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22 August 2016 / by / in

Illegality – No bar to Recovery

In the case of Patel v Mirza 2016 UKSC 42 Mr Patel was entitled to restitution of £620,000.00 given to Mr Mirza to place bets on a bank’s share price with the benefit of insider information. Mr Mirza’s expectations were not fulfilled and the intended betting did not take place.

Lord Toulson delivering the leading judgment, departed from the reliance test expressed in Tinsley v Milligan [1994] 1 AC 240, which bars the claimant if he relies on the illegality in order to bring the claim. The judgment also suggests that Holman v Johnson [1775] 1 Cowp 341, where Lord Mansfield said “no court will lend its aid to a man who founds his cause of action upon an immoral or illegal act”, will not be followed in all cases.

Lord Toulson explained:

“The essential rationale of the illegality doctrine is 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 (or, possibly, certain aspects of public morality, the boundaries of which have never been made entirely clear and which do not arise for consideration in this case). In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is 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.”

The range of factors to be considered may include:

“(a) how seriously illegal or contrary to public policy the conduct was;

(b) whether the party seeking enforcement knew of, or intended, the conduct;

(c) how central to the contract or its performance the conduct was;

(d) how serious a sanction the denial of enforcement is for the party seeking enforcement;

(e) whether denying enforcement will further the purpose of the rule which the conduct has infringed;

(f) whether denying enforcement will act as a deterrent to conduct that is illegal or contrary to public policy;

(g) whether denying enforcement will ensure that the party seeking enforcement does not profit from the conduct;

(h) whether denying enforcement will avoid inconsistency in the law thereby maintaining the integrity of the legal system.”

This line of reasoning was not shared by Lord Mance, Lord Clarke and Lord Sumption who considered there was no basis for substituting the clear cut principle identified in Holman v Johnson, founded on the need to maintain the integrity of the law with a mix of factors, which would not offer the same coherence or certainty.

There is a considerable departure from the position in Everet v Williams (1725) in which two highwaymen sought an account of the division of their profits, the court not only dismissed the action, but fined the plaintiff’s solicitors for the indignity visited upon it.

John Bechelet

John specialises in commercial and civil fraud litigation. Admitted as a solicitor in 1983, John worked in private practice and in-house for a leading life assurance company before establishing Bivonas with Antony Brown in 1997. John has extensive experience in a wide range of courts and tribunals including the UK Supreme Court, the Court of Appeal and the Divisional Court. He has been involved in a number of important reported cases.

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