One Claim or Separate Claims?

Leong Wai Hong and Angela explain the United Kingdom Supreme Court’s approach in interpreting an aggregation of claims clause.
What does the phrase “a series of related matters or transactions” in an aggregation of claims clause under a professional indemnity insurance policy really mean?
This was the question before the Supreme Court of the United Kingdom in AIG Europe Ltd v Woodman & Ors [2017] UKSC 18.
Pursuant to section 37 of the Solicitors Act 1974, the Law Society of the United Kingdom made rules that require solicitors to maintain professional indemnity insurance with authorised insurers. The rules also specify the minimum terms and conditions (“MTC”) which such insurance must satisfy, including a prescribed minimum figure for which the solicitors must be insured for any one claim. However, 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 omission in a series of related matters or transactions

will be regarded as one Claim.”
In 2013, two actions were brought in the High Court in England against two firms of solicitors (“solicitors”). The first action was brought by investors in a project to develop a holiday resort near Izmir in Turkey called the Peninsula Village. The second was brought by investors in a similar project in Marrakech, Morocco.
Both projects were developed by the subsidiaries of a UK company called Midas International Property Development Plc (collectively “developer”). The developer appointed the solicitors to devise a legal mechanism to finance the developments by giving the investors security over the development land. Accordingly, a trust was created for each development with the object of providing security for the investors, who are the beneficiaries under the trust. The funds advanced by the investors would be held by the solicitors in an escrow account and be released to the developer only when the value of the assets held by the trust was sufficient to cover the investment.
In addition to devising the scheme, the solicitors also acted for the developer in relation to the individual investments. The solicitors opened a file for each investment and prepared an agreement between each investor and the developer as well as an escrow agreement between the investor, the developer and the solicitors.
The solicitors released the funds in the escrow account to the developer for the Peninsula Village project in April 2007 and October 2008 and for the Marrakech project, between November 2007 and March 2008. The developer was wound up in November 2009. By then, all monies in the escrow account had been paid out by the solicitors and the two projects could not be completed. Hence the investors filed the actions against the solicitors to recover their losses on various grounds, including breach of contract, breach of trust, breach of fiduciary duty and negligence. In essence, the investors alleged that the solicitors failed to ensure that there was adequate security before releasing the funds to the developer.
The solicitors sought indemnity under a professional indemnity insurance (“Policy”) which they had taken up with the appellant (“insurers”) for their potential liability in respect of the two actions. The Policy had been issued on terms that corresponded with the MTC.
Under the Policy, the insurers’ liability was limited to £3.0 million in respect of each claim. The aggregate amount claimed by the investors exceeded £10.0 million.
The insurers took the position that the claims under the two actions were “one claim” and commenced proceedings against the solicitors for a declaration that the investors’ claims in the two actions to be considered as a single claim under clause 2.5(a)(iv) of the MTC.
The trustees of the Peninsula Village and Marrakech trusts (who represented the beneficiaries of each trust) joined in the proceedings. The trustees contended that none of the investors’ claims fall to be aggregated with those of any other investor. Alternatively, they contended that the claims under Peninsula Village and Marrakech could not be aggregated with one another.
The High Court found that all the claims arose from similar acts or omissions, but disagreed that they were “in a series of related matters or transactions”. The High Court held that the phrase refers to transactions which were related in the sense that the terms were conditional or dependent on each other. As the transactions entered into between the developer and each investor were not dependent, the claims of each investor cannot be aggregated as one claim. The High Court dismissed the insurers’ action. The insurers appealed.  
The Court of Appeal held that the High Court “went too far” in saying that the transactions had to be dependent on each other. It instead held that upon its true construction, the phrase “in a series of related matters or transactions” means that the matters or transactions must have an “intrinsic” relationship with each other, not an extrinsic relationship with a third factor, even if the third factor was common.
The Court of Appeal allowed the appeal and remitted the action to the High Court to be determined. The insurers criticised the Court of Appeal’s decision for introducing an unwarranted qualification into the concept of “related matters or transactions” and appealed to the Supreme Court.
The Supreme Court observed that the Law Society had amended clause 2.5 of the MTC to include sub-clauses (iii) and (iv) in light of the decision in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2003] 4 All ER 43, which held that “one series of related act or omissions” is confined to acts or omissions which “together resulted in each of the claims”.
