Patel v Mirza

Trinity Term

[2016] UKSC 42

On appeal from: [2014] EWCA Civ 1047

Patel (Respondent) v Mirza (Appellant)

before

Lord Neuberger, President

JUDGMENT GIVEN ON

20 July 2016

Heard on 16 and 17 February 2016

Appellant

Respondent

Professor Graham Virgo

Reya)

& Co)

LORD TOULSON: (with whom Lady Hale, Lord Kerr, Lord Wilson and

Lord Hodge agree)

Introduction

1. “No court will lend its aid to a man who founds his cause of action upon an

immoral or an illegal act.” So spoke Lord Mansfield in Holman v Johnson (1775) 1

Cowp 341, 343, ushering in two centuries and more of case law about the extent and effect of this maxim. He stated that the reason was one of public policy:

“If, from the plaintiff’s own stating or otherwise, the cause of

action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for

where both are equally in fault, potior est conditio defendentis.”

2. Illegality has the potential to provide a defence to civil claims of all sorts,

whether relating to contract, property, tort or unjust enrichment, and in a wide
variety of circumstances.

3. Take the law of contract. A contract may be prohibited by a statute; or it may be entered into for an illegal or immoral purpose, which may be that of one or both parties; or performance according to its terms may involve the commission of an offence; or it may be intended by one or both parties to be performed in a way which will involve the commission of an offence; or an unlawful act may be committed in the course of its performance. The application of the doctrine of illegality to each of these different situations has caused a good deal of uncertainty, complexity and sometimes inconsistency.

1. Holman v Johnson involved a claim for the price of goods which the plaintiff

sold to the defendant in Dunkirk, knowing that the defendant’s purpose was to

smuggle the goods into England. The plaintiff was met with a defence of illegality. The defence failed. Lord Mansfield held that knowledge on the part of the plaintiff

that the defendant intended to smuggle the goods did not affect the plaintiff’s

entitlement to recover the price of the goods, since he was not himself involved in the smuggling. By contrast, in Pearce v Brooks (1866) LR 1 Ex 213 a claim by a coachbuilder against a prostitute for the hire of what was described in the law report

as an “ornamental brougham” was held to be unenforceable for illegality after the

jury found that the defendant hired it for the purpose of prostitution and that the plaintiff knew that this was her purpose. It would seem that the difference between Holman v Johnson and Pearce v Brooks had to do with the type of goods supplied, because in both cases the plaintiff knew that the defendant was entering into the contract for an illegal or immoral purpose. In JM Allan (Merchandising) Ltd v Cloke [1963] 2 QB 340, 348, Lord Denning MR endeavoured to rationalise the authorities

by saying that “active participation debars, but knowledge by itself does not”.

However, the Law Commission commented in its discussion of the subject in its Consultation Paper on Illegal Transactions: the Effect of Illegality on Contracts and Trusts, LCCP 154 (1999) that the case law lacks clear guidance on what amounts to

“participation” in this context.

5. It is unclear to what extent the doctrine of illegality applies to a contract whose object includes something which is in some respect unlawful, or the performance of which will involve some form of illegality, but not in a way which is central to the contract. In St John Shipping Corpn v Joseph Rank Ltd [1957] 1 QB 267, 288, Devlin J said:

“If a contract has as its whole object the doing of the very act

which the statute prohibits, it can be argued that you can hardly make sense of a statute which forbids an act and yet permits to be made a contract to do it; that is a clear implication. But unless you get a clear implication of that sort, I think that a court ought to be very slow to hold that a statute intends to interfere with the rights and remedies given by the ordinary law of contract. Caution in this respect is, I think, especially necessary in these times when so much of commercial life is governed by regulations of one sort or another, which may

easily be broken without wicked intent.”

6. As to illegality in the manner of performance of a contract, Mance LJ observed in Hall v Woolston Hall Leisure Ltd [2001] 1 WLR 225, 246, that the conceptual basis on which a contract not illegal nor prohibited at the time of its formation may become unenforceable due to the manner of its performance is open to debate. In Anderson Ltd v Daniel [1924] 1 KB 138 a claim for the price of goods was held to be unenforceable because the seller had failed to give the buyer an invoice containing details which the seller was required to give him by statute. In the St John Shipping case Devlin J rejected the interpretation that the claim in Anderson Ltd v Daniel failed because in the course of performing a legal contract the plaintiff had done something illegal. The correct interpretation, he said, was that

“the way in which the contract was performed turned it into the sort of contract that was prohibited by the statute”: [1957] 1 QB 267, 284. In the St John Shipping case

the claim was for freight under a charter party. In the course of taking on bunkers the vessel was overloaded and the master thereby committed an offence, for which he was prosecuted and fined £1,200. The extra freight earned by the overloading was £2,295 and to that extent the ship owners stood to profit from their wrong. The cargo owners refused to pay that part of the freight. Devlin J rejected their defence. He held that since the goods had been delivered safely, the ship owners had proved all that they needed. He was not prepared to construe the statute as having the effect of making the contract prohibited. If it had been otherwise, the ship owners would not have been entitled to any freight and would therefore have suffered an additional penalty, much greater than that provided for by Parliament, for conduct which might have been unintentional.

7. In Ashmore, Benson, Pease and Co Ltd v Dawson [1973] 1 WLR 828 the Court of Appeal adopted a different approach. Manufacturers of heavy engineering equipment entered into a contract of carriage with road hauliers. There was nothing illegal in the formation of the contract, but the hauliers overloaded the vehicles which were to transport the load, in breach of road traffic regulations, and one of the

lorries toppled over during the journey as a result of the driver’s negligence. The

manufacturers’ transport manager was present when the goods were loaded and was

aware of the overloading. A claim by the manufacturers for the cost of repair of the damaged load was rejected on grounds of illegality. The Court of Appeal did not perform the same analysis as had Devlin J in the St John Shipping case. They held simply that the manufacturers participated in the illegal performance of the contract and were therefore barred from suing on it.

8.         These and other cases led the Law Commission to describe the effect that

unlawful performance has on the parties’ contractual rights as very unclear.

(Consultative Report on the Illegality Defence, LCCP 189 (2009), para 3.27.)

1. In this case the issue is whether Lord Mansfield’s maxim precludes a party

to a contract tainted by illegality from recovering money paid under the contract from the other party under the law of unjust enrichment (to use the term now generally favoured by scholars for what used previously to be labelled restitution and, before that, quasi-contract). On one side it is argued that the maxim applies as much to such a claim as to a claim in contract, and that the court must give no assistance to a party which has engaged in any form of illegality. On the other side it is argued that such an approach would not advance the public policy which

underlies Lord Mansfield’s maxim, once the underlying policy is properly

understood.
Structure of this judgment

1. With that introduction I turn to the facts of Mr Patel’s claim and how it was

decided in the courts below: see paras 11-16. A central part of their judgments, and

of Mr Mirza’s argument, concerns the doctrine of reliance applied by the House of

Lords in Tinsley v Milligan [1994] 1 AC 340: see paras 17-20. That decision led to the Law Commission conducting a comprehensive review of the law of illegality and making proposals for addressing what the Commission perceived to be its unsatisfactory features: see paras 21-49. Paras 33-39 concern European law and its potential impact on our domestic law. The approach adopted in Australia, Canada and the USA is considered at paras 50-66. Paras 67-81 address developments since

the Law Commission’s report, including three recent decisions of this court which

laid bare a division of opinion about the framework for deciding issues of illegality.

