What lies beneath?

Claims featuring allegations of dishonesty against professionals, including solicitors are, regrettably, not uncommon, and with almost all professional firms facing increased commercial pressures in light of the global financial turmoil, claims against solicitors involving serious allegations of dishonesty are rising.

While dishonesty claims most commonly arise in the context of mortgage lending transactions, both residential and commercial, such claims can be advanced in a variety of different circumstances. Allegations of this nature have enormous reputational and financial consequences for individuals, firms and their professional liability insurers. It goes without saying, therefore, that such claims require rigorous and careful analysis so that the pertinent issues are identified as early as possible and dealt with expeditiously.

Whether or not an individual has been dishonest in the context of civil proceedings was examined in detail in the well-known decisions of Twinsectra Ltd v Yardley [2002] UKHL 12 and Barlow Clowes International Limited v Eurotrust International Limited [2005] UKPC 37. Subsequent decisions have refined the position but it is clear, from both the authorities and commentary, that the test for dishonesty is not straightforward and its application continues to engender debate.

And there are still serious practical issues that professionals and their insurers will have to consider when dealing with allegations of dishonesty and, in the case of insurers, when reaching a decision as to whether or not an indemnity should be provided.

No unanimity over the test

Given that the types of claim in which allegations of dishonesty are pursued are generally not novel, one could be forgiven for thinking that a certain amount of unanimity would have been reached by the judiciary in deciding whether or not an individual has acted dishonestly. However, the picture painted by the relevant case law is not particularly clear and in the period since the Privy Council handed down its decision in Royal Brunei Airlines v Tan [1995] 2 AC 378 there has been much interesting debate.

In Tan, the Privy Council set out an objective test for dishonesty; in particular, Lord Nicholls concluded that: 'acting dishonestly, or with lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard'. Lord Nicholls went on to identify that 'carelessness is not dishonesty' but also that 'honesty is not an optional scale, with higher or lower values according to the moral standards of each individual'.

The Tan test was subject to the scrutiny of the House of Lords a few years later in Twinsectra Ltd v Yardley, Paul Leach & Co [2002] UKHL 12. In Twinsectra, the House of Lords upheld the objective test laid down in Tan but arguably introduced an element of confusion by, or so it seemed, effectively adding a second subjective stage to the test. In particular, their Lordships reached the conclusion that: 'a dishonest state of mind requires consciousness that one is transgressing ordinary standards of honest behaviour'. The consequence of this decision appeared to be that in future the court, and those seeking to deal with allegations of dishonesty, would have to consider and apply a two stage test, namely: (i) that an individual would have to know that the relevant facts would alert the ordinary person to the dishonest nature of the transaction; and (ii) the ordinary person would have concluded that the transaction was dishonest.

The decision in Twinsectra did create some uncertainty as to whether or not the House of Lords really intended to introduce an element of subjectivity to the test for dishonesty, and considerable argument ensued. The debate was taken up by the Privy Council in Barlow Clowes International Ltd v Eurotrust International [2005] UKPC 37 and while the court sought to provide clarity, there has been much argument as to whether this was achieved. In any event, the Privy Council rejected the submission, made on behalf of the alleged fraudster, that the court had to consider whether or not he appreciated that his actions would be considered to be dishonest by generally accepted standards of dishonesty. They accepted that, although Lord Hutton's judgment in Twinsectra might have suggested that such an approach was appropriate, a subjective analysis was not in practice an integral part of the test. Although Barlow Clowes appeared to reinstate the objective test, subsequent decisions suggest that the approach taken by the judiciary to allegations of dishonesty remains a little unclear.

The Court of Appeal adopted an arguably surprising analysis in Abou-Rahmah v Abacha [2006] EWCA Civ 1492, when it concluded that it did not need to consider whether the decisions in Twinsectra or Barlow Clowes conflicted with one another, albeit that that decision was based on the particular facts of the case. Having said that, Lady Justice Arden concluded that an objective test, in accordance with the Court of Appeal's decision in Barlow Clowes, should be applied.

The question was subject to further judicial consideration in 2007 by the High Court in the Attorney General of Zambia for and on behalf of the Republic of Zambia v Meer Care & Desai [2007] EWHC 952 (Ch).

