Stoffel v Grondona – does fraud pay?
Stoffel v Grondona [30.10.20]
Many professional negligence cases involve illegality of some form or another by a claimant. The most obvious examples are a borrower misrepresenting their income so as to procure a self certified loan (common in cases against solicitors and independent financial advisors (IFAs)); and claimants misrepresenting liabilities or “covering up” internal accounting irregularities (again common to solicitors cases but also audit claims).
Will the court allow such claims – “tainted with illegality” - to proceed? Or is there a public policy reason to stop a claimant running a “tainted” claim?
Stoffel – the facts
The claimant participated in a mortgage fraud:
- She entered into an agreement to “lend” her credit rating to Mr Mitchell
- Mitchell bought a flat for £30,000
- Three months later, Mitchell sold the flat to the claimant for £90,000 in a non-arm’s length transaction
- The claimant borrowed £76,500 from a lender without telling the lender any of the relevant history
- The claimant’s solicitor, negligently, failed to register the claimant’s title to the property or register the charge in favour of the lender
- Mitchell therefore retained legal title and borrowed money on it himself to the detriment of the claimant.
The claimant sued the solicitor asserting breach of duty in failing to register her title, claiming the value of the property as at the date of sale.
The law on illegality was last restated by the Supreme Court in Patel v Mirza in 2016. Prior to Patel, the Court imposed a “reliance” test, namely did a claimant have to rely on their illegality to prove the claim? If so, the claim was barred.
Patel provided a more nuanced approach. Lord Toulson presented two legal maxims; firstly that a person should not profit from their own wrongdoing and secondly that the court should not condone conduct which is harmful to the integrity of the legal system.
The following three principles should then be applied when dealing with the second maxim:
- What is the purpose of the “prohibition” – what societal harm is the law seeking to discourage?
- Whether, if the claim is denied, any other relevant public policy benefit would be impeded (other societal harm)?
- Would the denial of the claim be proportionate (proportionality)?
Application of the law to the facts
Many defendants and their insurers would be forgiven for thinking that the court would strive to ensure that a negligent professional is “protected” from the consequences of their careless act in circumstances where the claimant has made deliberate misrepresentations to both it and a third party – here the lender. But here, the Supreme Court declined to do so. Instead, in a mechanistic application of Lord Toulson’s approach, the following conclusions were reached:
The purpose of the prohibition
The court should discourage mortgage fraud. But, the fact that a fraudster may lose a civil law remedy against a professional in the event of the professional’s negligence, is unlikely to discourage mortgage fraud (possibly because fraudsters do not usually have to think that far ahead and do not factor the potential value of a negligence claim against a professional into their own analysis as to whether to commit a fraud). Further,
Other societal harm
The court was most convinced by the absence of “centrality” of the illegality to the breach of duty. The breach of duty occurred after both (1) the mortgage loan had been advanced and (2) the claimant had incurred equitable rights against Mitchell, who had signed the relevant TR1 transfer form. Accordingly, “the respondent’s claim for breach of duty against her solicitors is conceptually entirely separate from her fraud on the [lender]”.
The claim was therefore allowed. The solicitor was liable for the value of the property plus interest – a significant six figure sum. Even though the solicitor was entirely innocent and its client (although not prosecuted) had committed an offence under the Theft Act 1968.
Is this a fraudster’s charter?
There can be little doubt that certain claims which insurers would instinctively think should be rejected will now proceed – a bad thing generally for the solicitors profession having already faced two difficult 1 October renewal periods and a significantly hardening market for professional indemnity insurance. Indeed, many commentators foresee a glut of fraud related claims generally – for example arising from the COVID-19 related government assistance schemes over the last 6 months (such as furlough and tax 'holidays'). Professional indemnity insurers will therefore generally find the decision to be unwelcome.
But, importantly, the principle that a claimant should not be allowed to profit from their own wrongdoing is still relevant. Here, for complex reasons, it was accepted by the parties that the claimant would not “profit” if the claim was allowed to succeed. Essentially, the damages recovered against the solicitor would represent her indebtedness to the lender, which had secured summary judgment against the claimant. The claimant therefore asserted that the purpose of the claim “was not to profit but to obtain funds to reduce or discharge her liability under the [lender’s] charge.”
The absence of "profit” in this case should put a brake upon a more general application – whilst profiting from one’s own wrong is “no longer the true focus of the inquiry” it remains a “relevant consideration”. Allowing a fraudster to walk into the sunset with “profit” caused by an innocent mistake of a professional who was no doubt duped by the fraudster is, we expect, an outcome most judges would strive to avoid.