UK: Negligent Solicitors Firm Cannot Rely On Illegality Defence Despite Mortgage Fraud By The Claimant

Last Updated: 19 October 2018
Article by Neil Jamieson

Most Read Contributor in UK, November 2018

The Court of Appeal has ruled that there was a genuine public interest in ensuring a conveyancing solicitors' client could recover damages for negligence on the facts of this case despite the client instructing the solicitors as part of a plan to commit mortgage fraud.

Ms Maria Grondona v Stoffel & Co [2018] EWCA Civ 2031

Background

The defendant solicitors, Stoffel & Co, admitted failure to register the relevant forms (a transfer of the property, cancellation of existing charges and registration of the new charge) at the Land Registry when acting for the claimant purchaser, Maria Grondona, of a flat in Surrey. Grondona defaulted on her mortgage payments and the lender, Birmingham Midshires, sought to enforce its security but was unable to do so as a result of the registration error.

Birmingham Midshires brought proceedings against Grondona in order to obtain a money judgment. She defended the claim and brought a Part 20 claim against Stoffel & Co for an indemnity and/or a contribution. The law firm defended the Part 20 claim on the basis that although it was negligent and in breach of contract, Grondona could not recover damages because the purpose of the mortgage transaction was fraudulent and therefore the illegality principle known as ex turpi causa applied.

The background to the transaction was as follows. The property was owned by a business associate of Grondona's, a Mr Cephas Mitchell. Grondona and Mitchell entered into a contract which provided that Grondona would have a mortgage loan for the property in her name and Mitchell would pay the mortgage and deal with all other financial matters on the property. In return she would receive 50% of any profit on the future sale of the property. Grondona then purported to purchase the property from Mitchell for three times the amount that he had paid for it just a few months earlier. She did this with the assistance of an advance from Birmingham Midshires. In effect Grondona was obtaining further finance for Mitchell on a property he already owned and on terms that he would not personally have been able to obtain due to his poorer credit history. It was nonetheless the intention of all parties for the advance to be secured by a charge over the property.

High Court judgment

At first instance, the judge, HHJ Walden-Smith, held that Grondona had participated in a mortgage fraud to deceive Birmingham Midshires. She misrepresented on the mortgage application form that the purchase was not private (it was private), the deposit monies were from her own resources (they came from Mitchell) and that she was managing the property (Mitchell was managing the property). The judge also found that the contract between the pair meant Mitchell remained the owner of the property and the mortgage agreement was a sham because its purpose was not to enable Grondona to purchase the property.

However, the judge rejected the illegality defence on the basis that, following Tinsley v Milligan [1994] 1 AC 340, the correct test to apply was whether Grondona relied on the illegality to establish her claim. The judge held that this test was not met. Grondona had lost the benefit of the property as providing security for the mortgage advance because her title had not been registered. This was a direct result of Stoffel & Co's negligence. The claim against the law firm was entirely separate from the fraud. Grondona did not have to rely on the illegality in order to prove her claim.

Court of Appeal judgment

Giving the leading judgment in the Court of Appeal, Gloster LJ overturned two of the judge's key findings of fact even though Grondona had not appealed them. The judge had described the mortgage application and agreement as a sham. However, Gloster LJ found that, despite the transaction being fraudulent because it was based on misrepresentations, there was a genuine arrangement as between Grondona and Birmingham Midshires.

The judge had also said there was no genuine intention to transfer legal ownership of the property. However, Gloster LJ found that, regardless of the intentions of Grondona and Mitchell as to the beneficial ownership of the property, the whole purpose of their arrangement was to transfer legal title to Grondona so that she could grant a charge in Birmingham Midshires' favour to secure finance.

Patel v Mirza: new criteria for illegality principle

The parties agreed that the reliance test applied by the High Court had now been overruled by the Supreme Court in Patel v Mirza [2016] UKSC 42. The Court of Appeal therefore had to apply the criteria set out in Patel v Mirza (which was a claim for the return of money advanced for the alleged purpose of insider dealing, not a professional liability case) as to whether allowing a claim tainted by illegality would be contrary to the public interest. The Supreme Court set out the following three considerations:

  1. the underlying purpose of the prohibition which has been transgressed;
  2. conversely, any other relevant public policies which may be rendered ineffective or less effective by rejecting the claim; and
  3. the possibility of "overkill" unless the law is applied with a due sense of proportionality.

