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Fraud v Negligence

30 October 2018
Is a negligent solicitor liable to a Claimant who acted fraudulently?

Stoffel & Co v Grondona [2018] EWCA Civ 2031 is a rather curious decision by the Court of Appeal which upheld a damages award to a Claimant in respect of a solicitor's negligence claim, despite the Claimant having been a party to mortgage fraud.  Jackie Lynch discusses the implications for solicitors (and their insurers) below.

Background

The Appellant firm of solicitors (“the Defendant”) acted for Ms Grondona (“the Claimant”) in relation to her purchase of the leasehold interest in a property from her associate, Mr Mitchell.  However on conclusion, the Defendant failed to (1) properly register the purchase of the property with the Land Registry (2) discharge the existing mortgage; and (3) register the Claimant's new mortgage against the property. 

Ultimately, the Claimant fell into arrears and the new mortgage company (Birmingham Midshires), was unable to enforce its security due to the errors by the Defendant in registration.  Instead, they therefore sought a money judgment against the Claimant.  The Claimant then pursued the Defendant for breach of contract and/or negligence for any sums she was required to pay the lender.

The Defendant, whilst admitting negligence, fought the claim on the basis of the illegality principle (ex turpi causa) ie. recovery should be barred on the basis that the Claimant had in fact acted fraudulently.  It had been established that the underlying transaction was the result of the Claimant having come to an agreement with Mr Mitchell that she would essentially act as a conduit for him to obtain further mortgage financing in return for a share of any profit he might make.  The judge at first instance found that whilst there had been a scheme devised by the Claimant and Mr Mitchell to commit mortgage fraud, the argument in relation to the illegality principle would not succeed. The judge considered that in accordance with the decision in Tinsley v Milligan (1994), the Claimant had not relied on the illegality to bring her claim.  The judge determined that it was the Defendant's negligence which had caused the loss, i.e. the Claimant having lost the benefit of the property providing security for the loan.       

The appeal

The Court of Appeal also found in favour of the Claimant, albeit overturning two of the initial judge's findings of fact (despite the fact that the Claimant had not appealed these findings) and finding instead that (1) there had been an intention to transfer the property to the Claimant; and (2) there had been a genuine agreement between the Claimant and Birmingham Midshires.

On appeal it was accepted that the reliance test in Tinsley v Milligan (1994) had been overruled by the Supreme Court in Patel v Mirza (2016).  The Court of Appeal therefore had to balance a number of factors including the underlying purpose of the prohibition transgressed (mortgage fraud), public policy and proportionality. The Court's view was that had the Defendant not acted negligently, the Claimant would have had the benefit of title to the property. Lady Justice Gloster  commented “I see no public interest in allowing negligent conveyancing solicitors (or, in financial terms, their insurers), who are not party to, and know nothing about, the illegality, to avoid their professional obligations simply because of the happenstance that two of the clients for whom they act are involved in making misrepresentations to the mortgagee financier”.

A cross-appeal on damages was unsuccessful, with the Claimant's damages remaining limited to the forced sale value of the property at the date at which she would have had an unencumbered property, plus interest until the date of payment (rather than the full amount she owed the bank).

Considerations  

The Court of Appeal's view was that there is a public interest in ensuring that the solicitors' clients were entitled to seek damages arising from a legitimate retainer and that this took precedence over the undesirable consequences of mortgage fraud.  


The application of public policy in this way using the more flexible approach to illegality advocated by the majority of the Supreme Court in Patel v Mizra (contrasted with the reliance test in Tinsley v Milligan) resulted in the Court of Appeal separating the illegality from the legitimate retainer and the negligent actions of the Defendant. The decision will no doubt cause some consternation to solicitors and their insurers. It is understood that an appeal is being considered.  
 
 

Further Reading

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