14 Dec 2018

Should a client be able to claim damages for the inadequate performance of professional services by a solicitor even where the client's claim arose from a mortgage fraud?

Yes, said the Court of Appeal in the case of Stoffel & Co v Grondona [2018] EWCA Civ 2031 because the public policy interest in clients being able to obtain civil remedies for the inadequate performance of professional services by solicitors, outweighs the undesirable outcome of allowing claims to proceed where they arise from a fraudulent transaction. 

Facts

Marie Grondona, the claimant, purported to purchase leasehold premises from her associate, Cephas Mitchell, with a mortgage from Birmingham Midshires. In reality, this was a sham transaction as Mitchell owned the property but could not obtain a mortgage due to his poor credit history.  Mitchell only purported to sell the leasehold interest to Grondona who stood to obtain a share of the profit when the property was eventually sold. Stoffel & Co was instructed to register the title and a charge over the property to secure the mortgage advance. It failed to do so. Mitchell defaulted on the mortgage and Birmingham Midshires brought proceedings against Grondona to recover its advance.  In turn, Grondona sought an indemnity/contribution from Stoffel & Co. The firm admitted that it had acted negligently in failing to register the key title documents for the property, but denied that Grondona was entitled to recover damages because the purpose of the mortgage was fraudulent and the "illegality defence" of ex turpi causa applied. 

The Illegality Defence

The case of Tinsley v Milligan [1994] 1AC 340 upheld the traditional common law approach that a claimant would be prevented from bringing a claim if it arose from illegality.  However, there has been significant inconsistency in the application of Tinsley and the illegality defence was further explored in the case of Patel v Mirza [2016] UKSC 42. In that case, the Supreme Court identified a number of factors that may be relevant to the assessment of whether the defence should operate to prevent a claim being brought due to the illegal nature of the transaction, but did not set down firm guidelines to provide the courts with a clear cut test. Instead the factors were broad and encompassed consideration of the underlying purpose of the prohibition, any other relevant public policies, the possibility of overkill, proportionality and whether the illegal nature of the activity affected the main performance of the contract. The seriousness and centrality of the illegal act to the contract, as well as intention were also relevant factors.

The effect of Stoffel & Co v Grondona

The case of  Patel v Mirza allowed the Courts to take a discretionary approach based upon the individual facts of each case to assess whether a party should be able to escape civil liability on the basis of there being some participation in an illegal act. It is perhaps therefore not surprising that with such a non-prescriptive approach there would be further attempts to narrow the issues and revert to a more rule-based approach of assessment.   On appeal to the Supreme Court in Grondona it was accepted that the sale agreement between Grondona and Mitchell was ‘tainted with illegality’ because it was entered into with the object of deceiving the mortgage company and to enable the claimant to lend her good credit history to a business associate trying to secure finance with a poor history.

However, the issue was the degree to which the claimant's illegal conduct was central, or in fact relevant at all, to the retainer between the claimant and the defendant solicitors.  On that basis, the facts in Grondona did not meet the test of whether the illegality was closely connected nor inextricably linked to the claim, as set out in Patel v Mirza. Here, the claimant was not relying upon the illegal mortgage agreement to support her claim and Lady Justice Gloster stated that "I see no public interest in allowing negligent…solicitors…to avoid their professional obligations simply because of the happenstance that two of the clients…are involved in making misrepresentations to the mortgagee…" 

Grondona had never sought to evade her obligations under the mortgage charge and remained personally responsible for any sums not paid to Birmingham Midshires as a result of a sale of the property. Consequently, the Court of Appeal held that the claimant was arguably not seeking to profit from her mortgage fraud. The Court also considered that as a matter of public policy clients should be able to seek civil remedies arising from negligence/breach of contract where they have entered into a lawful retainer with a solicitor. 

Comment

Whilst the outcome of this case is not good news for solicitors and their insurers, it is perhaps not so surprising based on its particular facts by reference to the principles laid down in Patel v Mirza. In the context of professional negligence claims, Grondona v Stoffel & Co clearly affirms that any illegality by the claimant must be directly linked to a breach of the retainer or more closely connected to the terms of the retainer between the parties, to enable the illegality defence to operate.