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On appeal from: [2018] EWCA Civ 2031

The Supreme Court unanimously dismissed the appeal concerning whether the Court of Appeal had erred in its application of the Patel v Mirza guidelines. Consequently, the respondent’s claim was not barred by the illegality defence.

The respondent had had a business connection with Mr Mitchell. She agreed with Mr Mitchell in writing to provide her name on applications for mortgages over a number of properties in which Mr Mitchell had, or would have, an interest, including a leasehold flat in London. That property is the subject of this litigation.

In July 2002 Mr Mitchell bought for £30,000 a 125-year lease of the flat from the freeholder. Shortly afterwards Mr Mitchell borrowed a sum against the flat from BM Samuels Finance Group Plc and a charge was duly registered. In October 2002 Mr Mitchell sold the lease for £90,000 to the respondent. The respondent obtained an advance of £76,500 from the Birmingham Midshires building society on the basis that the monies would be used to discharge the earlier BM Samuels Finance Group Plc charge, and that a new charge should be executed in favour of Birmingham Midshires. The appellant acted for the respondent, Mr Mitchell and Birmingham Midshires.

The advance was made and paid to BM Samuels Finance Group Plc, however, as a result of the admitted negligence of the appellant, none of the relevant transactions, the transfer to the respondent, the charge to Birmingham Midshires or the release of the charge to BM Samuels Finance Group Plc were ever registered.

The respondent subsequently defaulted on payments to Birmingham Midshires and brought proceedings against the appellant to claim for breach of duty. The appellant admitted negligence but argued that damages were not recoverable because the purpose of the transaction was to put property into the respondent’s name in fraud of Birmingham Midshires.

The first instance judge made a judgment in the respondent’s favour. The appellant appealed to the Court of Appeal, where its appeal was dismissed. The appellant then appealed to the Supreme Court, which also unanimously dismissed its appeal. Lord Lloyd-Jones gave the judgment, with which all members of the Court agreed.

The Supreme Court decision in Patel v Mirza [2016] UKSC 42 set out a new policy-based approach to the illegality defence at common law. In that case, the majority held that, when a claim is tainted by illegality, the court should ask itself whether enforcing the claim would lead to inconsistency that is damaging to the integrity of the legal system. In making this assessment, the court should consider: (a) the underlying purpose of the illegality in question, and whether that purpose would be enhanced by denying the claim; (b) any other relevant public policy on which denying the claim may have an impact; and (c) whether denying the claim would be a proportionate response to the illegality.

The application of this trio of considerations should not be a mechanistic process. Accordingly, the court will identify the policy considerations at stages (a) and (b) of the trio at a relatively general level. The court’s task is to establish whether enforcing a claim that is tainted with illegality would be inconsistent with the policies to which the law gives effect or, where the policies compete, to decide where the balance lies. The court is not required to evaluate the underlying policies themselves.

In contrast, when considering proportionality at stage (c), it is likely that the court will need to look closely at the case before it. However, it is not necessary for the court to consider proportionality in every case. If, after it has examined the policy considerations at stages (a) and (b), the court determines that the claim should not be barred by the illegality defence, there will be no need for it to go on to consider proportionality. This is because the claim will be allowed, so there is no risk of disproportionate harm to the claimant by refusing relief to which he or she would otherwise be entitled.

In considering stage (a), Lord Lloyd-Jones observes that the respondent was engaged in mortgage fraud, which is a serious criminal offence. However, denying her claim would not enhance the underlying purpose of the prohibition on mortgage fraud. Fraudsters are unlikely to be deterred by the risk that they will be left without a civil remedy if their solicitors prove to be negligent. On the other hand, allowing the respondent’s claim would enhance the protection that the law provides to mortgagees and other members of the public, which is a further underlying purpose of the prohibition on mortgage fraud. By the time of the appellant’s negligence, it was in the interests of both the respondent and Birmingham Midshires that the transfer should be registered.

Turning to stage (b), denying the respondent’s claim would run counter to a number of important public policies. In particular, it would be inconsistent with the policy that solicitors should perform their duties to their clients diligently and without negligence, as well as with the policy that the victims of solicitors’ negligence should be compensated for the loss they have suffered. Denying the claim would also result in an incoherent contradiction in the law, because the law accepts that an equitable interest in the property passed to the respondent, even though she was engaged in mortgage fraud.

The balancing of the policy considerations at stages (a) and (b) indicate that the respondent’s claim should not be barred by the illegality defence. There is, consequently, no need to consider proportionality, but Lord Lloyd-Jones does so nevertheless.

He concludes that it would not be proportionate to deny the respondent’s claim because it is conceptually entirely separate from the mortgage fraud.

Enforcing the claim would not allow the respondent to profit from her wrongdoing. In any case, following Patel v Mirza, the court’s focus should be on the need to avoid inconsistency that is damaging to the integrity of the legal system. The question of whether the claimant will profit from the illegality remains a relevant consideration, but it is no longer the true focus of the court’s inquiry.

For judgment, please see: Judgment

For press summary, please see: Press summary

For non-PDF version of the judgment, please see: BAILII

Watch hearing
05 May 2020 Morning session Afternoon session

 

Watch Judgment summary
30 Oct 2020 Judgment summary