Paragraphs 82-94 contain a section entitled “The law at a crossroads”. This leads to

the critical part of the judgment, which considers the way forward and ends in a summary and proposal for the disposal of this appeal: paras 95-121. The reader who is more interested in what the judgment has to say about the future than the past will no doubt wish to concentrate on the final section.

Mr Patel’s claim

11. The essential facts can be shortly told. Mr Patel transferred sums totalling £620,000 to Mr Mirza for the purpose of betting on the price of RBS shares, using advance insider information which Mr Mirza expected to obtain from RBS contacts regarding an anticipated government announcement which would affect the price of

the shares. Mr Mirza’s expectation of a government announcement proved to be

mistaken, and so the intended betting did not take place, but Mr Mirza failed to repay the money to Mr Patel despite promises to do so. Mr Patel thereupon brought this claim for the recovery of the sums which he had paid. The claim was put on various bases including contract and unjust enrichment. A fuller account of the facts is given in the judgments of the courts below and in the judgment of Lord Neuberger.

12. The agreement between Mr Patel and Mr Mirza amounted to a conspiracy to commit an offence of insider dealing under section 52 of the Criminal Justice Act 1993. In order to establish his claim to the return of his money, it was necessary for Mr Patel to explain the nature of the agreement.

13. A defendant’s enrichment is prima facie unjust if the claimant has enriched the defendant on the basis of a consideration which fails. The consideration may have been a promised counter-performance (whether under a valid contract or not), an event or a state of affairs, which failed to materialise. (See Professor Andrew

Burrows’ A Restatement of the English Law of Unjust Enrichment, 2012, p 86, para

15). In Sharma v Simposh Ltd [2013] Ch 23, at para 24, the Court of Appeal cited

with approval Professor Birks’ summary of the meaning of failure of consideration

in his revised edition of An Introduction to the Law of Restitution (1989), p 223:

“Failure of the consideration for a payment … means that the

state of affairs contemplated as the basis or reason for the payment has failed to materialise or, if it did exist, has failed to

sustain itself.”

For Mr Patel to show that there was a failure of consideration for his payment of moneys to Mr Mirza, he had to show what the consideration was, and that required him to establish the nature of their agreement.

1. Applying the “reliance principle” stated in Tinsley v Milligan [1994] 1 AC

340, the judge held that Mr Patel’s claim to recover the sum paid was unenforceable

because he had to rely on his own illegality to establish it, unless he could have brought himself within the exception of the doctrine known, misleadingly, as locus poenitentiae; and that he could not bring himself within that exception since he had not voluntarily withdrawn from the illegal scheme.

15. In the Court of Appeal the majority agreed with the judge on the reliance issue, but disagreed with him on the application of the locus poenitentiae exception. They held that it was enough for the claim to succeed that the scheme had not been

executed. Gloster LJ agreed with the majority that Mr Patel’s claim should succeed

but she took a different approach to it. She began her thoughtful analysis with a cri

de coeur (para 47):

“As any hapless law student attempting to grapple with the

concept of illegality knows, it is almost impossible to ascertain or articulate principled rules from the authorities relating to the recovery of money or other assets paid or transferred under

illegal contracts.”

In summary, she rejected the view that Tinsley v Milligan was to be taken as laying down a rule of universal application that the defence of ex turpi causa must apply in

all circumstances where a claim involves reliance on the claimant’s own illegality.

It was necessary in her view to consider whether the policy underlying the rule which made the contract illegal would be stultified by allowing the claim. In addressing that issue, relevant factors included the degree of connection between the wrongful conduct and the claim made, and the disproportionality of disallowing the claim to the unlawfulness of the conduct. She identified the mischief at which the offence of insider trading was aimed as market abuse by the exploitation of unpublished price-sensitive information obtained from a privileged source. If no such activity occurred, Gloster LJ said that it was hard to see on what basis public policy should bar the return of money which had previously been intended to be used for that purpose. Mr Patel was not seeking to make a benefit from wrongdoing, and she did not consider that such an outcome would be just and proportionate.

16. On the issue of reliance, Gloster LJ did not consider it necessary for Mr Patel to establish that the intended betting on RBS shares was to be done with the benefit of insider information; it would have been enough for him to establish that the funds had been paid for the purpose of a speculation on the price of the shares which never took place. If, however, she were wrong on that issue, she agreed with the other members of the court on the locus poenitentiae issue.

The reliance principle and Tinsley v Milligan

17. The facts of Tinsley v Milligan are well known. Miss Tinsley and Miss Milligan each contributed to the purchase of a home. It was vested in Miss Tinsley’s

sole name, but on the mutual understanding that they were joint beneficial owners. It was put in her sole name so as to assist Miss Milligan to make false benefit claims from the Department of Social Security (DSS), which she did over a number of years

with Miss Tinsley’s connivance. The money obtained from the DSS helped them to

pay their bills, but it played only a small part in the acquisition of the equity in the house. Eventually Miss Milligan confessed to the DSS what she had done and made terms with it, but the parties fell out. Miss Tinsley gave Miss Milligan notice to quit and brought a claim against her for possession. Miss Milligan counterclaimed for a declaration that the property was held by Miss Tinsley on trust for the parties in equal shares.

18. The Court of Appeal by a majority decided in favour of Miss Milligan by applying the test whether it would be “an affront to the public conscience” to grant the relief claimed by her. The House of Lords unanimously rejected the “public

conscience” test, but by a three to two majority upheld the Court of Appeal’s

decision. The leading speech was given by Lord Browne-Wilkinson. His starting point was that title to property can pass under an unlawful transaction; but he held that the court would not assist an owner to recover the property if he had to rely on his own illegality to prove his title. The Court of Appeal had recognised that distinction in Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 in a case concerning personal property, referred to in more detail at para 111 below, and Lord Browne-Wilkinson held that the same applied to real property in which the claimant had a beneficial interest. Lord Browne-Wilkinson held that it was enough for Miss Milligan to show that she had contributed to the purchase of the property and that there was a common understanding that the parties were joint owners. She did not

have to explain why the property had been put into Miss Tinsley’s sole name. If the

relationship between them had been that of daughter and mother, and each had

contributed to the purchase of a property in the daughter’s name, the result would

have been different, because there would then have been a presumption of

advancement in the daughter’s favour. The mother would in those circumstances

have had to rely on the illegal nature of the transaction to rebut the presumption, and her claim would therefore have been defeated by the doctrine of illegality. Lord Browne-Wilkinson acknowledged the procedural nature of this approach at [1994] 1 AC 340, 374:

“The effect of illegality is not substantive but procedural. The

question therefore is, ‘In what circumstances will equity refuse

to enforce equitable rights which undoubtedly exist.’”

