Stoffel & Co v Grondona

The illegality defence bars a civil claim only where allowing it would create an incoherent contradiction that damages the integrity of the legal system. The court must consider the purpose of the prohibition transgressed, countervailing public policies and, where necessary, proportionality.

A claimant’s mortgage fraud does not bar compensation for a solicitor’s later negligence where the fraud was complete before the breach, the breach was conceptually separate from it, and recovery protects an existing property interest rather than an expected unlawful profit. Denial may also conflict with the policies requiring solicitors to perform their retainers diligently and compensating clients for negligent loss.

The respondent dishonestly obtained a mortgage advance as part of an arrangement intended to raise finance for another person. The appellant solicitors, who did not know of the fraud, failed to register the transfer to the respondent, the discharge of an existing charge and the new lender’s charge. The respondent consequently lost the property available to reduce her personal liability to the lender.

The Central London County Court awarded her £78,000 plus interest. The Court of Appeal dismissed the solicitors’ appeal in [2018] EWCA Civ 2031; [2018] PNLR 36, applying the policy-based illegality approach in Patel v Mirza. Permission to appeal to the Supreme Court was confined to whether that approach had been correctly applied.

The central issue was whether the respondent’s participation in mortgage fraud barred her otherwise complete claims in negligence and breach of retainer.

Appeal dismissed unanimously. Lord Lloyd-Jones delivered the judgment, with which Lord Reed, Lord Hodge, Lady Black and Lady Arden agreed.

1. The essential question under the policy-based approach in Patel v Mirza [2016] UKSC 42 is whether allowing a claim tainted by illegality would damage the integrity of the legal system by producing incoherent contradictions. The court considers: the purpose of the prohibition transgressed and whether denial would enhance it; countervailing public policies affected by denial; and, where required, whether denial would be proportionate. The first two considerations identify the relevant policies at a relatively high level of generality. Proportionality ordinarily requires closer attention to the particular facts.

2. Permitting the claim would not materially undermine the deterrent or protective purposes of the prohibition against mortgage fraud. The fraud was complete once the loan had been advanced. Registration occurred later and was not necessary to perpetrate it. Registration of the transfer and charge would instead have protected the mortgagee and made the property available to reduce the respondent’s personal liability.

3. Denial would conflict with important policies requiring conveyancing solicitors to perform their duties diligently and allowing clients to recover loss caused by negligent breach. It would also create incoherence in the law of property. Although the sale agreement was tainted by illegality, the respondent acquired an equitable right to be registered after the transferor executed and delivered the transfer. The law could not consistently recognise that interest while denying a remedy against a third party whose negligence prevented its protection by registration.

4. Denial would in any event be disproportionate. The solicitors’ breach was conceptually separate from the mortgage fraud. By the time registration was required, the fraud had been completed and equitable ownership had passed. Although reliance on illegality is no longer determinative, the ability to establish the negligence claim without relying on the fraud confirmed its lack of centrality.

5. The damages compensated the respondent for the loss of property that could have reduced or discharged her mortgage liability. They were not calculated by reference to profits expected from the fraudulent arrangement. The controlling inquiry was legal coherence, rather than whether the respondent could be said in a broad sense to have obtained something from her wrongdoing.

1. United Kingdom Supreme Court: Dismissed the solicitors’ appeal in [2020] UKSC 42. The policy-based illegality defence did not bar the respondent’s claim.
2. Court of Appeal: In [2018] EWCA Civ 2031; [2018] PNLR 36, dismissed the solicitors’ appeal and the respondent’s cross-appeal on quantum. It held that the transaction was not a sham, legal title was intended to pass, and Patel v Mirza did not bar recovery.
3. Central London County Court: Held that the respondent had knowingly participated in mortgage fraud but that illegality did not bar her claim under the then-applicable reliance approach. It awarded £78,000 plus interest for negligence and breach of retainer.