Halliwells LLP v NES Solicitors

A professional indemnity policy may exclude liability arising from dishonesty even where the insured solicitor claims to have believed that funds would later become available. The civil standard of dishonesty is objective, but it is applied to the particular conduct of the individual in light of that person’s actual knowledge and qualities. A solicitor’s undertaking to pay money ordinarily requires both a fund in the solicitor’s hands, or reasonably expected to come into them, and an underlying transaction involving services of the kind solicitors ordinarily provide. Giving an undertaking without more, particularly for a substantial fee, does not satisfy that requirement.

NES Solicitors sought a declaration that Quinn Direct Insurance Ltd was required to indemnify it against Halliwells LLP’s claim enforcing a £1.5 million undertaking. NES had given the undertaking after accepting a cheque which had not cleared and despite stating that it held the funds in its client account. Halliwells obtained judgment against NES, and NES’s claim for insurance cover proceeded against Quinn.

Quinn relied on policy exclusions for dishonesty, undertakings given for the insured’s benefit, and liabilities not arising from services in private legal practice. The central issues were whether the partners had acted dishonestly, whether the undertaking was given in the ordinary course of solicitors’ business, and whether the exclusions applied.

1. Dishonesty. The court applied the approach stated in Starglade Properties Ltd v Roland Nash [2010] EWCA Civ 1314. There is one objective standard of honest behaviour. The court must apply it to the conduct of the particular individual, taking account of that person’s actual knowledge and qualities. Quinn bore the burden of proving dishonesty on the balance of probabilities.
2. Both partners knew that NES did not hold £1.5 million in its client account when the undertaking was given. The cheque was post-dated and had not cleared. They knowingly represented that funds were held and that irrevocable instructions existed. Their conduct was dishonest by ordinary standards. The dishonesty exclusion therefore applied. The judge also found, alternatively, that each partner had condoned the other’s dishonesty.
3. Solicitorial function. Following United Bank of Kuwait v Hammoud [1988] 1 WLR 1051, an undertaking to pay money is within a solicitor’s ordinary authority only where a fund is held, controlled or reasonably expected to come into the solicitor’s hands, and the fund arises in an underlying transaction involving services ordinarily undertaken by solicitors. The court must examine the substance and detail of the transaction, as explained in JJ Coughlan Ltd v Ruparelia [2003] EWCA Civ 1057.
4. NES had been retained only to provide the undertaking. It had not undertaken meaningful work on the underlying transaction. The liability therefore did not arise from services in private legal practice within the policy. The undertaking was also connected with a fee or other benefit to NES, engaging the separate exclusion in clause 4.6(c).
5. NES’s claim failed. The court declared that Quinn was not liable to indemnify NES under the policy in relation to Halliwells’ claim or the costs of defending it. Consequential matters were reserved for a telephone hearing.