The Defence of Illegality – a Flexible Approach – Stoffel & Co v Grondona November 2020
The Supreme Court has handed down its decision in the case of Stoffel & Co v Grondona, in which it considers the much-debated defence of illegality and, in particular, the Court of Appeal’s application of the judgment in Patel v Mirza .
What is the defence of illegality?
The illegality defence denies an individual the right to a legal remedy where his claim relies in any way upon his own illegal act. It is a complex legal construct that has historically caused the courts many a headache, and this in turn has led to some inconsistency and uncertainty as to the correct legal approach.
The modern-day test was established by the House of Lords in Tinsley v Milligan  and effectively confirms that a claim will be barred if a claimant has to rely on his own illegality to bring it. The test was considered – and ultimately replaced – by the Supreme Court in Patel v Mirza , where the Court established that the principle will only apply if enforcing the claim would be harmful to the integrity of the legal system. It went on to set out a flexible three-tiered approach:
- Look at the underlying purpose of the prohibition transgressed in the claim and determine whether that purpose would be harmed in the enforcement of the claim.
- Consider any other public policy that the denial of the claim may have an impact on and the effect on it of denying the claim – “… any other relevant public policies which may be rendered ineffective or less effective by denial of the claim…”
- Ask whether the denial of the claim would be a proportionate response to the illegality; taking into account, amongst other things, the seriousness of the illegality, the centrality of it to the contract, whether it was intentional and the respective culpability of the parties.
However, despite the Supreme Court’s thorough analysis of the area of illegality, the inherent discretion in the approach in Patel v Mirza has in many ways fanned the flames of confusion and inconsistency that have dogged this legal concept over the years. So the Supreme Court’s decision in the Stoffel case has been eagerly awaited, in the hope that some much-needed clarity and consistency would be brought to bear.
Stoffel v Grondona – the facts
In 2000, Ms Grondona entered into an agreement with Mr Mitchell whereby she agreed to lend her name (and good credit rating) to Mr Mitchell for the purpose of obtaining more favourable mortgage terms than Mr Mitchell would otherwise have been able to obtain. In return, Ms Grondona was to receive 50% of the net profits when the properties were sold.
In July 2002 Mr Mitchell purchased the leasehold interest in a flat in London for £30,000 and subsequently borrowed a sum against the flat, in respect of which a charge was registered in the name of the lender.
In October 2002 Ms Grondona entered into a contract to purchase the property from Mr Mitchell for the sum of £90,000, secured by way of a mortgage in the sum of £76,475 from Birmingham Midshires. In order to secure the mortgage funds, Ms Grondona necessarily had to falsify much of the information provided to Birmingham Midshires, including the true purpose of the transaction.
The intention was that the earlier (less favourable) charge should be discharged, and the new charge registered in its place. Stoffel & Co (“the Solicitors”) were instructed by Ms Grondona and by Birmingham Midshires to act in connection with the property sale/purchase. Unfortunately the Solicitors negligently failed to register either the transfer or the charge, and Mr Mitchell therefore remained the registered proprietor, with the prior chargee’s charge remaining on the register.
Following default, Birmingham Midshires obtained a money judgment against Ms Grondona, and she in turn sought to pass on the loss to the Solicitors, claiming against them for their negligent failure to register the charge.
The lower courts
At first instance, it was held that Ms Grondona was entitled to bring her claim against the Solicitors, regardless of the fact that both her arrangement with Mr Mitchell and the Birmingham Midshires mortgage application were immoral, illegal and fraudulent.
The Court of Appeal subsequently considered the criteria set out in Patel and concluded that the public policy of prohibiting mortgage fraud would not be enhanced by excusing negligent solicitors for their conduct. Holding professionals to high standards was also required by public policy, and denying Ms Grondona a claim against her solicitors would produce a disproportionate and confusing outcome. This was especially so in circumstances where the new lender had not complained, and where Ms Grondona had not herself profited from the fraud. The appeal was therefore dismissed.
The Supreme Court
In considering the matter and, in particular, the Court of Appeal’s analysis of Patel, Lord Lloyd-Jones noted that the essential issue for consideration was “whether to allow the claim would damage the integrity of the legal system” and/or whether it would be “inconsistent with the policies to which the legal system gives effect”.
In seeking to analyse the claim by reference to the ‘trio of necessary considerations’ in the Patel case, he noted (on the first criteria of purpose) that “there clearly exists an important policy that the law should condemn mortgage frauds“. However, he doubted that “… permitting a civil remedy to persons in the position of the respondent [Ms Grondona] would undermine that policy to any significant extent.”
As for public policy and the Court’s role in being seen to stamp down on fraud as a means of protecting the public, Lord Lloyd-Jones argued that refusing Ms Grondona a remedy against the Solicitors would not provide that protection. Rather, the alleged negligence (failure to register the transfer) was not, he said, a necessary step in the fraud – indeed, it took place after the fraud was complete. Further, he said, denying Ms Grondona’s claim would run counter to other important public policies; in particular, that conveyancing solicitors should perform their duties to their clients diligently and without negligence. To fail to uphold that principle would amount to “a disincentive to the diligent performance by solicitors of their duties”.
Having formed the conclusions above on the first two limbs of the Patel test, Lord Lloyd-Jones did not need to go on to consider the third Patel criteria, regarding proportionality. In dismissing the Solicitors’ appeal he did, however, note two features that demonstrated that the illegality in this case was not central to the Solicitors’ breach of duty. First, by the time the Solicitors were required to register the transactions the loan had been agreed (and the defrauding of Birmingham Midshires had already taken place). And secondly, that by the same time, equitable title to the property had already passed to Ms Grondona. The negligence claim against the Solicitors was therefore “conceptually entirely separate from her fraud on the mortgagee”.
By confirming – and applying – the three principles of Patel v Mirza, the Supreme Court has reinforced the message that there are no fixed rules for an illegality defence. Rather the courts will adopt a more flexible approach, exercising a balanced judgment in individual circumstances, taking a general ‘high level’ view of purpose and public policy, before delving into proportionality in detail if the first two tests are met.
The Court’s confirmation that one should look not at whether the Claimant has gained an improper profit but, rather, at whether allowing the claim would result in an “incoherent contradiction damaging to the integrity of the legal system” should provide some clarity for future cases. However, it stops well short of the ‘one size fits all’ approach that many commentators were wanting.Download PDF