The defence of ex turpi causa non oritur actio has long been recognised by English law. It is founded on the principle that a right of action will not arise from a base cause and means that compensation will not generally be recoverable for breach of a contract tainted by illegality.
In the recent case of Stoffel & Co v Maria Grondona, the Court of Appeal was required to consider whether the defence of ex turpi causa was available to conveyancing solicitors facing a claim for professional negligence, where they had failed to register the transfer of a residential property, which it later transpired was associated with a mortgage fraud perpetrated by the Claimant.
Background
In 2000 Maria Grondona (“the Claimant”) entered into an agreement with Cephas Mitchell whereby she would secure mortgage loans in respect of various residential properties, which Mr Mitchell would let to tenants and manage. Eventually, and upon disposal of the properties, Mr Mitchell and the Claimant would each receive 50% of the profits.
In October 2002, the Claimant purported to purchase the leasehold interest in 73b Beulah Road, Thornton Heath, Surrey CR7 8JG (“the Property”) from Mr Mitchell in the sum of £90,000. She did so with the assistance of an advance from Birmingham Midshires, in the sum of £76,500, which was to be registered as a charge against the Property.
Stoffel & Co, a firm of solicitors, was instructed by the Claimant, Mr Mitchell and Birmingham Midshires to undertake the conveyancing required. Unfortunately, however, it failed to register with the Land Registry either the transfer from Mr Mitchell to the Claimant, or the release of an existing charge, or the charge granted by the Claimant in favour of Birmingham Midshires. As a consequence, Mr Mitchell remained the registered proprietor of the Property and was able to obtain further advances under the charge still registered against it.
The Claimant subsequently defaulted on the payments due to the Birmingham Midshires, who issued debt proceedings against her. In turn, the Claimant brought a claim for professional negligence against Stoffell & Co.
Decision at first instance
Giving judgment in the Central London County Court, Her Honour Judge Walden-Smith found that the Claimant and Mr Mitchell had engaged in mortgage fraud intended to deceive Birmingham Midshires into making the advance used by the Claimant to purchase the Property.
Applying the decision in Tinsley v Mulligan, she also held that whether the Claimant’s claim was defeated by the principle of ex turpi causa depended not on whether the illegality was closely connected, or inextricably linked, with the claim against the Stoffel & Co, but whether the Claimant relied upon that illegality to found her claim. On the facts of the case, she concluded that the Claimant did not have to rely upon the illegality to bring her claim and that accordingly, the defence of ex turpi causa did not apply.
Finally, and by way of compensation, the judge awarded the Claimant the sum of £78,000, together with interest, representing the value of the Property unencumbered as at the date of the negligent omissions made by Stoffel & Co in November 2009.
Issues on appeal
On appeal, Stoffel & Co submitted that as the Supreme Court in Patel v Mirza had subsequently overruled the reliance test in Tinsley, the decision at first instance was no longer sound and applying the new test, the Claimant should not be entitled to recover compensation from her illegal behaviour and active involvement in a mortgage fraud.
The Claimant cross-appealed. While accepting that the correct test to apply was that enunciated in Patel, she argued that she was nevertheless entitled to recover compensation for professional negligence. Further, and as to the amount of such compensation, she argued that this should be in the sum of approximately £143,000, representing the total amount of her outstanding liability to Birmingham Midshires under her mortgage account.
Judgment on appeal
Giving the leading judgment of the Court of Appeal, and amongst other matters, Lady Justice Gloster held that:
- The judge had been wrong to conclude that the Claimant’s mortgage application and agreement was a sham, which was not affected by her separate finding that the sale agreement between Mr Mitchell and the Claimant was tainted with illegality, its objective being to deceive institutional lenders;
- Had Stoffel & Co registered the transfer at the Land Registry, the legal title in the Property would have passed to the Claimant despite the illegal agreement, but the absence of registration meant the Claimant was only entitled to an equitable interest in the Property;
- There was no public interest in allowing negligent conveyancing solicitors to avoid their professional obligations, simply because of the happenstance that two of the clients for whom they acted were involved in making misrepresentations to a mortgagee financier;
- There was a genuine public interest in ensuring that clients using the services of solicitors are entitled to seek civil remedies for professional negligence against a defendant arising from a legitimate and lawful retainer which was entered into between them;
- It would be entirely disproportionate to deny the Claimant’s claim.
Lady Justice Gloster further held that the judge had been correct to conclude that the Claimant’s loss was limited to the value of the Property as at November 2009, rather than a sum calculated by reference to the Claimant’s ongoing debt obligation to Birmingham Midshires.
Comments
Ex turpi causa is not a defence that is frequently relied upon in professional negligence claims but, as the decision in this case demonstrates, it does arise from time to time. In assessing its merits, the court is likely to examine:
- The underlying purpose of the prohibition which has been transgressed;
- Any other relevant public policies which may be rendered ineffective or less effective by denial of the claim; and
- The possibility of overkill unless the law is applied with a due sense of proportionality.
As with any defence and in order to determine its true merits, careful consideration will need to be given to the factual circumstances to which it is sought to be applied. Where, as here, the defendant is clearly at fault, it is likely to be all the more difficult for it to persuade the court that issues of public policy should weigh in its favour, so as to deprive an injured party of compensation for the financial loss caused to it.
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