Can solicitors rely on the defence of illegality when being sued for professional negligence in relation to an unlawful transaction?
In its recent judgment of Stoffel & Co. v Grondona  UKSC 42, the Supreme Court of the United Kingdom (“Supreme Court”) examined the defence of illegality in the context of a professional negligence claim. The Supreme Court held that the true rationale of the defence of illegality is that recovery should not be permitted if it would result in inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system.
Ms Grondona, the claimant, entered into a business arrangement with Mr Mitchell, in which Ms Grondona lent her good credit history to Mr Mitchell to enable him to obtain finance from high street lenders to purchase properties, while Mitchell would pay all monthly mortgages of the properties. In return, Ms Grondona would receive 50% of the net profit when any of the properties were sold.
In July 2002, Mr Mitchell bought a flat in London (the “Property”) for £30,000 and borrowed a loan secured by a charge over the Property. The charge was registered in the name of the lender, BM Samuels Finance Group plc (“BM Samuels”). In October 2002, Mr Mitchell purported to sell the Property to Ms Grondona at £90,000 and Ms Grondona obtained a mortgage advance from Birmingham Midshires. Such mortgage advance was procured by fraud since it was a scheme used by Ms Grondona and Mr Mitchell to obtain mortgage loans on inflated valuation and for Ms Grondona to lend her good credit history to Mr Mitchell. However, Stoffel & Co., the defendant solicitors in the action, negligently failed to register documents effecting the transfer of title in the Property from Mr Mitchell to Ms Grondona. It also failed to register the release of the charge in favour of BM Samuels.
In 2006, Ms Grondona defaulted on mortgage payments and Birmingham Midshires brought proceedings against her. Because of the negligence of Stoffel & Co., Mr Mitchell remained the registered owner of the Property and BM Samuels remained as the chargee. Hence Ms Grondona was unable to sell the Property to meet her arrears. In turn, Ms Grondona brought a claim against Stoffel & Co. for breach of duty and/or breach of contract, while Stoffel & Co. raised the defence of illegality.
The defence of illegality
As decided in Patel v Mirza  AC 467, when considering the defence of illegality, the Court has to determine whether allowing a claim which is tainted by illegality would be contrary to public interest in a way that would produce inconsistency damaging to the integrity of the legal system. As such, the Court should consider:
1. the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim;
2. any other relevant public policy on which denying the claim may have an impact; and
3. whether denying the claim would be a proportionate response to the illegality.
It is noted that if there is a clear conclusion that the defence of illegality should not be allowed after examining the policy considerations, there will be no need to consider proportionality.
The judgment in light of Patel v Mirza
In application of the three considerations in Patel v Mirza, the Supreme Court made the following findings:
1. The illegal conduct in question is mortgage fraud and the underlying policy is both deterrence and the protection of the public, in particular mortgagees, from suffering loss. However, denying Ms Grondona’s claim against the solicitors’ negligent failure to register the transfer of the Property does not seem to enhance the relevant underlying purposes. On the contrary, the required registration of transfer was in fact in the interest of not only Ms Grondona, but also the mortgagee, since it was in their interest that Ms Grondona should have assets to meet her liability.
2. The denial of Ms Grondona’s claim would contradict with the policy that conveyancing solicitors should perform their duties to their clients diligently and without negligence and that in the event of a negligent breach of duty, the client should be compensated for the loss he has suffered. It would also create incoherence in the law that equitable interest in the Property was passed to Ms Grondona once Mr Mitchell had done everything he could do to effect the legal transfer, notwithstanding that the contract was tainted with illegality.
3. In considering proportionality, which is not necessary in this case, the Supreme Court found that the breach of duty by the solicitors was not central to the illegal conduct of Ms Grondona given that by the time the solicitors were required to register the transfer, (a) the defrauding of Birmingham Midshires had been completed and (b) the equitable interest in the Property had already passed to Ms Grondona. Thus, it would be disproportionate to deny Ms Grondona’s claim.
It is emphasized that while profiting from one’s own wrongdoing remains a relevant consideration, the true focus should be whether permitting recovery would produce inconsistency damaging to the integrity of the legal system.
On the particular facts of Stoffel & Co. v Grondona, the Supreme Court ruled that allowing the tainted claim would not cause such legal incoherence and disharmony such that the integrity of the legal system would be damaged. Thus, the claim was not barred by illegality.
While solicitors and other professionals may rely on the defence of illegality when being sued for professional negligence in relation to tainted claims, the Court assesses illegality by applying the three considerations in Patel v Mirza. Instead of a definitive test, it presents a flexible approach which finds balance between various public policies in light of the infinite factors which may be relevant to the particular case.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2020