When negligence and fraud collide

Stuart Pemble considers the Supreme Court’s decision to allow a mortgage fraudster to sue her negligent solicitors. Key point The Supreme Court has provided practical guidance on how to decide whether or not the illegality defence can succeed When considering the decision in Stoffel & Co v Grondona [2020] UKSC 42; [2020] PLSCS 196 – and the first instance and appellate decisions that preceded it – it is helpful to remember that the law is a series of rules that we as a society decide on and (on the whole) then abide by in order to regulate our lives. Admittedly, most of us aren’t involved in the day-to-day act of law making. That responsibility is shared by our elected representatives and the judiciary. But it helps to keep the underlying point in mind. Because, as our lives and the laws which regulate them become ever more complicated, it is inevitable the rules we settle on will come into conflict. And that is exactly what happened in Stoffel. In 2002, G had obtained a mortgage over a leasehold property in south London in order to allow a business partner – M (from whom she bought the property) – to get capital funding from a high street lender that he would otherwise have been refused. M was to pay the cost of the mortgage. S were G’s firm of solicitors and negligently failed to register the transfer to G or the mortgage she had obtained. M remained the registered proprietor and actually borrowed again from his own (more expensive) mortgage provider using the property as security in the meantime. In 2006, G defaulted on the mortgage and the building society brought proceedings against her, though its claim was settled before the matter came to court. G joined S to the proceedings and sought damages for the loss she allegedly suffered as result of S’s failure to register the transfer. S admitted negligence, but raised the defence of illegality because G only instructed it in order to further the fraud. Having lost at first instance and on appeal, S appealed to the Supreme Court. Illegality The common law has long taken a dim view of illegal activity. The maxim ex turpi causa non oritur action – that no action can be based on a dishonourable cause – has been drummed into generations of law students. Two important principles underpin that maxim: (i) a person should not be allowed to profit from their own wrongdoing; and (ii) the law should be coherent and not self-defeating, as would be the case if it condoned illegality by taking with one hand what it gave with the other. So, on the face of it, S had a strong claim. She still lost. This outcome can be traced back to the 2016 Supreme Court decision in Patel v Mirza [2016] UKSC 42, which changed the law on illegality, although the first instance decision in Stoffel (which S lost for other reasons) was handed down before the Supreme Court’s decision in Patel. Patel established a new framework for assessing whether it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system (or, possibly, public morality). There are three stages to consider when applying the new framework: (a) the underlying purpose of the prohibition which has been breached and whether that purpose will be enhanced by denying the claim; (b) any other public policy which will be impacted by denying the claim; and (c) whether denying the claim is a proportionate response to the illegality, especially considering that punishment for illegal acts is a matter for the criminal courts. Applying the framework Lord Lloyd-Jones, who gave the unanimous judgment of the Supreme Court, stressed that applying these considerations should not be a mechanistic process. The court should identify the policy considerations at stages (a) and (b) at a relatively general level and then ask whether enforcing a claim that is tainted by illegality would be inconsistent with those policies. Where there are competing policies, the court should decide where the balance lies. When considering the proportionality required by stage (c), Lord Lloyd-Jones felt it likely that the court would have to look closely at the case before it. However, this would not happen in every instance. If, having analysed the policy considerations, the court decides that the claim should not be barred by the illegality defence, there is no need for the court to consider proportionality. There can be no disproportionate harm to a claimant (by refusing the relief sought as a result of the illegality) because the claim is being allowed to proceed. In Stoffel, so far as stage (a) was concerned, Lord Lloyd-Jones held that although mortgage fraud was a serious criminal offence, denying S’s claim would not enhance the prohibition of mortgage fraud. Fraudsters are unlikely to be deterred by the risk they will be denied a civil remedy if their solicitors are negligent.  In contrast, allowing the claim would enhance the protection the law provides to mortgage borrowers. In relation to stage (b), Lord Lloyd-Jones felt denying G’s claim would conflict with a number of important public policies, not least that solicitors should perform their duties diligently and without negligence and, secondly, that victims of solicitors’ negligence should be compensated for their loss. The judge also noted that allowing the claim avoided a contradiction between the position in equity and at law because the equitable interest in the property had passed to G notwithstanding the fraud. The judge also held, obiter, that it would not be proportionate to deny G’s claim since it was conceptually separate from her fraud. Stuart Pemble is a partner at Mills & Reeve Image © Cris Faga/Shutterstock