Aggregation authority: Court of Appeal guidance

23rd May 2016

The Court of Appeal’s decision has been overturned.  Please see our current briefing on the Supreme Court’s decision for full, up-to-date advice on this important case.

The Court of Appeal has provided important guidance on the meaning of the aggregation clause in the Solicitors Regulation Authority’s (SRA) Minimum Terms and Conditions for solicitors professional indemnity insurance (MTC). Walker Morris’ Banking Litigation team, explains why the AIG Europe case is significant for all those bringing, facing or insuring multiple claims against solicitors.

Facts and First Instance

As we highlighted in our earlier briefing, the AIG Europe case [1] 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 a trust 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 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 [2], the High Court decided 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.

Court of Appeal clarification

The Court of Appeal has now confirmed, however, that the lower court’s interpretation was too restrictive, and AIG’s appeal has been allowed – in part. The Court of Appeal took into account:

• The literal or natural meaning of the wording of the clause itself [3];
• The context in which the clause was drafted [4]
• The fact that clause 2.5 MTC does not use traditional and well-known ways in which to formulate an extremely wide aggregation clause and therefore cannot have been intended to have such width; and
• The fact that the aggregation clause had to be approached neutrally, without any assumptions in favour of either insurers or insureds

and concluded that that the correct test was, instead, that the matters or transactions have to have an “intrinsic relationship with each other, not an extrinsic relationship” [5].

Whilst what will amount to an intrinsic relationship will differ according to the facts of each individual case, it does seem from examples given by the Court of Appeal that something more than a mere external common factor (such as transactions being conducted within the same geographical area or by the same solicitor or firm) will be required.

WM Comment

This case is valuable because it is the only authority on the scope of the standard aggregation clause – such disputes are usually resolved via the arbitration provisions within the relevant contract. The judgment will be welcomed by insurers to the extent that it provides some relief from the very restrictive approach that the High Court had adopted at First Instance. Equally, however, the Court of Appeal accepted the submissions of the intervening Law Society, that the correct interpretation was still more narrow than AIG had claimed. That is good news because any wider test may have rendered aggregation clauses vague and potentially void for uncertainty.

Historically, lenders with multiple claims against a dishonest solicitor have faced aggregation by insurers, which has limited the potential recoveries which can be made. Now, each case handled by the dishonest solicitor needs to be considered and only those which are intrinsically linked, such as through the same borrower or a property in the same development, will be aggregated. In practice, this may create a series of “one claim” pots and so increase the overall recoveries which lenders can make.

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[1] AIG Europe Ltd v OC320301 LLP (formerly The International Law Partnership LLP) and Ors and The Law Society of England and Wales (Intervener) [2016] EWCA Civ 367
[2] [2015] EWHC 2398
[3] This is consistent with the general approach to contractual interpretation, on which we have recently reported in some detail: https://www.walkermorris.co.uk/publications/disputes-matter-july-2015/contract-is-king-says-supreme-court/).
[4] Extensive reference was made in the judgment to the Lloyds TSB v Lloyds Bank case ([2003] 4 All ER 43), which gave a narrow construction to a “series of transactions” so that the insurer could not aggregate. Following that case concern arose as to how this affected the MTC.  That led to the current wording of clause 2.5 and, in turn, to the increase in the minimum limit from £1m to £2m (to offset the fact that more claims may therefore be aggregated).
[5] [2016] EWCA Civ 367 – various references, including paragraphs 19, 26 and 33.