In the nine-judge panel decision of Patel v Mirza [2016] UKSC 42, the Supreme Court of the United Kingdom has ruled that illegality will not always be a defence to a civil claim. This is a landmark decision because it changes a well-established principle of English law, i.e. the Court will not enforce an illegal bargain.

In this decision the English Court held that just because a party had provided funds to another for committing an illegal act did not mean that the paying party was not entitled to recover its funds in circumstances where they had not been used for the illegal act.

The facts

Mr Patel gave Mr Mirza the sum of £620,000, in order to place bets on the share price of a bank using insider information – a clearly illegal arrangement, which amounted to a conspiracy to commit the criminal offence of insider trading.

Mr Mirza did not receive the anticipated insider information and ultimately the bets were not placed. Mr Mirza, however, failed to return the money to Mr Patel, who sued for its recovery, on the grounds that Mr Mirza was unjustly enriched to the detriment of Mr Patel.

Mr Mirza contended that the money should not be returned, given that Mr Patel was involved in, and was relying on, the illegal arrangement. The question before the Court was therefore: does a claimant’s illegality bar recovery under a resulting claim?

The decision

The Supreme Court unanimously dismissed Mr Mirza’s appeal and held that the funds should be returned to Mr Patel. Although all nine Justices were agreed on the result of the appeal, their reasoning differs by a 5-4 majority split.

The majority of the Court held that a claimant who satisfies the ordinary requirements for a claim under unjust enrichment (i.e. was the defendant enriched at the expense of the claimant and if so, was the enrichment unjust) should not be debarred from his claim solely because the money was paid by him for an illegal purpose. While the Court envisaged that some claims might arise that would mean such a recovery could undermine the integrity of the justice system, the Court did not consider this to be such a case. The minority concluded that there was no inconsistency in allowing the recovery, provided that restitution (i.e. returning the parties back into the position they would have been in had no illegal arrangement been made) were possible.

Although the reasoning between the Justices differs, the result is a new and fresh treatment of the circumstances in which illegality might bar recovery under a civil claim.

Comment: a victory for immorality?

It has long been established under English law that “no court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act” (Holman v Johnson (1775) 1 Cowp 341, per Lord Mansfield at 343). Two broad policy reasons for this persist: first, a claimant should not be allowed to profit from his own wrongdoing and second, the Courts wish to avoid undermining the law, by condoning illegal conduct.

The Supreme Court has now held that while various factors are relevant to the protection of this public interest, the approach the Courts take needs to be principled and considered in each case. While there is a public interest in not undermining the integrity of the criminal justice system, nor should the civil courts impose additional penalties, disproportionate to the nature and seriousness of the wrongdoing in question.

The Supreme Court decision sets out a framework approach in relation to the illegality defence, which the Courts will assess as follows:

  1. the underlying purpose of the law which has been breached by the conduct, and whether that purpose is enhanced by denying the civil claim;
  2. the impact on public policy if the claim is denied; and
  3. whether denying the claim is a proportionate response to the illegality, bearing in mind that punishment remains the reserve of the criminal courts.

Relevant factors for this principled consideration might, therefore, include seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was a difference in the blameworthiness attributed to the parties. The Court also considered that in some cases, denial of a claim could give the other party (who, in this instance, was equally culpable) a very substantial and unjust reward. The fact that Mr Patel paid money for an illegal purpose was not sufficient justification for the Court to prevent its recovery in the absence of other compelling factors. The Court did not consider that any special circumstances arose in this case, which meant that Mr Patel’s illegal conduct prevented recovery under civil law; neither party in this case could claim clean hands, their conduct arguably being equally reprehensible.

Is the result of Patel v Mirza likely to be perceived as a victory for immorality? That is unlikely. While it no longer follows that it is always in the public interest to prevent repayment of under illicit arrangements, the Court has set out a principled framework for consideration of illegality as a defence. The notion of assessing where the “clean hands” in the case lie, alongside assessing each party’s respective culpability, shines through in the new principled approach, with the Court always looking at balancing both sides of the equation.

With the UK Bribery Act 2010 in force and now beginning to produce results, it will be interesting to observe how the Courts apply this new principled framework in practice, particularly as criminal and civil legal arenas continue to collide more frequently in the growing field of corporate and business crime.