19.       Lord Goff, in the minority, held at p 356 that if A puts property in the name

of B intending to conceal A’s interest for a fraudulent or illegal purpose, neither law

nor equity will allow A to recover the property, and equity will not assist him in

asserting an equitable interest in it. It made no difference whether A’s case could be

advanced without reference to the underlying purpose. He recognised, at p 363, the resulting hardship and said that he did not disguise his unhappiness at the result, but he did not regard it as appropriate for the courts to introduce a discretion. He considered, at p 364, that reform should be instituted only by the legislature, after a full inquiry by the Law Commission, which would embrace not only the advantages and disadvantages of the present system, but also the likely advantages and disadvantages of a discretionary system. He added that he would be more than happy if a new system could be evolved which was both satisfactory in its effect and capable of avoiding the kind of result which in his judgment flowed from the established rules in cases such as Tinsley v Milligan.

20. Tinsley v Milligan has been the subject of much criticism in this and other jurisdictions, for its reasoning rather than its result, but this is the first time in this jurisdiction that its reasoning has been directly called into question. Two decades have since passed since the decision and it is right to trace the developments which have occurred in that period.

Law Commission

21. After the decision in Tinsley v Milligan the Law Commission included the illegality defence in its Sixth Programme of Law Reform (1995) (Law Com 234). It undertook a full inquiry of the kind which Lord Goff envisaged. It published its first consultation paper, Illegal Transactions: The Effect of Illegality on Contracts and Trusts (LCCP 154), in 1999. The responses, and developments in the case law, led the Commission to re-consider the problems and its proposals for reform. In 2009 it issued a further public consultation paper, The Illegality Defence: A Consultative Report (LCCP 189). In 2010 it issued its final confirmatory report, The Illegality Defence (Law Com 320). In relation to trust law, it proposed statutory reform and it produced a draft bill. In relation to the law of contract and unjust enrichment, the Commission considered that there were serious problems but that they were capable of being, and could best be, tackled by the process of judicial development. In 2012

the government announced that it did not intend to take forward the Commission’s

recommendation for statutory reform of the law relating to trusts, because it did not consider reform of this area of the law to be a pressing priority for the government.

22. From its study of the case law and academic writing, the Commission identified the principal policy rationales for the illegality doctrine as 1) furthering

the purpose of the rule infringed by the claimant’s behaviour, 2) consistency, 3) prevention of profit from the claimant’s wrongdoing, 4) deterrence and 5)

maintaining the integrity of the legal system. It observed that these rationales were not mutually exclusive but overlapped to a greater or lesser degree. A sixth possible rationale, punishment, was controversial. The large majority of consultees considered that punishment was a matter for the criminal courts (to which one might

add regulators) and should not be invoked in determining parties’ civil disputes.

(LCCP 189, paras 2.5-2.31.)

23. The conclusion that the illegality defence presented serious problems represented the overwhelming view of academic commentators and consultees generally. The Commission analysed the problems under four heads - complexity, uncertainty, arbitrariness and lack of transparency. It did not suggest that the problems resulted generally in unsatisfactory outcomes, but it was critical of the way in which they were reached. It said that, on the whole, the case law illustrated the judges threading a path through the various rules and exceptions in order to reach outcomes which for the most part would be regarded as fair between the parties involved, although there were instances of results which the Commission considered to be unduly harsh, for example in unlawful employment cases. Generally, the courts managed to avoid unnecessarily harsh decisions either by creating exceptions to the general rules or by straining the application of the relevant rules on the particular facts so as to meet the justice of the case. Seldom was there an open discussion in the judgments of the considerations which led the court to its decision. (LCCP 189, paras 3.50-3.60.)

24. The Commission considered that Tinsley v Milligan, and cases following it, exemplified the problems of arbitrariness, uncertainty and potential for injustice. The rule applied in that case was arbitrary in that the question whether the illegality affected the recognition or enforcement of the trust depended not on the merits of the parties, nor the policies underlying the illegality defence, but on a procedural issue. Moreover the effect of applying the reliance principle in cases involving the presumption of advancement gave that presumption an overriding importance which it was never intended to have. It led to uncertainty because there was much confusion

over what exactly amounted to “reliance”, particularly when the claimant was

seeking to establish an equitable interest under a constructive trust. It had the potential to force the court into unjust decisions because, by focusing on procedural matters, the reliance principle precluded the court from paying attention to the policies that justified the existence of the defence, or taking into account such matters as the seriousness of the illegality and the value of the interest at stake. (Law Com 320, paras 2.13-2.15.)

25. The Commission examined the law in other jurisdictions, European law and European human rights law. In its first consultation paper in 1999 the Commission’s

proposed recommendation was to introduce statutory reform on the lines of the New Zealand model. The New Zealand Illegal Contracts Act 1970, section 7, provides

that the court may grant to any party to an illegal contract “such relief by way of

restitution, compensation, variation of the contract, validation of the contract in whole or part or for any particular purpose, or otherwise howsoever as the court in

its discretion thinks just”. In its 2009 consultative report the Commission noted that

the operation of this provision had been widely heralded as a success; that it had not created the deluge of litigation that was feared by some commentators; and that this model of reform, with slight variations, had been recommended by the law reform bodies of several other Commonwealth jurisdictions (LCCP 189, para 3.81). Nevertheless, in its 2009 consultative report and in its final report the Commission did not recommend statutory change (except in relation to trusts) for a combination of reasons. Although the proposal for statutory reform in the 1999 consultation paper had been supported by a majority of consultees, a minority had made critical comments which persuaded the Commission that judicial reform was a better way forward, and the Commission found difficulties in drafting a satisfactory statutory model. Most importantly, developments in the case law and the critical responses of consultees led the Commission to conclude that it was open to the courts to develop the law in ways that would render it considerably clearer, more certain and less arbitrary.

26. Among domestic authorities, the Commission referred to the decisions of the

House of Lords in Bakewell Management Ltd v Brandwood [2004] 2 AC 519 and
Gray v Thames Trains Ltd [2009] AC 1339.

27. Bakewell bought an area of land registered as a common. Owners of neighbouring properties had for years driven across the land to reach the public highway. Bakewell brought an action to prevent them from continuing to do so. The defendants claimed to have acquired rights of way by prescription, but by driving

across the land without the owner’s consent they had committed offences under the

Law of Property Act 1925. So to establish their property rights the defendants had to rely on conduct which was criminal. This, Bakewell submitted, they were not entitled to do. Its argument was rejected. The House of Lords held that public policy did not prevent the defendants from acquiring an easement where the landowner could have made a grant which would have removed the criminality of the user. Lord Walker, with whom Lord Bingham and Lady Hale agreed, said at para 60:

“I do not see this as reintroducing the ‘public conscience’ test

which this House disapproved in Tinsley v Milligan [1994] 1 AC 340. It is merely a recognition that the maxim ex turpi causa must be applied as an instrument of public policy, and not in circumstances where it does not serve any public interest: see for instance National Coal Board v England [1954] AC 403,

419.”

28. Gray v Thames Trains Ltd was a case in tort. Mr Gray developed post- traumatic stress disorder through being involved in a major railway accident, which caused him to suffer depression and a substantial personality change. He was previously of unblemished character but two years after the accident, and while under medical treatment, he pursued and stabbed to death a man who had stepped in front of his car. His plea of guilty to manslaughter on the ground of diminished responsibility was accepted and he was ordered to be detained in a mental hospital. He sued the train operator for negligence and liability was admitted. His claim for damages included compensation for his loss of liberty, damage to reputation and loss of earnings during his detention. The House of Lords held that public policy precluded him from recovering damages under those heads. The leading opinion was given by Lord Hoffmann, with whose reasoning Lord Phillips (subject to certain additional observations) and Lord Scott agreed.

