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Fraudulent clients can successfully sue their solicitors – but not necessarily in all cases

  • Market Insight 9 November 2020 9 November 2020
  • UK & Europe

  • Insurance & Reinsurance

Should a client involved in a fraudulent property transaction be able to recover compensation from its solicitor for a failure to register title? After more than 5 years of litigation the trial judge, the Court of Appeal and now the Supreme Court has considered this question in Stoffel & Co v Grondona [2020] EWCA Civ 2031. For solicitors and their professional indemnity insurers the answer is a disappointing "Yes".

Fraudulent clients can successfully sue their solicitors – but not necessarily in all cases

The Law

It is a well-established principle that a claimant cannot rely on its own illegal conduct to pursue a cause of action against another person. Following the decision on illegality in Patel v Mirza [2016] UKSC 42 the legal profession has sought guidance from the Supreme Court in Grondona as to when a client's illegal conduct will prevent it from successfully pursuing a negligence claim.

Facts

Ms Grondona sought damages against her solicitors Stoffel & Co for negligence and/or breach of retainer for failing to register title to a property she was buying. The seller remained the registered proprietor and Ms Grondona had no security for her mortgage.

However, it subsequently transpired that Ms Grondona had been a participant in a mortgage fraud by using her name on the mortgage application to obtain finance for the seller. Although Stoffel & Co admitted breach of duty, they argued that Ms Grondona's illegal conduct meant that the Court should bar her claim on the basis of illegality (or ex turpi causa).

Decision

At first instance the illegality argument failed. The Supreme Court handed down its decision in Patel v Mirza shortly afterwards, which laid out three factors to be considered before a claim should be denied for illegality. As a result, Stoffel & Co appealed on the basis that the factors in Patel should be applied.  However, the Court of Appeal also declined to apply the illegality "defence".

In its judgment the Supreme Court has provided refined guidance on how Patel v Mirza should be applied. The three factors can be summarised as follows:

  1. What is the underlying purpose of making the conduct in question illegal and would that purpose be enhanced by denying the claim;
  2. Are there any relevant public policy issues which may be undermined if the claim is denied; and
  3. Would denying the claim be a proportionate response to the illegality?

Lord Lloyd-Jones explained that, when considering factors (a) and (b) the Court should evaluate the relevant public policy considerations at a "relatively high level of generality". Only if the balance of those policy considerations indicates that the claim should be denied will it then be necessary for the court to consider factor (c) and closely scrutinise the facts in order to assess whether denying the claim would be proportionate. The key consideration for the court is whether allowing the claim will lead to an inconsistency that could damage the integrity of the legal system. Applying the Patel factors in Grondona, the Supreme Court held that:

  1. Potential mortgage fraudsters are unlikely to be deterred by the risk that they will be left without a civil remedy if their solicitors act negligently and neither would denying a claim enhance the protection of lenders.
  2. Denying the claim would run counter to public policy and would not incentivise solicitors to perform their duties diligently and to detect fraud. Clients should have a remedy against solicitors that act negligently. Denying the claim would also result in an inherent contradiction in the law if, despite Ms Grondona being entitled to an equitable interest in the property, irrespective of the mortgage fraud, she was denied a claim if her solicitor failed to protect that interest.
  3. Accordingly, it was not necessary for the Supreme Court to consider the third factor, but Lord Lloyd-Jones stated that it would not be proportionate to deny a claim that was conceptually separate from the mortgage fraud.

Comment

The guidance provided by the Supreme Court ought to be helpful in assessing the application of illegality in the future. The decision clarifies that the court will be guided by policy factors and that claims are only likely to be denied if they would not result in an inherent contradiction in law.

Although this decision may leave legal professionals and their insurers questioning in what circumstances the illegality "defence" can be successfully deployed, the decision in Patel is not "year zero" and we doubt Grondona is the last word on illegality:   

  1. Clearly, it will not be enough for the solicitor just to point to some form of illegal conduct by a client.  However, if the Courts are to evaluate policy considerations at a "high level of generality" it seems at least arguable that fraudsters might be deterred if there was a risk that claims tainted by mortgage fraud would be denied on grounds of illegality (i.e. they could not rely on PI insurance);
  2. Although Lord Lloyd-Jones stated that avoiding profiting from wrongdoing should not be the focus of the inquiry, he confirmed that it remains relevant. In this case Ms Grondona was not seeking to profit from her claim. Stoffel & Co had also acted for both seller and purchaser and failed to spot several badges of fraud. This therefore leaves open the question of what would happen in other circumstances, such as if a solicitor only acts for a purchaser, the fraud is very sophisticated and opaque and /or the claimant claims for all of the profits it would have gained if the transaction had been successful?

Solicitors may also look for different ways to protect themselves:

  1. Solicitors must remain vigilant for signs of underlying fraud and therefore avoiding involvement in a transaction that is suspicious.
  2. Beyond that, could solicitors consider enhancing their engagement letters to secure a warranty from the client regarding the bona fides of the transaction? Or seek to exclude liability in the event that the instruction is in any way linked to illegal conduct? While such steps might provide a better platform to argue that the illegal conduct is central to the retainer, it may not assist in light of the primary policy considerations favoured by Lord Lloyd-Jones at stages (a) and (b).

Ultimately solicitors continue to be held to high standards and cannot easily expect to escape liability for negligence, just because a client is dishonest in some aspect of the transaction.

End

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