Landmark judgment by the Supreme Court ushers in new era for the defence of illegality

In a welcome decision, the Supreme Court, by a majority of 6-3, has adopted a flexible, policy-based approach to the illegality defence (also known as "ex turpi causa, non oritur actio") in line with the recommendations by the Law Commission and with the approach adopted in other commonwealth jurisdictions such as New Zealand, Australia and Canada.

The practical question for the courts has always been whether to allow the claimant the remedy sought, or refuse it on the basis that the "illegality" taints the claim to such an extent that relief ought to be denied. Various overlapping/contrasting approaches have emerged over the years which have given rise to legal complexity and confusion over which approach should be followed.

The claimant, Mr Chandrakant Patel, and the defendant, Mr Salman Mirza, entered into a conspiracy to commit the offence of insider dealing. 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. Mr Mirza's expectation of an announcement proved to be mistaken and so the intended betting did not take place. However, despite promises to do so, Mr Mirza failed to repay the money given to him by Mr Patel. Mr Patel then brought a claim for the recovery of the sums on various bases, including contract and unjust enrichment. To establish his claim for the return of his money, it was necessary for Mr Patel to explain the nature of the agreement and Mr Mirza sought to rely on the defence of illegality, by invoking the so-called "reliance principle" (Tinsley v Milligan (1994)) i.e. that the claim could not be brought because it involved reliance on the claimant's own illegality.

Lord Toulson, giving the leading judgment, held that "a person who satisfies the ordinary requirements of a claim in unjust enrichment will not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration." Lord Toulson accepted that there may be reasons why courts might refuse assistance to a claimant, but remarked that such cases are likely to be rare. Since Mr Patel satisfied the ordinary requirements of a claim for unjust enrichment, he should not be barred from enforcing his claim by reason only of the fact that the money which he sought to recover was paid for an unlawful purpose.

Lord Toulson highlighted that the two policy reasons for the illegality defence were: (i) that a person should not be allowed to profit from his own wrongdoing; and (ii) the law should be coherent and not self-defeating, "condoning illegality by giving with the left hand what it takes with the right hand."

Overruling the reliance approach in Tinsley, the Supreme Court held that the new correct approach for a court, when considering the application of the common law doctrine of illegality, is to have regard to the policy factors involved and to 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 denial of the relief claimed. In order to assess whether the public interest would be harmed in that way, he held it necessary to consider three key factors:

the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim;

any other relevant public policy on which the denial of the claim may have an impact; and

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.

In reaching these conclusions, Lord Toulson firmly rejected the strongly expressed dissenting view (as expressed by Lords Mance, Sumption and Clarke) that this "open and unsettled range of factors" (per Lord Mance) would lead to uncertainty.