Supreme Court restates illegality rule as bar to action

Nine judges of the UK Supreme Court have restated the approach that courts should take in deciding whether a claim should be treated as barred because of illegality.

The court, upholding the Court of Appeal, unanimously agreed that a claim by Chantrakant Patel against Salman Mirza should be allowed to go ahead – though the judges gave different strands of reasoning for their decision.

Mr Patel paid £620,000 to Mr Mirza to bet on the movement of RBS shares on the basis of inside information. Mr Mirza expected his contacts to inform him of a Government announcement about the bank. Mr Mirza’s expectation was not fulfilled and the intended betting did not take place. But Mr Mirza did not return the money. He defended the claim on the basis of a complicated explanation which denied any agreement to engage in insider dealing. The judge at first instance rejected this explanation but dismissed the claim on the basis that Mr Patel's account meant that his case was founded on an agreement to contravene the prohibition on insider dealing in s 52 of the Criminal Justice Act 1993.

The Court of Appeal allowed Mr Patel’s appeal on the basis that he had withdrawn from the illegal agreement before it had been carried into effect.

Giving the lead judgment dismissing Mr Mirza's further appeal, Lord Toulson (with whom Lady Hale, Lord Kerr, Lord Wilson and Lord Hodge agreed) rued that the reliance test (Tinsley v Milligan [1994] 1 AC 340), which barred the claimant if they relied on the illegality in order to bring the claim, had been criticised and should no longer be followed.

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. In assessing whether the public interest would be harmed in that way, it was necessary to consider (a) the underlying purpose of the prohibition which had been transgressed and whether that purpose would be enhanced by denial of the claim; (b) any other relevant public policy on which the denial of the claim might have an impact; and (c) whether denial of the claim would be a proportionate response to the illegality. Various factors might be relevant, but the court was not free to decide a case in an undisciplined way. The public interest was best served by a principled and transparent assessment of the considerations identified, rather by than the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate.

In considering whether it would be disproportionate to refuse relief, as a matter of public policy, potentially relevant factors included the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties’ respective culpability.

A claimant such as Mr Patel, who satisfied the ordinary requirements of a claim for unjust enrichment, should not be barred from enforcing his claim by reason only that the money in question was paid for an unlawful purpose. This was not a case where to enforce the claim might be regarded as undermining the integrity of the justice system.

Lord Kerr, concurring, identified a choice of approaches between a rule-based approach and a more flexible approach taking into account the policy considerations said to favour recognising the defence of illegality. A rule-based approach had failed to lead to the predictability it sought. Further, it was questionable whether particular weight should be given to predictability where a claimant and defendant had been parties to an illegal agreement.

Lord Neuberger (the President), Lord Mance, Lord Clarke and Lord Sumption all concluded that there was no inconsistency in the law in permitting a party to an illegal arrangement to recover any sum paid under it, so long as restitution was possible. An order for restitution simply returned the parties to the position in which they would and should have been, had no such illegal arrangement been made.

Lord Neuberger expressed the further view that, in relation to other issues involving illegal arrangements, Lord Toulson's suggested approach provided as reliable and helpful guidance as it was possible to give; but
Lords Mance, Clarke and Sumption each considered that, with the above clarification of the operation of restitution, there was no basis for substituting for the clear-cut principle founded on the need to maintain the integrity of the law, a mix of factors as advocated by Lord Toulson, which would not offer the same coherence or certainty.

Click here to view the judgments.