AIG Europe Ltd v OC320301 LLP & Ors

In this action the Claimants, AIG Europe Limited, seeks a declaration that certain claims (“the underlying claims”) brought by many individuals against a firm of solicitors are to be aggregated and thus considered a single claim for the purposes of a claim brought by the firm of solicitors against AIG under an insurance policy. In order to determine the claim for a declaration it is necessary to construe the aggregation clause in the policy and apply it to the facts of the present case.

The underlying claims have been brought in two actions in the Chancery Division. They are yet to be determined and so, for the purposes of the present proceedings, it is necessary to assume that the allegations made in the underlying claims are true.

AIG’s claim for a declaration has been opposed by the Fifth and Sixth Defendants (“the Trustees”) who are the trustees of the trusts that are the subject matter of the underlying proceedings. The Trustees represent the claimants in the underlying proceedings. Although the Trustees are not party to the insurance policy in reality the dispute as to the true construction of the aggregation clause and its application to the facts of this case is between AIG and the Trustees. The firm of solicitors, two of its partners and an employee (the First to Fourth Defendants) were not represented at this trial.

The parties agreed that the Solicitors Regulation Authority (“SRA”) could informally intervene in the proceedings by providing written submissions as to the governing principles of construction. The SRA did so but did not seek to make submissions as to how the aggregation clause should be applied to the particular facts of this case.

This can most conveniently be taken from the letter before the underlying actions which I was asked to read and to which I was referred at the trial. Other matters which are not in dispute are taken from counsel’s skeleton arguments.

Midas International Property Development PLC (“Midas”) was a UK company which wished to develop holiday homes at Peninsula Village, Turkey and at Al Johara, Morocco. Between April 2006 and August 2009 Midas offered opportunities to invest in those holiday homes, principally by way of interest bearing loans or by the direct purchase of holiday homes. Midas engaged the firm of John Howell & Co., subsequently the International Law Partnership LLP (“TILP”), to advise it on all international property law aspects of the property transactions.

An elaborate scheme was devised with a view to protecting the interests of the investors and thereby encouraging them to invest. The investor became party to an Escrow Agreement with TILP as escrow agents to whom the investors’ monies were paid. The investor also became a beneficiary of a Deed of Trust. The trust was to hold security over the land to be purchased. Pursuant to the loan and purchase agreements the monies received from investors were not to be paid over by the escrow agent to the local Midas development company until the promised level of security was in place. The deed of trust contained an express provision for the test which the original trustees (the Second to Fourth Defendants) had to apply prior to the release of any money from the escrow account. This was known as the cover test. If it was met the original trustees were entitled to authorise the release of monies from the escrow account for the purchase of land or to finance the development generally.

There was one trust established for Peninsula Village and one trust established for Al Johara. They were separate. The investors were only intended to be admitted to the relevant trust once the cover test had been applied and the monies released from the escrow account. The objects of the trust were to realise the assets in order to repay the investors if the developments failed.

Typically, the files maintained in relation to each investor contained an escrow agreement, a loan or purchase agreement and a copy of the relevant trust deed. Each file had its own designated matter and ledger number and contained records of payments into the escrow account, transfers from that account to a holding account and, finally, the release of the funds to the local Midas company.

Peninsula Village involved the acquisition of a substantial plot of land near Cesme, close to Izmir. The development involved the construction of about 420 villas and apartments. A contract for the purchase of the land was entered into by the local Midas company in April 2007. Al Johara involved the development of 8 plots of land near Marrakech (“the Marrakech development”) and was a larger development than Peninsula Village. The local Midas company did not enter into a contract for the purchase of land but, in November 2007, entered into a contract for the purchase of shares in Les Kasbahs du Sud SA, a local company which owned the land in question.

However, the local Midas companies were unable to complete the contracts for the purchase of the land and for the purchase of shares in the land-owning company, which inability led to the failure of both the Peninsula and Marrakech developments. By November 2009 Midas was wound up. It is the case of the investors that by this time all of the invested monies held in escrow had been paid out to the local Midas companies.

