The application of aggregation clauses to Ponzi schemes is an area bereft…
In AIG Europe Ltd v OC320301 LLP and others  EWCA Civ 367, the Court of Appeal reviewed a decision of Teare J concerning whether a number of different claims against a firm of lawyers could be characterised as arising from similar acts or omissions in a series of related matters or transactions for the purposes of limb (iv) of the aggregation provision within the prevailing Solicitors’ Minimum Terms and Conditions (“MTC”).
Peter Morcos from 4 New Square (instructed by Will Glassey at Mayer Brown) appeared on behalf of AIG at first instance and in the Court of Appeal
Midas was a UK property company which embarked on two schemes to develop holiday homes: one near Izmir in Turkey, the second near Marrakech in Morocco. The first defendant (previously known as the International Law Partnership (“TILP”)) was engaged to advise Midas on all international property law aspects of the two transactions.
The land acquisition and construction costs for each scheme were to be financed by investors. The financing of each scheme was independent of the other and elaborate arrangements were implemented to protect the interests of the investors. Each investor made payment to TILP under the terms of an escrow agreement, particular to the investor, under which TILP would act as escrow agents; the investor was also admitted as a beneficiary under a deed of trust for the scheme in question; each trust was to hold security over the land to be purchased for the respective scheme and the monies held in escrow were not to be paid out by TILP until a promised level of security was in place (the test to be applied by TILP being known as “the cover test”).
A tranche of money relating to the Turkish development was paid out of escrow in April 2007. A further sum, contributed by purchasers of holiday homes (rather than investors) in the Turkish development was paid out in October 2008.
In respect of the Moroccan development, a tranche of money was paid out of escrow in November 2007, with further sums being paid on various dated between November 2007 and February 2008.
The acquisition of the land for the Turkish development ultimately foundered because the mortgage over the land in favour of the relevant trust was subject to a ‘usufruct’ (a right to use and enjoy the fruits of the land) in favour of the vendors. The Moroccan schemes failed too: the land for the development had to be acquired through the purchase of shares in the land-owning company, but only a minority of the shares was acquired and the land was subject to prior pledges in favour of other shareholders.
The trustees of the two trusts (“the Trustees”) brought proceedings against TILP (by now renamed as “OC320301 LLP”) on behalf of 214 investors, claiming a total of more than £10M. The essential complaint made was that TILP had failed to apply the cover test adequately or at all.
TILP’S PROFESSIONAL INDEMNITY INSURANCE
TILP was insured by AIG Europe. The limit of indemnity under the policy was £3M any one claim. The relevant policy terms were subject to the aggregation provisions found at Clause 2.5 of the Solicitors’ MTC, namely:
(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
(b) all Claims against one or more Insured arising from one matter or transaction
will be regarded as One Claim.”
THE COVERAGE PROCEEDINGS AND THE AGGREGATION ISSUE AT FIRST INSTANCE
AIG brought proceedings (“the AIG Proceedings”) against TILP and also the Trustees seeking a declaration that the Trustees’ claims in the underlying litigation should be treated as a single claim for policy purposes.
But for the aggregation provision in the policy, the claim in respect of each investor would have been treated as a separate claim. However, AIG contended that the Trustees’ claims arose from:
- Similar acts or omissions (namely the failure properly to apply the cover test in respect of escrow agreements and trust deeds which were materially identical in the case of each investor).
- A series of related matters or transactions, because they all arose out of Midas’s property business which was operated in a manner common to all investors and to which funds had been attracted by the promise that they would be protected by the escrow agreements and trust deeds.
Conversely, the Trustees argued that the claims on behalf of the Turkish investors arose from TILP’s failure to understand the impact of the usufruct on the Trustee’s ability to complete, whereas the defects in the Moroccan security were different in nature. They also contended that the transactions from which the claims arose were not “related” since the individual transactions concerning each investor were not dependent upon each other.
In the alternative to their primary arguments, both AIG and the Trustees argued that there were two different series of related transactions: those concerning the Turkish development and those concerning the Moroccan development. If this argument were to be accepted, then two £3M limits of indemnity would be available to meet all of the claims.
(1) Similar Acts or Omissions
It was common ground that acts or omissions could be similar if they bore a resemblance or likeness to each other without being identical. The judge considered that the requisite degree of similarity needed to be real or substantial rather than fanciful or insubstantial. The judge upheld AIG’s arguments that the common thread to all of the claims was a failure to apply the cover test properly before releasing the monies from escrow, thereby exposing the investors to loss in the event that the developments themselves failed: this meant that there was a real and substantial degree of similarity sufficient to satisfy the first part of sub-clause (iv).
(2) Series of Related Matters or Transactions
The judge noted that the words “series of related matters or transactions” were intended to limit the scope of what would otherwise be a very wide aggregation clause. He considered that the words used had three possible meanings:
- A series of transactions which were related by reason of being interdependent on each other.
- A series of transactions related by being investments in one particular development.
- A series of transactions related by being of a similar kind, for example (and as AIG argued) because they were all made as part of Midas’s modus operandi, using a similar security structure with Midas at its hub.
Teare J rejected AIG’s primary case (based on the third possible meaning): in his view such a construction would result in a very wide unifying factor with no obvious limit; such a test would be too uncertain and soft-edged to have been intended.
