In Stoffel & Co. v Grondona, the Supreme Court considered the defence of illegality in the context of solicitors' negligence. The case confirms a new policy-based approach to be applied when determining whether the illegality defence is applicable.
Facts of the case
Ms Grondona, bought a property in October 2002 from Mr Mitchell, with whom she had a business relationship. He had purchased a 125-year lease of the ground floor flat around 3 months earlier, having funded the purchase via a loan, with a charge registered in the name of his lender. Ms Grondona obtained a loan on the basis that the earlier charge would be discharged, and a new charge would be registered in favour of her lender.
The lender had obtained summary judgement against Ms Grondona for default of payments under the charge. In turn, Ms Grondona sought damages from her solicitors, Stoffel & Co for failure to register the documents for transfer at the Land Registry and discharge the original charge, resulting in Mr Mitchell remaining the registered owner of the property, still subject to the initial charge. However, Stoffel & Co argued that the illegality defence would apply due to Ms Grondona having made a number of fraudulent misrepresentations in order to secure the mortgage advance.
The trial judge held that Ms Grondona's claim was not barred by the illegality defence, applying the reliance test from Tinsley v Milligan 1994, that a defence of illegality would only be successful if the defendant could show that the claimant had to rely on the illegality in order to bring the claim.
The Court of Appeal dismissed the solicitors' appeal, applying the test set out in Patel v Mirza 2016 UKSC 42 which requires the court to consider the three-part test:
(a) The underlying purpose of the illegality in question;
(b) Any other relevant public policy on which denying the claim may have an impact; and
(c) Whether denying the claim would be a proportionate response to the illegality.
Stoffel & Co then appealed to the Supreme Court.
Supreme Court Decision
The Supreme Court unanimously dismissed the appeal. Lord Lloyd Jones said that the decision in Patel v Mirza set out a new policy-based approach to the illegality defence at common law. The main assessment should be whether enforcing the claim would lead to inconsistency that is damaging to the integrity of the legal system. In deciding this, the court should consider the three-part test set out above.
The Supreme Court, in considering relevant public policy, did not take the view that allowing an action against solicitor negligence would have the effect of undermining the policy of criminalising mortgage fraud. Conversely, the Supreme Court considered that solicitors should be performing their duties without negligence, and clients should be entitled to recover any losses in the event of breach of duty. It would go against this policy if the Court were to allow solicitors to escape liability for negligence.
The Court concluded that denying the claim would be disproportionate due to the lack of centrality of the illegal conduct to the breach of duty by Stoffel & Co. Although the lender was not party to the Supreme Court case itself, the court understood that the lender was a clear victim of the underlying fraud and the court took this into account in balancing the policy considerations for whether to allow a negligence claim to succeed.
Analysis
Following Patel v Mirza, it was thought that the illegality defence test led to both flexibility and uncertainty in allowing a wide margin of discretion for judges to consider the competing policy factors. The Supreme Court in Stoffel provides further guidance on how the Patel v Mirza test should be applied with an emphasis on the policy-based approach to the illegality defence. The facts of Stoffel are of particular relevance in this instance, as the fraudulent conduct was not central to the negligence claim. The purpose of the solicitors' involvement was not to further the fraud itself. The decision also confirms that the underlying rationale for the illegality defence is considering whether allowing the award would result in an "incoherent contradiction damaging the integrity of the legal system."
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