Menu

Mortgage fraudster allowed to sue solicitors

Definition of fraud Print publication

22/11/2018

The Court of Appeal has allowed a claim against negligent solicitors, despite the fact that the claimant had committed mortgage fraud. In so doing, the Court of Appeal has provided important guidance on the application of the ‘illegality defence’.  Sandip Singh, a Director in Walker Morris’ Banking & Finance Litigation team, reviews the recent case of Stoffel & Co v Grondona [1].

What is the ‘illegality defence’?

The law of England and Wales has, since the eighteenth century [2], refused to assist a claimant whose cause of action is based on an illegal act.  This principle is known as the illegality defence (or ‘ex turpi causa non oritur actio‘) and it has been the focus of key litigation in some of our higher courts in much more recent times.

In Tinsley v Milligan [3] the House of Lords decided that a party could advance the illegality defence only where the claimant had relied on its illegality to establish its claim.  In 2016, however, the Supreme Court, in the now-leading case of Patel v Mirza [4], decided that the fundamental rationale underpinning the illegality defence was the public interest in disallowing claims where prosecution would be harmful to the integrity of the legal system.

The Supreme Court therefore set out three considerations for deciding whether or not the illegality defence may proceed:

  • What is the underlying purpose of the prohibition which has been transgressed?
  • Are there any other relevant public policies which may be rendered ineffective or less effective by denial of the claim?
  • Whether denial of the claim would be a proportionate response to the illegality, taking into account factors such as (non-exhaustively) the seriousness of the illegality, its centrality to the claim, whether it was intentional, the relative culpability of the parties.

In the recent case of Stoffel & Co v Grondona, the Court of Appeal applied those criteria to a case involving professional negligence and mortgage fraud.

What happened in the case?

Stoffel & Co, a firm of solicitors, made registration errors when acting on the purchase of a flat. When the purchaser/borrower defaulted on mortgage payments, the lender was unable to enforce its security as a result of those errors.  The lender issued proceedings against the borrower; and the borrower brought a counter-claim in negligence against the solicitors.  In fact, the borrower had made various fraudulent misrepresentations in the mortgage application, so the solicitors sought to rely on that illegality in defence of the negligence claim.

Court of Appeal decision

Applying the Patel v Mirza criteria, the Court of Appeal held:

  • The underlying purpose of the prohibition transgressed by the claimant borrower was, effectively, the fight against mortgage fraud. Dishonest mortgage applicants should not be empowered by the law to abuse the system, however there is no public interest in allowing negligent conveyancing solicitors who are not party to and have now knowledge of the illegality to avoid their professional obligations simply because of the happenstance of their client’s fraud. In fact, it is more likely that mortgage fraud will be avoided if solicitors are acutely aware of their need to be alive to, and to question, potential irregularities in a mortgage transaction.
  • On the other side of the coin, there is a genuine public interest in ensuring that clients who instruct solicitors are entitled to seek civil remedies for negligence/breach of contract arising from a legitimate and lawful retainer which was entered into between them.
  • Whilst the borrower’s misrepresentations to the lender were “reprehensible”, to deny the negligence claim would be disproportionate for a variety of reasons [5], but in particular because the illegality was not central or even relevant to the solicitor’s retainer or to the claimant’s claim (rather, it was merely part of the “background story”).

The solicitors were not, therefore, allowed to rely on the illegality defence and the claimant’s mortgage fraud to beat the negligence claim against them.

WM Comment

This case is interesting because it is the first practical application of the Patel v Mirza criteria in a solicitors’ professional negligence case context.  The case provides useful guidance as to the analysis and approach that a court is likely to adopt whenever the applicability of the illegality defence falls to be considered.

The decision is also likely to be welcomed by claimant lenders and borrowers alike for the clear message that it sends to conveyancing solicitors about how important it is, regardless of any back story, that they discharge their professional duties in full by properly delivering upon the job that they have been retained to do.

It seems clear that, for any illegality to be relied on in defence to a negligence claim, there will need to be much more of a connection between that and the solicitors’ instructions than existed in this case and that it would not be a defence for a negligent solicitor to point towards the fraud of others as being a defence to his own liability.

____________________

[1] [2018] EWCA Civ 2031
[2] Holman v Johnson (1775)
[3] [1993] UKHL 3
[4] [2016] UKSC 42
[5] Ibid. para 39

Contacts