The investors’ case is that had the defendants put in place an effective form of security and/or applied the cover test properly the investments would have been protected or would never have been released from the escrow account.

The mortgage established over Peninsula Village was defective because it was subject to a “usufruct” in favour of the vendors. The security established over the shares in Kasbah (a “nantissement”) had limited value because, pursuant to the terms of the shares sale, the local Midas company owned only 16.5% of the shares in Kasbah and in any event it was subject to prior pledges in favour of other shareholders.

In the result the investors claim to have lost in excess of £10m. (though credit will be given for any capital recovered as a result of steps taken in Turkey and Marrakech to realise at least some of the trust assets).

The trustees represent 214 investors or beneficiaries, the vast majority of whom are private individuals. In broad terms they fell into the following categories. First, there were those who lent money to the Peninsula Village development which was paid out of the escrow account in April 2007. Second there were those who lent money to the Marrakech development which was paid out of the escrow account in November 2007. Third, there were those who had lent money to the Marrakech development which was paid out of the escrow account on various dates between November 2007 and February 2008. Fourth, there were those who had paid money to purchase holiday homes in Peninsula Village which was paid out of the escrow account in October 2008.

There was also a group of investors or beneficiaries who are known as “crossover” beneficiaries. They had originally entered into loan or purchase agreements with regard to Peninsula Village but, when there were planning delays at Peninsula Village, were encouraged to invest in the Marrakech development instead.

Several causes of action are relied upon. In the Amended Particulars of Claim the claims of those who loaned money are put in negligence and breach of fiduciary duty and the claims of those who paid money to purchase a holiday home are put in misrepresentation, breach of the escrow agreements and breach of duty as trustee. These claims are particularised in several ways. Counsel for AIG has identified the key complaints as a failure to apply the cover test adequately or at all with the result that the escrow funds were released without there being adequate security (see paragraphs 63-73 of his skeleton argument). Counsel for the Trustees has also summarised the breaches of duty relied upon in essentially the same, though slightly fuller terms (see paragraphs 86 and 96 of his skeleton argument).

Each year the Law Society makes rules under section 37 of the Solicitors Act requiring solicitors to arrange insurance with Qualifying Insurers. Such policies must comply with the Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors and Registered European Lawyers in England and Wales (“the MTC”). The MTC are therefore in the nature of delegated legislation but are, in effect, incorporated into the policies of insurance issued by the Qualifying Insurers.

TILP arranged insurance with AIG. The limit of liability (any one Claim, Defence Costs in addition) was £3m. The cover was in respect of “all Loss resulting from any Claim for any civil liability of any Insured which arises from the performance of or failure to perform Legal Services”. “Claim” was defined as “any demand for compensation or Damages for a civil liability of any Insured.” There was an aggregation clause (entitled Related Claims) but it is common ground that it was not in the same terms as the aggregation clause in the MTC and thus the governing clause was clause 2.5 of the MTC entitled One Claim, which provided as follows:

“The insurance may provide that, when considering what may be regarded as one Claim for the purposes of the limits contemplated by clauses 2.1 and 2.3 :

(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

and

(b)

all Claims against one or more Insured arising from one matter or transaction

will be regarded as One Claim.”

There was a retention or excess clause of £7,500 (each and every Claim, but not applicable to Defence Costs), subject to an overall annual aggregate limit of £22,500. The policy provided that “a single retention shall apply to Loss arising from all Claims alleging the same Wrongful Act.” Thus there was one aggregation clause for assessing the limit of AIG’s liability and another for assessing the amount of the retention or excess; a situation described in argument as asymmetrical aggregation.

AIG’s case is that the claims brought by the investors against the First to Fourth Defendants arise from similar acts or omissions in a series of related matters or transactions with the result that AIG’s limit of liability is £3m.

