In Grondona v Stoffel & Co [2018] EWCA Civ 2031, the Court of Appeal placed more importance on the public policy argument of clients being able to seek damages for solicitors’ negligence even in claims where the claimants have potentially committed fraud and the illegality defence is argued
Conveyancing solicitor’s negligence
This Court of Appeal case involved a claim brought by Ms. Grondona against the Defendant law firm Stoffel & Co following the firm’s failure failure to register the transfer of Ms Grondona’s property together with the discharge of the existing charge and registering a new legal charge i.e. in carrying out the crucial, familiar steps of a conveyancing transaction in preparing and submitting essential legal documents to the Land Registry, namely forms TR1 and DS1. This resulted in the Claimant suffering financial loss when her mortgagee sought to enforce its security and was unable to do so therefore obtained a money judgment against the Claimant. The Claimant subsequently sought damages from the Defendant.
The illegality defence
The Defendant admitted to its error in provision of completing the necessary documents. However, it sought to use the defence of illegality whereby Ms. Grondona was not the actual owner of the property at all and had committed mortgage fraud. The Defendant’s case was that the mortgage was for the original owner of the property, Mr. Mitchell, however it would have been harder to obtain due to his unreliable financial history. In light of this, the parties had entered into an agreement whereby Mr. Mitchell continued to be the owner and managed the property and its rents while Ms. Grondona was to receive 50% of the profit on the sale of the property. The Defendant claimed that the claim was tainted by illegality the illegality principle of ex turpi causa applied so the Claimant’s recovery of damages should be barred.
The Claimant rejected the defence of ex turpi causa on the grounds that the Claimant did not have to rely on the illegality in question in order to prove her claim (the test in Tinsley v Milligan [1993] UKHL 3).
Public interest and solicitor‘s negligence outweighed potential illegality
In considering the issues in this case, the Court of Appeal approached the balancing exercise as set out in Patel v Mirza [2016] UKSC 42. Notwithstanding the dishonest purpose of the transaction, there had been a genuine intention to transfer the legal ownership of the property to the Claimant and the mortgage agreement itself was genuine.The Defendant had been retained to carry out this work for the Claimant and it had failed to do so.
In handing down its judgment, the Court of Appeal considered the following factors:
- Public Interest: While the Claimant was involved in mortgage fraud, the Court could see “no public interest in allowing negligent conveyancing solicitors who are not party to and know nothing about the illegality to avoid their professional obligations simply because of the happenstance that two of the clients for whom they act are involved in making misrepresentations to the mortgagee financier“.
- Proportionality: It would be disproportionate to reject the claim in the absence of any complaint being raised by the lender against the Claimant on the grounds of fraud. Furthermore, the Claimant had not sought to evade her obligations under the charge and had pursued the negligence claim, not to profit from the fraud, rather to obtain funds to discharge her liability to the lender. The Claimant’s illegal conduct was not central or relevant to her retainer with the Defendant but held to be part of the “background story”.
- Negligence of the Solicitors: The solicitors had been negligent in that they had failed to provide adequate services to the client.
- Illegality Principle Non-Applicable: The Court also focused on the fact that since the mortgage fraud was not connected to the negligence claim filed by Ms. Grondona and did not directly affect it, the illegality principle was not applicable to this appeal. The Defendant had still been negligent.
Good news for claimants in negligence claims
It may come as as surprise that a client can commit fraud but still be entitled to damages from their solicitors. In this case the public interest argument in upholding a claim for solicitors’ negligence outweighed any potential fraud committed by the Claimant. This Court of Appeal case is positive for Claimants and should make solicitors and insurers more cautious in terms of negligence or breach of contract in the provision of their services as it shows they cannot escape liability for their negligence.
Clarification on Illegality Defence
This case was particularly important as it further cleared the confusion regarding the ‘illegality defence’ that was previously brought up in Patel v Mirza. Lord Toulson observed:
“in considering whether it would be disproportionate to refuse relief to which the Claimant would otherwise be entitled as a matter of public policy various factors may be relevant …potentially relevant factors include the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was a marked disparity in the parties’ respective culpability”
For a claim to be dismissed in accordance with the illegality defence, it must have a close connection with the claim rather than a mere aspect to the background story. Moreover, this case clarified that the illegality defence is to apply, taking into account the nature and seriousness of the illegality.
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