Search

Illegality revisited: The Supreme Court decision in Stoffel v Grondona considered from a lender’s perspective

The Supreme Court recently handed down its unanimous decision in the case of Stoffel & Co v Grondona [2020] UKSC 42. Chris Freeman, a Senior Associate in our Dispute Resolution Team and a professional negligence specialist, examines why the decision may be of interest to lenders.

The facts

The facts in this case can be distilled down to a few key points for the purpose of this article.  In short, the claimant (who was the respondent in the Supreme Court appeal) procured a mortgage advance from the lender by fraud, with dishonest representations made on the mortgage application.  Stoffel & Co acted as the claimant’s solicitors at the time (and also as the lender’s solicitors) in connection with the transaction, however they negligently failed to register the transfer of the property at the Land Registry, remove the previous lender’s charge or register the new lender’s charge.  By the time of the trial, negligence was admitted, but Stoffel & Co sought to rely on the claimant’s illegality as a defence to the professional negligence claim which the claimant borrower had brought against them.

In the meantime, the lender had obtained summary judgment against the borrower, and had settled claims against Stoffel & Co and the previous lender.

The decision

In a unanimous decision by the Supreme Court, the appeal was dismissed and the illegality defence put forward by Stoffel & Co failed.

Lord Lloyd-Jones gave the leading judgment.  What was notable from a lender’s perspective was how the court’s decision was influenced, at least in part, by the consideration of the mortgagee’s position in these types of circumstances.

The court failed to see how refusing the claimant a remedy against her negligent solicitors would enhance the protection of the public (and mortgagees) against suffering loss as a result of mortgage fraud.  The “required registration was not a necessary step in perpetrating the fraud”.  In those circumstances, the Supreme Court did not consider that refusing to allow the claimant’s negligence claim against her solicitors would afford any protection to the mortgagee.

When balancing whether the negligence claim against Stoffel & Co should be denied on the basis of the claimant’s illegality, lenders will be interested to note that Lord Lloyd-Jones also commented:

While Birmingham Midshires had, in these circumstances, an independent claim for negligent breach of duty against the appellants, it can at the very least be said that the denial of such a claim by the respondent against the appellants would not enhance the protection afforded by the law to mortgagees”.

“To permit the respondent’s claim in the particular circumstances of this case would not undermine the public policies underlying the criminalisation of mortgage fraud and could, indeed, operate in a way which would protect the interests of the victim of the fraud, ie the mortgagee”.

Comment

Whilst the Supreme Court case itself didn’t involve the lender, the lender was clearly a victim of the underlying fraud here.  The court was alive to that fact and took this into account when balancing the policy considerations in allowing a negligence claim of this nature to succeed against the solicitors.  Indeed, it noted that an important public policy consideration was that victims of solicitors’ negligence should be compensated for their loss.

The case is of course fact specific and there will be other instances where the illegality is more closely connected with the negligence, such that the illegality defence may succeed.  The lack of centrality of the illegality to the breach of duty was clearly of relevance here.  However, the case again emphasises the need for conveyancing solicitors to be alive to the potential red flags of fraud. 

Chris Freeman is a specialist in professional negligence lender claims, and was recognised as a key lawyer in the firm’s professional negligence team in the 2021 edition of Legal 500.

The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.

The Supreme Court’s decision can be read in full here.

Send us a message