UKSC Reviews “Illegality” Defence in a Professional Negligence Setting

Background

Stoffel & Co v Grondona [2020] UKSC 42 is the first authoritative application of the common law principles underpinning an illegality defence in a professional negligence setting, since the landmark judgment of the UK Supreme Court in Patel v Mirza [2016] UKSC 42.

Until 2016, the common law in relation to illegality had been relatively settled, with the courts applying a “reliance” based test set out in Tinsley v Milligan [1994] 1 AC 340 – namely, a defendant asserting an illegality defence had to demonstrate that the claimant relied on his or her illegality to bring the claim. The position changed when a majority of the UK Supreme Court adopted a more flexible approach based on policy considerations.  Mirza sets out three criteria when assessing whether an illegality defence may succeed. It requires the court to consider:

(a) the underlying purpose of the prohibition which has been transgressed and whether that purpose would be enhanced by denial of the claim (and allowing the illegality defence);

(b) whether there is any other relevant public policy on which denial of the claim may have an impact; and

(c) whether denial of the claim would be a proportionate response to the illegality.

Stoffel & Co v Grondona

In Stoffel & Co, the English courts were asked to consider whether the claimant could succeed in her claim against solicitors who had negligently failed to register a transfer and a charge relating to a property transaction. In brief, the claimant agreed to use her good credit history to obtain a mortgage on a property which she bought from the seller and, in doing so, raised money for the seller. The transaction appears to have been a “mortgage fraud”. The solicitors acted for the buyer, lender and (rather oddly) the seller. The solicitors (among other things) failed to register the transfer and the charge, as a result of which the seller was left as the registered owner and the lender was left without a registered interest. The lender proceeded against the claimant (for the value of the unencumbered property) and she sought damages from the solicitors.

The solicitors’ negligence was not in issue. However, they raised an illegality defence based on the claimant’s unlawful conduct.

The first instance decision was decided before the final judgment in Mirza and, therefore, applied the “reliance” test in Tinsley. The court found for the claimant and rejected the solicitors’ illegality defence. Although the mortgage advance had been obtained by dishonest means, the court found that the claimant did not have to “rely” on her illegality to bring her claim. The Court of Appeal, applying the policy-based approach outlined in Mirza, also rejected the solicitors’ defence.

The UK Supreme Court dismissed the solicitors’ appeal and concluded as follows:

(a) denial of the claim would not significantly enhance the protection afforded by the law to mortgagees. The risk of being left without a civil remedy against their solicitors did not appear to feature in the thinking of fraudsters. Conversely, allowing the claim would enhance the protection afforded to mortgagees and members of the public;

(b) there were other policy considerations in favour of allowing the claim. First, conveyancing solicitors should perform their contractual duties diligently and without negligence. Second, clients who suffer loss as a result of their solicitors’ negligence should be compensated. Third, despite the fraud, the claimant had acquired an equitable interest by virtue of the executed transfer agreement and (on the facts) it would lead to a legally incoherent result to deny her claim based on the same illegality.

Given that the policy considerations supported the rejection of the illegality defence there was no need to consider issues of proportionality (point (c) above). However, the Supreme Court considered that (on the facts) it would be disproportionate to deny the claim. For example, the fraud was not central to the negligence which took place after the fraud had been completed and the underlying loan advanced.

Takeaway Point for Professionals

Issues arising from the illegality defence have historically been difficult. This has been, in large part, because the defence can arise in numerous different and complex contexts – for example, contractual, tortious and restitutionary. While the outcome in Stoffel & Co may disappoint solicitors and their insurers, it does not close the door on an illegality defence. There will be instances where the fraud is more closely connected with the alleged professional negligence.

These developments also serve as a reminder to solicitors to: (i) stay vigilant for signs that a transaction may be tainted by fraud and (ii) consider how they can protect themselves with respect to fraudulent misrepresentations in respect of an engagement (particularly, as regards new clients).

Partner, RPC

Senior Associate, RPC