Legal Principles and Key Points
- In the case of Patel v Mirza  U.K.S.C. 42, it was held that a claimant who met the ordinary requirements of a claim for unjust enrichment should not be automatically prevented from pursuing his claim on the grounds that they were seeking to recover money paid pursuant to a contract to carry out an illegal activity.
Facts of the Case
- C transferred sums totalling £620,000 to D to bet on share prices, using advance insider information D expected to obtain from contacts within the company.
- This information regarding an anticipated government announcement that was expected to significantly affect the share prices.
- D’s expectation of the announcement was mistaken, so the intended betting did not occur. C brought a claim to recover the money based on unjust enrichment.
- The contract between C and D was found to amount to a conspiracy to commit the offence of insider dealing.
- D’s enrichment is on the facts unjust if C enriched D on the basis of a consideration which fails, such as an event which fails to materialise. C had to explain the illegal nature of their dealing to the court.
- The judge held that C’s claim was unenforceable because C relied on his own illegality to establish it, and C had not voluntarily withdrawn from the illegal scheme.
- The Court of Appeal held that the fact the insider trading had not been executed was reason enough for C’s claim to be enforced.
- Did the maxim in Holman v Johnson -that the court would not assist a claimant who based his action on an immoral or illegal act-prevented C from recovering money paid under a contract ‘tainted with illegality?’
Held by the Supreme Court
- Finding for C, that there were policy reasons for illegality defending a civil claim; a person should not benefit from their own wrongdoing, and the law should be coherent in not condoning illegality.
- Unless a statute provided otherwise, property could pass under a transaction that was illegal as a contract. The dissenting judge had taken the correct approach in asking whether the policy underlying the rule that made the contract illegal would be invalidated if C’s claim was allowed.
- Since C was seeking to unwind from the arrangement, not profit from it, the policy would not be undermined. C’s claim met the ordinary requirements of an unjust enrichment claim, and so must succeed.
- There are two broad policy reasons for the doctrine of illegality as a defence in civil claims. First, a person should not be allowed to profit from his own wrongdoing. Second, the law should be coherent and not self-defeating, condoning illegality by giving with the left hand what it takes with the right hand.
- We should not attempt to create a definitive list of relevant factors because of the infinite possible variety of cases. The integrity and harmony of the law permit such flexibility. The civil law can allow a claim like C in this case to succeed where denying it would be disproportionate, and this does not undermine the criminal law’s function in punishing completed unlawful acts.
- “The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system (or, possibly, certain aspects of public morality, the boundaries of which have never been made entirely clear and which do not arise for consideration in this case). In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather by than the application of a formal approach capable of producing results which may appear arbitrary, unjust, or disproportionate” .