The Supreme Court yet again addressed the defence of illegality, this time in the context of claims for negligence against solicitors. They ruled that negligent solicitors should not be able to avoid liability when it later emerged that their client was engaged in mortgage fraud.

Andrew Warnock QC, Maurice Rifat of 1 Chancery Lane and Laura Giachardi of 42 Bedford Row successfully represented the Respondent in the Supreme Court, in the appeal of Stoffel & Co v Grondona [2020] UKSC 42. Lord Lloyd-Jones JSC gave the unanimous Judgment of the Supreme Court (Lord Reed, Lord Hodge, Lady Black and Lady Arden all agreeing)

Factual Background

The Respondent claimed damages against the Appellant for negligently failing to register her title to leasehold property which she had purchased from the vendor. The Respondent and the vendor already knew each other and had agreed that the vendor would remain the ‘real’ owner the property, and that the Respondent would obtain a mortgage to purchase it from him by fraudulently misrepresenting to the lender that she was to be the owner, that it was an arms’-length sale and that the deposit (provided to her by the vendor) was from her own funds. All of these representations were false and were made in order to raise capital finance for the vendor from a high street lender which he would not otherwise have been able to obtain.

Despite admitting their negligence, Stoffel & Co. defended their claim alleging that their retainer with the Respondent was tainted by fraud and that she was using them as a necessary step, in effect as a ‘cat’s-paw’, to obtain the mortgage advance from her lender. Stoffel & Co.’s case was essentially that she was a fraudster and to be able to claim the value of the lost property that should have been registered in her name was allowing her to ‘get away with it’.

Appeal history

At trial, the Respondent was successful, with the trial judge finding that the Respondent did not need to rely on the fraud to make good her claim (per Tinsley v Milligan).

The Appellant was given permission to appeal to the Court of Appeal following the decision of the Supreme Court in Patel v Mirza overruling the reliance test in Tinsley, and introducing the policy based test, where to decide whether a claim based on or tainted by fraud should succeed, the test is whether to allow the claim would be harmful to the integrity of the legal system and resolved by the Court considering (1) the underlying purpose of the prohibition which has been transgressed (2) any other relevant public policies which may be rendered ineffective by denial of the claim and (3) whether it is proportionate to deny the claim. Factors going to proportionality are the seriousness of the illegal act, the culpability of the claimant and whether the illegality is central to the claim.

At appeal the Respondent was again successful. The Court’s judgment was given by Gloster LJ applying the new test under Patel v Mirza and upholding the Respondent’s claim for negligence.

The Appellant was given permission to appeal to the Supreme Court on the single ground of whether the Court of Appeal erred in applying the test in Patel v Mirza. The Supreme Court unanimously dismissed the appeal.

Supreme Court decision

The detailed reasoning of the Supreme Court will be analysed in more detail in subsequent articles. However, it is worth, at this stage, highlighting the 5 main points that can be taken away from the Supreme Court decision in this complex area of law.

1. The overriding consideration for the court in applying the illegality defence is maintaining the integrity of the legal system. This links to Professor Burrows’ ‘Restatement’ works in which he emphasises that ‘stultification’ is the key, namely that the law should not give with one hand what it takes with another. The key question is whether allowing the claim would result in an inherent contradiction in the legal system.
2. That in applying the test in Patel v Mirza, in order to decide whether a claim should succeed if it is tainted with or based on fraud, the Court should evaluate the relevant policy considerations at a relatively high level of generality. Only if after a balancing of policy considerations suggests a denial of the claim will it be necessary for the Court to go on to consider proportionality, which will only then involve a detailed analysis of the facts of each individual case.
3. Importantly, title to property passes under a contract, even if that contract has an illegal purpose. The transferee obtains good title both in law and equity. This also entails the transferee being able to enforce her property rights including claiming damages for its loss. Lloyd-Jones JSC found that this was an important stand-alone policy against denying the claim.
4. That the reliance test set out in Tinsley v Milligan, although overruled in Patel v Mirza, remains relevant as it goes to the issue of centrality. If the essential facts founding the claim can be established without reference to the illegality, then the illegality is unlikely to be central to the claim. Lord Sumption dissenting in Patel described the reliance test as the narrowest available. If a claimant gets past it, then it is unlikely that their claim will be harmful to the integrity of the legal system.
5. Finally, that although the motive behind most illegal agreements is to make a profit, the Court must look at the claim being made and not whether the claimant is ‘getting away’ with something. A claim for compensation for property lost by the negligence of a solicitor is not a claim to recover a profit. 

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Laura Giachardi

Call 2009

02.11.2020