A firm of solicitors has been held liable for negligent in relation to a mortgage, even though the client obtained the mortgage as part of a fraudulent scheme.

The UK Supreme Court gave the ruling in refusing an appeal by former Kent solicitors Stoffel & Co against a decision of the English High Court and Court of Appeal in favour of their client Maria Grondona.

The case concerned a flat in Thornton Heath, Surrey, the lease of which was bought by a Mr Mitchell, who took out a mortgage with BM Samuels Finance Group. In October 2002, Ms Grondona bought the property from Mr Mitchell, with the assistance of a mortgage advance of £76,475 from Birmingham Midshires. The trial judge found that Ms Grondona procured the advance by fraud, to raise capital for Mr Mitchell which he would not otherwise have been able to obtain. The two had agreed that Mr Mitchell would be responsible for the mortgage payments.

Stoffel & Co acted for Ms Grondona, Mr Mitchell and Birmingham Midshires in connection with the transaction, but negligently failed to register at the Land Registry the forms transferring the property from Mr Mitchell to Ms Grondona, releasing the BM Samuels charge and registering the Birmingham Midshires charge. Mr Mitchell thus remained the registered owner, and subsequently received further advances from BM Samuels on the basis of its charge.

When Ms Grondona defaulted on payments, Birmingham Midshires brought proceedings against her. She in turn sought damages from Stoffel & Co. The firm admitted negligence but argued that it was entitled to rely on the illegality defence.

Lord Lloyd-Jones, with whom Lord Reed, Lord Hodge, Lady Black and Lady Arden agreed, said the Supreme Court decision in Patel v Mirza (2016) had set out a new policy-based approach to the illegality defence at common law: the court should ask itself whether enforcing the claim would lead to inconsistency that was damaging to the integrity of the legal system.

In making this assessment, the court should consider: (a) the underlying purpose of the illegality in question, and whether that purpose would be enhanced by denying the claim; (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. At stages (a) and (b) the court’s task was to establish whether enforcing a claim that was tainted with illegality would be inconsistent with the policies to which the law gave effect, or to decide where the balance lay.

In considering stage (a), denying Ms Grondona's claim would not enhance the underlying purpose of the prohibition on mortgage fraud. Fraudsters were unlikely to be deterred by the risk that they would be left without a civil remedy if their solicitors proved to be negligent. On the other hand, allowing the claim would enhance the protection that the law provided to mortgagees and other members of the public, which was a further underlying purpose of the prohibition on mortgage fraud. By the time of Stoffel & Co’s negligence, it was in the interests of both Ms Grondona and Birmingham Midshires that the transfer should be registered.

Turning to stage (b), denying Ms Grondona’s claim would run counter to a number of important public policies, in particular the policy that solicitors should perform their duties to their clients diligently and without negligence, as well as the policy that the victims of solicitors’ negligence should be compensated for the loss they had suffered. It would also result in an incoherent contradiction in the law, because the law accepted that an equitable interest in the property passed to Ms Grondona, despite her fraud. The balancing of the policy considerations at stages (a) and (b) indicated that Ms Grondona’s claim should not be barred by the illegality defence.

There was therefore no need to consider proportionality, but it would not be proportionate to deny Ms Grondona’s claim, because it was conceptually entirely separate from the mortgage fraud. Enforcing the claim would not allow Ms Grondona to profit from her wrongdoing. In any case, following Patel v Mirza, the court’s focus should be on the need to avoid inconsistency that was damaging to the integrity of the legal system. The question of whether the claimant would profit from the illegality remained a relevant consideration, but it was no longer the true focus of the court’s inquiry. 

Click here to access the judgment.