Contract: Illegality

Applying the policy based approach adopted in Patel v Mirza [2017] 1 All ER 191, the Court of Appeal, Civil Division had correctly held that the fact that the respondent had been a participant in an illegal mortgage fraud designed to obtain money for the vendor did not preclude her from recovering against the appellant solicitors for negligence and breach of duty on the basis of the illegality principle. Accordingly, the Supreme Court dismissed the appellant’s appeal against the Court of Appeal’s decision, deciding that the Court of Appeal was correct in its conclusion that a defence of illegality should not bar the respondent’s claim.

The present appeal raised issues as to the application of the new policy-based approach outlined in Patel v Mirza[2017] 1 All ER 191  (Patel) in the context of a claim for negligent breach by a solicitor of his retainer, a concurrent claim in breach of contract and in tort. In Patel, a majority of the Supreme Court had rejected the reliance principle whereby relief was refused to parties who had to rely on their own illegality to establish their case. In its place, the majority adopted a more flexible approach which openly addressed the underlying policy considerations involved and reached balanced judgment in each case, and which also permitted account to be taken of the proportionality of the outcome.

In the present proceedings, in 2000, the respondent had participated in an illegal mortgage fraud designed to obtain monies from a bank for the vendor of certain property (M), whom she had had a business connection with, to enable M to purchase the property. The respondent had lent her good credit history to M to enable him to obtain

finance behind the scenes and out of sight of the potential lender. The appellant solicitors’ firm had acted for the respondent, for M and for the chargee (BM), in connection with the relevant transaction. On or about October 2002, M had executed in favour of the respondent, and delivered to the appellant, the Land Registry Form TR1 in relation to the property.

As a result of the appellant’s admitted negligence and breach of duty in failing to register the relevant forms, M had remained the registered proprietor of the property and a company had remained the registered proprietor of a charge over the property. The respondent defaulted on payments under a different charge and BM brought proceedings against her in order to obtain a money judgment. She defended the claim and brought proceedings against the appellant by means of a CPR Pt 20 claim for an indemnity and/or a contribution and/or damages for breach of duty and/or breach of contract.an indemnity, a contribution and/or damages for negligence and/or breach of retainer.

The appellant defended the CPR Pt 20 claim on the basis that there were no damages recoverable by the respondent because the purpose of the transaction to put the property into her name and to obtain a mortgage had been illegal, in that it had been a conspiracy to obtain finance for the vendor by misrepresentation and, accordingly, the principle of ex turpi causa non oritur actio applied.

 The judge concluded that the illegality defence did not apply. She held that the claim against the appellant for failing to register the forms was conceptually separate from the fraud. The claim did not rely on the allegations of illegality and the reason for the conveyance was irrelevant to it. Accordingly, she found in favour of the respondent and awarded her damages of £78,000, the value of the property with interest thereon. The appellant appealed against the judge’s decision. The respondent cross-appealed, challenging the method of the calculation of the quantum of damage.

The Court of Appeal, Civil Division, dismissed the appellant’s appeal and the cross-appeal on quantum. It held, on the basis of Patel, which had been handed down since the first instance decision, that the illegality defence did not bar the respondent’s claim. Although mortgage fraud was a canker on society, barring the claim against the negligent appellants would not enhance the fight against mortgage fraud. There was a public interest in ensuring that clients who used the services of solicitors were entitled to seek civil remedies for negligence or breach of contract against their solicitors arising from a legitimate and lawful retainer between them, in circumstances where the client was not seeking to profit or gain from her mortgage fraud but merely to ensure that the chargee’s security had been adequately protected by registration. In the Court of Appeal’s view, to deny the claim would also be disproportionate to the wrongdoing involved.

The appellant was granted permission to appeal to the Supreme Court.

Whether the Court of Appeal had erred in its analysis and application of the Patel guidelines.

The appellant submitted that the present case was a paradigm case for the refusal of relief on the grounds of illegality. The respondent had utilised the appellant’s services in the context of and in order to execute a mortgage fraud which she and M had been practising on BM. The appellant had acted innocently but incompetently in carrying out its instructions and had left the respondent without registered title to a property which was only to be transferred to her for the purpose of the mortgage fraud. He submitted that if the illegality defence operated to leave the loss to lie where it fell, then the respondent could complain of no injustice.

It was accepted in Patel that the essential rationale of the illegality doctrine was that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system. It was established in Patel that, assessing whether the public interest would be harmed in that way, it was necessary: (a) to consider the underlying purpose of the prohibition which had been transgressed and whether that purpose would be enhanced by denial of the claim; (b) to consider any other relevant public policy on which the denial of the claim might have an impact; and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment was a matter for the criminal courts (see [22], [23], of the judgment).

In the present case, first, with regard to (a), while BM had, in the circumstances, an independent claim for negligent breach of duty against the appellant, it could at the very least be said that the denial of such a claim by the respondent against the appellant would not enhance the protection afforded by the law to mortgagees. It was, therefore, in the interests not only of the respondent but also of BM for the appellant to have complied with their duties to the respondent. Second, in relation to (b), to permit the respondent’s claim in the particular circumstances of the 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, namely the mortgagee. Further, to deny the respondent’s claim would run counter to other important public policies. It would be inconsistent with the policy that the victims of solicitors’ negligence should be compensated for their loss. It would be a disincentive to the diligent performance by solicitors of their duties and would also result in an incoherent contradiction given the law’s acknowledgment that an equitable property right vested in the respondent. In those circumstances, it was not strictly necessary to go on to consider (c) (see [31], [35] of the judgment).

The true rationale of the illegality defence, as explained in Patel and in R v Hebert[1990] 2 SCR 151 was that recovery should not be permitted where to do so would result in an incoherent contradiction damaging to the integrity of the legal system. In the present case, to allow the respondent’s claim to proceed would not involve any such contradiction, for the reasons given (see [46] of the judgment).

The Court of Appeal had correctly followed the policy-based approach adopted by Patel and had been correct in its conclusion that a defence of illegality should not bar the present claim (see [47] of the judgment).

Patel v Mirza [2016] UKSC 42 followed; R v Hebert [1990] 2 SCR 151 adopted; Tinsley v Milligan [1992] Ch 310 considered; Sweetman v Nathan [2003] EWCA Civ 1115 considered; Hounga v Allen [2014] UKSC 47 considered; Les Laboratoires Servier v Apotex Inc [2014] UKSC 55 considered; Bilta (UK) Ltd (in liq) v Nazir [2015] UKSC 23 considered.

Decision of Court of Appeal, Civil Division [2017] 1 All ER 19 Affirmed.

Michael Pooles QC and Dan Stacey (instructed by Levi Solicitors LLP, Leeds Central) for the appellant.

Andrew Warnock QC, Maurice RifatLaura Giachardi (instructed by WH Matthews & Co Solicitors) for the respondent.

Neneh Munu - Barrister.