On 16 December 2016, the High Court handed down a summary judgment in Tchenguiz & Others v Grant Thornton UK LLP & Others [2016] EWHC 3727, in Grant Thornton's ("GT") favour, striking out certain claims against the firm.

This is the latest development in a long-running dispute involving two sets of proceedings brought by Vincent and Robert Tchenguiz and related parties (the "VT Proceedings" and the "RT Proceedings"), in relation to an investigation into their conduct by the Serious Fraud Office (the "SFO Investigation"). The judgment relates to an application by GT for summary judgment in the VT proceedings.

Mr Justice Knowles decided that GT was entitled to rely upon releases in GT's favour contained in a settlement agreement between the VT Claimants and an Icelandic bank, Kaupthing Bank hf ("Kaupthing"). The VT Claimants argued unsuccessfully that the illegality doctrine rendered the agreement unenforceable by GT. In our October 2016, issue we considered the implications of Patel v Mirza [2016], in which the Supreme Court created a wholly new "range of factors" test for the illegality defence (also known as ex turpi causa - a claimant has no legal remedy allowing it to profit from its own wrongdoing). In this judgment Mr Justice Knowles applied the new range of factors test.

Background

The underlying facts are complex but the issues before the court were relatively straightforward. Each of the VT Proceedings and the RT Proceedings include claims against GT and two of its partners (the "GT Defendants") alleging conspiracy and malicious prosecution arising from the GT Defendants' involvement in the SFO Investigation.

In September 2011, the VT Claimants (but not the RT Claimants) entered into a settlement agreement Kaupthing, which contained various mutual releases, including a release covering claims against GT as one of several parties falling within the description "Kaupthing Released Parties" (the "Settlement Agreement"). The VT Claimants claimed that they had only signed the Settlement Agreement as a result of pressure brought upon them, and that the Settlement Agreement was tainted by, or founded on, illegality because its object, to settle claims against the Kaupthing parties, was to further a conspiracy to damage the VT Claimants in preventing them bringing claims in the future. They argued that the GT Defendants should be unable to rely on the releases in the Settlement Agreement because of the illegality doctrine.

A twist in the story is that Mr Johannsson (a member of the Resolution and Winding Up Committees of Kaupthing) was also a Defendant to the VT Proceedings until, early in 2016, he successfully applied before Mr Justice Knowles for summary judgment (the "First Application"). The illegality doctrine was also relied upon by the VT Claimants in the First Application which involved different counsel, but deployed many of the same arguments.

Judgment

The Court rejected the VT Claimants' arguments and granted the GT Defendants' application for summary judgment in the VT Proceedings. The Court also granted the GT Defendants and Mr Johannsson's application for summary judgment in respect to one of the claims in the RT Proceedings. In doing so, Mr Justice Knowles noted that in the First Application, the VT Claimants had also argued that the Settlement Agreement could not be enforced as it was tainted by, or founded on, illegality in the form of conspiracy, and that he had rejected that argument. He acknowledged that the law had since been developed by the Supreme Court in Patel v Mirza, and that the VT Claimants' arguments ought to be re- considered as a result.

The Court, applying Patel v Mirza, again rejected the VT Claimants' argument that the real purpose of the Settlement Agreement was the furthering of the conspiracy. It drew a crucial distinction between contracts whose object, purpose or performance were illegal (such as the contract for insider dealing in Patel v Mirza), and contracts whose object, purpose or performance were not illegal (such as the Settlement Agreement). There were a number of factors the Court took into account in finding this which are too numerous to summarise here, but a telling factor was the fact that claims of this very type, namely based upon alleged misconduct on the part of those involved in the SFO investigations, were clearly in the contemplation of the parties to the Settlement Agreement.

The Court also considered it to be "crucially significant" that the VT Claimants (whilst alleging it was tainted by illegality) had not asked the court to set aside the Settlement Agreement, but were instead seeking to prevent its enforcement against themselves only.

We note that both this strike-out judgment and the earlier strike-out judgment granted to Mr Johannsson are subject to appeals.

Comment

It should be noted that the facts of this case did not lend themselves to the illegality defence. The VT Claimants were seeking to take the benefit of the Settlement Agreement (in settling claims against them by Kaupthing parties) whilst arguing the GT Defendants should not be allowed to enforce it. That was not an attractive position to take.

We have previously commented that there might be exposure to novel legal arguments and consequential additional legal costs for directors and their insurers when faced with litigation where underlying facts concern illegal conduct. This case is a perhaps an illustration of this. Mr Justice Knowles had earlier in 2016 dismissed a claim against a co-defendant, Mr Johannsson, allowing him to rely upon the same releases which favoured the GT defendants in the Settlement Agreement, and did not agree with the VT Claimants that the illegality doctrine prevented him from doing so. Broadly speaking, the VT Claimants raised the same arguments against GT, but applying the new "range of factors" test under Patel v Mirza when considering the illegality defence. Other claimants will we predict "have a go" under the new test in the hope of finding traction before another court, and there is a risk that this could have an impact on legal defence costs for insurers.

It is interesting to note that Mr Justice Knowles, whilst supposedly applying the range of factors test, ventured no analysis on how that test differed from the old pre Mirza law (i.e. the "reliance test"). Clearly, he took into account a range of factors when reaching his conclusion and perhaps this is the lesson to be drawn from this judgment, namely, the court will take into account all arguments in deciding whether the public interest lies in recognising the illegality defence on particular facts. However, it leaves the question of how future courts will apply the range of factors test wide open, and whilst on these facts the result under the range of factors test was the same as under the reliance test, we shall see the law develop in future cases.

Finally, it should be noted that the decision has no impact on Jetvia SA v Bilta UK Ltd, namely that fraudulent directors are unable to rely on the illegality defence, which will be a relief to D&O insurers who might otherwise be asked to provide cover for such arguments.

To read the judgment click here.