UK: Lord Nicholls Rules OK?

Last Updated: 14 October 2008
Article by Mike Willis

Like love, 'dishonesty' is something you expect to recognise when you come across it, and that has been the starting point adopted by judges in most of the reported cases in recent years when the issue has arisen. The trouble is, when faced with the task of coining a working legal test and definition of dishonesty for use in civil cases, the courts have failed to fix on an unequivocal approach, setting an awkward challenge for lawyers when trying to advise their clients.

A further difficulty is that the principal focus has been on accessories and those who 'knowingly assist' in wrongful activity and it remains unclear whether the same test will, or should be, applicable in all civil contexts where the conduct of an individual comes under scrutiny.

The issue of uncertainty is whether the conduct in question should be judged against a strictly objective standard of honesty, or whether the subjective circumstances and understanding of the perpetrator should also be taken into account. Since 1995 there have been specifically relevant decisions by two Privy Councils, two House of Lords, four Courts of Appeal, and three Divisional Courts (hearing appeals from the Solicitors Disciplinary Tribunal), and by assorted trial judges. Yet the law is likely to remain in flux at least in some respects. This is primarily because the 3 : 2 majority decision by the House of Lords in Twinsectra v Yardley1 (2002) was broadly understood by lawyers and academics to have set a legal test which required both, first, an objective appraisal as to whether the defendant was, in fact, as Lord Hutton put it, "transgressing ordinary standards of honest behaviour" and then, second, an enquiry into his own state of mind as to what "he knows would offend normally accepted standards...". This dual test has proved difficult and frequently controversial to apply in practice in subsequent cases, with the second limb of it being interpreted variously against wide-ranging or inexplicit criteria.

The Privy Council revisited the issue four years later in Barlow Clowes v Eurotrust2 (2006), setting its own interpretation of the second limb of the test as a requirement simply to apply the objective analysis to what the person in fact knew at the time, and not as a test of their subjective values and appreciation. Lord Nicholls asserted that "acting dishonestly ... means simply not acting as an honest person would in the circumstances [knowing what he did]"; and Lord Hoffman made clear that "although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards".

Despite the lack of status of Privy Council decisions in English law, especially on an issue already covered by the House of Lords, this approach has been endorsed by subsequent courts and commentators as an important 'clarification' of the ambiguities arising from the law lords' judgments in Twinsectra. An article by the Master of the Rolls Sir Anthony Clarke3, which followed an oral presentation in April 20064, has been particularly influential. To those who heard that speech (including the writer) it was recognisable as a significant and deliberate steer, at least to the solicitors profession he presides over. It is unsurprising that it has been cited with approval by the trial judges in two leading cases. Sir Anthony concluded his oral delivery with a comment, not appearing in the written texts, that "Lord Nicholls rules OK"; a reference to his own view that the approach adopted by his Lordship as Privy Councillor in both Royal Brunei Airlines v Tan in19955 and Barlow Clowes ten years later "is in the ascendant". His article has been cited, and the objective test applied, by the trial judge Peter Smith J in Zambia v Meer Care & Desai (2007)6, who summarised the test in light of Barlow Clowes in terms:

"The test is ... an objective one which takes account of the individual in question's characteristics, experience, knowledge etc. .........It ...requires a court to assess an individual's conduct according to an objective standard of dishonesty. In doing so, a court has to take account of what the individual knew, his experience, intelligence and reasons for acting as he did. Whether the individual was aware that his conduct fell below the objective standard is not part of the test. "

This approach has not been questioned, at least in the first of several Court of Appeal decisions in the Zambia case listed for judgment in July 2008. It was also followed, again at first instance, recently by Teare J in Markel International Insurance Co Ltd v Surety Guarantee Consultants Ltd (3 June 2008)7.

That said, as Sir Anthony emphasised, the liabilities contemplated in the leading cases so far referred to have been concerned with claims for equitable fiduciary breach or knowing assistance to breach of trust, which "are not a form of liability which arises in restitution"; and the judgments are well laced with cautions that a rule or test for one area of the law, explicitly cases involving accessories to other people's wrongdoings, may not be appropriate for others where the allegations assert more direct perpetration. In most such situations, as in the Markel case, the primary wrongdoers' liabilities arise under torts of Conspiracy, Fraud or Deceit, which have their own jurisprudence, and the Twinsectra issues are critical only for those defendants who were accessories or facilitators.

Yet there seems no obvious reason why the same test should not be applicable for all civil liability cases driven by parties' alleged misconduct where their honesty is in issue, or at least claims for financial loss, including simple contract claims, such as the application and enforceability of an exclusion under an insurance policy or service agreement; or procedural decisions such as deliberate concealment (for limitation purposes) or non-party costs awards.

Whether a purely objective approach is appropriate for non-pecuniary civil liability cases may be more problematic. A particular area of civil jurisprudence where the courts may yet be loath to dispense with a full enquiry into a respondent's subjective understanding of an honesty 'standard' (as well as factual knowledge) is appeals from professional disciplinary tribunals. In Bryant v Law Society (December 2007)8, a Solicitors Tribunal finding of dishonesty against Bryant, for his involvement in and facilitation of some complex fraudulent commercial dealings by his clients, was overturned by the Divisional Court. It preferred to follow the pre-Barlow Clowes interpretation of Twinsectra, applied by three earlier divisional courts and at least one Court of Appeal9, maintaining that for solicitors involved in dubious transactions, the applicable tests for their dishonesty require both an objective analysis against the ordinary standards of reasonable and honest people, and a properly conscientious subjective investigation as to whether they had been aware that by those standards they were acting dishonestly. In that regard the tradition of applying a test more closely analogous to the 'mens rea' principles applied by the criminal courts (most prominently endorsed in R v Ghosh (1982))10 has obvious attraction.

Disciplinary proceedings for professional misconduct might frequently presage subsequent civil liability, but they do not create the civil liabilities themselves. Rather, they are concerned with the professional's integrity and fitness to practise and sustain a livelihood, which usually requires careful scrutiny of their behaviour in light not only of the facts and likely opinions of others about their actions (usually from a distance, with the corruptive sanctimony of hindsight), but also of their own understanding as well as knowledge.

First published in Legal Week

Footnotes

1 Twinsectra v Yardley [2002] 2 AC 164 (HL)

2 Barlow Clowes International Ltd (in liquidation) & Others v Eurotrust International Ltd [2006] 1 ALL ER 333 (PC)

3 Sir Anthony Clarke MR "Claims against Professionals: Negligence, Dishonesty and Fraud";[2006] 22 Professional Negligence 70/85

4 Professional Negligence and Liability Conference 27 April 2006

5 Royal Brunei Airlines v Tan [1995] 2 AC 378

6 AG of Zambia v Meer Care & Desai (No2) [2007] ADR.L.R.06/29

7 Markel International Insurance Company Ltd v Surety Guarantee Consultants Ltd & Ors[2008] EWHC 1135

8 1) Hugh Bryant (2) Reginald Bench v Law Society (DC[2007] EWHC 3043 (Admin)

9 D v Law Society [2003] EWHC 408 (Admin); Bultitude v Law Society [2004] EWCA Civ 1853 (16 December 2004); Donkin v The Law Society [2007] EWHC 414 (Admin) (07 March 2007)

10 R v Ghosh [1982] qb 1053

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