The Trustees’ case is that they do not with the result that the losses estimated to exceed £10m. can be recovered; alternatively they say that all claims in respect of Peninsula Village arise from similar acts or omissions in a series of related matters or transactions and that all claims in respect of Marrakech arise from similar acts or omissions in a series of related matters or transactions with the result that the limit of AIG’s liability is £3m. in respect of Peninsula Village claims and a further £3m. in respect of Marrakech claims.

Counsel for AIG submitted that all of the underlying claims flow from the release by the First to Fourth Defendants of money held in escrow when it ought not to have been released. The cover test was not properly applied in each case. The escrow agreements and trust deeds were materially the same in each case. It followed, he submitted, that the underlying claims arose from similar acts or omissions. He further submitted that all of the underlying claims arose out of investments in Midas’ property business which was operated in a manner common to all claimants; funds were attracted on the basis that they would be protected by the escrow agreements and trust deeds. Where necessary switching between schemes was possible, as illustrated by the “crossover” investors. It followed, he submitted, that the similar acts or omissions (from which the claims arose) were in a series of related matters or transactions.

Counsel for the Trustees submitted that in the case of the Peninsula Village the complaint was that the First to Fourth Defendants had agreed to the grant of a usufruct without obtaining any legal or valuation advice that it would still be possible to realise the ipotek in order to repay the investors in the event of default. In the case of the Marrakech development the complaint was that the security taken by the trustees was defective for other reasons. It was therefore only possible to say “at very high level of abstraction” that the acts or omissions were similar. It followed that the acts or omissions giving rise to the claims with regard to Peninsula Village were different from the acts or omissions giving rise to the claims with regard to the Marrakech development. He further submitted that the relevant transactions did not follow each other in “temporal succession” or follow one another “in time or in logical order”. They were begun at different times and were “completed” (in the sense of the monies being released from the escrow account) on various dates between April 2007 and October 2008. In any event they were not “related” because there was no connection between the investors (save in very few instances, for example where both husband and wife made an investment) and the individual transactions were not dependent upon each other. It followed that the acts or omissions relied upon were not in a series of related matters or transactions. In the alternative there were two series of related matters or transactions, those with regard to the Peninsula Village and those with regard to the Marrakech development.

Aggregation clauses permit two or more claims to be treated as a single claim where they are linked by a unifying factor of some kind. The choice of language used to express that unifying factor is of critical importance. The unifying factor may be express or it may be necessary to imply a unifying factor from the general context; see Lloyds TSB General Insurance Holdings Ltd & Ors v Lloyds Bank Group Insurance Co Ltd [2003] 4 AER 43 at paragraphs 14, 15, 17 and 26 per Lord Hoffman.

The parties and the SRA have informed me that clause 2.5 of the MTC was rewritten following the decision of the House of Lords in Lloyds TSB General Insurance Holdings Ltd & Ors v Lloyds Bank Group Insurance Co Ltd. I was also informed that there is no authority on the true construction of clause 2.5 of the MTC. There are of course decisions on aggregation clauses expressed differently from clause 2.5 (in particular Lloyds TSB General Holdings Ltd & Ors v Lloyds Bank Group Insurance Co Ltd) but because those decisions are on differently expressed clauses they can only be of very limited assistance. The court’s task is to construe and apply clause 2.5.

It is common ground that the MTC are the product of delegated legislation. The policy underlying the legislation is to ensure that solicitors are financially able to compensate their clients where claims are made against them; see Swain v The Law Society [1983] 1 AC 598 at pp.608 and 618 per Lords Diplock and Brightman. However, the presence of the limit per claim and the aggregation clause means that the solicitors’ ability to compensate may be limited to a sum less than the actual claim. Thus, although the court must be entitled when construing the MTC to have regard to the policy underlying the legislation (cf The Mortgage Corporation v The Solicitors Indemnity Fund (unreported, 15 May 1978 per Sir John Vinelott) it would be too simplistic to say that when construing the MTC, and in particular, the ambit of the aggregation clause that that construction should be adopted which gives the public the greatest level of protection. The MT was the result of discussions between the SRA and the insurance industry. The aggregation clause is part of the resulting package. No doubt it could have been more narrowly expressed but then the limit per claim might have been less or the premium may have been greater. Thus, when construing the MTC, and in particular the aggregation clause, the court should do so in a neutral manner, neither predisposed to assist the public nor predisposed to assist the insurer. As is the case with all written documents the court’s task is to identify the meaning which the instrument would be reasonably understood to bear in its context.

