Patel v Mirza
| Patel v Mirza | |
|---|---|
| Court | UK Supreme Court |
| Citation(s) | [2016] UKSC 42 |
| Case history | |
| Prior action(s) | [2014] EWCA Civ 1047 |
| Keywords | |
| Illegality, insider trading | |
Patel v Mirza [2016] UKSC 42 is a UK company law and English contract law case, concerning the scope of the illegality principle relating to insider trading under section 52 of the Criminal Justice Act 1993.
Facts
Mr Patel claimed £620,000 from Mr Mirza, after he had transferred him the money to illegally bet on the price of Royal Bank of Scotland shares, but the contract was not carried through. Under section 52 of the Criminal Justice Act 1993, using advance insider information to profit from trading in securities is an offence (so as to prevent some people unfairly profiting from market changes before the public). Mr Patel and Mr Mirza were planning to do insider dealing, but an announcement by the government that they had anticipated was mistaken. After this, Mr Mirza refused to repay Mr Patel the £620,000. Mr Mirza brought a claim based on contract and unjust enrichment, but Mr Patel argued that no such obligation could be enforced because the whole contract was illegal, and any claim precluded by the principle that ex turpi causa non oritur actio (no claim may arise from an illegal act).
Judgment
The UK Supreme Court held unanimously that Mr Patel could recover the money. A majority of the Court, agreeing with Lord Toulson's judgment, thought that the principle should be based on the purpose of the illegality rule in question, and that no reasons of policy precluded the restitution of money even though the contract would be illegal. A minority of Lord Mance, Lord Clarke and Lord Sumption thought that a range of different rules should apply. The formal test in Tinsley v Milligan[1] was held to no longer represent the law.[2]
Lord Toulson (with whom Lady Hale, Lord Kerr, Lord Wilson and Lord Hodge agreed) said the following.
| “ | 74. Miss Hounga brought claims against the Allens in the employment tribunal for unfair dismissal, breach of contract and unpaid wages. They were dismissed on the ground that her contract of employment was unlawful. She appealed unsuccessfully to the appeal tribunal and she did not seek to appeal further. Neither the Court of Appeal nor the Supreme Court therefore had occasion to consider whether she was entitled to be paid for the services which she rendered on a quantum meruit (by analogy with cases such as Mohamed v Alaga & Co and Nizamuddowlah v Bengal Cabaret Inc et al).
75. Miss Hounga also claimed to have been the victim of the statutory tort of unlawful discrimination under the Race Relations Act 1976, section 4(2)(c), in relation to her dismissal. The tribunal found that she had been dismissed because of her vulnerability consequent upon her immigration status. She was therefore the victim of unlawful discrimination and she was awarded compensation for her resulting injury to feelings. The tribunal’s order was set aside by the Court of Appeal, which held that the claim was tainted by the illegal nature of her employment and that for the court to uphold it would be to condone the illegality, but it was restored by the Supreme Court. The leading judgment was given by Lord Wilson, with whom Lady Hale and Lord Kerr agreed. 76. Lord Wilson did not consider that the solution of the case lay either in asking whether Miss Allen needed to rely on an illegal contract or in asking whether there was an inextricable link between the illegality to which she was a party and her claim. At the heart of the judgment Lord Wilson set out his approach in para 42: “The defence of illegality rests on the foundation of public policy. ‘The principle of public policy is this …’ said Lord Mansfield by way of preface to his classic exposition of the defence in Holman v Johnson (1775) 1 Cowp 341, 343. ‘Rules which rest on the foundation of public policy, not being rules which belong to the fixed or customary law, are capable, on proper occasion, of expansion or modification’: Maxim Nordenfelt Guns and Ammunition Co v Nordenfelt [1893] 1 Ch 630, 661 (Bowen LJ). So it is necessary, first, to ask ‘What is the aspect of public policy which founds the defence?’ and, second, to ask ‘But is there another aspect of public policy to which the application of the defence would run counter?’” 