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The ‘Illegality’ Defence rears its ugly head again.

Articles | Tue 18th Sep, 2018

Maurice Rifat comments on his success in the recently handed down decision of the Court of Appeal.

In the Judgment in Stoffel v Grondona [2018] EWCA CIV 2031 handed down on 13th September 2018, the Court of Appeal held that a solicitors’ firm was liable in negligence in failing to register their client’s title to a property, even though the underlying transaction was tainted with illegality.

Ms. Grondona was represented by Maurice Rifat, who successfully argued that there was no “public interest” in allowing a negligent conveyancer to avoid liability for a registration error, where the property sale transaction was completed to execute a mortgage fraud. Lady Justice Gloster agreed, holding that to find otherwise might make solicitors less diligent.

Gloster LJ ruled that there was “a genuine public interest” in ensuring that clients who use the services of solicitors are entitled to seek civil remedies for negligence/breach of contract against the solicitor arising from “a legitimate and lawful retainer which was entered into between them, in circumstances where the client was not seeking to profit or gain from her mortgage fraud, but merely to ensure that that the chargee’s security was adequately protected by registration”.

At first instance, Her Honour Judge Walden-Smith in Central London County Court found for the claimant in her claim for damages against the solicitors for negligence and/or breach of retainer in failing to register a Land Registry transfer and a cancellation of entries for lenders form.

She awarded damages and interest of £95,000, representing the loss in value of the property.

This was even though the judge found that the claimant was a participant in an illegal mortgage fraud designed to obtain monies for the purported vendor in the transaction.

She rejected the illegality defence of ex turpi causa on the grounds that the test in Tinsley v Milligan was not met: it was the solicitors’ failure that had caused the loss and the claimant did not have to rely on the illegality in question in order to prove her claim.

On appeal, it was common ground that this test had been overruled by the Supreme Court’s 2016 ruling in Patel v Mirza and the Court of Appeal therefore had to apply the new approach to the facts.

Gloster LJ first overturned two of the Circuit Judge’s key findings of fact; firstly, HHJ Walden-Smith had called the mortgage application and agreement a “sham”, but Gloster LJ said that, though it was fraudulent in that it contained misrepresentations, this did not “as a matter of law result in it being a sham transaction”; secondly, the fact that the sale agreement and transfer were tainted with illegality, because it was entered into with the object of deceiving the lender, did not justify the judge’s conclusion that Mr Mitchell and Ms Grondona did not intend legal title to the property to pass to her.

Gloster LJ explained: “The whole purpose of the arrangement between the claimant and Mr Mitchell… was that she should be clothed with the legal title so as to be able to obtain finance from Birmingham Midshires and grant a charge in the latter’s favour to secure such finance…There can be no doubt that Mr Mitchell and the claimant intended that there would be an actual transfer of legal title in the property.”

The judge said it was clear that, in general, once property, or an interest in it [including an equitable interest], has passed to the illegal transferee, “he has all of the remedies available to him as the valid holder of that property or interest”. She added, In those circumstances, what the defendant firm was obliged to do, and failed to do, so far as the claimant was concerned, was to protect the claimant’s equitable interest in the property and her liability under the…charge by registering the TR1, the discharge of the [incumbent] charge and the…[new] charge, as a first legal charge, so that she became entitled to a legal interest in the property and her position as charore and her liability under her personal covenant was protected. The illegal features of the agreement between the claimant and Mr Mitchell were irrelevant to that obligation.”

Gloster LJ further accepted the claimant’s submissions that in any event, it would be entirely disproportionate to deny her claim if one takes into account the non-exhaustive list of potentially relevant factors set out by Lord Toulson in Patel v Mirza.

She said, “These include the fact that, although the misrepresentations to [the mortgagee] were reprehensible, the reality was that:

i)       the ‘victim’ chargee itself raised no complaint against her on the grounds of fraud, but adopted the transaction;

ii)      the solicitor at the defendant’s firm did not allege fraud in his witness statement;

iii)     the claimant did not seek to evade her obligations under the [mortgagee’s] charge; indeed, as the judge said at [49],   she was legally responsible under the terms of her personal covenant for any sums not paid to [the mortgagee] as a result of a sale of the property;

iv)    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.”

The attempt by Stoffel’s insurers to dispute the claim for damages for negligence because of an underlying fraud in the transaction upon which the solicitors themselves were instructed was misguided and opportunistic.

Other commentators who are raising their eyebrows at this decision should perhaps take a step back and consider whether it really would have been the correct interpretation of Patel v Mirza to allow legal advisors to wriggle out of liability for negligence/breach of contract against their own clients by raising issues of fraud or unlawfulness in relation to the very transaction upon which they were instructed? This interpretation would have massively widened the use of the illegality defence in circumstances where none of the Supreme Court panel in Patel v Mirza were looking to do so.

Thankfully, the Court of Appeal has prevented solicitors’ insurers from taking such an opportunistic position and has reminded Judges, and especially those of a more censorious nature, to concentrate on the question of whether relief should be granted rather than whether the contract or transaction is tainted with illegality (Patel v Mirza [107] per Lord Toulson).


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