Similar acts or omissions: The claims must “arise from” similar acts or omissions. Although there was some dispute between the parties and the SRA as to the nature of the causative element involved in the phrase “arise from” (was it sufficient that there was “some causative element” or must the acts or omissions be the “proximate cause”) I was told that there was no need on the facts of this case to resolve that dispute. What I did have to determine was whether the claims arose from “similar acts or omissions”.

There was no dispute that acts or omissions are similar if they bear a resemblance or likeness to each other without being identical. Nor was there any dispute that at one level of abstraction, labelled “very high” by counsel for the Trustees, the acts and omissions of the First to Fourth Defendants were similar. But at a lower level, when one had regard to what they had actually failed to do, their acts or omissions were said to be not similar but different. At what level should one judge similarity ?

Clause 2.5 does not give any express assistance on this question. It seems to me that in the absence of express assistance the court must decide what is implicit in the clause. The aim or object of the clause is to permit claims to be aggregated for the purpose of applying the limit of the insurer’s liability per claim. (A different aggregation clause was agreed for the retention or excess clause.) The requisite degree of similarity must be that which is appropriate having regard to that aim or object. In deciding what that degree is the court cannot re-write clause 2.5 by adding words to it which are neither expressed nor implied in the clause. That being so, and being faithful to the words in the clause, the requisite degree of similarity must be a real or substantial degree of similarity as opposed to a fanciful or insubstantial degree of similarity. This is not adding words which are not to be found in the clause. Rather it is construing the adjective “similar” which is found in the clause.

In all the claims, both those with regard to Peninsula Village and those with regard to the Marrakech development, the local Midas company could not pay the vendor (in the one case the vendor of the land and in the other case the vendor of the shares in the local company which owned the land). In those circumstances the defendants failed to provide effective security (in the one case over the land and in the other case over the shares) so that the cover test was not properly applied. Thus, after the investors’ monies had been released, the investors were exposed to loss in the event that the developments failed. In my judgment this is a real and substantial degree of similarity. It is neither fanciful nor insubstantial. It must therefore follow, in the language of the clause, that all the claims arose out of similar acts or omissions. I accept that they were not identical but they do not have to be.

In a series of related matters or transactions: This phrase serves to limit the scope of the aggregation clause which would otherwise be very wide. The phrase embodies the unifying factor (or an important part thereof) which makes it appropriate to aggregate claims.

Counsel for the Trustees submitted that the similar acts or omissions were not in “a series of related matters or transactions” because the individual transactions of loan or purchase whether in Peninsula Village or in the Marrakech development are separate and independent of each other. If that were wrong then his alternative submission was that the transactions concerning Peninsula Village were related to each other and that the transactions concerning the Marrakech development were related to each other but that the transactions concerning Peninsula Village were not related to the transactions concerning the Marrakech development.

Counsel for AIG submitted that they were all related because they were all made pursuant to what was described as the “Midas modus operandi” or, as it was put in counsel’s skeleton argument, “there was the same security structure with Midas as the hub”.

“Series” takes its meaning from its context. In some contexts it denotes matters which together form part of a whole, as in the Ashes Test series against Australia. In other contexts it denotes matters of a similar kind which occur one after the other, as in a series of explosions on board tankers carrying crude oil. In yet other contexts it denotes matters which bear a logical relationship with each other, as in what is the next number in the series 5,10,15 ?

In the present case the words to be construed are “a series of related matters or transactions” in a solicitors’ insurance policy. In particular, the words “related matters or transactions” must be considered, for they throw light upon the intended meaning of “series”. They must of course be considered having regard to the context in which they are found, namely, an aggregation clause in a solicitors’ insurance policy the aim and object of which is to aggregate several claims into one claim for the purpose of applying the insurers’ limit of liability per claim. It is only by examining the words used in their context that the court can identify the meaning which the clause in question would be reasonably understood to bear.