29. Lord Hoffmann observed, at paras 30-32, that the maxim ex turpi causa expresses not so much a principle but a policy based on a group of reasons, which vary in different situations. The courts had therefore evolved varying rules to deal with different situations. Because questions of fairness and policy were different in different cases and led to different rules, one could not simply extrapolate rules applicable to one situation and apply them to another. It had to be assumed that the

sentence was what the criminal court regarded as appropriate to reflect Mr Gray’s

personal responsibility for the crime he had committed. It was therefore right to apply the rule that he could not recover damages for the consequences of the sentence, reflecting an underlying policy based on the inconsistency of requiring someone to be compensated for a sentence imposed because of his personal responsibility for a criminal act. It was also to right to apply a wider rule that you cannot recover damage which is the consequence of your own criminal act, reflecting the idea that it is offensive to public notions of the fair distribution of resources that a claimant should be compensated (usually out of public funds) for the consequences of his own criminal conduct.

30. Lord Phillips said, at para 15, that he would reserve judgment as to whether the ex turpi causa maxim should apply if it were clear from the judge’s sentencing remarks that the claimant’s offending behaviour played no part in the decision to

impose a hospital order, or, where the claimant’s criminal act demonstrated a need

to detain him both for his own treatment and for the protection of the public, if the judge made it clear that he did not believe that the claimant should bear significant

personal responsibility for his crime. Lord Brown agreed with Lord Phillips’

reservations.

31.       Lord Rodger said, at paras 78-83, that the civil court must assume that the

order made by the criminal court was appropriate to reflect Mr Gray’s personal

responsibility for the crime he had committed. The right approach on the facts of the

case was that the court must “cleave to the same policy as the criminal court”.

However, he considered that the approach might well be different if the offence of which he had been convicted was trivial but revealed that he was suffering from a

mental disorder, due to the defendant’s fault, which made a hospital order

appropriate.

32. The Law Commission drew from the various judgments a readiness on the part of the judges to examine the policy reasons which justified the application of the illegality defence and to explain why those policies applied to the facts of the case.

33. The Commission also considered the question how far illegal conduct may deprive claimants of rights under European Union law (LCCP 189, paras 3.82-3.89). Some contractual rights are now derived from EC directives. For example, the right to equal pay granted by the Equal Pay Directive (directive 75/117/EEC) is implied as a term into the employment contract. In other cases, such as the Sale of Consumer Goods Directive (directive 99/44/EC), EU law provides remedies that depend on the existence of a contract. The issue may therefore arise whether a national illegality doctrine which prevents a party from enforcing a contract is compatible with the EU law from which the contractual right arose.

34. In the 1990s various breweries let pubs to tenants on terms containing beer ties. These were found to be unenforceable because they breached article 81 (previously article 85) of the European Community Treaty. The issue then arose whether the fact that the tenant had been party to an illegal contract precluded him from claiming damages from the brewery. In Gibbs Mew plc v Gemmell [1999] 1

EGLR 43, 49 the Court of Appeal held that this was so, because “English law does

not allow a party to an illegal agreement to claim damages from the other party for

loss caused to him by being a party to the illegal agreement” (per Peter Gibson LJ).

35. In Courage Ltd v Crehan (Case C-453/99) [2002] QB 507, the Court of Appeal referred the question to the European Court of Justice, which took a different view. Advocate General Mischo expressed the view, at paras 38-43, that although the individuals protected by article 81 were primarily third parties (consumers and competitors), a rule which automatically excluded a party to the agreement from the

protection of article 81 was “too formalistic and does not take account of the

particular facts of individual cases”; and that a party which was too small to resist

the economic pressure imposed on it by the more powerful undertaking had more in common with a third party than with the author of the agreement. (The potential parallel with the relationship in some cases between an employer and an employee is obvious.)

36. The court agreed with the Advocate General. It held that where a contract was liable to restrict or distort competition, community law did not preclude a rule of national law from barring a contracting party from relying on his own illegal actions, if it was established that that party bore significant responsibility for the distortion of competition. In that context the matters to be taken into account by the national court included the respective bargaining power and the conduct of the parties to the agreement in the economic and legal context in which they found themselves. It was for the national court to ascertain whether the party who claimed to have suffered loss through concluding such a contract was in a markedly weaker position than the other party, such as seriously to compromise or even eliminate his freedom to negotiate the terms of the contract. An absolute bar to an action being brought by a party to a contract which violated the competition rules would not advance the full effectiveness of the prohibition contained in the Treaty, but rather the reverse.

1. The effect of the court’s decision was not to treat article 81 as intended for

the protection of parties who infringed it, as a class, but to treat it as a matter for the national court to determine whether on the facts of a particular case a party should be regarded as sinned against rather than sinning, and therefore entitled to damages for the consequences of the offending provision of the agreement.

38. The potential impact of European law was referred to, obiter, by Mance LJ in Hall v Woolston Hall Leisure Ltd [2001] 1 WLR 225. The claimant was dismissed from her employment as a chef when her employer became aware that she was pregnant. She brought a claim in the industrial tribunal for compensation under the Sex Discrimination Act 1975. The Act pre-dated the Equal Treatment Directive (76/207/EEC) but gave effect to its provisions. Mrs Hall succeeded on liability, but it emerged during the remedies hearing that her employer was defrauding the Inland Revenue by falsely pretending that her net salary of £250 per week was her gross salary. She was aware of the fraud, because she was given pay slips which showed her gross pay as £250, deductions of £63.35 and net pay of £186.65. She knew that this was untrue, but when she raised the matter with her employer she was told that this was the way in which they did business. The tribunal held that the contract was tainted by illegality and that she had no right to compensation under the Act. Its decision was upheld by the appeal tribunal but reversed by the Court of Appeal,

which held that her acquiescence in the employer’s conduct was not causally linked

with her sex discrimination claim and that public policy did not preclude her from enforcing her statutory claim. Mance LJ observed additionally that the Act should as far as possible be read as providing the same scope of protection as the Directive.

Mrs Hall’s position fell within the wording and purpose of the Directive despite the

tribunal’s finding of her knowledge of the fraud on the Inland Revenue.

39. That case did not involve the direct enforcement of a contractual obligation, but in cases where European Union rights depend on the existence of a contract (for example, in the consumer context), the Law Commission doubted whether the Court of Justice would be content with a system of domestic illegality rules which were formalistic and did not allow room for a proportionate balancing exercise to be carried out on the basis of clear principles of public policy (LCCP 189, para 3.89).

40. Where the terms or performance of a contract involve breach of a legislative provision, it is rare (as the Commission noted) for the statute to state expressly what are to be the consequences in terms of its enforceability. (For an example of an express statutory unenforceability provision, see section 127(3) of the Consumer Credit Act 1974, which arose for consideration in Wilson v First County Trust Ltd (No 2) [2004] 1 AC 816.) It is to be noted that in the present case, as Gloster LJ

pointed out, section 63(2) of the Criminal Justice Act 1993 stipulated that “No contract shall be void or unenforceable by reason only of section 52”, presumably

because of a concern that if a contract which involved insider dealing contrary to section 52 were void, there could be undesirable consequences for parties down the line. The question whether a statute has the implied effect of nullifying any contract which infringes it requires a purposive construction of the statute, as illustrated by the decision of the Court of Appeal in Hughes v Asset Managers plc [1995] 3 All ER 669 which the Commission commended.

