Clarification on "condoning fraud"

Professional negligence claims provide a route to recover any losses suffered due to mortgage fraud. Insurers will seek to avoid paying claims based on the dishonest acts of a solicitor, but they cannot do so if there is an innocent partner. The recent case of Discovery Land Company LLC v AXIS Speciality Europe SE [2023] EWHC 779 (Comm) has provided helpful clarification for lenders about when a partner is considered innocent.

The Facts

Discovery Land Company LLC v AXIS Speciality Europe SE involved a solicitor’s practice, Jirehouse Partners LLP, with two principals, Mr J and Mr P.

Mr J was a fraudster. He defrauded his clients by stealing c$14m intended for the purchase of a castle in Scotland. He then lied to his clients to obtain further monies, dishonestly persuading them to send him a further $9.3m which was used to complete the purchase of the castle. Once purchased, Mr J fraudulently arranged to mortgage the castle for £5m without his clients’ knowledge, and stole the mortgage advance, too.

Mr J’s clients unsurprisingly brought a claim against Jirehouse to recover the monies they had lost in the Scottish castle fraud. Jirehouse’s Insurers sought to avoid cover due to the fraudulent acts of Mr J. The question remained whether Insurers could also withdraw cover on the basis that the remaining principal, Mr P, had condoned Mr J’s fraud (and was not an “innocent partner”).

The judge concluded that Mr P was fundamentally unsuited to being a solicitor. He was willing to lie to the Court and untruthfully sought to minimise his knowledge of Mr J’s fraudulent conduct. However, the Court concluded that Mr P was not aware that Mr J was carrying out a multimillion-pound fraud, and consequently had not condoned it. Accordingly, Insurers could not withdraw cover for the claim.

The judge made the following key findings:

• The ordinary language meaning of “condoned” should be used. To condone an act, the person condoning must be shown to have accepted or approved that particular fraudulent activity.
• It is not necessary to prove that the fraudulent act was known before or at the time it was committed. It can be sufficient to show that the person knew and had condoned a pattern of dishonest behaviour of which the fraudulent act formed part.
• Blind eye knowledge should be considered, including the deliberate avoidance of confirming suspicions firmly grounded in specific facts that the condoner has good reason to believe.

In summary, Insurers can only withdraw cover if they can prove that the innocent partner/principal condoned the specific fraudulent acts forming the basis of the claim. Condoning fraudulent or dishonest conduct more generally where it is not connected to the specific claim in question is not sufficient to allow Insurers to withdraw cover.

Commentary

This case is good news for lenders at a time where we are seeing more instances of mortgage fraud and solicitor interventions. The decision limits Insurers’ opportunities to decline cover where there is dishonesty in one part of a solicitor practice but where there is at least one innocent partner. This is particularly important at a time when most lender panels include firms with more than one partner.

TLT have a team of professional negligence specialists who have acted for lenders for over 20 years in cases involving mortgage fraud and insurance coverage disputes. If you would like to discuss further, please do contact us.

Co-authors: Alice Evelegh-Taylor and Nick Curling

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.