Supreme Court applies Patel v Mirza to reject illegality defence to solicitors' negligence claim where claimant had engaged in mortgage fraud

The Supreme Court has held that a claimant who had engaged in mortgage fraud was not barred from bringing a claim against her solicitors for negligently failing to register the forms transferring the property to her and releasing a prior mortgage: Stoffel & Co v Grondona [2020] UKSC 42.

The decision is of interest in illustrating 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."

Background

In March 2000 the claimant, Ms Grondona, entered into an agreement with a Mr Mitchell under which she agreed to have in her name mortgage loans in relation to four rental properties, on the basis that Mr Mitchell would pay the mortgages and manage the properties and Ms Grondona would receive 50% of the net profit when any of the properties were sold.

One of these properties was 73b Beulah Road ("the property"). Mr Mitchell purchased a 125-year lease of the property for £30,000 in or about July 2002, and for that purpose took out a six-month loan of £45,000 secured by a legal charge over the property with BM Samuels. In October 2002 Ms Grondona purchased the leasehold interest in the property from Mr Mitchell for the sum of £90,000, taking out a mortgage of £76,475 from Birmingham Midshires.

Stoffel & Co solicitors ("the solicitors") acted for Ms Grondona, Mr Mitchell and Birmingham Midshires in connection with the transaction. The solicitors failed to register at the Land Registry the forms transferring the property to Ms Grondona and releasing the BM Samuels charge. As a result, Mr Mitchell remained the registered proprietor of the property and BM Samuels remained the registered proprietor of the BM Samuels charge, and further advances were made to Mitchell under that charge.

In 2006 Ms Grondona defaulted on payments under the mortgage and Birmingham Midshires brought proceedings against her. She brought a Part 20 claim in negligence against the solicitors, who raised an illegality defence, ie that Ms Grondona could not recover damages because the purpose of putting the property into her name and obtaining a mortgage from Birmingham Midshires was illegal, in that it was a conspiracy to obtain finance for Mr Mitchell by misrepresentation, and the purpose of instructing the solicitors was to further that fraud.

In April 2014 the leasehold interest in the property was sold by BM Samuels for £110,000 in order to satisfy the sum owed by Mr Mitchell under the BM Samuels charge. In May 2014, Birmingham Midshires obtained summary judgment against Ms Grondona in the sum of £70,000.

The judge found that Ms Grondona had participated with Mr Mitchell in a mortgage fraud, the purpose of which was to obtain moneys from Birmingham Midshires for Mr Mitchell which he could not obtain himself. The fraud involved making dishonest misrepresentations in the mortgage application form that: the sale to Ms Grondona was not a private sale; the deposit moneys were from her own resources; and she was managing the property. However, she concluded that the solicitors could not rely on the illegality defence, applying Tinsley v Milligan, as the claim did not rely on the allegations of illegality. Ms Grondona was awarded damages of £78,000, the value of the property as at November 2009, plus interest.

The Court of Appeal dismissed the appeal, applying Patel v Mirza which had been handed down since the first instance decision. It considered that, although mortgage fraud was a canker on society, barring the claim would not enhance the fight against mortgage fraud, there was a public interest in ensuring that clients can pursue claims against solicitors for negligence or breach of contract, and to deny the claim would be disproportionate to the wrongdoing involved. The solicitors were granted permission to appeal on the ground that the Court of Appeal erred fundamentally in its application of the Patel v Mirza guidelines.

Decision

The Supreme Court dismissed the appeal, Lord Lloyd-Jones giving a judgment with which Lord Reed, Lord Hodge, Lady Black and Lady Arden agreed.

Lord Lloyd-Jones referred to the “trio of necessary considerations” described by Lord Toulson in Patel v Mirza to determine whether allowing a claim which is tainted by illegality would be contrary to the public interest, namely:

• the underlying purpose of the prohibition which has been transgressed, and whether that purpose will be enhanced by denying the claim;
• any other relevant public policies which may be affected;
• whether denial of the claim would be a proportionate response to the illegality.

