Turning A Blind Eye ' What Is Required To Condone Dishonesty

• Published date: 16 May 2023
• Subject Matter: Finance and Banking, Insurance, Litigation, Mediation & Arbitration, Criminal Law, Financial Services, Insurance Laws and Products, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Weightmans
• Author: Mickaela Fox and Deborah Sullivan

A full breakdown on the case of Discovery Land Co LLC v Axis Specialty Europe SE [2023] EHHC 779 (Comm)

We consider the recent case of Discovery Land Co LLC vAxis Specialty Europe SE [2023] EHHC 779 (Comm), in which the Commercial Court examined the meaning of "condone" in the dishonesty exception of the SRA Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors ("the MTCs"). The judgment also considered the aggregation wording in the relevant insurance policy, which mirrored the corresponding provision of the MTCs.

The background

AXIS was the primary layer professional indemnity insurer of Jirehouse Partners LLP and two private limited companies, Jirehouse and Jirehouse Trustees Ltd ("JTL") (together, "the Jirehouse Entities").

Discovery Land Co LLC ("the Company") had obtained judgments against the Jirehouse Entities in respect of two claims concerning client money provided in connection with the purchase of Taymouth Castle in 2018 and 2019.

The first claim ("the Surplus Funds Claim") involved Mr Jones, a director of the limited companies and a member of the LLP, dishonestly removing $14,050,000 from JTL's account, which related to the Company's purchase of Taymouth Castle.

The second claim ("the Dragonfly Loan Claim") involved Mr Jones, dishonestly and without authority, arranging and drawing down '4,980,470 from Dragonfly Finance s.a.r.l. as a loan against security over Taymouth Castle over a period of circa three weeks then removing that sum from Jirehouse's client account.

The Jirehouse Entities had not satisfied the judgments, having ultimately been intervened by the SRA and become insolvent. It was not in dispute that the Company was entitled to pursue against AXIS the rights (if any) of the Jirehouse Entities to be indemnified, under the terms of their insurance ("the Policy"), in respect of the judgments.

Reflecting the wording of the relevant provision in the MTCs, Clause 2.8 of the Policy permitted Axis to decline cover in respect of,

"Any claims directly or indirectly arising out of or in any way involving dishonest or fraudulent acts, errors or omissions committed or condoned by the insured, provided that:

(a) the policy shall nonetheless cover the civil liability of any innocent insured; and

(b) no dishonest or fraudulent act, error or omission shall be imputed to a body corporate unless it was committed or condoned by, in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."

The question for Knowles J was whether Mr Prentice, the other director of Jirehouse and a member of Jirehouse Partners LLP, had condoned the acts of dishonesty by Mr Jones thus entitling AXIS to decline cover.

The condonation of fraud question

In addressing the condonation of fraud question, the court not only had the benefit of hearing evidence from Mr Prentice but it also had available a transcript of "much of" an indemnity interview carried out by Mr Jamie Smith KC in June 2019, at the request of AXIS.

Knowles J concluded that the word "condone" should be given its meaning in "ordinary language", conveying acceptance or approval. He also observed that, in some situations, the condonation/approval did not require "an overt act".

Knowles J also agreed with the submission for Axis that:

"...there is nothing in the language used to suggest that it is only if a person knows of a particular fraudulent act before or at the time it is committed that he is taken to have condoned it. It is enough to know and condone a pattern of...