According to Lord Toulson, who delivered the unanimous decision of the Supreme Court, sub-clause (iii) covers multiple claims that arise from the same act or omission whereas sub-clause (iv) covers similar acts or omissions, subject in each case to the important limitation that the act or omission giving rise to the claims must be “a series of related matters or transactions”.
His Lordship explained that by requiring that the acts or omissions should have been in a series of related transactions, the scope of aggregation is confined to circumstances in which there is “a real connection between the transactions in which they occur, rather than merely a similarity in the type of act or omission”.
The Supreme Court was of the opinion that the Court of Appeal’s formula was not necessary or satisfactory due to the uncertainty as to the meaning of the term “intrinsic” in the context of two transactions. Lord Toulson said that sub-clause (iv) consisted of two separate requirements, both of which must be satisfied for the clause to apply. First, the acts or omissions giving rise to the claims should be similar, and second, the acts or omission must be in a series of matters or transactions which are related.
Lord Toulson said that in considering the application of the phrase “a series of related matters or transactions”, it is necessary to first identify the matters or transactions involved and then determine whether the transactions are related.
According to His Lordship, the expression “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”. The Supreme Court held that determining whether the transactions are related is an acutely fact sensitive exercise.
The Supreme Court was of the view that the transactions involved an investment in a particular development scheme under a bilateral contract but had an important trilateral component by reason of the solicitors’ role as trustees and escrow agents. The trust deed also created a multilateral element by reason of the investors being co-beneficiaries.
According to the Court, the transactions entered into in respect of each development were connected in significant ways. Each set of investors invested in a common development for which monies advanced by them were intended, in combination, to provide capital to the developer. Further, the investors in each development were all participants in a standard scheme and were co-beneficiaries under a common trust.  
The Supreme Court found that the above connecting facts, when viewed objectively, led to a firm conclusion that the claims of each group of investors arose from acts or omissions in a series of related transactions. Accordingly, the insurers were entitled to aggregate the claims of the Peninsula Village investors as one claim, and the claims of the Marrakech investors as another.
However, the Supreme Court did not find anything to relate the transactions entered into by the investors in the Peninsula Village project to the transactions entered into by the investors in the Marrakech project. Other than the development companies running both projects being subsidiaries of the Midas Group and the similarity of the legal structure of the projects, both projects were separate and unconnected. Both projects relate to different sites and the respective groups of investors were protected by different trust deeds over different assets. Hence, it was held that based on the facts, the insurers had no right to aggregate the claims of the Peninsula Village investors with those of the Marrakech investors.
The Supreme Court allowed the appeal against the Court of Appeal decision.
The Supreme Court’s decision provides guidance on how the courts should interpret the phrase “a series of related matters or transactions” in an aggregation of claims clause. It is worth noting that the Supreme Court has stated that the word “related” in the phrase “a series of related matters or transactions” does not bear the same connotation as in the phrase “related series of acts or omissions” dealt with by the House of Lords in the Lloyds TSB case.
The House of Lords decision in the Lloyds TSB case has been applied by the Malaysian High Court in Tune Insurance Malaysia Bhd & Anor v Messrs K Sila Dass & Partners [2015] 9 CLJ 93 which considered the phrase “related acts”. This case concerned fraud or embezzlement committed by one employee of the insured practice against different parties who were all unrelated. The High Court was of the view that the words “related acts” in the phrase “all claims by one or more claimants that arise from one series of related acts …” in an aggregation clause should be interpreted to include “the underlying cause or source or other commonalities underlying the fraudulent acts and embezzlements”. The High Court was satisfied that the unifying factor in that case was the particular employee, the main perpetrator, who had committed all the fraudulent acts and embezzlements at the insured practice’s branch office. Accordingly, the Court held that all claims arising from the misconduct of the employee concerned are to be treated as “one claim”.
The UK Supreme Court’s decision in AIG Europe Ltd v Woodman and Others does not bind the Malaysian Courts. However, as the aggregation of claims clause in certain professional indemnity insurance policies in Malaysia contain provisions that are in pari materia with clause 2.5(iv) of the MTC, the UK Supreme Court’s approach in this case is likely to be followed by the Malaysian Courts when the need to interpret the same provision arises.