41. If a contract involving prohibited conduct is not void as a matter of statutory construction, the Commission recommended that in deciding whether a claim arising from it should be disallowed by reason of illegality, the court should have regard to the policies that underlie the doctrine. It stressed that it was not advocating a general discretion, but a principled evaluation recognising (as Lord Walker put it in the Bakewell case, at para 60) that the maxim ex turpi causa must be applied as an instrument of public policy and not in circumstances where it would not serve the public interest. The Commission identified a number of potentially relevant factors: most importantly, whether allowing the claim would undermine the purpose of the rule which made the relevant conduct unlawful, and, linked to that question, the causal connection between the illegality and the claim (including how central the illegality was to the contract), the gravity of the conduct of the respective parties and the proportionality of denying the claim. (LCCP 189, para 3.142) The Commission recommended a broadly similar approach to the maxim ex turpi causa in cases of unjust enrichment, tort and enforcement of property rights.

42. The Commission considered that it was within the power of the courts to develop the law in that direction and that there were signs of willingness to do so. The underlying principles were already to be found in the case law and courts were in practice influenced by them in reaching their decisions, in some cases more openly than in others.

43. In relation to the application of the illegality defence to claims of unjust enrichment, the Commission carried out a detailed review in its 1999 consultation paper (LCCP 154, paras 2.32-2.56) and a further review in its 2009 consultative report (LCCP 189, paras 4.1-4.62). An unjust enrichment claim may simply be to unwind the transaction by repayment of moneys paid and restoration of the parties to their original position, or it may take the form of a claim for recompense for benefits provided by one party to the other (a quantum meruit claim).

44. The Commission observed that one might have expected to find that illegality has little role to play as a defence to a claim for unjust enrichment, since the claimant is not seeking to execute the contract. However, after a more liberal start, the courts adopted a much tougher stance, applying the ex turpi causa maxim to such claims unless the claimant could bring himself within certain recognised exceptions. These were a) duress, b) possibly ignorance of a fact or law that rendered the contract illegal, c) possibly membership of a vulnerable class protected by statute and d) locus poenitentiae. The locus poenitentiae exception has given rise to difficult and conflicting case law, which was meticulously analysed in the judgments of the courts below in the present case with different conclusions. I do not propose to repeat their analysis because I do not consider it necessary to do so. The topic has only acquired importance because of the strictness of the basic rule which the courts have applied.

45. Not every case, however, has received such strict treatment. In Mohamed v Alaga & Co [2000] 1 WLR 1815 the Court of Appeal took a more flexible approach. The plaintiff, a Somali translator and interpreter, sued the defendant solicitors for breach of a contract by which he was to introduce Somali refugees to the firm, and assist in the preparation and presentation of their asylum claims, in consideration for a half share of the legal aid fees received by the firm. Alternatively, he claimed payment for his professional services as a translator and interpreter on a quantum meruit. His claim was struck out on the ground that the alleged fee sharing contract contravened rules which had statutory force under the Solicitors Act 1974 and that he was therefore precluded by the doctrine of illegality from claiming payment for services provided under the contract. The Court of Appeal restored the claim for payment on a quantum meruit.

46. Lord Bingham CJ (with whom the other members of the court agreed) differentiated between the claims for breach of contract and quantum meruit. As to the former, he held that the purpose of the prohibition in the statutory rules was the protection of the public, and that it would defeat the purpose of the prohibition if a

non-solicitor party to the agreement could invoke the court’s aid to enforce the

agreement. As to the quantum meruit claim, Lord Bingham acknowledged that on one view of the case the plaintiff was seeking to recover part of the consideration payable under an unenforceable contract. But he preferred to view it as a claim for a reasonable reward for professional services rendered. He considered it relevant (obviously to the question of the public interest in permitting or disallowing the claim) that the parties were not equal in blameworthiness. The firm could be assumed to know the rules and the likelihood was that it had acted in knowing disregard of them. By contrast, Lord Bingham had no difficulty in accepting that the plaintiff was unaware of any reason why the firm should not make the agreement, which was a common type of agreement in other commercial fields.

47. Mr Matthew Collings QC for Mr Mirza submitted in this case that Mohamed v Alaga & Co was a one off case and either represents an exception, peculiar to its particular facts, to the general rule that a party is not entitled to payment for services rendered under an illegal contract or was wrongly decided.

48. The Commission considered that the policies which underlie the illegality defence are less likely to come into play where parties are attempting to undo, rather than carry out, an illegal contract. As in the case of contractual enforcement, it recommended that a decision on disallowing a particular restitutionary claim for illegality should be based openly on the policies underlying the defence, taking into account the same sort of factors (such as the relative conduct of the parties and the proportionality of denying the claim).

49.       I have said that the Commission examined the law of other jurisdictions.

Before considering developments in domestic law since the Commission’s final

report, it is convenient at this stage to refer to the law in Australia, Canada and the

USA.

Australia

50. In Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538, the High Court of Australia considered essentially the same issues as in Tinsley v Milligan, which it declined to follow. As the widow of a mariner who had served in World War 1, Mrs Nelson was eligible under the Defence Service Homes Act 1918 to buy a house with the benefit of a subsidy from the Commonwealth of Australia, provided that she did not own or have a financial benefit in another house. She provided the money to buy a house in Bent Street, Sydney, but the transfer was taken in the names of her son and daughter. Their common intention was that Mrs Nelson should be the beneficial owner of the house. The reason for putting the Bent Street property in the names of her children was to enable her to buy another property with the benefit of a subsidy under the Act. This she did. One year later the Bent Street property was sold. By this time Mrs Nelson and her daughter had fallen out, and a dispute arose as to who was entitled to the sale proceeds. Mrs Nelson and her son brought proceedings against the daughter for a declaration that the proceeds were held by the son and daughter in trust for their mother. The daughter opposed the claim and sought a declaration that she had a beneficial interest. Under Tinsley v Milligan the daughter would have succeeded, because the illegal purpose of the parties in arranging for the property to be transferred into the names of the children would have prevented Mrs Nelson from rebutting the presumption of advancement in their favour.

51. The High Court unanimously rejected that approach. The majority (Deane, McHugh and Gummow JJ) held that the court should use its equitable jurisdiction to grant the declaration sought by Mrs Nelson, with the proviso that it should be subject to terms designed to ensure that the benefit wrongly obtained on the purchase of the second property should be repaid to the Commonwealth. The minority (Dawson and Toohey JJ) would have made the declaration without any such proviso, since the Commonwealth was not a party to the proceedings and should in their view be left to decide what action, if any, it wished to take.

52.       Toohey J said at pp 595-597:

“Once we are in the realm of public policy we are in a rather

shadowy world. It is perhaps the more shadowy here because Mrs Nelson is not asking the court to enforce a contract but rather to give effect to the resulting trust which would ordinarily arise once the presumption of advancement has been rebutted.

…

To allow the result in such a situation to be determined by the procedural aspects of a claim for relief is at odds with the broad considerations necessarily involved in questions of public policy.