The judge considered that both the first and second possible meanings were potentially clear and readily comprehensible. However, he considered that the most natural meaning of the phrase “a series of related matters or transactions” was that the matters or transactions should be in some way be dependent on each other since it was difficult to talk of transactions being related if they were not inter-connected. The judge also considered that the first possible meaning was appropriate in the context of an aggregation clause, since it would make sense to aggregate similar acts and omissions in interdependent transactions. He therefore rejected the second meaning too and found for the Trustees.
THE COURT OF APPEAL
AIG argued there was no justification for the judge’s conclusion that transactions needed to be interdependent in order to constitute “a series of related matters or transactions”, and contended that all of the Midas transactions fulfilled the requirements of the aggregation clause. The trustees sought to uphold the judge’s reasoning. The Law Society, in the guise of the SRA, intervened and argued that the clause did require some sort of relationship between the matters or transactions: while the relationship did not need to be as narrow as interdependence, it needed to be based on an intrinsic connection rather than some common extrinsic factor such as geography or the identity of the solicitor.
Delivering the judgment of the Court, Longmore LJ pointed out that – on a linguistic analysis – the wording of the clause required that there should be some sort of connection between the transactions for them to be related. The Court went on to conclude that the connection had to be intrinsic rather than remote – for example, transactions which took place in contemplation of each other might be connected. The Court rejected the idea that any degree of relatedness would suffice, not only concluding that this would result in an impossibly wide construction of the clause, but also relying on the parties’ failure to adopt language traditionally used in order to formulate a wide aggregation provision (such as “any claim or claims arising from one originating clause …”). The Court of Appeal considered that its approach was consistent with that adopted in Lloyds TSB General Insurance v Lloyds Bank Group Insurance  Lloyd’s Rep IR 623, where the House of Lords had specifically emphasised the parties’ failure to adopt wording known to create a wide aggregation clause.
As is well known, the wording at Clause 2.5 of the Solicitors’ MTC was introduced – in its current form – into many professional indemnity policies following the House of Lords’ decision in the Lloyds TSB case. The Law Society Gazette for 27 January 2005 which explained that the clause had been introduced in order to address Qualifying Insurers’ concerns that the decision in Lloyds TSB had unacceptably narrowed the effect of the aggregation provision; the Gazette also recorded that the potentially greater width of the revised Clause 2.5 was one of the factors which prompted the revision of the then-current minimum Limit of Indemnity for any one claim from £1 million to £2 million. The Court of Appeal considered that this published history as to the genesis of the clause provided an important and admissible part of the background “matrix” of facts against which the clause should be construed.
Having determined the issues of principle in the manner outlined above, the Court of Appeal considered that it was in no position to make the necessary findings of fact as to how those principles should be applied in the current case. It therefore decided that the case should be remitted to the Commercial Court to allow the necessary findings of fact to be made.
In a postscript which some might consider bizarre, the Court also decided to set aside the judge’s finding that the claims all arose from “similar acts or omissions”. The Court did not suggest that the judge had been wrong in making this finding, but simply decided that the new “trier of fact” should not be inhibited by the finding which had been made on this issue!
Teare J’s decision, depending as it did on an apparent non-sequitur that transactions could not be related if they were not interdependent, was always vulnerable to attack. The disapproval of that part of his reasoning does not come as a surprise.
There will inevitably be many who are disappointed that the Court of Appeal’s decision has not done more to clarify the scope and application of the extended aggregation wording introduced after the Lloyds TSB case. The third and fourth limbs of clause 2.5 (a) are famously opaque, and one could be forgiven for thinking that an elucidation of the necessary relationship between the matters or transactions that it be “intrinsic” as opposed to “extrinsic” does little to narrow the field of possible outcomes.
But there are some pointers here as to what might be the solutions to some of the common problems that arise in this field. So, for example:
- It seems unlikely that the mere fact that the counterparty to the transactions is the same, or that they are on the same standard terms, will be enough without more to establish an intrinsic connection between them.
- Likewise the fact that the Court departed (without reference to authority) from the proposition that one considers the matter from the perspective of the insured (here the firm of solicitors) – hitherto assumed to be correct on the basis of Forney v Dominion Insurance Co Ltd  1 WLR 928 at p.934C-D and Kuwait Airways Corp v Kuwait Insurance Co  1 Lloyd’s Rep 664 at p.686 col.2 – may mean that it will not be enough to show that, from the insured’s viewpoint, the transactions are part of a scheme.
- Transactions that relate to the same subject-matter, for example, the sale of a number of units at a single development, will probably not, without more, be sufficiently related (again, contrary to the received wisdom in relation to this clause).
- Transactions that are part of a single fraud probably will be sufficiently related, the fraud providing the intrinsic connection between them.
- Transactions that cross-refer to one another might also be sufficiently related.
Ultimately, the market will need to await the outcome of the further trial, and almost certainly further appeals, until true clarity is available. The continuing uncertainty is unlikely to provide encouragement to existing or potential participants in a professional indemnity market which continues to offer little return to insurers. Similarly, that uncertainty may bedevil any attempt to advise either insurers or insureds (or, more often, their creditors) as to their respective rights and obligations, particularly in the context of bulk retail practices. It would not be too late for those responsible for the minimum terms to consider wording that was less obscure.