Two wrongs don’t make a right: Solicitors held to be negligent after illegality defence is rejected by Court of Appeal

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 negligence: Solicitors failure to register transfer of property

The 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 (DS1) and registering a new legal charge (TR1) i.e. in carrying out the crucial, familiar steps of a conveyancing transaction in preparing and submitting essential legal documents to the Land Registry. This led to the Claimant suffering financial loss when her mortgagee sought to enforce its security and was unable to do so. It therefore obtained a money judgment against the Claimant. She subsequently sought damages from the Defendant.

Defendant firm argues illegality defence against negligence claim

The Defendant admitted to its error in failing to complete the necessary legal 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. Their case was that the mortgage was for the original owner, Mr. Mitchell, however it would have been harder to obtain due to his unreliable financial history therefore 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).

Court’s balancing exercise in considering solicitors’ negligence

In considering the issues in this case, the Court of Appeal approached the balacing 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 effect both of these outcomes and it had failed to do so.

The Court of Appeal focused on the following factors in handing down judgment:

  1. Public Interest: The Court considered that 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“.
  2. Proportionality: It would be disproportionate to reject the claim considering the lender had raised no complaint against the Claimant on the grounds of fraud and had accepted the transaction. Furthermore, the Claimant had not sought to evade her obligations under the charge and had pursued the claim in negligence not to profit from the fraud but to obtain funds to reduce her liability to the lender. The Claimant’s illegal conduct was not central or relevant to the retainer with the Defendant but held to be part of the “background story”.
  3. Negligence of the Solicitors: The solicitors had been negligent in that they had failed to provide adequate services to the client.
  4. Illegality Principle Non-Applicable: The Court of Appeal also focused on the fact that since the mortgage fraud was not connected to the claim filed by Ms. Grondona and did not directly affect it, the illegality principle was not applicable in this appeal. The Defendant had still been negligent.

Positive news for claimants in negligence claims

Negligent Solicitors Accountable

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 case is positive for Claimants and should make solicitors and insurers more cautious in terms of negligence or breach of contract in services with their clients in that they cannot escape liability for their negligence.

Impact of illegality defence on Claimant’s claim for negligence

This case was particularly important as it further cleared the confusion regarding the ‘illegality defence’ that was previously brought up in the Patel v Mirza case. 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, it clarified that the illegality defence is to apply based on the nature and seriousness of the illegality.

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