…

Although the public policy in discouraging unlawful acts and refusing them judicial approval is important, it is not the only relevant policy consideration. There is also the consideration of preventing injustice and the enrichment of one party at the expense of the other (St John Shipping Corpn v Joseph Rank

Ltd [1957] 1 QB 267, 288-289, per Devlin J).”

McHugh J, at p 609, described as unsatisfactory a doctrine of illegality that depended upon the state of the pleadings. He said at p 611:

“The doctrine of illegality expounded in Holman was

formulated in a society that was vastly different from that which exists today. It was a society that was much less regulated. With the rapid expansion of regulation, it is undeniable that the legal environment in which the doctrine of illegality operates has changed. The underlying policy of Holman is still valid today - the courts must not condone or assist a breach of statute, nor must they help to frustrate the

operation of a statute … However, the Holman rule, stated in the bald dictum: ‘No court will lend its aid to a man who founds

his cause of action upon an immoral or an illegal act’ is too

extreme and inflexible to represent sound legal policy in the late twentieth century even when account is taken of the

recognised exceptions to this dictum.”

53. McHugh J went on to suggest that except in a case where a statute made rights arising out of a particular type of transaction unenforceable in all circumstances, a court should not refuse to enforce legal or equitable rights on the ground of illegality if to do so would be disproportionate to the seriousness of the conduct or if it would not further the purpose of the statute. He said at 612-613:

“It is not in accord with contemporaneous notions of justice

that the penalty for breaching a law or frustrating its policy should be disproportionate to the seriousness of the breach. The seriousness of the illegality must be judged by reference to the statute whose terms or policy is contravened. It cannot be assessed in a vacuum. The statute must always be the reference

point for determining the seriousness of the illegality.”

McHugh J’s approach was cited with approval by a majority of the High Court in

Fitzgerald v F J Leonhardt Pty Ltd [1997] HCA 17; (1997) 189 CLR 215.

54. Noting the criminal sanctions which were available under the Act (imprisonment for up to two years) and the ability of the Commonwealth to recover any payments wrongly obtained by Mrs Nelson, the court did not consider that it should impose a further sanction by refusing to enforce her equitable rights, particularly when such a refusal would result in a penalty out of all proportion to the seriousness of her conduct (pp 570-571 per Deane and Gummow JJ, 590-591 per Toohey J and 616-617 per McHugh J).

Canada

55. In Hall v Hebert [1993] 2 SCR 159 the owner of a car allowed a passenger to drive it in the knowledge that he had drunk a large amount of beer during the course of the evening. The car overturned and the driver suffered head injuries. The

Supreme Court held that the driver’s claim against the owner in negligence was not

barred by illegality, but that there should be a reduction in damages for contributory
negligence. The judgment of the majority was given by McLachlin J.

56.       She held that the courts should be allowed to bar recovery in tort on the

ground of the plaintiff’s illegal or immoral conduct only in very limited

circumstances. The basis of the power lay in the duty of the courts to preserve the integrity of the legal system and it was exercisable only where that concern was in issue. It was in issue where a damage award in a civil suit would allow a person to profit from illegal or wrongful conduct, or would permit an evasion or rebate of a penalty prescribed by the criminal law. In such instances the law refused to give by its right hand what it took away by its left hand.

57. McLachlin J emphasised the importance of defining what was meant by profit when speaking of the plaintiff profiting from his or her own wrong. It meant profit in the narrow sense of a direct pecuniary award for an act of wrongdoing. Compensation for something other than wrongdoing, such as for personal injury,

would not amount to profit in that sense. Compensation for the plaintiff’s injuries

arose not from the illegal character of his conduct, but from the damage caused to him by the negligent act of the owner in letting him drive. It represented only the value of, or substitute for, the injuries he had suffered by the fault of another. He would get nothing for being engaged in illegal conduct. McLachlin J accepted that there might be cases where a claim should be barred from tort recovery which did not fall within the category of profit, in order to prevent stultification of the criminal law or the evasion of a criminal penalty, but the underlying principle was that the use of the power to deny recovery on the ground of illegality was justified only where the claim would introduce inconsistency into the fabric of the law.

58. In Still v Minister of National Revenue (1997) 154 DLR (4th) 229 an American citizen lawfully entered Canada and applied for permanent residence status. Pending consideration of her application, acting in good faith, she accepted employment but did so without obtaining a work permit as required by the Immigration Act 1985. She was subsequently laid off and submitted a claim for benefits under the Unemployment Insurance Act 1985. Her claim was rejected on the ground that the employment on which she relied in order to found her claim was prohibited under the Immigration Act. She appealed successfully to the Federal Court of Appeal.

59. The judgment of the court was given by Robertson JA. The court accepted that her employment without a work permit was expressly prohibited by the

Immigration Act. It acknowledged that under what it described as the “classical

model” of the illegality doctrine, the fact that the applicant acted in good faith was

irrelevant; her employment under an illegal contract could not constitute insurable employment for the purposes of the Unemployment Insurance Act. However, it said at para 24 that in recognition of the rigidity and oft-times unfair application of the classical illegality doctrine, the courts had developed several ways in which a party may be relieved of the consequences of illegality where appropriate. The difficulty

with those exceptions arose from “the legal manoeuvring that must take place to

arrive at what is considered a just result”. The court examined, at paras 25-36, a line

of authorities of the Ontario courts which showed the courts turning from the classical model towards a modern approach. It expressed the view, at para 42, that the classical model had lost its persuasive force, and was now honoured more in the breach than in its observance through the proliferation of so-called judicial

“exceptions” to the rule. The new approach involved an examination of the purpose

underlying the relevant prohibition, and its rationale was explained by McLachlin J
in Hall v Hebert.

1. After citing McLachlin J’s judgment in Hall v Hebert, the court said at para

“As the doctrine of illegality rests on the understanding that it

would be contrary to public policy to allow a person to maintain an action on a contract prohibited by statute, then it is only appropriate to identify those policy considerations which

outweigh the applicant’s prima facie right to unemployment

insurance benefits. … While on the one hand we have to

consider the policy behind the legislation being violated, the Immigration Act, we must also consider the policy behind the legislation which gives rise to the benefits that have been

denied, the Unemployment Insurance Act.”

61. The court proceeded to consider the objectives underlying each of the two Acts. As to the policy consideration that a person should not benefit from his or her own wrong, the court regarded it as a critically significant fact that she had not deliberately broken the law but acted in good faith, and it noted that during her employment both the applicant and her employer had contributed to the unemployment insurance fund. Taking account of the objectives underlying each Act and the facts of the case, it concluded that denial of the application was not required in order to preserve the integrity of the legal system and would be disproportionate to the breach involved in failing to have obtained a work permit.

USA

1. The American Law Institute’s Restatement (2nd) of Contracts (1981) states

at para 178(1):

“A promise or other term of an agreement is unenforceable on

grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the

enforcement in such terms.”

63. Nizamuddowlah v Bengal Cabaret Inc (1977) 399 NYS 2d 854 provides a practical example in the case of a devious and oppressive employer. The central defendant (the effective owner of the company named as first defendant) met the

plaintiff in Bangladesh and offered to employ him at the defendant’s restaurant in

New York City. The plaintiff was to work for an initial period of three months

without payment, after which he was to be paid a waiter’s salary. The plaintiff accepted the offer. The defendant arranged for the plaintiff’s travel and entry to the USA on a visitor’s visa, and he also promised to obtain a resident visa or “green

card” for him. The plaintiff worked for the defendant for 20 months, but he received

no payment despite several demands. He also made repeated inquiries about his green card, but the defendant persistently stalled him. The plaintiff eventually managed to obtain a green card through his own efforts and sued the defendant to recover wages under the Minimum Wage Act. The defendant sought the dismissal of the action on the ground that the contract was illegal.

