Stoffel & Co. (Appellant) v Grondona (Respondent) [2020] UKSC 42
Brief Facts
Ms Grondona had a business relationship with Mr Mitchell. Mr Mitchell owned a leasehold property (the "Property") and, after its purchase, he borrowed £45,000 from BM Samuels Finance Group Plc who secured the loan by way of a charge over the Property (the "BM Samuels Charge"). A few months after Mr Mitchell's purchase of the Property, Ms Grondona bought the Property from Mr Mitchell. Ms Grondona obtained a mortgage advance of £76,475 from Birmingham Midshires who secured the mortgage by way of a charge over the Property. Stoffel & Co. acted for Ms Grondona, Mr Mitchell and Birmingham Midshires in the transaction.
It transpired that Ms Grondona obtained the mortgage from Birmingham Midshires fraudulently; the purpose of the fraud was to obtain capital which would otherwise not have been made available to Mr Mitchell. Ms Grondona and Mr Mitchell had agreed that Mr Mitchell would be responsible for the mortgage repayments. In other words, Ms Grondona's purchase was part of a fraud.
Stoffel & Co. negligently failed to register at the Land Registry: (i) the transfer to Ms Grondona; (ii) the release form for the BM Samuels Charge; and (iii) the Birmingham Midshires charge. Ms Grondona subsequently defaulted on the repayments of the Birmingham Midshires mortgage. Birmingham Midshires brought a claim against Ms Grondona and, in turn, Ms Grondona brought a claim against Stoffel & Co. Stoffel & Co. admitted that it was negligent in not registering, amongst other things, the mortgage charge but argued that it was entitled to rely upon the defence of illegality; in other words, Stoffel & Co. argued that it was entitled to escape liability as Ms Grondona had instructed them to further her mortgage fraud. The High Court and Court of Appeal did not agree and Stoffel & Co. appealed to the Supreme Court.
The Supreme Court Decision
By a unanimous decision the Supreme Court held that Ms Grondona's claim against Stoffel & Co. was not barred by the illegality defence.
The Supreme Court based its decision on the reasoning set out in Patel v Mirza [2016] UKSC 42. In that case the Supreme Court set out a "trio of necessary considerations" for a Court to take into account when asked to bar a claim by reason of illegality. This is not a mechanistic test, instead the three policy considerations should be considered at a relatively "general level". The Court should consider:
(a) the underlying purpose of the illegality in question, and whether that purpose would be enhanced by denying the claim;
(b) any other relevant public policy on which denying the claim may have an impact; and
(c) whether denying the claim would be a proportionate response to the illegality.
In applying these considerations to the facts in Stoffel & Co. v Grondona, the Supreme Court held that, regarding (a) above, whilst Ms Grondona was engaged in mortgage fraud and that there exists an important policy that the law should condemn mortgage frauds, denying the claim would not enhance the underlying purpose of the prohibition of mortgage fraud. The Supreme Court did not consider that denying a civil claim would constitute a deterrent to mortgage fraud perpetrators. Conversely, allowing Ms Grondona's claim would enhance the protection that the law provides to mortgagees which is a further underlying purpose of the prohibition of mortgage fraud.
Turning to (b), the Supreme Court held that denying Ms Grondona's claim would be contrary to public policy. For example, it would run counter to the public policy that solicitors should perform their duties diligently and, when breach of duty occurs, the public policy that the victim of such breach should be compensated. The Supreme Court also considered that denying the claim would also result in a "incoherent contradiction in the law" as Ms Grondona would have an equitable interest in the Property, even if she was engaged in mortgage fraud. It would be incoherent for the law to accept on the one hand that an equitable interest passed, notwithstanding the agreement for sale was tainted by reason of illegality, whilst on the other hand, refusing to permit proceedings against a third person based on the same illegality. For these reasons, and others, the Supreme Court held that Ms Grondona's claim against Stoffel & Co. was not barred by reason of illegality.
There was no real need to then consider test (c), although the Supreme Court did comment that it would not be proportionate to deny Ms Grondona's claim as the claim itself was separate from the mortgage fraud which had already taken place before Stoffel & Co's breach of duty took place, and Ms Grondona was not making a profit from her fraud, but instead was avoiding a loss.
Comment
At face value the Supreme Court's decision seems surprising, however, this does not provide a precedent for all claims tainted by illegality from being enforced; a great deal will depend on the proximity of the illegality to the claim itself. In this case the fraud was considered quite distinct from the civil claim in respect of the solicitor's breach, a point made by the trial judge and the Court of Appeal. When considering the decision in the round, the doctrine of illegality is becoming much more nuanced and, of course, fact sensitive. Moreover, the Supreme Court's decision shows that a Court is willing to consider much broader implications when considering whether a claim should be barred by reason of illegality. The Court's focus is now much more on how inconsistency can be avoided in order to maintain the integrity of the legal system.
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