In Patel v Mirza [2016] UKSC 42, a nine Justice panel of the Supreme Court found the opportunity to clarify the "illegality defence"; an area of law which, until now, was in what the President described as a state of "some disarray".

Patel concerned a contract between Messrs Patel and Mirza, under the terms of which Mr Patel would pay Mr Mirza sums totalling £620,000 for the purpose of betting on the price of RBS shares, using advance insider information that would affect the price of the shares.  As it happened, the insider information was not forthcoming, so no such betting occurred.  Mr Mirza did not repay Mr Patel.  Mr Patel therefore brought his claim for recovery of the amounts paid to Mr Mirza on various bases including contract and unjust enrichment.

A five Justice majority, led by Lord Toulson, reformed the law on the illegality defence; doing away with the "reliance test" from Tinsley v Milligan [1994] 1 AC 340 and instead focused on the central issue of whether or not allowing the claim would be harmful to the integrity of the legal system, which was to be analysed by a trio of considerations:

  • The purpose of the prohibition that was 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 may have an impact
  • Whether denial of the claim would be a proportionate response to the illegality.

In the majority's view, the policy behind the prohibition on insider trading was not infringed, because no insider trading had ever taken place.

The minority thought that the "trio of considerations" adopted by the majority was inappropriate because it amounted to ill-defined judicial discretion; and that restitution alone was sufficient to dispose the case. The minority also considered that restitution ought to be available in cases where an illegal contract was part or wholly performed, provided that mutual restitution of any benefits conferred remained possible.

However, the Supreme Court was unanimous in holding that Mr Patel was entitled to return of the sums paid to Mr Mirza, since the intended illegality had never taken place.

See the Court's decision here.