Illegality and Unjust Enrichment: Supreme Court Reviews the Doctrine of Illegality

The Supreme Court in Patel v Mirza [2016] UKSC 42 has reviewed the doctrine of illegality and sought to clarify the extent to which it applies in civil proceedings.

The specific question the Supreme Court was required to consider was whether the principle of illegality operates so as to prevent a party to a contract tainted by illegality from seeking restitution of money paid under the contract. However, the Court also took the opportunity to look at the doctrine of illegality more generally.

It has long been established that illegality can provide a defence to civil claims under English law. As Lord Mansfield stated in Holman v Johnson (1775) 1 Cowp 341: ‘no court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act’. However, the limits of this doctrine have often been considered to be unclear and its application inconsistent. As Gloster LJ stated in Patel v Mirza in the Court of Appeal: ‘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’.

On the facts, the Respondent had given the Appellant £620,000 to bet on a bank’s share price on the basis that the Appellant expected to be in receipt of insider information. However, the Appellant never received the insider information he had been expecting and, as a result, the bet was never placed.

The Appellant did not return the £620,000 to the Respondent and when sued by him for that sum, argued that the Respondent’s claim should fail because of the illegality affecting the contract. He succeeded at first instance; the decision was overturned by the Court of Appeal and the Appellant subsequently appealed to the Supreme Court.

The majority identified the following factors that would need to be considered by a Court when faced with an illegality defence:

• the underlying purpose of the prohibition that was being transgressed and whether that purpose would be enhanced by denial of the claim;
• any other relevant public policy on which the denial of the claim might have impact;
• whether the denial of the claim would be a proportionate response to the illegality. 

They agreed with the approach of Gloster LJ in the Court of Appeal: namely that what is necessary to determine is whether the policy underlying the rule which rendered the contract illegal would be ‘stultified’ if the claim were allowed. The majority took the view that there was no policy reason why the Respondent should forfeit the money paid to the Appellant given that he was seeking to unwind the arrangement as opposed to profit from it. Generally, where a claimant has satisfied the requirements for an unjust enrichment claim, the claim should not fail merely because the money which was the subject of the claim had been advanced for an unlawful purpose. In the present case, the mischief that the ban on insider trading was aimed at, preventing market abuse, had not occurred and accordingly there was no obvious policy reason why the money should not be returned.

In so reasoning, the Supreme Court rejected the previously applicable test, from the case of Tinsley v Milligan [1994] 1 AC 340, that operated to bar a claim which had been brought in reliance on an illegality.

Please click here for our full briefing on the case and its implications.

This post comes to us from Norton Rose Fulbright. It has been authored by Andrew Sheftel, Senior Knowledge Lawyer at Norton Rose Fulbright.