77. On the first question, drawing on the judgment of McLachlin J in Hall v Hebert, Lord Wilson addressed the policy consideration of preserving the integrity of the legal system and not allowing persons to profit from their illegal conduct. He concluded that an award of compensation for damage to Miss Hounga’s feelings was not a form of profit from her employment; it did not permit evasion of a penalty prescribed by the criminal law; and it did not compromise the integrity of the legal system. Conversely, he said that application of the defence could encourage those in the situation of Mrs Allen to believe that they could discriminate against people like Miss Hounga with impunity and could thereby compromise the integrity of the legal system. On the second question, Lord Wilson said that the Court of Appeal’s decision ran strikingly counter to the public policy against forms of people trafficking and in favour of the protection of its victims. Weighing the policy considerations, he concluded that insofar as any public policy existed in favour of applying the illegality defence, it should give way to the public policy to which its application would be an affront. 78. Hounga v Allen was a case in tort, but Lord Wilson’s approach to the illegality defence was applied by the Court of Appeal in R (Best) v Chief Land Registrar [2016] QB 23, where the issue was whether a claim to be registered under the Land Registration Act 2002 (“LRA”) as the proprietor of a residential building by adverse possession was barred by illegality. The circumstances were that part of the relevant period of possession involved the commission of trespass which constituted a criminal offence under section 144 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPOA”). 79. Sales LJ (with whom McCombe LJ agreed) expressed the view, at para 51, that the best guidance on the relevant analytical framework was to be found in Lord Wilson’s judgment (from which he quoted para 42 and the passage which followed it). Applying that guidance, he examined the public policy considerations underlying the provisions of the LRA governing acquisition of title to land and the public policy considerations underlying section 144 of LASPOA. He concluded that the mischief at which section 144 was aimed was far removed from the intended operation of the law of adverse possession and that public policy did not preclude the claim for registration. |
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Lord Kerr gave a judgment concurring with Lord Toulson.
Lord Neuberger gave a further opinion, endorsing Lord Toulson.
Lord Mance gave his opinion, suggesting that the range of factors test might not increase certainty. Lord Clarke gave his opinion.
Lord Sumption gave his opinion, with which Lord Clarke agreed.
| “ | 243. The other category comprises cases in which the application of the illegality principle would be inconsistent with the rule of law which makes the act illegal. The paradigm case is a rule of law intended to protect persons such as the plaintiff against exploitation by the likes of the defendant. Such a rule will commonly require the plaintiff to have a remedy notwithstanding that he participated in its breach. The exception generally arises in the context of acts made illegal by statute. In Browning v Morris (1778) 2 Cowp 790, 792, Lord Mansfield expressed the point in this way:
“Where contracts or transactions are prohibited by positive statutes for the sake of protecting one set of men from another set of men, the one, from their situation and condition being liable to be oppressed or imposed upon by the other, there the parties are not in pari delicto; and in furtherance of these statutes, the person injured, after the transaction is finished and completed, may bring his action and defeat the contract.” The classic modern illustration is Kiriri Cotton Co Ltd v Dewani [1960] AC 192, in which a tenant was held entitled to recover an illegal premium paid to the landlord, notwithstanding that his payment of it involved participating in a breach of an ordinance regulating tenancies. Lord Denning, delivering the advice of the Privy Council, observed at p 205 that: “The duty of observing the law is firmly placed by the Ordinance on the shoulders of the landlord for the protection of the tenant.” Hounga v Allen [2014] 1 WLR 2889 on its facts illustrates the same principle. The claimant had been illegally trafficked into the United Kingdom by her employer. Her vulnerability on that account enabled her employer to exploit and ultimately to dismiss her. An attempt to bar her claim for unlawful discrimination on account of her participation in her own illegal trafficking failed. There was no claim under the employment contract itself, which was illegal, but it may well be that a claim for a quantum meruit for services performed would have succeeded on the same ground. There is New York authority for such a result: see Nizamuddowlah v Bengal Cabaret Inc (1977) 399 NYS 2d 854. |
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