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Commercial: ILLEGALITY: fraudulent claimant entitled to damages from negligent solicitors

Did the claimant’s participation in a mortgage fraud prevent her recovering damages for professional negligence from her conveyancing solicitors?

No, said the Court of Appeal in Stoffel & Co v Grondona [2018] EWCA Civ 2031.

G purchased a property from her business associate, M, with the assistance of mortgage finance. The transaction was not intended to be a transfer of M’s beneficial interest in the property; merely a way for him to obtain finance that he could not obtain in his own name. In pursuance of the transaction, G committed a mortgage fraud.

G’s solicitors, S, failed to register the transfer and the legal charge in favour of G’s lender. G subsequently defaulted in payments to her lender. Due to the registration failures, G’s borrowing was unsecured and her lender sued her for a money judgment. G claimed damages against S for failing to register the relevant documents.

S admitted negligence but defended the claim on the basis that the purpose of the transaction was illegal, as it involved a mortgage fraud. It was common ground that in deciding this issue the Court of Appeal should apply the test set out in the Supreme Court decision in Patel v Mirza [2017] A.C. 467.

As the transfer had not been registered, G had only an equitable interest in the property; namely, the right to be registered as legal owner. Nevertheless, she fell within the general principle that, once an interest in property had passed to an illegal transferee, she had all of the remedies available to her as the valid holder of that interest. S was therefore obliged to protect G’s equitable interest and her liability to her lender by registration. The illegal features of her agreement with M were irrelevant to that obligation.

It was necessary to consider whether, applying the three criteria in Patel v Mirza, there was any reason why G should not be entitled to recover damages from S. As to those criteria:

  1. The underlying purpose of the prohibition transgressed: mortgage fraud was a canker on society and it was extremely important that dishonest mortgage applicants were not empowered to abuse the system. However, there was no public interest in allowing negligent solicitors who were unaware of the illegality to avoid their professional obligations.
  2. Other relevant public policies which might be rendered less effective by denial of the claim: there was a genuine public interest in ensuring that clients were entitled to seek civil remedies for negligence/breach of contract against their solicitors arising from a lawful retainer.
  3. Proportionality: it would be entirely disproportionate to deny G’s claim. Among other matters, her illegal conduct was irrelevant to the otherwise legitimate retainer with S, and she was not intending to profit from her fraud. There was no risk that her claim would undermine the integrity of the justice system.

Winston Jacob / 10th Oct 2018


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