64. By working in the USA before he obtained a green card the plaintiff violated the immigration laws, and the judge was not prepared to accept his plea of ignorance,

since he was warned in his application form for a visitor’s visa that gainful

employment would constitute a breach of his visa conditions. The judge concluded

that he had willingly fallen in with the defendant’s proposal because of his strong

desire to emigrate to the USA. The judge identified the public harm liable to result from the type of conduct exposed by the case: employment of aliens such as the plaintiff in times of high unemployment deprived citizens and legally admitted aliens of jobs; their employment on substandard terms could depress wages and working conditions; and it could diminish the effectiveness of labour unions.

65. However, the judge found that the defendant was the main perpetrator, intent on evading and taking advantage of the immigration laws. He said that knowing about the immigration laws, and aware that a party to an illegal contract could not ask a court to help him to carry out his illegal objective, the defendant ran his enterprise without fairly compensating his employees. The judge concluded that the equitable course was that the plaintiff should be paid on the basis of unjust enrichment, and he calculated the amount of the award by reference to the statutory minimum wage.

66. The New York Supreme Court, Appellate Division, upheld the judgment at

(1979) 415 NYS 2d 685. Observing that the Minimum Wage Act contained no
indication of a legislative intent to protect only American workers, the court said:

“Even illegal aliens have the right to pursue civil suits in our

courts, and the practice of hiring such aliens, using their services and disclaiming any obligation to pay wages because the contract is illegal is to be condemned. The law provides penalties for aliens who obtain employment in breach of their visa obligations, but deprivation of compensation for labor is not warranted by any public policy consideration involving the

immigration statutes.”

Developments since the report of the Law Commission

67. The Court of Appeal supported and followed the approach of the Law Commission in Les Laboratoires Servier v Apotex Inc [2012] EWCA Civ 593, [2013] Bus LR 80 and ParkingEye Ltd v Somerfield Stores Ltd [2013] QB 840. In the latter case ParkingEye contracted to provide a system of automated monitoring

of car parking at Somerfield’s supermarkets. The system recorded vehicle

registration numbers and customers would be charged for staying beyond a set

period. The contract was to be for an initial term of 15 months and ParkingEye’s

remuneration was to come from the charges levied over that period. Overstayers were to be sent letters of demand in a standard form agreed between the parties in advance of the conclusion of the contract. If the first demand did not result in payment, it was to be followed by a series of further demands in stronger terms. The third pro forma letter was deceptive because it falsely represented that ParkingEye had the authority and intention to issue proceedings against the customer if payment was not made within a stipulated period. Six months into the contract Somerfield repudiated it for reasons unconnected with the letters of demand. By that time the

monitoring system had been installed at 17 of its stores. ParkingEye’s claim for

damages was met with a defence which included a plea of illegality based on the
intended use of deception in the performance of the contract.

68. The trial judge rejected the defence and awarded ParkingEye damages of £350,000 for loss of profits caused by Somerfield’s repudiatory breach. The Court

of Appeal upheld his decision. The legally objectionable letter was only a small part of the intended performance of the contract and was not essential to it. The judge had found that ParkingEye did not appreciate that the letter would be legally objectionable when the parties agreed on its form, and that, if someone had pointed the matter out, the letter would have been changed. When its objectionable nature occurred to Somerfield, the proper and reasonable course would have been for Somerfield to raise the matter with ParkingEye and continue to honour the contract, so long as ParkingEye made the necessary alteration and performed the contract in

proposition that the House of Lords unanimously rejected in Tinsley v Milligan. We are entitled to change the law, but if we do that we should do it openly, acknowledging what we are doing and assessing the consequences, including the indirect consequences, so far as we can foresee them. In my opinion, it would be wrong to transform the policy factors which have gone into the development of the current rules, into factors influencing an essentially discretionary decision about whether those rules should be applied. Neither party contended for such a result, and their reticence was in my view entirely justified. It would be unprincipled and uncertain, and far from confining the ambit of the illegality principle to its essential minimum, it could only broaden it beyond its proper limits. Perhaps most important of all, justice can be achieved without taking this revolutionary step.

1. The reason why the application of the “range of factors” test on a case by

case basis is unprincipled is that it loses sight of the reason why legal rights can ever be defeated on account of their illegal factual basis. It is I think right to make four points:

i) Whatever rationale one adopts for the illegality principle, it is manifestly designed to vindicate the public interest as against the interests and legal rights of the parties. That is why the judge is required to take the point of his own motion even if the parties have not raised it, as the deputy judge did in this case. The operation of the principle cannot therefore depend on an evaluation of the equities as between the parties or the proportionality of its impact upon the claimant.

ii) The “range of factors” test largely devalues the principle of

consistency, by relegating it to the status of one of a number of evaluative factors, entitled to no more weight than the judge chooses to give it in the particular case. The criminal law, which is in almost every case the source of the relevant illegality, is a critical source of public policy. It is the prime

example of the “positive law” (Lord Mansfield’s phrase) which has always

moulded the law of illegality in civil proceedings. The courts cannot consistently or coherently recognise legal consequences for an act which the law treats as punishable. Gloster LJ, for example, thought it relevant that there was no finding that Mr Patel knew that insider dealing was illegal. Yet that would have been of no relevance in a criminal court, and it is difficult to see

why it should be any more relevant in a civil one. Professor Burrows’ factor

(f) (whether denying enforcement will ensure that the party seeking enforcement does not profit by the conduct) is surely fundamental to the principle of consistency, and not just a factor to be weighed up against others.

iii) The main justification for the “range of factors” test has always been

that it enables the court to avoid inflicting loss on the claimant disproportionate to the measure of his badness. This was the instinct that led the Court of Appeal in Euro-Diam Ltd v Bathurst [1990] 1 QB 1 to propose that the illegality principle should be applied only where the alternative would be shocking to the public conscience. That concept was rejected in Tinsley v Milligan. Since then, it has been suggested that there may be cases at the opposite end of the spectrum of gravity, in which the offence was too trivial to engage the illegality principle: see Gray v Thames Trains Ltd, at para 83 (Lord Rodger). One would expect most if not all such offences to be covered by the exception for cases in which the application of the illegality principle would be inconsistent with the legal rule which makes the act illegal. But, extremes apart, it is difficult to reconcile with any kind of principle the notion that there may be degrees of illegality, as Professor

Burrows’ factor (a) seems to envisage. If the application of the illegality

principle is to depend on the court’s view of how illegal the illegality was or

how much it matters, there would appear to be no principle whatever to guide

the evaluation other than the judge’s gut instinct. This was why this court

recently rejected the view expressed by the Court of Appeal in Les Laboratoires Servier v Apotex Inc [2013] Bus LR 80 that an illegal act might nevertheless found a cause of action if it was not as wicked as all that.

iv) The “range of factors” test discards any requirement for an analytical

connection between the illegality and the claim, by making the nature of the connection simply one factor in a broader evaluation of individual cases and offering no guidance as to what sort of connection might be relevant. I have already observed that the reliance test is the narrowest test available. If it is no longer to be decisive, the possibility is opened up of an altogether wider ambit for the illegality principle, extending to cases where the relevant connection was remote or non-existent but other factors not necessarily involving any connection at all, were thought to be compelling.

