Illegality re-examined

Richard Hayes and Oliver Hyams consider whether the public policy approach taken by the Supreme Court in Patel v Mirza has clarified the law of illegality

The common law doctrine of illegality has often - and rightly - been criticised as complex and incoherent. In the recent decision of Patel v Mirza [2016] UKSC 42, a nine-member panel of the Supreme Court delivered fresh guidance as to its application.

The illegality principle operates in a variety of circumstances as a defence to civil claims relating to contract, property, tort, and unjust enrichment. It exists for two primary policy reasons: a person should not be allowed to profit from their own wrongdoing and the law should be coherent and not self-defeating.

This has, in practice, caused immense difficulty for the courts, and a schism between judges who perceive the law of illegality as calling for the application of clear rules, and those who wish to address the equity of each case as it arises.

In Tinsley v Milligan [1994] 1 AC 340, the House of Lords, by a majority of 3:2, formulated a reliance principle: the defence of illegality would succeed where a claimant needed to rely upon their own illegality to establish their cause of action. Conversely, if the claimant did not need to rely on their own illegality to establish their cause of action (as in Tinsley), the defence of illegality would fail, even though a transaction might be regarded as tainted by illegality.

Tinsley produced capricious results, with the outcome of cases dependent upon procedural matters, such as the rules of pleadings, the incidence of the burden of proof, and equitable presumptions (such as advancement). Accordingly, in Patel the Supreme Court proposed a new approach.

The facts in Patel were straightforward. Mr Patel paid £620,000 to Mr Mirza. The plan was for Mirza to place bets on a bank's share prices with the benefit of insider information, which would have contravened section 52 of the Criminal Justice Act 1993. Mirza did not obtain the inside information and the bets were not placed. Patel requested the return of his money. Mirza refused, relying on the illegality of the scheme.

Public interest

Giving the leading judgment of the majority, Lord Toulson considered it would be contrary to the public interest to enforce a claim if doing so would be harmful to the integrity of the legal system. Assessing whether the public interest would be harmed by enforcing a claim and, consequently, whether it would be appropriate to do so depends on a range of factors:

• The underlying purpose of the prohibition which had been transgressed and whether that purpose would be enhanced by the denial of the claim;

• Whether there was any other public policy which would be affected by a denial of the claim; and

• Whether denial of the claim would be a proportionate response to the illegality (the 'range of factors' approach).

In Patel, the illegal scheme had not been implemented; the claim was simply for restitution of the sums advanced and the illegal element remained wholly executory. The balancing exercise required the return of Patel's money. 'Far too vague'

The minority (who nevertheless agreed with the result) concluded that the majority's range of factors approach was deficient. Lord Sumption argued that the policy factor approach 'is far too vague and potentially far too wide to serve as the basis on which a person may be denied his legal rights'. Much will be left, effectively, to the discretion of individual judges, substituting 'a new mess for the old one'.

The minority concluded that the case could be decided on restitutionary principles, so that, subject to some exceptions, a claimant who has paid money under a contract to perform an illegal activity is entitled to the return of the money which they have paid, where that illegal activity is not proceeded with for reasons outside the control of the parties.

The majority, however, emphasised that the court would not be free to decide cases in an unprincipled way, highlighting relevant considerations in applying the new test: the seriousness of the conduct in question; whether the illegality is central to the claim; the extent to which each party is culpable; and whether there is knowing illegality.

In future claims involving illegality, careful consideration will have to be given to the three limbs of the test formulated by the majority:

• The purpose of the rule that has been broken and whether denying the claim would further that purpose;

• The engagement of other public policy; and

• The proportionate approach in the case before the court.

On balance, justice should benefit from the court having room for manoeuvre, since illegality can arise in an extremely broad range of factual circumstances.

Richard Hayes, pictured, and Oliver Hyams are barristers at Lamb Chambers @LambChambers www.lambchambers.co.uk