were founded on the fact that the solicitors released monies too early or at all in respect of the two developments and therefore that they met the aggregation test, set out in clause 2.5 of the Law Society’s Minimum Terms and Conditions for solicitors professional indemnity insurance (MTC), for claims arising from “similar acts or omissions in a series of related matters or transactions”.  This was relevant because the insurer wished to rely on the aggregation clause to limit its liability.

At First Instance the High Court had found that to fall within a “series of related matters or transactions”, and therefore to be caught by clause 2.5 MTC, an element of conditionality between, or inter-dependency on, the matters/transactions in question, was required. The Court of Appeal rejected that decision as being too restrictive. It decided instead that, to be related, matters or transactions had to have an “intrinsic” relationship with each other, but the Court of Appeal did not define an intrinsic relationship.

Whilst the Court of Appeal’s judgment was welcomed by insurers to the extent that it gave scope for them to aggregate claims in more and wider circumstances than the High Court’s approach would have done, nevertheless AIG appealed to the Supreme Court on the basis that the introduction of the “intrinsic” test was an unwarranted and unhelpful qualification of the “related matters or transactions” concept. Following the Court of Appeal’s decision, there had been significant uncertainty in the market as to when matters or transactions might be sufficiently related to enable aggregation and that left insurers potentially exposed to very significant claims which, arguably on a common sense definition, might be related.

Supreme Court confirmation

The Supreme Court has now overturned the Court of Appeal’s judgment. It has rejected the intrinsic relationship test as being too uncertain. It has clarified that the correct approach is to view the matters or transactions objectively in the round, and to determine simply whether there is any “interconnection” between them.

In an attempt to provide some abstract guidance, the Supreme Court put it another way: the matters or transactions must “in some way fit together“. It concluded that determining whether matters are related is an acutely fact sensitive exercise, which requires an exercise of judgment, and that to try to impose any more prescriptive test would be unhelpful.

On the facts of this particular case, the Supreme Court held (in summary) that the Morocco transactions were related to each other and those claims could therefore be aggregated; and that the Turkey transactions were related to each other, and that those claims could be aggregated. Transactions entered into in respect of the Morocco development were not, however, related to transactions entered into in respect of the Turkey development.  Explaining its reasoning, the court stated that, for each of the Morocco and Turkey developments respectively, “[t]he 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.” (Looking at the Supreme Court’s sentence structure and attempting to extract a practical lesson for future application, it is arguable that either the mere fact of the common development site or the common trust arrangement would be a sufficient interconnection to enable aggregation – the Supreme Court does not say that both of these elements were necessary.)

Implications

In attempting to come up with a test to determine whether or not claims fell within the aggregation provision at clause 2.5 MTC, both the High Court and the Court of Appeal had effectively been guilty of reformulating the clause itself and implying restrictions that just aren’t there. Whilst the Supreme Court’s decision does not impose any rigid test, and does therefore leave scope for debate and potentially litigation on a case-by-case basis, it is welcomed.

Not only is this decision consistent with recent leading authorities on contractual interpretation and the implication of contractual terms [2], but also it acknowledges that, when finalising the MTCs in the first place, the Law Society had negotiated the provision within the market and had chosen not to prescribe any criteria as the clause had to remain open enough to cover the very wide range of matters and transactions upon which solicitors might provide professional services.

So far as for building societies and others bringing, facing or insuring multiple claims against solicitors are concerned, this Supreme Court judgment should be viewed as a return to the pre-AIG status quo. Whenever the question of aggregating multiple claims against solicitors arises, each case will have to be considered on its own facts. Where any dispute arises, the correct approach will be to examine the circumstances objectively and in the round.  General pre-action protocol requirements under the Civil Procedure Rules [3], including inter-party negotiation and even Alternative Dispute Resolution attempts, may assist this process, as greater transparency and cooperation (such as, where appropriate, the pre-action voluntary disclosure of sufficient information and documentation to enable each party to fully understand the other’s position) can facilitate early and amicable settlement to the benefit of all parties.

Furthermore, the Third Parties (Rights Against Insurers) Act 2010 (in force as of August 2016) should provide further clarity and certainty for building societies and other retail lenders going forward, as it will require insurers to bring aggregation arguments in any substantive proceedings.  There is therefore a lesser risk of a lender obtaining judgment only to be hit by an aggregation argument at a later stage.

If you would like any advice or assistance in light of the Supreme Court’s decision in AIG, please get in touch and we will be very happy to help.

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[1] AIG Europe Ltd v Woodman & Ors [2017] UKSC 18 (on appeal from [2016] EWCA Civ 367)
[2] See Contract is King, says Supreme Court; and Break clauses, apportionment and implying contractual terms: Supreme Court puts an end to the confusion
[3] See the Practice Direction on pre-action conduct and protocols

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