Did participation in a mortgage fraud bar a negligence claim?
The court has long struggled with the enforceability of contracts involving illegality. It used to ask itself whether a claimant was relying on an illegal action to support a claim: Tinsley v Mulligan [1994] AC 240. But, following the Supreme Court decision in Patel v Mirza [2016] UKSC 42, the policy is now more flexible. The court must consider whether it would damage the integrity of the legal system to allow a claimant to pursue a claim.
Stoffel & Co v Grondona [2020] UKSC 42; [2020] PLSCS 196 concerned a property that was transferred to a new owner to further a mortgage fraud. The transferee entered into the transaction to enable the owner of the property, who had a poor credit history, to secure finance that would not otherwise have been available to him. But the parties had agreed that the transferor would continue to deal with the property as if it were his own – and that the transferee would be entitled to 50% of any profit made when the property was sold.
Instead, the transferor died, leaving the transferee liable on the mortgage that she had signed and without any legal title to the property – because the Land Registry had rejected her solicitors’ application to register the transfer into her name. Was the transferee able to claim damages from her solicitors, in contract and tort, for the failure to register the transfer? Or did the rules on illegality preclude any such claim?
The court has long struggled with the enforceability of contracts involving illegality. It used to ask itself whether a claimant was relying on an illegal action to support a claim: Tinsley v Mulligan [1994] AC 240. But, following the Supreme Court decision in Patel v Mirza [2016] UKSC 42, the policy is now more flexible. The court must consider whether it would damage the integrity of the legal system to allow a claimant to pursue a claim.
Stoffel & Co v Grondona [2020] UKSC 42; [2020] PLSCS 196 concerned a property that was transferred to a new owner to further a mortgage fraud. The transferee entered into the transaction to enable the owner of the property, who had a poor credit history, to secure finance that would not otherwise have been available to him. But the parties had agreed that the transferor would continue to deal with the property as if it were his own – and that the transferee would be entitled to 50% of any profit made when the property was sold.
Instead, the transferor died, leaving the transferee liable on the mortgage that she had signed and without any legal title to the property – because the Land Registry had rejected her solicitors’ application to register the transfer into her name. Was the transferee able to claim damages from her solicitors, in contract and tort, for the failure to register the transfer? Or did the rules on illegality preclude any such claim?
The transferee argued that punishment was a matter for the criminal courts. She stressed that the illegality was not central to her contract with her solicitors and that she was not seeking to profit from the fraud. She was, in fact, seeking damages to help redeem, or partially redeem, the mortgage that she had signed.
The High Court applied Tinsley and upheld the transferee’s claim. And, although it acknowledged the importance of preventing mortgage fraud, so too did the Court of Appeal. But it based its decision on the newly released judgment in Patel. It agreed that the mortgage fraud was part of the background story and did not believe that the integrity of the justice system would be undermined by the enforcement of the claim.
Did the Court of Appeal err fundamentally in the way that it applied Patel? The Supreme Court has decided that it did not. It explained that it was important to balance any competing policy considerations and – if, as a result, the transferee’s claim was at risk of being denied – to apply the law proportionately.
The law firm had argued that the denial of the claim would deter the use of solicitors as “catspaws” in mortgage frauds. But Lord Lloyd-Jones, who spoke for the Supreme Court, doubted whether the possibility of losing a professional negligence claim featured in fraudsters’ thinking. Refusal of a remedy would not assist the lender who had been defrauded of its money and would run counter to other public policies. It would not encourage solicitors to act diligently and it would be inconsistent with the policy that the victims of solicitors’ negligence should be compensated for their loss.
The transferee’s claim for breach of duty against her solicitors was conceptually entirely separate from her fraud on the mortgagee – and the transferee would not be profiting from her wrong. Finally, and more importantly, the focus of inquiry in such cases now centres on whether pursuit of a claim would damage the integrity of the legal system.
Allyson Colby, property law consultant
