Supreme Court endorses a trio of necessary considerations for the illegality defence

02 Nov 2020

Stoffel & Co v Grondona [2020] SC 42

These days we don’t use Latin much as part of everyday speech but the Latin phrase ex turpi causa as shorthand for the illegality defence is something of an exception. At its simplest a defendant deploys the defence to seek to persuade the court that where a claimant’s claim arises from illegal or immoral conduct no cause of action exists; that a claimant wrongdoer should not be able to profit from their own wrongdoing.    

Given the myriad of matters and transactions in which professionals are involved it can, in the right situation, be a useful tool in the armoury for the defence of such claims. Whilst no right thinking person would want a claim based on illegal or immoral conduct to succeed (the defence arises in the context of an application of public policy) the courts have wrestled with the right test (resolved to an extent by the Supreme Court in Patel v Mirza [2016] UKSC 42 - see below) and then the way that test is applied to a given set of facts.

In the context of a claim against solicitors the illegality defence has again found its way to the Supreme Court in Stoffel & Co v Grondona.

The Facts

The claimant and a Mr Mitchell entered into a contrived business arrangement as to various properties (including flat 73b Beulah Road) whereby mortgage loans to be secured on those properties would be in her name; Mr Mitchell would collect the rents and pay the mortgages with the claimant receiving 50% of the net profit on the properties when they were sold.    

In October 2002 the claimant purported to purchase Mr Mitchell’s leasehold interest in flat 73b for £90,000 funded by a mortgage advance of £76,500 from Birmingham Midshires (BM) with a charge in favour of BM to be registered against the property. Solicitors Stoffel & Co acted for the claimant, Mr Mitchell and BM in that transaction. Whilst Stoffel paid over the BM mortgage advance to discharge the existing charge secured on the property, they failed to register the redemption of that charge, the claimant’s purchase and the BM charge. Mr Mitchell remained the registered proprietor of the property; he secured further lending against the property and over time the BM mortgage fell into arrears.

BM pursued a money judgment against the claimant (who remained personally liable on the mortgage) who defended that claim and brought a claim against Stoffel for the failure to register her purchase and the BM charge. Stoffel admitted the failure to register was a breach of duty but denied the claim on the basis they could rely on the illegality defence as the purpose of their instructions was to further a mortgage fraud. 

The journey to the Supreme Court

At the trial of the claimant’s claim against Stoffel (which predated the Patel v Mirza judgment) it was found the claimant had participated in a mortgage fraud on BM, dishonestly representing that the purchase was not a private sale; she was providing the deposit and that she managed the property. That said Stoffel’s attempt to rely on an illegality defence was unsuccessful – the claimant was awarded £78,000 being the value of the property unencumbered as at November 2009 (when she was in substantial mortgage arrears and would have been subject to repossession proceedings in any event).

The Court of Appeal disagreed with the way the trial judge had viewed the transaction – although the mortgage application was fraudulent it did not result in a sham transaction as between the claimant and BM in relation to the legal charge. Then it applied the policy-based test in Patel v Mirza – that when considering whether a claim tainted by illegality should be allowed to proceed there is considered;   

a) …the underlying purpose of the prohibition which has been transgressed…- Whilst mortgage fraud is a canker on society it is not in the public interest to allow negligent conveyancing solicitors (and their insurers) to avoid their professional responsibilities and doing so would be unlikely to reduce the prevalence of such fraud;  

b) …any other relevant public policies which may be rendered ineffective or less effective by denial of the claim…- There is a genuine public interest in ensuring that those who retain solicitors to ensure that their mortgage is registered against the property to be secured (ie here for a legitimate purpose) can pursue a claim;    

c) … the possibility of overkill unless the law is applied with a due sense of proportionality…- Amongst other considerations the claimant did not seek to avoid her liability to BM nor enforce her agreement with Mr Mitchell. Her illegal conduct was simply part of the background story to an otherwise a legitimate retainer between her and Stoffel.

Applying the Patel v Mirza test and whilst for different reasons, the Court of Appeal agreed with the trial judge that the illegality defence did not bar the claim. Stoffel appealed as to the application of the Patel v Mirza test to the facts.

The Supreme Court decision

Dismissing the appeal the “…trio of necessary considerations” set out in Patel v Mirza was wholeheartedly endorsed as the right balancing test (see (a) to (c) above) to avoid inconsistent outcomes that would be damaging to the integrity of the legal system. It further provided guidance on the test’s application - stages (a) and (b) only require policy considerations to be identified at a “relatively high level of generality”. If the conclusion on the first two stages is that the illegality defence should not be allowed there is no need to consider the proportionality test at (c).  Conversely if the conclusion on the first two stages indicated a denial of the claim proportionality is considered and in that there should be close scrutiny of particular facts of the claim.  

Applying that test the Supreme Court agreed with what had been said before – it is clearly public policy that conveyancing solicitors perform their duties diligently and without negligence. Moreover refusing the claim would not deter mortgage fraud; on the contrary there is more likelihood that mortgage fraud would be prevented if solicitors addressed perceived irregularities in a transaction. That this transaction bore some of the badges of mortgage fraud which Stoffel had failed to address did nothing to help Stoffel’s cause.

Having reached those conclusions there was no need to consider the third stage of the test – proportionality – however in doing so the court reinforced the previous conclusion that the mortgage fraud was simply the background and not central to Stoffel’s breach of duty. By the time of Stoffel’s failure to register the transfer to the claimant and the BM charge the mortgage fraud was complete – BM had made their advance. Moreover the court was not assisting a wrongdoer to profit from her own wrongdoing as the claimant’s claim was limited to the property lost as a result of Stoffel’s negligence - not to recover any element of her deal with Mr Mitchell.           

What this means for you

There is now greater clarity in the application of the Patel v Mirza test for the application of the illegality defence in the context of professional negligence claims and whilst it was unsuccessful here there remains scope for it to be used certainly to rein in the more opportunistic of claims arising from illegal or immoral conduct on the part of the claimant. It reinforces the courts are going to have no appetite to award damages where illegal or immoral conduct is integral to the claim rather than (as was found here) in the background. We’ve seen an example of that recently in Day v Womble Bond Dickinson (UK) LLP [2020] EWCA Civ 447 where the claimant’s claim that his conviction and sentence was as a result of the solicitor’s failure to properly defend him was struck out as breaching the illegality principle – there the criminal penalties were central to the claim.

As for the deterrence of mortgage fraud as a matter of public policy it was rejected this would be served by limiting the recovery options available to the borrower making the dishonest representations to the lender – the better deterrence was for solicitors to be liable in damages for their admitted negligence and that …solicitors appreciate that they should be alive to, and question, potential irregularities in any particular transaction. Whilst this isn’t new as a standard against which solicitors are judged in claims with a mortgage fraud element it does act as a reminder of the extent to which solicitors can be viewed as a crucial gatekeeper in the battle against such fraud. With the challenges that the current pandemic presents including the potential for volatility in the property market solicitors need to keep up their guard. 

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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.

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