In that case, Mr Justice Peter Smith concluded that the 'analysis [as to whether the test was objective and/or subjective was] largely a matter of over elaboration' and that the 'test for dishonesty is essentially a question of fact whereby the state of mind of the defendant had to be judged in the light of his subjective knowledge but by reference to an objective standard of dishonesty'.

Moreover, Peter Smith J postulated that lawyers had become 'sidetracked by Twinsectra'. In particular, he agreed with Lord Clarke MR's analysis in an article titled 'Claims Against Professionals: Negligence, Dishonesty and Fraud' [2006] 22 Professional Negligence 70/85, which suggested that those who had concluded that Twinsectra was a departure from the objective test set out in Tan were wrong. That approach accords with the conclusion adopted by the Privy Council in Barlow Clowes.

It is also worth noting that Peter Smith J stated that he doubted, as he considered was often the case, 'whether in practice it [the test for dishonesty] will make any difference'.

Essentially, Peter Smith J's view was that whether or not someone had been dishonest was a question of fact and that 'if the court is of the opinion that with his knowledge he [the defendant] consciously departed from the objective standards of propriety he is dishonest. The text [sic] equally establishes that honest people do not deliberately close [their] eyes and ears or deliberately do not ask questions lest he learns something he would rather not know and then proceed regardless'.

Peter Smith J subsequently reiterated this approach in Hanco ATM Systems Limited v Cash Box ATM Systems Limited [2007] EWHC 1599 (Ch).

While Peter Smith J's judgment in Zambia was subject to a (successful) appeal by certain of the defendants, the Court of Appeal (The Attorney General of Zambia for and on behalf of the Republic of Zambia v Meer Care & Desai (a firm) [2008] EWCA Civ 1007) did not have to address the question of whether or not Peter Smith J had adopted the correct test.

They did consider whether or not the test had been applied correctly on the basis of the specific facts to the case (they concluded it had not), although the Court of Appeal's decision did not provide further elucidation on how it should be applied in practice.

A different test in disciplinary proceedings

It should be borne in mind that a different approach has been taken in the context of disciplinary proceedings. In Bryant v The Law Society [2007] EWHC 3043 (Admin), on appeal from the Solicitors Disciplinary Tribunal, the court concluded that the test is: 'as it was widely understood to be before Barlow Clowes, that is a test that includes the separate subjective element.'

The court explained that the approach in the context of disciplinary proceedings was necessarily different; in particular, the court considered that the test should be more closely aligned to the criminal test, given the 'extremely serious consequences' following a finding of dishonesty. It is not clear whether this approach will continue to be adopted (or why professionals should be distinguished in this way) and it must at least be arguable that it would be more appropriate for the same test to be adopted in all proceedings of a non-criminal nature.

Early, case-by-case assessment

So where does that leave us? Practitioners dealing with claims which include allegations of dishonesty continue to find these issues difficult given the remaining uncertainty as to whether or not a tension exists between the tests articulated in Twinsectra and Barlow Clowes. Lady Justice Arden's judgment in Abacha suggests that no such tension exists and, similarly, Peter Smith J's interpretation of the test appears to accept the objective test originally formulated by Tan and adopted in Barlow Clowes. Further judicial authority from the House of Lords would not necessarily provide any further clarity than that provided by Barlow Clowes. In the circumstances, the courts and parties to litigation will have to apply current judicial authority to the specific facts of each individual case. This must mean assessing claims on an objective basis in the context of the particular factual matrix, and that the knowledge that a defendant's plea that he did not believe a particular act to be dishonest is not likely to defeat an allegation of dishonesty.

Obviously allegations of dishonesty will continue to be a cause for concern and it will plainly be important to assess carefully in each case whether or not the allegations can be sustained.

A firm facing a claim which appears to have arisen as a result of the conduct of a rogue partner or employee should certainly: (a) consider what (additional) risk management procedures can be put in place to seek to ensure that dishonest conduct does not re-occur and to minimise the risk of dishonest conduct going undetected (see box); and (b) discuss with insurers the possible implications of the allegations in terms of whether or not the firm's professional indemnity policy will respond to all or some of the claims.

Given the growing potential impact of dishonesty claims, both in reputational and financial terms, it is essential in every case involving allegations of dishonesty to ensure that a careful and fair analysis of each case is undertaken at an early stage, before further commercial and reputational damage is done.