Professional negligence – Illegality – Registration of title – Respondent obtaining judgment against appellant firm of solicitors for negligence and/or breach of retainer in failing to register title to property – Court of Appeal dismissing appellant’s appeal – Appellant appealing – Whether claim barred by illegality defence – Appeal dismissed
The respondent made an agreement in writing with a third party (M) to provide her name on mortgage applications over properties in which M had an interest, including a leasehold flat at 73b Beulah Road, Thornton Heath, Surrey.
In July 2002, M purchased a 125-year lease of the flat from the freeholder for £30,000. He subsequently borrowed a sum against the flat and a charge was registered against the property. In October 2002, M sold the lease to the respondent who obtained an advance of £76,500 on the basis that the monies were to be used to discharge the earlier charge and a new charge would be registered in favour of her lender.
The appellant firm of solicitors acted for the respondent, M and her lender. The advance was made and the monies paid to the previous lender. However, as a result of the admitted negligence of the appellant, none of the transactions were registered. The appellant argued that it was entitled to rely on the illegality defence because the purpose of the transaction was to put the property into the respondent’s name in fraud of her lender.
The appellant appealed against a decision of the county court in favour of the respondent in her claim for damages against the appellant for negligence and/or breach of retainer in failing to register transfer document form (TR1), a legal charge and a Land Registry cancellation of entries for lenders form (DS1) in relation to the property.
The High Court ruled in favour of the respondent and the Court of Appeal dismissed the appellant’s appeal against that decision: [2018] EWCA Civ 2031; [2018] EGLR 42. The appellant appealed. The issue was whether the Court of Appeal erred in its application of the guidelines in Patel v Mirza [2016] UKSC 42 relating to the doctrine of illegality.
Held: The appeal was dismissed.
(1) ) Following the new approach to the illegality defence at common law adopted by the Supreme Court in Patel v Mirza, there were two broad discernible policy reasons for the common law doctrine of illegality as a defence to a civil claim: a person should not be allowed to profit from his own wrongdoing; and the law should be coherent and not self-defeating, by condoning illegality. The central question was whether allowing recovery for something illegal would produce inconsistency and disharmony in the law and cause damage to the integrity of the legal system. To answer that question, it was necessary to: (a) consider the underlying purpose of the prohibition which had been transgressed; (b) consider conversely any other relevant public policies which might be rendered ineffective or less effective by denial of the claim; and (c) keep in mind the possibility of overkill unless the law was applied with a due sense of proportionality.
Applying that trio of necessary considerations should not be a mechanistic process. Whether allowing the claim would damage the integrity of the legal system depended on whether it would be inconsistent with the policies to which the legal system gave effect. The court was not concerned to evaluate the policies themselves. It simply sought to identify the policies to which the law gave effect which were engaged by the question whether to allow the claim, to ascertain whether to allow it would be inconsistent with those policies or, where the policies competed, where the overall balance lay.
By contrast, in considering proportionality, it was likely that the court would have to give close scrutiny to the detail of the case. However, if it was clear that the defence should not be allowed, there would be no need to go on to consider proportionality, because there was no risk of disproportionate harm to the claimant by refusing relief.
(2) The respondent was knowingly and dishonestly involved in a mortgage fraud which was a serious criminal offence. The appellant, which knew nothing about the illegality, was retained by the respondent to facilitate the mortgage fraud. Deterrence was an underlying policy of the criminal law against fraud. However, permitting a civil remedy to persons in the position of the respondent would not undermine that policy. Fraudster were unlikely to be deterred by the risk of being left without a remedy if their solicitor proved negligent in registering the transaction.
It was also unlikely that refusing the respondent a civil remedy would enhance the further underlying purpose of protecting the public, and in particular mortgagees, from suffering loss. Registration of the transactions could only take place after the completion of the conveyance. By the time of the negligent breach of duty the loan had already been advanced and, denying a remedy to the respondent in respect of negligence in what occurred subsequently would not protect the mortgagee. The registration of the transfer was necessary before the mortgagee’s charge could be registered.
(3) Had the appellant registered form TR1, legal title would have passed to the respondent under section 27(1) of the Land Registration Act 2002. In the event, the respondent was entitled to an equitable right to be registered as proprietor of the registered legal title. To permit the respondent’s claim would not undermine the public policies underlying the criminalisation of mortgage fraud and could protect the interests of the mortgagee. Furthermore, to deny the respondent’s claim would be inconsistent with the policy that the victims of solicitors’ negligence should be compensated for their loss. It would be a disincentive to the diligent performance by solicitors of their duties and result in an incoherent contradiction given the law’s acknowledgment that an equitable property right vested in the respondent.
(4) It would not have been proportionate to deny the respondent’s claim because it was conceptually entirely separate from the mortgage fraud.
(5) The court was not assisting the respondent to profit from her own wrongdoing. The true rationale of the illegality defence was that recovery should not be permitted where it would result in an incoherent contradiction damaging to the integrity of the legal system. To allow the respondent’s claim to proceed would not involve any such contradiction.
Michael Pooles QC and Dan Stacey (instructed by Levi Solicitors LLP, of Leeds) appeared for the appellant; Andrew Warnock QC, Maurice Rifat and Laura Giachardi (instructed by WH Matthews & Co Solicitors) appeared for the respondent.
Eileen O’Grady, barrister
