[2010] EWHC 26 (QB)


The dishonesty exclusion in a professional indemnity policy applied where a director of the solicitors’ firm Joshua & Usman Legal Services Limited (JULS), Ms Usman, had condoned a state of affairs which allowed her fellow director, Mr Atikpakpa, to perpetrate two mortgage frauds in which the firm had acted for the lenders. The judge held that the word “condone” in the policy was intended to convey a state of affairs where the non-dishonest director knows of the dishonesty or fraud of his co-director yet overlooks it. He applied the test for dishonesty in Twinsectra v Yardley that the conduct was dishonest by the ordinary standards of reasonable and honest people and that the person in question also realised that by those standards his conduct was dishonest.

In the case of the first mortgage fraud, Ms Usman had knowingly facilitated the mortgage fraud perpetrated by Mr Atikpakpa by signing documents verifying his income which were false. Matters were not as clear in the second since Ms Usman had not been aware of the transaction. However, the judge held, relying on Zurich Professional Ltd v Karim (2006), that the claim arose from dishonest conduct by Mr Atikpakpa which Ms Usman had condoned, leaving him free to act dishonestly. The fact that she had been involved in mortgage fraud on her own account and had given false evidence in proceedings against an employee of the firm made this an easy conclusion to reach.

As for the background to the claim, Goldsmith Williams was the solicitors’ firm appointed by the lenders in both of the transactions in question and after repaying the loan monies to the lenders, it took assignments of the lenders’ causes of action against the firm. Having restored the insolvent JULS to the register in 2004, Goldsmith Williams obtained a judgment against the firm and made a claim against the defendant insurers under the Third Parties (Rights against Insurers) Act 1930. The claim failed because the insurers were entitled to rely on the fraud exclusion in the policy.

Comment: professional indemnity insurers facing a mounting number of lender claims arising in circumstances similar to those in this case will be reassured that the courts are applying a fairly broad test when considering the meaning of “condone” in the standard fraud exclusion. However, given the documentary evidence of Ms Usman’s own fraudulent conduct (she did not give evidence), the outcome was not surprising. It was not critical, therefore, to examine the test for dishonesty in the context of a solicitor’s dishonest assistance in a breach of trust. Indeed, the judge expressly said that he did not need to consider the rival tests found in Twinsectra and Barlow Clowes International Ltd v Eurotrust International Inc, and adopted the Twinsectra subjective version which requires the individual to have been aware that her conduct was dishonest.

The Privy Council in Barlow Clowes interpreted Twinsectra as applying a predominantly objective test: if by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards. The defendant needs only to be conscious of the elements of the transaction which make participation transgress ordinary standards of honest behaviour. This approach has been followed by the Court of Appeal in Abou-Rahmah v Abacha where Arden LJ openly acknowledged that the Privy Council had interpreted Twinsectra in a way which was not obvious from a reading of the House of Lords’ judgment which refer to a two-limbed test. The Barlow Clowes test was applied in Zurich v Karim but has not been adopted in disciplinary cases (see Bryant v Law Society). In a less clear-cut case, this issue is likely to resurface.

This case is a classic example of the expense involved in bringing a claim under the Third Parties (Rights against Insurers) Act 1930. Goldsmith Williams incurred legal costs in restoring JULS to the register, bringing proceedings against the company and in bringing the present proceedings against the insurers. The firm has recovered nothing. At least under the Third Parties (Rights against Insurers) Bill, currently proceeding through parliament, a third party claimant will not have to go through the first two stages of the present procedure since the claimant will acquire a right to sue the insurer directly as soon as the company becomes subject to an insolvency procedure.