When will involvement in illegality prevent a claim for restitution?

In the landmark case of Patel v Mirza, the UK Supreme Court has ruled on the issue of when involvement in illegality bars a claim. This article considers the detail of the case and the implications of the judgment.

4 August 2016

In the landmark case of Patel v Mirza, the UK Supreme Court has ruled on the issue of when involvement in illegality bars a claim. This article considers the detail of the case and the implications of the judgment.

Mr Patel gave Mr Mirza £620,000 to place bets on the Royal Bank of Scotland’s ("RBS") share price, on the basis that Mr Mirza was expecting to receive insider information from RBS contacts regarding a government announcement, which would affect the share prices. The government announcement transpired to be a mistake and so the betting did not take place. However, Mr Mirza did not repay the money to Mr Patel despite an agreement to do so. 

Mr Patel brought a claim against Mr Mirza for the restitution of the money, but in order to do so had to admit his intentions to engage in an illegal act (namely, conspiracy to commit an offence of insider dealing under section 52 of the Criminal Justice Act 1993). Mr Mirza in response relied on case law which bars a claimant from relief if they rely on their own illegal actions to establish the claim.

History of the court case
When the case was first heard, the High Court dismissed the claim on the ground that “No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act.” As the only reason that the illegal purpose had not taken place was because it could not have done so, rather than Mr Patel having voluntarily withdrawn from the arrangement, the judge held that Mr Patel was barred from recovering the money he paid.

The Court of Appeal then reversed this decision, finding that there was no reason to differentiate between refusing to let a claimant recover funds because the illegal agreement could not be performed, as here, and the situation where the claimant had voluntarily withdrawn from the agreement. In either scenario, the illegal agreement is not carried into effect, and so they held that Mr Patel was entitled to recover the £620,000. 

Judgment of the Supreme Court
The Supreme Court decided unanimously to dismiss Mr Mirza’s appeal and stated that Mr Patel is entitled to full restitution of the £620,000.  

Giving the leading judgment, Lord Toulson reviewed the current law in detail. He stated that for centuries, the actions of the claimant being illegal has been a defence to civil claims, due to the policy reasons that a person should not be allowed to benefit from their own wrong doing and that the law should be coherent and not self-defeating. 

Lord Toulson, however, felt that the approach followed by the courts to date has been ineffective in offering solutions to problems and that it may tempt judges to focus on the gain of the claimant instead of any potential damage to the legal system. He stated that the essential rationale of the illegality doctrine is that it would be contrary to public policy interest to enforce a claim, if to do so would be harmful to the integrity of the legal system. Before a judgement can be passed as to the potential damage enforcing a claim could cause to the legal system, three criteria must be considered:

  1. Whether the underlying purpose of the prohibition will be enhanced by the denial of the claim;
  2. If any other public policy could be rendered ineffective or less effective by denial of the claim; and
  3. Whether denial of the claim is proportionate to the illegality, bearing in mind that punishment is a matter for the criminal courts.

He concluded that a principled and transparent assessment is essential in considering the above criteria, to avoid producing results which may appear arbitrary, unjust, or disproportionate.

When deciding whether to refuse a claimant relief, Lord Toulson outlined various factors which are potentially relevant. These include the seriousness of the conduct, whether it was intentional, its centrality to the contract and whether there was a marked disparity in the parties’ respective culpability.

This case provides helpful guidance and sets a precedent for a more flexible approach to the doctrine of illegality, where claimants may now be able to lodge successful claims despite being involved in illegality. The decision also forces courts to look at the underlying rationales behind the doctrine and provide a principled assessment for claimants in the future.