Whatever its advantages to our ancestors, in the modern world it can be a problem, especially for solicitors, bankers and accountants. A professional’s obligation is to comply with his client’s instructions. But when he is suspicious that his client is a fraudster he must not blind himself to that concern. If he does there may be implications under money laundering legislation, for one thing. There is also the victim of the fraud to think of.
Fraudsters have a habit of spending the victim’s money and disappearing. With the principal culprit no longer worth pursuing, victims of fraud often sue those who have assisted them to spend or hide the money. The most attractive targets are the fraudster’s bankers, accountants or solicitors. There is, as any claimant knows, nothing like a well-heeled defendant who cannot make a run for it.
For years, arguments raged as to what these professionals would have to have done to render themselves liable to the victim. Clearly they would have had to have assisted in the fraud in some way, but that would not, of itself, be enough. Sadly, it is an everyday occurrence for professionals to play a helpful part in their clients’ fraudulent schemes without knowing it.
Defining dishonesty
In 1995 it was decided that a professional would have had to have assisted ‘dishonestly’ to be liable. But what constitutes dishonesty? In 2002 the Twinsectra litigation appeared to provide an answer. The House of Lords imposed a requirement before a judge could find dishonesty that the defendant must have been “conscious” of “transgressing ordinary standards of honest behaviour”, as Lord Hoffman put it.
It was good news for Leach, a solicitor and a defendant in the case. He had received money from another solicitor who — as Leach knew — had promised someone else he would retain it. Leach sent the money on to his own client because his client had told him to. While most people would regard his actions as improper, Leach lacked the necessary ‘consciousness’ and so escaped liability.
The Twinsectra- decision had a certain legal neatness. The criminal courts have long adopted the same requirement for conscious wrongdoing and it was convenient for both courts to use the word in the same way.
Unfortunately, letting Leach off the hook meant that someone else had to bear the consequences of his actions — a point brought home four years later when the Law Lords were confronted by a case in the aftermath of the Barlow Clowes scandal.
An
The judgments in Twinsectra were re-read and it was decided they had never imposed a requirement for “consciousness that one is transgressing ordinary standards of honest behaviour” after all. It was now simply for the judge to decide whether or not ordinary, honest people would regard the defendant’s actions as dishonest, whether or not he realised it at the time.
This was bad news for Henshaw, whose lawyers had relied on Twinsectra clearly saying the reverse. As the judges subsequently put it, the law had been “clarified” — in other words, changed or reversed.
There is nothing terribly unusual about a spot of judicial doublethink — quite the reverse. It is all part of the job of a Law Lord and the resulting untruth is so moral that nobody bothers to regard it as one. Besides, unlike Leach and Henshaw, Law Lords — when they indulge in it — can usually say it is all for the best.
Unfortunately, here it was not. Tests of civil liability that depend upon the claimant showing that the defendant was dishonest are always more trouble than they are worth. True to form, the Barlow Clowes test is no better than the Twinsectra one it replaced.
Judges are only human
The particular Achilles’ heel of the Barlow Clowe test is that it assumes that judges — who are as human and individual as anyone else — will be consistent as to what is dishonest.
The problem that judges might differ in their views as to what is honest comes unpleasantly close to the nerve for the legal profession, but in the past our most distinguished judges have demonstrated it. Mr Justice Denning, for example, heard the case of a defendant who sold uncollected goods and gave the proceeds to the Salvation Army.
“Such conduct is not, to my mind, dishonest,” he said.
But it certainly was dishonest to the mind of Lord Justice Greene, the Master of the Rolls (whom Denning would one day replace) when Denning’s judgment was appealed.
“No amount of self-deception can make a dishonest action other than dishonest,” thundered Greene (referring to self-deception on the defendant’s part and not to any on that of a doubtless chastened Denning).
The Denning/Greene judicial contretemps took place many years ago, but the problem of judicial inconsistency remains today.
In the recent Abou-Rahmah litigation the Court of Appeal considered whether or not a bank had acted dishonestly in handling the proceeds of fraud. While Lady Justice Arden held that the bank had acted honestly, it was clear a second Lord Justice would have been amenable to a suggestion to the contrary. The third suggested that a requirement of conscious wrongdoing usually made no difference because when people behave in a way that most people regard as dishonest, they usually know it.
While bankers and other professionals are held liable only if they are dishonest, the uncertainty will remain. Unfortunately, it is cases like those of Leach and Henshaw, where there is disagreement on what is honest and what is not, that tend to come before the court.
So why are we happy for difficult moral matters like this to be left to a judge — effectively a jury of one? In his book Judges, David
Sigmund Freud would have had one. As Freud observed, we sometimes have a tendency to imbue those in power with desirable attributes (Stockholm syndrome, incidentally, is arguably the best-known example of Freud’s observation). But there is no reason why lawyers — including judges — should be better or more consistent than anyone else when deciding what is or is not honest.
Ironically, the modern test of dishonesty in civil proceedings requires an element of self-deception for people to believe in it.
Robert Hunter is a partner and head of trust, asset tracing and fraud at Allen & Overy.