If solicitors fail to do their job properly, with the result that a fraudulent transaction is not carried out as intended, are the solicitors still liable?

Stoffel & Co v Maria Grondona [2018] EWCA Civ 2031

In a recent case it was found they could be, but by reaching that view the court was able to supply the defrauded lender with a remedy.  It seems a perverse outcome, but the purpose of the court made overall sense.

Facts

Mrs Grondona claimed against her solicitors for their failure to register at Land Registry a transfer to her of 73b Beulah Road in Thornton Heath, Surrey.  She was buying that house (or so it seemed) from a Mr Mitchell. 

However, the reality was that Mrs Grondona was in cahoots with Mr Mitchell to ‘front’ residential mortgage loans to obtain funds for his property business.  He retained beneficial ownership of the house at all times, with the result that her mortgage application was dishonest. 

When Birmingham Midshires sought repayment of the £90,000 advance from her, Mrs Grondona claimed against the solicitors who had failed to provide her (and the lender) with the security of the property. She successfully recovered around £95k to compensate for the outstanding borrowing she had incurred with Birmingham Midshires on the residential mortgage loan she had used to buy the house.

Defence of illegality by solicitors

However, the solicitors who negligently failed to register the transfer of the house appealed.  They argued that because the transaction as a whole was a mortgage fraud, they should be absolved of any liability.  They relied on the long-held principle of English law by which no-one can benefit from an illegal act [1].

Appeal outcome

The appeal judges accepted the view that the claim was simply to recover damages to put Mrs Grondona back in the position she would have been had the defendant not been negligent or in breach of contract.  Crucially, it was not to enable her to gain or profit from the fraud. Her claim for damages was in order to extricate her from the transaction and to redeem, or part redeem, the mortgage for which she was liable.  

They also agreed that the loan and security were not intended to be a sham but was a real transaction and the intention was to charge the property.  The deception was in relation to Mr Mitchell’s involvement, given that the purpose of the transaction was for him, in effect, to obtain lending on more favourable terms than he could himself obtain.

Also, the court decided that the illegal conduct was not central to the retainer between the claimant and her solicitor. The claimant wanted the transfer and charge registered to give effect to the security.

The appeal court therefore decided that the solicitors should be liable.  Birmingham Midshires were the victim of the fraud and by this means they were able to recover their loan.

Does this judgment condone mortgage fraud? 

The appeal judges were at pains to say that was not what they were doing.  Lady Justice Gloster said:

“mortgage fraud is, of course, a canker on society and it is extremely important that dishonest applicants for mortgages should not be empowered by the law to abuse the system. However, 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.” 

Canker and happenstance it may have been, but also a happy stance for the lender.



[1] Known as ‘ex turpi causa non oritur actio’ for Latin buffs

About the author

Susan Hopcraft Partner

Susan advises on all aspects dispute resolution particularly in the financial services sector. She has extensive insurance, professional negligence and restrictive covenants experience. She deals with claims against solicitors, valuers, surveyors, brokers and accountants, fraud issues, recoveries for lenders and bank mis-selling.