The Supreme Court has established a new approach to the question of whether a defendant will be able to rely on the defence of illegality: Patel (Respondent) v Mirza (Appellant) [2016] UKSC 42.
Under this new approach, the defence will apply if enforcing the claim would be harmful to the integrity of the legal system. In assessing whether that is the case, the court must consider:
- whether the underlying purpose of the law which has been broken will be enhanced by denying the claim;
- any other relevant public policy which may be affected by denying the claim; and
- whether denying the claim would be a proportionate response to the illegality.
The Supreme Court found that, under this new approach, a claimant will not ordinarily be debarred from enforcing a claim for unjust enrichment simply because the money he seeks to recover was paid for an unlawful purpose – though there may be rare cases where enforcing such a claim might be regarded as undermining the integrity of the justice system. In this case there were no such circumstances, and so the claimant succeeded in his claim for recovery of money paid under an illegal contract (for insider dealing) which was not ultimately performed.
This new approach replaces the test adopted by the House of Lords in Tinsley v Milligan [1994] 1 AC 340, under which a claim would be barred if the claimant had to rely on the illegality to bring the claim. The so-called reliance test has been much-criticised on the basis that it is arbitrary, uncertain and potentially unjust, in particular because the question of whether a claim could proceed depended on a procedural issue of how the case must be pleaded rather than the merits of the parties or questions of public policy.
On numerous occasions in recent years, the courts have identified the need for the Supreme Court to address the proper approach to the defence of illegality in an appropriate case (see for example this blog post on Jetivia SA v Bilta (UK) Limited [2015] UKSC 23). It is therefore welcome that the Supreme Court has clarified the law in this difficult area.
That said, there is force in the view expressed by a minority of the Supreme Court that the new approach risks enabling the courts to apply the illegality principle in an inconsistent way and possibly beyond its proper limits. There is a fear, succinctly expressed by Lord Sumption, that the new approach "converts a legal principle into an exercise of judicial discretion", in the process exhibiting all the vices of "complexity, uncertainty, arbitrariness and lack of transparency". It has however been authoritatively established as the correct approach to the law.
Tom Henderson, a senior associate in our dispute resolution team, considers the decision further below.