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Property: Illegality Defence: Stoffel & Co v Grondona [2020] UKSC 42

Dominic Bright discusses the recent Supreme Court decision explaining how the new policy-based illegality defence applies in relation to the case of Stoffel and Co v Grondona [2020] UKSC 42.

How does the new, policy-based approach to the illegality defence apply?

Illegality defence 

In Tinsley v Milligan [1994] 1 AC 340 (HL), the traditional illegality principle was applied.  The parties had to rely on their own illegality to establish their case.  Relief was refused.

In Patel v Mirza [2016] UKSC 42, [2017] AC 467 at [120], Lord Toulson (with whom Lady Hale, and Lords Kerr, Wilson and Hodge agreed) rejected the traditional application in these terms (with emphasis added):

“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 … In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.”


Ms Grondona (“G”) had an agreement with Mr Mitchell (“M”).  G agreed to mortgage loans for four properties.  M agreed to pay half of the net profit of the properties to G upon sale.

The freehold interest in one of the properties (“the property”) was bought by Ms Hedley (“H”).  H obtained finance from BM Samuels Finance Group plc (“Samuels”).  Samuels obtained a registered charge.

M paid £30,000 to H for a lease of part of the freehold of the property.  M took out a loan of £45,000 for six months.  It was secured by a legal charge with Samuels (“the Samuels charge”).

The leasehold interest was registered in M’s name.  The Samuels charge was registered.

G purchased the leasehold interest in the property from M for £90,000.  Three times the price that M paid when it was created.  To do so, G obtained a mortgage from Birmingham Midshires for about £75,000 (“the Birmingham Midshires mortgage”).

The advance was to be secured by a charge (“the Birmingham Midshires charge”).

The Birmingham Midshires mortgage was procured by fraud.  G made dishonest misrepresentations.  The purpose was to avoid funding the purchase of the property by G.

Stoffel & Co (“Stoffel”) are solicitors.  Stoffel acted in the conveyance for G, M and Birmingham Midshires.  M executed the ‘Transfer of Whole of Registered Title’ (“the Form TR1”) of the property in favour of G.  M also delivered the TR1 to Stoffel.

Stoffel paid about £75,000 by way of mortgage advance from Birmingham Midshires to Samuels.  This was for the Samuels charge to be discharged.  Samuels provided Form DS1 releasing the Samuels charge (“the Form DS1”).

Stoffel failed to register the Form TR1, the Form DS1, or the Birmingham Midshires charge (“the forms”).  M remained the registered proprietor of the property.  Samuels remained the registered proprietor of the Samuels charge.

Procedural history

G defaulted on payments under the Birmingham Midshires charge.

Birmingham Midshires brought proceedings against G.  It was defended.

G also brought proceedings against Stoffel for an indemnity and / or a contribution and / or damages for breach of duty and / or breach of contract.

Stoffel defended on the basis that the claim was debarred by illegality.  The purpose of putting the property into G’s name, and obtaining the Birmingham Midshires mortgage, was illegal.  It was a conspiracy to obtain finance for M by misrepresentation.  The purpose of instructing Stoffel was to further that fraud.

Birmingham Midshires amended its claim.  It claimed directly against Stoffel, Samuels and M.

The first and second were settled.  Summary judgment was obtained against G.

County Court

HHJ Walden-Smith held that G’s claim was not debarred by illegality.

Tinsley was applied.  The claim against Stoffel for failing to register the forms was conceptually separate.  It did not rely on illegality.  The reason for the conveyance was irrelevant.

G was awarded damages of about £80,000.

Court of Appeal

Stoffel appealed.  G cross-appealed on quantum.

Patel was handed down after judgment by HHJ Walden-Smith.  Patel was applied.  Debarring the claim against the negligent solicitors would not enhance the fight against mortgage fraud.  It would be disproportionate to the wrongdoing.

The appeal, and cross-appeal on quantum, was dismissed.

Supreme Court

Lady Hale, and Lords Hodge and Briggs, granted Stoffel permission to appeal on application of the Patel guidelines.  It is interesting to note that Lady Hale and Lord Hodge were in the majority in Patel, however, Lord Briggs was subsequently elevated.

G had a complete cause of action.  The issue was whether there was a defence of illegality.


Lord Lloyd-Jones (with whom Lords Reed and Hodge, and Ladies Black and Arden agreed) applied the three considerations in Patel at [101].  They are set out above.

First consideration: underlying purpose

G was knowingly and dishonestly involved in a mortgage fraud.  The sale between M and G was tainted with illegality.  G’s conduct was proscribed under section 15 of the Theft Act 1968.