1. The reason why the adoption of a “range of factors” test on a case by case

basis would be uncertain is obvious in the light of these considerations. An evaluative test dependent on the perceived relevance and relative weight to be accorded in each individual case to a large number of incommensurate factors leaves

a great deal to a judge’s visceral reaction to particular facts. Questions such as how

illegal is illegality would admit of no predictable answer, even if the responses of different judges were entirely uniform. In fact, it is an inescapable truth that some judges are more censorious than others. Far from resolving the uncertainties created by recent differences of judicial opinion, the range of factors test would open a new era in this part of the law. A new body of jurisprudence would be gradually built up to identify which of a large range of factors should be regarded as relevant and what considerations should determine the weight that they should receive. No one factor would ever be decisive as a matter of law, only in some cases on their particular facts. The size of the authorities bundles in this and other recent appeals to this court on the illegality principle is testimony to the volume of litigation which the principle has generated in every period of its history. I do not suppose that those who are about to enter into an illegal transaction are in the habit of studying the decisions of the courts on the point, but those who advise them after the event do, and the resultant uncertainty is likely to generate a great deal of wasteful and unnecessary litigation. I would readily accept that certainty is not the only value, or even necessarily the most important. But we are concerned in this case with the law of contract, an area in which the value of certainty is very great. It is one thing to say that a legal right may be overridden by a rule of law. It is another thing altogether to make a legal

right, and particularly a contractual right, dependent on a judge’s view about

whether in all the circumstances it ought to be enforced.

264. Finally, I would point out that the adoption of such a revolutionary change in hitherto accepted legal principle is unnecessary to achieve substantial justice in the great majority of cases. The unsatisfactory features of the illegality principle as it has traditionally been understood have often been overstated, in part because of the way in which they were emphasised by Lord Goff in Tinsley v Milligan. It was, he

said, “not a principle of justice; it is a principle of policy, whose application is

indiscriminate and so can lead to unfair consequences as between the parties to

litigation” (p 355B-C). That observation, however, reflected his view that no

equitable interest in property could ever be claimed where the legal title had been vested in another for dishonest purposes. The law had been stated in this way by Lord Eldon at the beginning of the 19th century: see Muckleston v Brown (1801) 6

Ves 52 and Curtis v Perry (1802) 6 Ves 739. But Lord Eldon’s approach, although

adopted by Lord Goff, was rejected by the majority of the Committee. When the law of illegality is looked at as a whole, it is apparent that although governed by rules of law, a considerable measure of flexibility is inherent in those rules. In particular, they are qualified by principled exceptions for (i) cases in which the parties to the illegal act are not on the same legal footing and (ii) cases in which an overriding statutory policy requires that the claimant should have a remedy notwithstanding his participation in the illegal act. Properly understood and applied, these exceptions substantially mitigate the arbitrary injustices which the illegality principle would otherwise produce. At the same time, the wider availability of restitutionary remedies which will result from the present decision will do much to mitigate the injustices which have hitherto resulted from the principle that the loss should lie where it falls.

265. For these reasons, I regret that I cannot agree with the conclusion of Lord Toulson (para 109) that that the application of the illegality principle should depend on

“the policy factors involved and … the nature and

circumstances of the illegal conduct, in determining whether the public interest in preserving the integrity of the justice

system should result in the denial of the relief claimed.”

In my opinion, this is far too vague and potentially far too wide to serve as the basis on which a person may be denied his legal rights. It converts a legal principle into an exercise of judicial discretion, in the process exhibiting all the vices of

“complexity, uncertainty, arbitrariness and lack of transparency” which Lord

Toulson attributes to the present law. I would not deny that in the past the law of illegality has been a mess. The proper response of this court is not to leave the problem to case by case evaluation by the lower courts by reference to a potentially unlimited range of factors, but to address the problem by supplying a framework of principle which accommodates legitimate concerns about the present law. We would be doing no service to the coherent development of the law if we simply substituted a new mess for the old one.

Application to the present case

266. Against that background it is in my view entirely clear that the transaction into which these parties entered was affected by the illegality principle. The agreement pleaded, and found by the deputy judge to have been made, was not simply that Mr Mirza would place bets on movements of RBS shares for the joint account of himself and Mr Patel, but that he would do so with the benefit of inside information. Subject to immaterial exceptions, section 52 of the Criminal Justice Act 1993 makes it an offence for a person in possession of inside information to deal

or encourage another person to deal in “securities”, including contracts for

differences. This was accordingly an agreement for Mr Mirza to commit a criminal
offence. It was also a criminal conspiracy to that end.

267. Section 63(2) of the 1993 Act provides that: “No contract shall be void or unenforceable by reason only of section 52.” The contracts affected by section 52

are contracts by way of dealing in securities. It follows that if Mr Mirza had placed the spread bets with IG Index, as he had conditionally promised to do, the contract would have been enforceable as between himself and IG Index. But Mr Patel could not have obtained specific performance of the distinct contract between himself and Mr Mirza or damages for breach of it. This is because, first, he would have had to rely on the contract, which provided as one of its terms that the dealing should be carried out with the benefit of inside information. Mr Patel could not have avoided this result by simply characterising it as an agreement to speculate in RBS shares without referring to the basis on which it was agreed that that should happen. Secondly, none of the possible exceptions apply. The parties were on the same legal footing. Both would be liable to conviction for conspiracy in a criminal court, and any difference in the degree of their fault would be relevant only to the sentence. Section 52 of the Criminal Justice Act 1993 is not a statute designed to protect the interests of persons entering into an agreement to commit the offence of insider dealing, and there is no other overriding statutory policy which requires their participation in the offence to be overlooked when it comes to determining its civil consequences.

1. However, restitution still being possible, none of this is a bar to Mr Patel’s

recovery of the £620,000 which he paid to Mr Mirza. The reason is simply that although Mr Patel would have to rely on the illegal character of the transaction in order to demonstrate that there was no legal basis for the payment, an order for restitution would not give effect to the illegal act or to any right derived from it. It would simply return the parties to the status quo ante where they should always have been. The only ground on which that could be objectionable is that the court should not sully itself by attending to illegal acts at all, and that has not for many years been

regarded as a reputable foundation for the law of illegality. This was Gloster LJ’s main reason for upholding Mr Patel’s right to recover the money. Although my

analysis differs in a number of respects from hers, I think that the distinction which she drew between a claim to give effect to a right derived from an illegal act, and a claim to unpick the transaction by an award of restitution, was sound.

1. In the circumstances, Mr Mirza’s only arguable defence was that he had paid

the money to Mr Georgiou, the intermediary who had proposed the deal. But the judge declined to make a finding to this effect, and rejected a defence of change of position on the ground that even if it was true, Mr Mirza had had no reason to repay the money to anyone but Mr Patel from whom he had received it.

270. The Court of Appeal gave judgment for Mr Patel for £620,000 with interest. For the reasons which I have given, which correspond to those given by Lord Mance and Lord Clarke, I would dismiss the appeal against that order.