Legal principles seem to have been simpler and easier to understand back in 1775. A lot of credit for this rests with one of Britain’s greatest-ever judges, Lord Mansfield. His judgment in Holman v Johnson [1775] 1 Cowp 341 is a case in point, the judge reaching the eminently sensible conclusion that:
“No court will lend its aid to a man who founds his cause of action on an immoral or illegal act.”
There are very sound reasons for this. First, the law should not allow a person to profit from their own wrongdoing. Second, the law should be coherent and not self-defeating: how can the law be trusted if it both condemns and then condones the same action?
Sadly, the intervening years have not been kind to this principle and the courts have struggled to adopt a coherent approach when considering the enforceability of contracts involving illegality. Most recently, and until the Supreme Court’s landmark rewriting of the principle in Patel v Mirza [2016] UKSC 42, practitioners relied on the test approved by the House of Lords in Tinsley v Milligan [1994] 1 AC 340.
In Tinsley, it was decided that if a claimant had to rely on an illegal act in support of a claim, then the action was barred – what became known as the “reliance test”. This soon became the subject of significant criticism. The principle focused on how a claimant’s case was (or should have been) pleaded – was there reliance on an illegal act? – as opposed to the underlying merits of the case. There was also a lack of clarity as to what actually constituted reliance.
Patel
In many ways, the facts of Patel are a good example of why the law in this area is so tricky, not least because both parties were willing participants in the underlying illegality. P gave M £620,000 to bet on anticipated fluctuations in RBS’s share price. The money was handed over on the basis of insider information which M hoped to obtain from contacts at the bank about an anticipated government announcement. The announcement was never made and the bets never placed. The agreement between P and M amounted to a conspiracy to commit the offence of insider dealing, contrary to section 52 of the Criminal Justice Act 1993.
M refused to pay the money back. P sued. M’s defence was that the claim should fail because of the illegality of his agreement with P.
At first instance, the judge felt he was bound by the reliance test and refused P’s claim. P was successful on appeal, however, with the majority of the Court of Appeal deciding that, because the scheme did not proceed, P was entitled to the return of his money.
The Supreme Court ruling
The Supreme Court also agreed with P, although on different grounds. Lord Toulson, who gave the leading judgment (with which a majority of other justices agreed), confirmed that Tinsley was no longer good law. There is an entirely new way to consider illegality:
“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…”
There are three separate considerations – already being referred to as the “range of factors” test – for a court to bear in mind when assessing whether the public interest has been harmed in this way. First: what is the underlying purpose of the legal prohibition which has been transgressed and will that purpose be enhanced by the denial of the claim? Second: is there any other relevant public policy which will be affected by the denial of the claim? Finally: is denial of the claim a proportionate response given that punishment for illegality is a matter for the criminal courts?
Lord Toulson felt that, in each instance, a court had to apply a “principled and transparent assessment of the considerations identified”. When applying the range of tests to P’s case, the doctrine of illegality should not stop him from recovering the money because: (i) he would be entitled to recover the money by way of a claim of unjust enrichment; and (ii) there was no damage to the integrity of the justice system in allowing him to do so.
What next?
Not all of the judges agreed. A minority were persuaded that P was entitled to the return of his money by way of unjust enrichment but without the need for the range of factors test. Lord Sumption emphasised that unjust enrichment does not fall foul of any prohibition against illegal contracts because it simply returns the parties to the position they would have been in had no illegal arrangement been made. He also felt that the Supreme Court was doing the law a disservice by establishing a test that was effectively a case-by-case evaluation by reference to a potentially unlimited range of factors:
“We would be doing no service to the coherent development of the law if we simply substituted a new mess for the old one.”
I think Lord Sumption is right. Lord Mansfield’s approach had the merits of simplicity and clarity, especially where there are other legal principles – such as unjust enrichment – which can be relied upon to resolve the merits of a particular case. Although well-intentioned and dealing with a fiendishly tricky area, it may be that the Supreme Court has simply replaced one confusing test for illegality with another.
Stuart Pemble is a partner at Mills & Reeve LLP
