Stoffel & Co was a firm of solicitors which was closed down by the Solicitors Regulation Authority in February 2015. I don’t know why the SRA intervened, but the negligence discussed in Stoffel & Co v Grondona [2018] EWCA Civ 2031; [2018] EGLR 42 suggests that, as a firm, it didn’t have its troubles to seek.
In 2002, the firm acted for Maria Grondona in the purchase of a long leasehold interest in 73b Beulah Road, Thornton Heath. It failed to register the transfer (or the mortgage Grondona had obtained from the Birmingham Midshires Building Society) with the Land Registry. When Grondona defaulted on her mortgage payments, Birmingham Midshires sued her for the money she owed. Grondona joined Stoffel & Co by CPR Part 20 alleging breach of contract and negligence for its failure to register the property in her name.
The fascinating quirk to the case is that, despite admitting that it had been negligent, Stoffel & Co still defended the Part 20 claim. It argued that it should not pay anything because its negligence arose in a transaction where Grondona was committing mortgage fraud. As such, Stoffel & Co looked to rely on the legal principle ex turpi causa non oritur actio (“from a dishonourable cause, an action does not arise”): the legal doctrine that a claimant cannot pursue a legal remedy if that remedy arises in connection with its own illegal act.
By the time the case was heard at first instance, Birmingham Midshires had settled out of court. HHJ Walden-Smith therefore had to decide whether or not the mortgage fraud meant that Grondona’s claim against Stoffel & Co should succeed or fail. The judge allowed Grondona’s claim and awarded damages based on the fact that she did not have an unencumbered property (the previous mortgage lender’s charge was still recorded on the title at the Land Registry) which she could offer as security for her loan from Birmingham Midshires. Stoffel & Co appealed.
The fraud
Grondona was a poor fraudster. So bad, in fact, that in March 2000 she recorded the fraud in a formal written agreement with her co-conspirator, Cephas Mitchell (who appears sadly to have passed away by the time of trial). Grondona was able to obtain mortgages at more competitive rates than Mitchell. The March 2000 agreement provided for her to purchase four properties (including 73b Beulah Road). In return, Mitchell would pay the mortgages, collect rent, manage and maintain the properties. Grondona would be entitled to a 50% share of any profit when the properties were sold.
Mitchell had purchased the leasehold interest in Beulah Road for £30,000 in July 2002. In the transaction which Stoffel & Co failed to register at the Land Registry, Grondona purchased that interest from Mitchell three months later for £90,000, a return on Mitchell’s “investment” of 300%.
The Supreme Court changes the law
In between HHJ Walden-Smith’s decision and the hearing before the Court of Appeal, the Supreme Court handed down its decision in Patel v Mirza [2016] UKSC 42 (see “A morality tale for our times”, EG, 26 November 2016). Gloster LJ, giving the leading judgment in Stoffel, had to apply that new test.
There are three parts to it:
- What is the underlying purpose of the legal principle which has been transgressed?
- Are there any other public policies which would be rendered ineffective or less effective by denying Grondona’s claim?;
- The law should be applied with a due sense of proportionality to avoid overkill.
The judge had no difficulty in allowing the claim.
In relation to the first limb, and while accepting that mortgage fraud is “a canker on society” and that “it is extremely important that dishonest applicants for mortgages should not be empowered by the law to abuse the system”, she felt that there was no public interest to be served by allowing negligent solicitors to escape liability because of a fraud of which they were completely unaware. Indeed, the judge commented that there may well be less mortgage fraud “if solicitors appreciate that they should be alive to, and question, potential irregularities in any particular transaction”.
Gloster LJ went even further: “Moreover, the premise that it would assist the fight against mortgage fraud if mortgagors involved in making false representations to mortgagees were unable to recover if their solicitors were negligent in failing to register the mortgagee’s security seems, to say the least, questionable.”
The judge also took comfort from the fact that Birmingham Midshires had not alleged fraud against Grondona and Mitchell.
So far as the second limb was concerned, the judge stressed that there was a “genuine public interest” in allowing clients to sue their negligent solicitors; an interest which would be weakened if the claim was denied.
Under the third limb, Gloster LJ felt that the fraud and the negligence were so far removed from one another that allowing the claim would not undermine the integrity of the justice system. She also noted that Grondona was not trying to get her half-share of any profit under her “agreement” with Mitchell, but to reduce or discharge her loan from the building society.
In reaching her conclusion, the judge also had to satisfy herself that title in the house (albeit only equitable in this instance) had passed notwithstanding the fraud. Relying on Chitty on Contracts and a range of distinguished authority – including Singh v Ali [1960] AC 167 – Gloster LJ had no difficulty in doing so.
Stuart Pemble is a partner at Mills & Reeve