The words used have at least three possible meanings. First, they could denote a series of transactions which are related by reason of being dependent on each other. Or, secondly, they could mean, having regard to the factual context of the First to Fourth Defendants’ business, a series of independent transactions which are related because they are investments in one particular development eg the Peninsula Village. Or, thirdly, they could mean a series of independent transactions which are related because they are of a similar kind, namely, they are all made pursuant to what was described as the “Midas modus operandi” or, as it was put in counsel’s skeleton argument, “there was the same security structure with Midas as the hub”.

Counsel for AIG favoured the third of these possible meanings and submitted that “a series of related matters or transactions” meant matters or transactions which, on the facts of the particular case, are sufficiently similar and/or connected to one another. In my judgment, however, this is unlikely to have been the intended meaning. If it were correct, the scope of the unifying factor and hence of the aggregation clause would be very wide with no clear limit. Claims would be aggregated where they arose out of similar acts or omissions in matters or transactions which are sufficiently similar and/or connected with another. But such test is vague, uncertain and soft-edged. AIG offered no assistance as to how one judged whether transactions were “sufficiently” similar and/or connected with another. A reasonable man would expect an aggregation clause to be reasonably certain in its scope.

The second possible meaning (the Trustees’ alternative submission) has the advantage of being clear and readily comprehensible. The transactions concerning investments in Peninsula Village are one series of related matters or transactions and the transactions concerning investments in the Marrakech development are another series of related matters or transactions.

The first possible meaning (the Trustees’ primary submission) also has the advantage of being clear and readily comprehensible. In the present case there is common ground on the pleadings that the individual transactions were not conditional or dependent upon each other. In addition, the natural meaning, or at any rate the most natural meaning, of the phrase “a series of related matters or transactions” in the context of a solicitors’ insurance policy is, in my judgment, a series of matters or transactions that are in some way dependent on each other. It is difficult to talk of transactions being related unless their terms are in some way inter-connected. Finally, the first possible meaning can reasonably be said to be appropriate in the context of an aggregation clause because there is sense in aggregating such claims where they arise out of similar acts or omissions in transactions that are dependent on each other.

It may be said that it also makes sense to aggregate claims as one claim where they all concern transactions in one development. However, the wording of the clause, “a series of related matters or transactions”, in its context appears to me to point to transactions which are, by reason of their terms, dependent on each other rather than independent of each other.

For these reasons I have reached the conclusion that the underlying claims are not to be aggregated as one claim. They arise out of similar acts or omissions but the acts or omissions are not in a series of related transactions because the terms of the transactions are not conditional or dependent upon each other. The acts or omissions are not therefore in a series of related matters or transactions.

I have reached this conclusion without reference to authority because there is no authority on the meaning of clause 2.5. Reliance was, however, placed by counsel for AIG on an Australian authority and on an English authority and by counsel for the Trustees on an English authority. I shall therefore refer to them.

In Distillers v Ajax Insurance Co Ltd (1974) 130 CLR 1 the High Court of Australia had to construe an aggregation clause which referred to “any claimant or number of claimants in respect of or arising out of any one occurrence or in respect of or arising out of all occurrences of a series consequent on or attributable to one source or original cause”. The case arose in the context of the supply of the drug thalidomide to pregnant women by the insured against whom had been brought a number of actions by or on behalf of children born with deformities caused by the ingestion of thalidomide.

Stephen J., who had been referred to dictionaries and to previous cases, concluded at paragraph 26 that

“the meaning of “series” in the provision is, I think, that of a number of events of a sufficiently similar kind following one another in temporal succession. ……….Since any number of distinct events will, unless by coincidence they occur simultaneously, necessarily occur in a temporal sequence, the only remaining attribute of the concept of a series to be satisfied is that the events should be, in a sufficient degree, similar in nature.”