The Court of Appeal applied the three considerations in Patel v Mirza as follows:

  1. The underlying purpose of the prohibition transgressed – Gloster LJ made clear that she saw mortgage fraud was a "canker on society" but found nonetheless that there was "no public interest in allowing negligent conveyancing solicitors (or, in financial terms, their insurers), who are not party to, and know nothing about, the illegality, to avoid their professional obligations simply because of the happenstance that two of the clients for whom they act are involved in making misrepresentations to the mortgage financier". In Gloster LJ's view it is more likely that mortgage fraud will be avoided if solicitors appreciate the need to be alive to, and question, potential irregularities in any particular transaction.
  2. Any other relevant public policies which might be less effective by rejecting the claim – Gloster LJ held that there was a genuine public interest in ensuring that clients who use the services of solicitors are entitled to seek civil remedies for negligence/breach of contract arising from a legitimate and lawful retainer in circumstances where the client was not seeking through that retainer to profit or gain from her mortgage fraud, but merely to ensure that the chargee's security was adequately protected by registration.
  3. Proportionality – Grondona's misrepresentations to Birmingham Midshires were held to be "reprehensible", but Gloster LJ concluded that it would be "entirely disproportionate" to deny her claim bearing in mind the following considerations: (a) Birmingham Midshires had adopted the transaction rather than complain on the grounds of the fraud; (b) Stoffel & Co had not alleged fraud in its witness statement; (c) Grondona was not seeking to evade her obligations under the charge but accepted responsibility and was trying to pay; (d) the illegal conduct was not central to or indeed relevant to the solicitors' retainer but was simply "part of the background story"; (e) Grondona's intention in pursuing the negligence claim was not to profit from a fraud, but rather to obtain funds to reduce or discharge her liability to Birmingham Midshires; and finally (f) in the circumstances there was no risk that the enforcement of her claim would undermine the integrity of the justice system.

Applying the Patel v Mirza criteria, the Court of Appeal therefore found there was no reason to depart from the judge's conclusion that Grondona was entitled to sue her solicitors for negligence in failing to register the transfer form which would have ensured she had legal title.

Comment

The Supreme Court judgment in Patel v Mirza was welcomed for removing some of the confusion which existed in prior case law about how the illegality defence should be applied, but its public policy based approach has made it difficult to predict how it will be applied to the facts of a particular case. That said, although the outcome in this case will have come as a disappointment to Stoffel & Co and its insurers, it was perhaps not a great surprise given the facts of the case.

As Lord Toulson had observed in Patel v Mizra, in "considering whether it would be disproportionate to refuse relief to which the Claimant would otherwise be entitled as a matter of public policy various factors may be relevant ...Potentially relevant factors include the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was a marked disparity in the parties' respective culpability" (emphasis added). This formulation and the overall approach of the Supreme Court suggested that the "overkill" of striking down an otherwise valid claim on the basis of illegality would be a relatively rare thing.

In Grondona the Court of Appeal was able to separate the mortgage fraud from the mechanics of the conveyancing transaction which the solicitors had been employed to undertake. As Gloster LJ put it, "the illegal features of the agreement between the Claimant and Mr Mitchell were irrelevant to [Stoffel & Co's] obligation". In other words, there was a marked lack of centrality to the solicitors' retainer of the illegality complained of. In public policy terms, the protection of the innocent lender, Birmingham Midshires, (which was likely to benefit from the success of the claim) is also likely to have been a factor in the court's decision.

Patel v Mizra made it clear that given the infinite variety of possible circumstances, a prescriptive or definitive test for when liability will be excluded on the grounds of illegality is not possible and the Court of Appeal in Grondona did not try to identify one. Each case will require careful scrutiny. It seems safe to conclude, however, that for illegality to succeed as a defence to a professional liability claim there will need to be a closer connection than existed in Grondona between the illegality with which the underlying transaction/claim is tainted and the nature of the professional retainer said to have been breached.

The degree of the connection required remains to be worked out in future cases and may depend on the interplay with the other factors which the court will need to take into account in carrying out its balancing act, such as the nature and seriousness of the illegality. It will be interesting to see how the courts apply Patel v Mizra to the facts of future professional indemnity cases and the weight placed on the degree of centrality of the illegality when taken alongside other competing factors.

One thing which can safely be said, and not for the first time, is that when the necessary public policy analysis is undertaken the perceived deep pocket of the professional's insurers will be an obstacle in establishing an illegality defence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions