UK Supreme Court tests illegality defence

Out-Law News | 06 Nov 2020 | 12:19 pm | 5 min. read

The UK Supreme Court has delivered two differing judgments focusing on whether someone can benefit from an illegal action – deciding that the circumstances of a case determine whether the ‘illegality defence’ can apply.

The court ruled unanimously in both cases. In one, it found that a firm of solicitors could not escape liability in a professional negligence case because their client was involved in mortgage fraud. In the other, the Supreme Court ruled that a woman who had been convicted of her mother’s manslaughter could not claim damages for losses she suffered as a result of that conviction.

Herring Andrew

Andrew Herring

Partner

It appears that there is now a trend of courts being willing to transfer the risk of fraud on to property lawyers and other professionals involved in their clients’ transactions

The firm of solicitors, Stoffel & Co, brought its appeal to the Supreme Court after its client, Maria Grondona, successfully sued it before the High Court and Court of Appeal for negligence.

Grondona had bought a property from a business partner with the assistance of a mortgage advance secured by a charge over the property, but the advance had been obtained by fraud as she made dishonest representations on the application form. The aim of the fraud was to raise money for her business partner, Cephas Mitchell, who had previously obtained a separate charge over the property.

Stoffel & Co failed to register the form transferring the property to Grondona and forms relating to the two charges over the property at the Land Registry. In the High Court, the firm admitted negligence, but said it could rely on the illegality defence because it had only been instructed to further the mortgage fraud.

The Supreme Court examined the application of guidelines set down in the case of Patel v Mirza, a 2016 ruling concerning the illegality defence which identified three stages that should be considered: the underlying purpose of the illegality, and whether that would be enhanced by denying the claim; any other relevant public policy on which denying the claim could have an impact; and whether denying the claim would be a proportionate response to the illegality.

Giving the judgment in the Stoffel & Co case, Lord Lloyd-Jones said that while deterring mortgage fraud was important, refusing a remedy against property lawyers was unlikely to enter the fraudster’s head and in this case, Grondona’s fraud was complete.

The court said those using legal services should be entitled to a remedy for negligence, and a remedy should only be refused if granting it would be “legally incoherent”. Lord Lloyd-Jones added that property lawyers should be encouraged to be alert to possible irregular transactions, and denying Grondona’s claim for negligence “would be a disincentive to the diligent performance by solicitors of their duties”.

While Stoffel & Co said the fact that the firm was retained to advise on the mortgage process was central to the fraud, the court disagreed. It said Grondona’s claim for breach of duty against the firm was “conceptually entirely separate from her fraud on the mortgagee”.

The court also said Grondona would not profit from wrongdoing if she succeeded in her claim for negligence, as the claim was one of compensation for loss suffered by Stoffel & Co’s negligence.

It found that the “true rationale of the illegality defence” was “that recovery should not be permitted where to do so would result in an incoherent contradiction damaging to the integrity of the legal system" and that, "in the present case, to allow the respondent’s [Grondona’s] claim to proceed would not involve any such contradiction”.

The court also examined the three stages of the illegality defence in the other case to be handed down last month. Ecila Henderson was convicted of manslaughter by reason of diminished responsibility after stabbing her mother to death in 2010 while experiencing a serious psychotic episode.

Henderson brought a negligence claim against Dorset Healthcare University NHS Foundation Trust, which admitted liability for not returning her to hospital when her psychiatric condition deteriorated, and accepted that had it done so, her mother would not have died.

The Supreme Court again looked at the three stages identified in the Patel v Mirza case. However this time it found that the reasons for allowing Henderson’s claim did not outweigh the reasons for denying it. Refusing her claim was not disproportionate, and maintaining the integrity of the legal system was more important than making Dorset Healthcare responsible for Henderson’s mother’s death, it ruled.

Fletcher Michael_November 2019

Michael Fletcher

Partner

The case of Patel v Mirza was the subject of much commentary when it was originally decided. It is helpful to claimants and defendants that the Supreme Court has applied the judgment again and in this context, provided further clarity on how the courts should approach the illegality defence in the future

Craig Connal QC said a broad thread or moral right ran through both cases.

Connal said: “To an untutored observer, the result in Henderson may seem obvious. Allowing a claim for the consequences of having killed another person should only produce one answer. The critical – perhaps even unsympathetic – approach to the property lawyers in the other may appear to have influenced the result. A lawyer being sued by a fraudster might look at the matter through a different lens.”

Litigation expert Michael Fletcher, also of Pinsent Masons, said: "This is the first time the Supreme Court has considered the application to solicitors’ negligence claims of the more flexible, policy-driven approach to the illegality defence which it established in the case of Patel v Mirza. The illegal act of the claimant will not necessarily cause its claim to fail."

"The Supreme Court considered that the key 'essential question' to be determined was whether to allow the claim would damage the integrity of the legal system by permitting incoherent contradictions in the law. The Supreme Court therefore balanced the public policy reasons which underpin the criminalisation of mortgage fraud with the public policy reasons for holding negligent solicitors liable for losses caused by their negligence. Here, the negligence was in the registration of the property following its transfer; regardless of the fact of the mortgage fraud, title had passed to Ms Grondona but the solicitors failed properly to register that title. The public policy reasons behind criminalising mortgage fraud would not be contradicted by finding the solicitors liable for negligence in failing to register title, which would also have been in the lending bank’s interests, and so the defence failed," he said.

"The case of Patel v Mirza was the subject of much commentary when it was originally decided. It is helpful to claimants and defendants that the Supreme Court has applied the judgment again and in this context, provided further clarity on how the courts should approach the illegality defence in the future," Fletcher said.

Civil fraud and asset recovery specialist Andrew Herring, also of Pinsent Masons, said: "The ruling in Stoffel v Grondona reinforces the policy-based approach adopted recently in the case of Dreamvar v Mishcon de Reya, as it appears that there is now a trend of courts being willing to transfer the risk of fraud on to property lawyers and other professionals involved in their clients’ transactions."

"Given the current economic climate, it is likely that we will begin to see a significant increase in frauds becoming uncovered and consequential claims against professionals. It is therefore more important than ever for solicitors in all practice areas, as well as other professionals, to fully understand the detail behind any advice being provided to clients and to ensure that they are far more diligent about the checks being undertaken during a transaction," he said.

Co-written by Craig Connal QC.