In applying these considerations, the essential question is whether to allow the claim would damage the integrity of the legal system. The answer will depend on whether it would be inconsistent with the policies to which the legal system gives effect. The court is not concerned to evaluate those policies but to identify the policies engaged and ascertain whether allowing the claim would be inconsistent with those policies or, if the policies compete, where the overall balance lies. If, on examining the relevant policy considerations, the court clearly concludes that the defence should not be allowed, there will be no need to go on to consider proportionality.

Underlying purpose of the prohibition

As to the underlying purpose of the prohibition, Lord Lloyd-Jones said there clearly exists an important policy that the law should condemn mortgage frauds, which are serious criminal offences, and deter such conduct. He doubted, however, that allowing Ms Grondona's claim would undermine that policy to any significant extent, as the risk of being left without a remedy if their solicitor should prove negligent in registering the transaction was unlikely to feature in the thinking of those considering engaging in such a fraud.

A further underlying purpose of the prohibition against mortgage fraud is the protection of the public, and in particular mortgagees. Again it was difficult to see how refusing the claim would enhance that protection and, in fact, the registration of the transfer was in the interests of the mortgagee, as well as Ms Grondona.

Other relevant public policies

There were important countervailing public policies in play, namely that conveyancing solicitors should perform their duties to their clients diligently and that clients should be entitled to seek a civil remedy for loss suffered as a result of their negligence. To permit solicitors to escape liability for negligence in current circumstances would run counter to these policies.

A further countervailing public policy arose in this case relating to the effect of the transaction on property rights. Lord Lloyd-Jones noted that, unless a statute provides otherwise expressly or by necessary implication, where property is transferred for an illegal purpose the transferee nonetheless obtains good title both in law and in equity. In this case, no legal title passed to Ms Grondona but, as Mr Mitchell had done everything he could do to effect the legal transfer, she was entitled to an equitable right to be registered as proprietor of the registered legal title. It would be inconsistent to deprive her of the remedies provided by law for the protection of that interest.

Accordingly, Lord Lloyd-Jones concluded, permitting the claim in this case would not undermine the public policies underlying the criminalisation of mortgage fraud, and could help to protect the interests of the mortgagee as victim of the fraud. Furthermore, to deny the claim would run counter to other important public policies, eg that victims of solicitors’ negligence should be compensated for their loss. It would be a disincentive to solicitors' diligent performance of their duties, and result in an incoherent contradiction given the law’s acknowledgment that an equitable property right vested in Ms Grondona.

Proportionality

It was therefore unnecessary to go on to consider proportionality, but Lord Lloyd-Jones's comments suggest that in his view it may have been disproportionate to deny the claim against the solicitors because the fraudulent conduct merely provided the background to that claim and was not central to it. While the question of whether a claimant must rely on illegal conduct to establish a cause of action is no longer determinative of an illegality defence, following Patel v Mirza, it may still have a bearing on the issue of centrality. Here, the claim was conceptually entirely separate from the illegality and could be established without reference to it.

Profiting from one's own wrongdoing

Finally, Lord Lloyd-Jones considered the solicitors' submission that Ms Grondona's intention in committing the fraud was to make a profit, the loss resulted from her wrongdoing, and so the policy consideration that a person should not be allowed to profit from her own wrongdoing applied. Lord Lloyd-Jones agreed that (as for most illegal agreements) Ms Grondona's motive was to make a profit. He commented that, clearly, it would be objectionable for the court's processes to be used to recover the profits which would have been obtained had the illegal scheme succeeded. However, the claim in this case was not to recover a profit, but to recover compensation for property lost by the negligence of the appellants. So it was not a case of the court assisting a wrongdoer to profit from her own wrongdoing.

In any event, even if allowing the claim could be said to allow Ms Grondona to profit from her own wrong, that was no longer the true focus of the inquiry in considering an illegality defence. As Lord Toulson explained in Patel v Mirza, the notion that persons should not be permitted to profit from their own wrongdoing is unsatisfactory as a rationale of the illegality defence.