Supreme Court rejects illegality defence to claim where claimant had engaged in an illegal act (mortgage fraud)

The Supreme Court has held that a claimant who had engaged in mortgage fraud was not barred from bringing a negligence claim in relation to the property transaction associated with the fraud: Stoffel & Co v Grondona [2020] UKSC 42.

While the claim in this case was against the claimant's solicitors, it is a noteworthy decision for financial institutions considering how to resist claims where there is some element of illegality involved on the claimant’s part (such as mis-selling claims where the claimant has provided deliberately false information).

The decision illustrates the application of the (relatively) new test for the illegality defence, as established in Patel v Mirza [2016] UKSC 42 (considered here). This replaced the test adopted by the House of Lords in Tinsley v Milligan [1994] 1 AC 340, which turned on the formalistic question of whether the claimant had to rely on the illegality to bring the claim. The current test is described by the Supreme Court in the present case as “a more flexible approach which openly addresses the underlying policy considerations involved and reaches a balanced judgment in each case, and which also permits account to be taken of the proportionality of the outcome”.

The decision suggests, however, that while the test is no longer one of reliance, this question may still have a bearing on whether the fraud is central to the claim, which may in turn be relevant in considering whether it is proportionate to deny the claimant relief. It also suggests that, in the ordinary course, a claimant is unlikely to succeed in a claim to recover the profits of the fraud – not because the claimant would have to rely on the fraud in order to establish the claim, but because this is likely to be the outcome when the court balances the competing policy considerations. As the court commented in this case: “Clearly, it would be objectionable for the court to lend its processes to recovery of an award calculated by reference to the profits which would have been obtained had the illegal scheme succeeded.”

For a more detailed discussion of the decision, please see our litigation blog post.