Gibbs J. agreed, adding at paragraph 1, that the occurrences did not have to follow in “any progressive order”.

Menzies J. cogently dissented for reasons which illustrate the difficulty of construing “series”:

“The word “series” does not, I think, normally carry with it the notion of a sequence with some connexion between the items in the sequence. Here whatever connection there is between the occurrences is to be found in what constitutes the further requirement, viz, that they are attributable to one source. The problem is do they form a series ? Prima facie I think not. It is probably true that no two of the relevant occurrences happened at the one time so that it may be taken for granted that they occurred one after another, but I do not regard that as itself sufficient to constitute them occurrences in a series ……..The numbers 1,2 and 3 are a series of numbers because they are in a particular order, but I would not regard the numbers 7,16 and 100 as a series of numbers because they are in no discernible order. It seems to me that order is the characteristic of a series and there is no order in the occurrences here under consideration. The difficulty with the phrase here is to attribute any particular meaning to it, other than the unlikely one, that it merely excludes occurrences happening at the one time. This is because the element of connexion between occurrences which could perhaps constitute them in a series does not depend upon the word “series” itself, that is, that they are attributable to one source. This is dealt with expressly. To reject the construction of the phrase “occurrences in a series” means no more than any number of occurrences not happening at the one time does, it must be conceded, leave the words “in a series” with problematical positive significance. Nevertheless ………I am not satisfied that the occurrences with which we are concerned are occurrences in a series simply because they happened one after the other………”

In Countrywide Assured Group PLC v Marshall [2003] 1 AER Comm 237 this court followed the approach of the majority. The material phrase in the policy was “one occurrence or all occurrences of a series consequent upon or attributable to one source or original cause.” The context was a claim against underwriters in respect of liability for missold pensions. Morison J. said, at a paragraph 14:

“When is an occurrence part of a series of occurrences ? To form part of a series there must be some connecting factor which links occurrences which would otherwise be separate. In the Australian case (Distillers Co. Biochemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd [1974] 130 CLR 1) the majority considered that the occurrences must be of a sufficiently similar kind to qualify for forming part of a series. In this case the claims might properly be all described as occurrences of misselling of pensions. On the assumed facts the claims are sufficiently related to form part of a series; and that would be so, I think, whether or not they were attributable to one source or original cause. ”

Counsel for AIG submitted that the phrase “series of related matters or transactions” should be construed in the same way as the majority construed series in Distillers and as Morison J. did in Countrywide. But both the language of the aggregation clause and the context were different in those cases and I therefore do not find them of any real assistance in construing and applying the aggregation clause in the present case.

In AG v Cohen [1937] 1 KB 478 the Court of Appeal had to consider the meaning of the phrase “the transaction thereby effected does not form part of a larger transaction or of a series of transactions” as found in section 73 of the Finance Act 1910. Counsel for the Trustees relied upon this case but, because the context was tax law, one must be very cautious in seeking assistance from it in the insurance context. The factual context was that the respondent had purchased six houses at an auction from the same vendor. In two cases the purchase price exceeded £500 and in four cases it did not. There were six contracts of sale each separately stamped. Double stamp duty was payable if the six purchases were part of a series of transactions in respect of which the aggregate value exceeded £500. The Court of Appeal held (Romer LJ dissenting) that the sales did not form part of a series of transactions. Greene LJ said, at p.489

“The word “series” must be read in its context, which is “part of a larger transaction or of a series of transactions”. The expression “part of a series” suggests, to my mind, that by a series is meant something of which it can be said there is some integral relationship between its parts. It does not, I think, convey the idea that all that is required is that the transaction should be one of a number of transactions related to one another in time or space or both. This view is, I think, strengthened by the fact the expression “part of a series of transactions” stands in juxtaposition to the expression “part of a larger transaction”. …….

Given the difference in wording and in context neither the decision nor the reasoning can assist in the present case. But the reasoning of Greene LJ illustrates importance of studying the language and context to discern the intended unifying factor.

For the reasons which I have endeavoured to express I must refuse AIG the declaration they seek.