Manchester Building Society v Grant Thornton UK LLP  EWHC 963 (Comm) – Accountants had not assumed responsibility for economic losses flowing from negligent accounting treatment
MBS' claim against GT for £48.5M largely failed…
Published 20 March 2019
The illegality defence (also known as the doctrine of ex turpi causa) denies a claimant a legal remedy where his claim is based on his own illegal act. Application of the doctrine has historically been criticised for its technical complexity leading to uncertainty as the courts have grappled with the public policy issues surrounding whether to allow the claimant a remedy.
The Supreme Court sought to overcome these difficulties in the 2016 case, Patel v Mirza, [see our article] by disposing of the “reliance” test approved by the House of Lords in Tinsley v Milligan  and introducing the new “range of factors” test. The new test considers reliance (i.e. that a claimant cannot rely on his own illegality to establish a claim) alongside a range of other factors relevant to the public interest including whether denying the claim would be just and proportionate. How the courts should apply this test in different contexts is a developing area of the law.
This article considers the illegality defence in the context of a negligence claim. Although the claim was against a firm of solicitors, the principles which emerge will be applied to a range of other professionals including accountants and auditors.
In October 2002, the Claimant, Maria Grondone (C) purported to purchase the leasehold interest of a property from Mr Mitchell for £90,000 (three times the price he had paid earlier that year) using a loan from Birmingham Midshires (BM). Stoffel & Co (D) were the solicitors representing MG, BM and Mr Mitchell.
D repaid the existing loan using BM’s advance but negligently failed to register the transfer at the Land Registry, meaning that Mr Mitchell remained the registered owner of the property and BM’s charge was not registered. C defaulted on the BM loan and proceedings were brought against her for a money judgment. C defended the claim and brought Part 20 proceedings against D for breach of duty and/or breach of contract. D defended the claim on the basis that, whilst it had admitted negligence, no damages were recoverable as the transaction was illegal (a conspiracy to obtain finance for Mr Mitchell). Summary judgment was obtained by BM against C for £70,000.
Part 20 claim
It was found that C had lent her good credit history to Mr Mitchell to enable him to obtain finance and that they perpetuated a mortgage fraud to deceive BM into making the advance.
The judge considered whether C relied upon the illegality to found her claim and concluded that D’s failures had denied C the benefit of security from BM’s mortgage: the fact that the mortgage had been obtained dishonestly did not prevent a claim being brought. Applying Tinsley v Mulligan, the judge held that C did not have to rely upon the illegality to bring her claim and so it was allowed.
D appealed on the basis that Patel had overruled the reliance test in Tinsley v Milligan. D said that C was actively involved in a mortgage fraud and that awarding damages would effectively be allowing the enforcement of an illegal transaction.
C asserted that there were already criminal sanctions available against her, she did not wish to benefit from the fraud and only wanted to be put back in the position that she would have been in had the negligence not occurred. D’s response included an argument that C was in arrears and therefore would have been subject to repossession in any event.
Applying Patel, the critical issue in determining whether such an agreement is a sham, even if tainted by illegality, is an analysis of the intentions of the parties. A legal charge between BM and C was intended to take effect and the fact that the parties were involved in a mortgage fraud did not result in a sham transaction between C and BM. In Singh v Ali Lord Denning said “The court does not confiscate the property because of the illegality - it has no power to do so - so it says, in the words of Lord Eldon: 'Let the estate lie where it falls."
In Patel, Lord Toulson said that in order to judge whether allowing a claim tainted by illegality would be harmful to the public interest, the following three points should be considered: 1) the underlying purpose of the prohibition which has been transgressed, 2) any other relevant public policies which may be rendered ineffective by denying the claim, and 3) the possibility of overkill unless the law is applied with a due sense of proportionality. Applying each of these to this case, the judge concluded: