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Two wrongs don’t make a right: Court of Appeal decides illegality is no defence to professional negligence claim

16 October 2018

For public policy reasons, the Court of Appeal has held that the defence of illegality was not available to a firm of solicitors that failed to register a property transfer to a client involved in mortgage fraud. The court decided that there was no risk that enforcing the client’s negligence claim would undermine the integrity of the justice system and she was entitled to damages, in spite of the fraud.

Background

This is the Court of Appeal case of Stoffel & Co v Grondona [2018] EWCA Civ 2031.

At first instance, the judge found in favour of the Claimant (Ms Grondona) in her claim for damages against her conveyancing solicitors for negligence and/or breach of retainer. The solicitors admitted negligence/breach for failing to properly file forms with the Land Registry registering a property transfer to Ms Grondona, cancelling a prior mortgage charge and registering a new mortgage. However, the firm argued on the basis of the illegality principle that Ms Grondona’s participation in an illegal mortgage fraud (designed to obtain monies for someone else) stopped her from recovering damages.

Although the High Court agreed there had been a mortgage fraud, it held that the defence of illegality did not apply because Ms Grondona was not relying upon the illegal mortgage agreement to support her claim for professional negligence (the “reliance test”). Ms Grondona was awarded damages and the firm appealed.

The illegality principle at appeal

At appeal, the parties agreed that the reliance principle that the first instance decision was based on was no longer legally applicable. That decision pre-dated the case of Patel v Mirza [2016] UKSC 42, in which the majority of the Supreme Court recast the illegality principle. According to the Supreme Court, the key consideration is now whether allowing a claim tainted by illegality would be contrary to the public interest because it would be harmful to the integrity of the legal system, taking into account:

  • the underlying purpose of the law that has been broken;
  • whether some other public policy would be rendered ineffective or less effective by denying the claim; and
  • whether it is proportionate to deny the claim, taking into account various factors.

Although the Court of Appeal was required to apply these different Patel v Mirza criteria to the facts in this case, it still upheld the conclusion reached at first instance i.e. that Ms Grondona was entitled to sue her solicitors for negligence and be awarded damages.

Weighing up the public policy considerations

The Court of Appeal made clear that mortgage fraud is “a canker on society”, but said that there was no public interest in allowing solicitors who had no knowledge of the illegality to avoid their professional obligations simply because their client happened to be involved in mortgage fraud.

Looking at the other public policy considerations, the Court of Appeal said: “there is 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 against a defendant arising from a legitimate and lawful retainer which was entered into between them, in circumstances where the client was not seeking to profit or gain from her mortgage fraud”.

Proportionality

On the particular facts of this case, the Court of Appeal decided it would be disproportionate to deny the claim on various grounds. These included the fact that the solicitors firm did not allege fraud in its witness evidence, the illegal conduct was not central or relevant to the otherwise proper and legitimate contract of retainer between client and solicitor (“it was simply part of the background story”) and Ms Grondona’s intention in pursuing the claim was not to profit from the fraud.

Ultimately, the Court of Appeal was satisfied that there was no risk that enforcement of the claim would undermine the integrity of the justice system and the appeal was dismissed.

Comment

It may seem a harsh result that a client can commit fraud, but still be entitled to damages from their solicitors in relation to the same transaction. However, it is not difficult to see how the Court of Appeal reached that outcome having carried out a careful weighing up exercise to apply the law on the illegality principle to the facts in this case. The clear message from the court is that the public interest is in ensuring that solicitors cannot rely on hiding behind a client’s wrongdoing to get off the hook for their own negligent performance.

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