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When considering an illegality defence, should a court (or tribunal) apply the 'common sense' test of Lord Toulson in Patel v Mirza?

Yes, held the Supreme Court in Stoffel & Co v Grondona, a case arising from a fraudulent mortgage application.

The appellant, a solicitors' firm, had failed to register the Respondent's property transfer. Essentially the appellant argued that they should not be liable as the respondent had obtained a mortgage on the property illegally.

The Supreme Court applied Lord Toulson's test in Patel v Mirza to the facts of the case and dismissed the appeal. The three factors applied, broadly:

(i) people should not profit from their own wrongdoing;

(ii) the law should be coherent and not self-defeating;

(iii) Consider the purpose of the prohibition breached; the public policy impact of denying the claim whilst considering the possibility of 'overkill' if the law isn't applied proportionately.

The illegality defence is not simply about preventing a wrongdoer from profiting by it, but ensuring that claims should not be permitted where they would result in an 'incoherent contradiction damaging to the integrity of the legal system'. In this case, there would be incoherence in the law if the respondent could not recover for her loss as she had an equitable interest in the property, and denying her legal title due to the solicitors' error would dis-incentivise solicitors from acting properly.

In the employment context, this case could well further water down the scope for illegality defences where illegality is likely to be incidental to the claims brought, given the public interest in employment rights being upheld generally.

Thanks to Ed McFarlane of Law at Work for preparing this case summary.