The illegality defence – Stoffel v Grondona revisited
"No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act."
This was the opening line of the Supreme Court's 2016 decision in Patel v Mirza , quoting the decision of Lord Mansfield in Holman v Johnson from 1775. Why then has the Supreme Court – in Stoffel v Grondona - declined the appeal of a firm of solicitors who relied on this long established principle when defending itself from a professional negligence action brought by a fraudster?
This was the opening line of the Supreme Court's 2016 decision in Patel v Mirza1, quoting the decision of Lord Mansfield in Holman v Johnson2 from 1775. Why then has the Supreme Court – in Stoffel v Grondona - declined the appeal of a firm of solicitors who relied on this long established principle when defending itself from a professional negligence action brought by a fraudster?
The Doctrine of Illegality
The law in relation to illegality had, until 2016, been relatively settled with the court applying the controversial test laid out in Tinsley v Milligan3. That was a reliance based test, where a defendant asserting the defence of illegality would have to demonstrate that the claimant had relied on his or her illegality to bring the claim. The position changed when the Supreme Court overruled Tinsley in Patel. The court replaced the reliance test with a set of guidelines that should be applied when considering the illegality defence.
Lord Toulson held that "the essential rationale of the illegality doctrine is that 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". He then set out three criteria when assessing whether an illegality defence may succeed. It requires the court to consider:
- what the underlying purpose of the prohibition which has been transgressed was and whether that purpose would be enhanced by denial of the claim;
- whether there any other relevant public policy on which the denial of the claim may have an impact; and
- would the denial of the claim be a proportionate response to the illegality.
In considering the third limb, Lord Toulson suggested that potentially relevant factors might include the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties' respective culpability.
The facts of Patel were relatively straightforward. The court was asked to consider whether a defendant could rely on the illegality doctrine to defend a claim for unjust enrichment. The claimant has paid £620,000 to the defendant to bet on the price of some shares based on insider information that the defendant expected, but did not in the event, obtain. The defendant did not place the bet, but also did not repay the money. The agreement between the parties amounted to a conspiracy to commit an offence of insider dealing under section 52 of the Criminal Justice Act 1993.
In applying Lord Toulson's criteria, the Supreme Court upheld the Court of Appeal's decision to allow the claim and deny the defence of illegality. It held that a claimant, such as Mr Patel, who satisfied the ordinary requirements of a claim for unjust enrichment should not be debarred from enforcing his claim by reason only of the fact that the money which he seeks to recover was paid for an unlawful purpose.
Stoffel & Co v Grondona: the facts and decisions below
In Stoffel the court was asked to consider whether Ms Grondona could succeed in her claim against a firm of solicitors who had negligently failed to register the transfer and charge on a property transaction. The relevant facts were as follows:
- Ms Grondona entered into a business agreement with Mr Mitchell, the purpose of which was to effectively provide her good credit history to enable him to expand his property business.
- In July 2002 Mr Mitchell bought the leasehold interest in a property in London for £30,000 and shortly afterwards he borrowed a sum against the flat and a charge was registered in the name of the lender.
- In October 2002 Mr Mitchell sold the lease for £90,000 to Ms Grondona. She obtained an advance of £76,500 from a lender on the basis that the earlier charge would be discharged and a new charge registered in its favour.
- Stoffel & Co negligently failed to register the transfer to Ms Grondona, the charge in favour of the lender or release the prior charge.
- Ms Grondona's lender obtained a money judgment against her and she looked to pass on that liability to Stoffel & Co.
The first instance decision was decided under the Tinsley test. The judge found that Ms Grondona had lost the benefit of the property as providing security for the mortgage as a result of the defendant's negligence. Whilst on the facts as she found them, the mortgage advance had been obtained dishonestly, it did not prevent the claim being brought. She did not have to rely on her illegality to bring her claim; it was only as a result of Stoffel & Co's negligence that her title had not been registered. It was not necessary to rely on the illegal mortgage agreement to support her claim.
On appeal, the Court of Appeal applied the Patel test and again found that the claimant was entitled to enforce her claim against the solicitors. Lady Justice Gloster applied Lord Toulson's three criteria as follows.
In assessing the first criteria, Lady Justice Gloster found that whilst mortgage fraud was "a canker on society" and it was "extremely important that dishonest applicants for mortgages should not be empowered by the law to abuse the system", there was no public interest in permitting the negligent solicitors to avoid their professional obligations.
In contrast, when assessing the second criteria, she found that there was a genuine public interest in ensuring that parties could seek civil remedies for negligence/breach of contract against a defendant arising from a legitimate and lawful retainer.
Finally, in assessing the third criteria, she found that it would be disproportionate to deny the claimant's claim. Although the misrepresentations made to the lender were "reprehensible", neither the lender nor the solicitor had alleged fraud, Ms Grondona had not sought to evade her obligations under the charge and "…her illegal conduct was not central, or indeed relevant, to the otherwise proper and legitimate contract of retainer between the claimant and the defendant or indeed to the claimant's claim in the present action; it was simply part of the background story". Accordingly, Lady Justice Gloster concluded that there was "no risk that the enforcement of [Ms Grondona's] claim would undermine the integrity of the justice system".
The Supreme Court decision
The Supreme Court dismissed the appeal. Lord Lloyd-Jones made some general points about the application of Patel. He said that "the essential question" to be determined was whether to allow the claim would damage the integrity of the legal system by permitting incoherent contradictions in the law. The evaluation of policy considerations in stages one and two should be conducted in a structured approach but at a high level of generality. It would be unusual for a court to permit evidence to be adduced on the policies or the effect of permitting the claim on them. In contrast, the evaluation of the proportionality consideration in stage three would usually require close scrutiny to the detail of the case. It may however not be necessary at all where evaluation of the policy criteria itself provides a clear conclusion that the defence should not be allowed.
In assessing the first criteria, Lord Lloyd-Jones held that there clearly existed an important policy "that the law should condemn mortgage frauds". However, he said that he doubted that "… permitting a civil remedy to persons in the position of the respondent would undermine that policy to any significant extent" and that "the risk that they may be left without a remedy if their solicitor should prove negligent in registering the transaction is most unlikely to feature in their thinking".
He agreed with the submission on behalf of the fraudulent claimant that a further purpose of the prohibition against mortgage fraud is the protection of the public and lenders from suffering loss and that refusing the claimant a remedy against the solicitors would not assist with this policy. The particular failure complained of (failure to register the transfer) was not a necessary step in the fraud and took place after the fraud was complete. It was also in the interests of the lender that the transfer should be registered as it was a necessary step in the registration of its charge and it was in the lender's interest to have that security. In fact, the lender had been unable to enforce against the claimant on her covenant and had no security over the property. Accordingly, denial of the claim would not enhance the protection offered to lenders.
Lord Lloyd-Jones then examined the second criteria. He agreed with the Court of Appeal that as a matter of public policy, clients should be able to seek civil remedies for negligence against their solicitors and that "to permit solicitors to escape liability for negligence on the conduct of their clients' affairs when they discover after the event that a misrepresentation was made to a mortgagee would run entirely counter to these policies". He added that there was more likelihood that mortgage fraud would be prevented if solicitors appreciated that they should be alive to irregularities in transactions. He also examined the law in relation to the transmission of property rights under illegal contracts (i.e. that property can pass under such contracts). He held that it would be incoherent for the law to accept that principle on the one hand while refusing the claimant a remedy against a third party in respect of their failure to protect that property right.
Overall, he held that allowing the fraudulent claimant's claim would not undermine the public policies underlying the prohibition of mortgage fraud and would run counter to other important public policies.
Importantly however, he did not discount the possibility that this policy would be subjugated in some circumstances where affording a remedy would be legally incoherent. Accordingly, there does remain the possibility of the successful application of the defence in some circumstances.
Lord Lloyd-Jones then proceeded to deal with proportionality. It was strictly not necessary to do so because there were no policy related reasons to prevent the claim. However, he did examine certain aspects. He did not agree that any significant weight was to attach to the claimant's point that the lender was the real victim of her fraud rather than the solicitors or that she herself had intended that the lender would be repaid. He was more persuaded by the fact that the claimant's fraud was not central to the defendant's breach of duty. In particular, the fraud had already taken place by the time of the solicitor's failure.
He did then examine whether allowing the claim would permit the claimant to profit from her own wrongdoing. He said that here she was not profiting but avoiding a loss and that the policy of not permitting such profiting was not central to the rationale of the illegality defence following Patel.
This decision does not lay down any principle that tainted claims can be enforced against professionals. On the particular facts of this case, the policy considerations were not sufficiently engaged to produce the incoherence in the law required to prevent a tainted claim from being enforceable. However, there will be instances where the fraud is more closely connected with the error by the professional complained of. In addition, it will be possible in many cases to demonstrate that the engagement of the professional itself was induced by an implied fraudulent misrepresentation. These cases always need careful thought and consideration to identify at an early stage the full nature and extent of the dishonesty by the client.
This decision was handed down at the same time as the decision in Ecila Henderson v Dorset Healthcare University HNS Foundation Trust. In that case the defendant's illegality defence succeeded where the claimant was seeking to recover damages for negligence leading to the tragic manslaughter by her of her mother. The claimant was convicted of manslaughter by reason of diminished responsibility. In that case the gravity of the criminal offence, the public interest in the allocation of NHS resources, the close connection between the claim and the offence, and the public interest in preventing unlawful killing were all policy factors that would cause unacceptable legal incoherence with the allowance of the claim.1  UKSC 42
2 (1775) 1 Cowp 341, 343
3  1 AC 340