Stoffel knew nothing about it.  Stoffel were retained to facilitate the fraud.

Purposes for criminalising mortgage fraud were analysed.


Prosecutions are difficult.  Accordingly, the deterrent effect is limited.  Refusal of relief to a party involved in mortgage fraud would enhance the deterrent effect.

Lord Lloyd-Jones doubted that permitting a civil remedy to persons in G’s position would undermine this policy to any significant extent: “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.”

Protection of mortgagees from loss

Lord Lloyd-Jones considered that “it is difficult to see how refusing [G] a civil remedy against her solicitors for negligence in failing to register the transfer would enhance [the] protection [of mortgagees from loss].”  Registration “was not a necessary step in perpetrating the fraud”.

In fact, a civil remedy protected mortgagees: “Were [G] to recover compensation from [Stoffel], that could be applied to meet or reduce her liability to Birmingham Midshires”.

Second consideration: countervailing public policies

These concern professional duties, remedies in default, and the effect of the transaction.

Professional diligence & remedy in default

Conveyancing solicitors should perform their duties without negligence.  Default should entitled clients to seek a civil remedy for loss suffered.  Permitting escape after discovery of a misrepresentation “would run entirely counter to these policies.”

Further, “there is more likelihood that mortgage fraud would be prevented if solicitors appreciate that they should be alive to, and question, potential irregularities”.  There were three potential irregularities capable of providing notice of the possibility of fraud.

Effect of transaction on property rights

Lord Lloyd-Jones was clear that “unless a statute provides otherwise expressly or by necessary implication, property can pass under a contract which is illegal as a contract.”

G and M intended to register the legal title of the property, so that it passed to G.  Had Stoffel registered the Form TR1, legal title would have passed.  In the event, legal title did not pass.

As M had done everything that he could do to effect the legal transfer, G was entitled to an equitable interest in the property.  This gave rise to an important countervailing public policy:

“Once an equitable interest in the property has passed to [G], she should have available to her as the holder of that interest the remedies provided by law for its protection.  It would … be incoherent for the law to accept on the one hand that an equitable interest in the property passed to [G], notwithstanding that the agreement for sale was tainted with illegality, while on the other refusing, on the basis of the same illegality, to permit proceedings against a third party in respect of their failure to protect that equitable interest by registering the Form TR1 at the Land Registry.”

Third consideration: proportionality

Conclusions on the first and second considerations meant that “it is not strictly necessary to go on to consider the third … namely whether denial of the claim would be a proportionate response to the illegality.”

Centrality of illegality

Lord Lloyd-Jones found that two features “demonstrate the lack of centrality of the illegality to the breach of duty of which [G] complains.”

First, the fraud had already been achieved by the time that Stoffel were required to register the transactions.  Secondly, equitable title to the property had already passed to G, albeit that legal title could only pass on registration of the transfer.

The essential facts founding the claim can be established without reference to illegality.  The claim for breach of duty is conceptually separate from the fraud on the mortgagee.

Profiting from wrongdoing

Lord Lloyd-Jones reasoned (with emphasis added) that:

“For one branch of the law to enable a person to profit from behaviour which another branch of the law treats as criminal or otherwise unlawful would tend to produce inconsistency and disharmony in the law and so cause damage to the integrity of the legal system.  In the present case it is not suggested by either party that by suing [Stoffel, G] is seeking to profit from her wrongdoing.

It was submitted that the policy consideration – that one should not be allowed to profit from her own wrongdoing – applies equally to the loss resulting from Stoffel’s wrongdoing.

Lord Lloyd-Jones responded (with emphasis added) that:

“Clearly, it would be objectionable for the court to lend its processes to recovery of an award calculated by reference to the profits which would have been obtained had the illegal scheme succeeded. This, however, is not a claim to recover a profit but a claim for compensation for property lost by the negligence of [Stoffel]. … This is not a case of the court assisting a wrongdoer to profit from her own wrongdoing.

It was argued that G would profit from her fraudulent transaction.  If her claim succeeds, “she will acquire the means of meeting a substantial judgment against her.”  This is not the correct analysis.  In any event, “the notion that persons should not be permitted to profit from their own wrongdoing is unsatisfactory as a rationale of the illegality defence.”

Lord Lloyd-Jones concluded that: “The true rationale of the illegality defence … is that recovery should not be permitted where to do so would result in an incoherent contradiction damaging to the integrity of the legal system.”  G’s claim did not.


The Court of Appeal correctly followed the new, policy-based approach to the illegality defence.  The claim was not barred.  The appeal was dismissed.


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