In a recent decision, the Commercial Court dismissed a claim for dishonest assistance against IG (a major financial broker and provider of CFD products), providing a useful summary of the principles in relation to dishonesty.

Background

The claimants entered into agreements with Echelon, a small Scottish brokerage, under which Echelon was to enter into contracts for difference (CFD) with IG. The agreements stated that money paid to Echelon was to be held in segregated accounts, and used only for their own separate trading. However, rather than placing the trades as agent, Echelon placed matching trades with IG under a contract which provided that both parties would deal with each other as principals.

Echelon went into liquidation having allowed one of its CFD clients to run up a large deficit, whilst it used funds paid by and due to others of its clients, to finance its liabilities to IG, contrary to the agreements between Echelon and its clients.

The claimants sought to recover their losses on the basis that IG employees had dishonestly assisted in breaches of fiduciary duty by Echelon. The claimants allege that the IG employees turned a blind eye to the fact that Echelon was using funds received from some clients to fund cash withdrawals and deficits on other accounts when it did not have collateral elsewhere to cover the shortfall in the accounts in deficit.

Decision

The claim was rejected on the basis that the claimants had failed to establish dishonest participation by the defendant’s employees in the wrongdoing practised by Echelon. Claims of dishonest assistance and knowing receipt were dismissed.

It was held that employees of the defendant were entitled reasonably to rely on representations by Echelon, for example that they had collateral to support the account deficit, and that some of its clients held positions with other CFD providers that Echelon was setting off against deficits on their positions with IG, without demanding supporting documentary evidence. Even where the judge found that an employee ought to have enquired further into Echelon’s FSA permissions to deal with client money, the failure to do so was not dishonest.

In reaching his decision, the judge summarised some of the principles relating to dishonesty, as discussed in a number of leading authorities:

  • It is not necessary to establish that the defendant considered that he was acting dishonestly. Instead, the defendant’s knowledge of the transaction has to be such as to render his participation contrary to the normally acceptable standards of honest conduct.
  • An honest person will not deliberately close his eyes and ears, or deliberately avoid asking questions to prevent him learning something he would rather not know and then proceed regardless.
  • A dishonest state of mind may consist in suspicion combined with a conscious decision not to make enquiries.
  • In commercial situations, dishonesty can be found on the basis of commercially unacceptable conduct.
  • Acting in reckless disregard of others’ rights or possible rights can be a sign of dishonesty.
  • Recklessness is a species of dishonest knowledge, and is therefore relevant to the Court’s consideration. “Not caring” does not mean “not taking care”, rather it means indifference to the truth. The moral obliquity of this position is in the wilful disregard of the importance of the truth.
  • Someone can know, and can suspect, he is assisting in a misappropriation of money without knowing that the money is held on trust, or what a trust means.

Comment

This case provides a useful summary of the principles in relation to dishonest assistance, including the test for dishonesty. It also provides a useful illustration of the duties which arise where parties are dealing with trust property. While, on the facts, the relevant employees of IG were held not to have acted dishonestly, the principles set out in the judgment are a reminder that parties cannot simply turn a blind eye.