Claim for recovery of money paid under an illegal contract
Patel paid £620 000 to Mirza to bet on Royal Bank of Scotland shares, using inside information.
The purpose of the contract was never carried out and Patel sued for the return of his money.
Deputy Judge David Donaldson QC refused the claim on the ground that it was based on an illegal agreement.
The Court of Appeal (Rimer, Vos and Gloster LJJ) found in favour of Patel. Gloster LJ found that in reality, Patel was not relying on the illegal contract but seeking to undo it. Rimer and Vos LJJ held that they had a discretion to allow the claim to carry out justice even if Patel was relying on an illegal contract.
A nine member panel of the UKSC was divided: Lords Toulson, Kerr, Wilson, Hodge, Neuberger and Lady Hale wished to lay down rule that the courts had a discretion to allow claims tainted with illegality, while Lords Sumption, Clarke and Mance favoured a stricter approach referred to as the “reliance rule”: the court would only assist those litigants who could base their claim on a separate untainted ground e.g. ownership. All agreed that Patel should succeed.
Those in favour of a discretion were of the view that the situations which arose were too diverse to be solved by the reliance rule. Lord Toulson (who delivered the main judgment): “The rule as stated [does] not permit differentiation between minor and serious illegality and between central or peripheral illegality.”
On the other hand, Lord Sumption: “[there is a] tendency of any test broader than the reliance test to degenerate into a question of instinctive judicial preference for one party over another.”
Although Lord Toulson considered other common law jurisdictions: Australia, New Zealand, Canada and the USA, he did not consider South Africa where the leading judgment is Jajbhay v Cassim.
In Jajbhay v Cassim the Roman Law roots of the complementary maxims, ex turpi causa non oritur actio and in pari delicto potior conditio defenditis were considered.
In Jajbhay v Cassim the state of English Law, as it then was, was criticized for blurring the distinction between the two maxims.
In Jajbhay v Cassim, a landlord entered into a lease prohibited by law. Without cancelling the lease, he sought to recover possession by asking the court to, in effect, undo the illegal contract.
The Court applied the maxim, in pari delicto and refused the relief.
In so doing, Watermeyer JA examined Roman law and Roman Dutch Authorities as well as English Law. He concluded that in our law there should be a discretion based on public policy to administer simple justice between man and man.
He rejected the reliance theory in English Law, noting that it was confined to enforcement of collateral transactions connected with the illegal contract and, of uneven application, because of the rules of pleading: a plaintiff who had to rely on an illegal contract to rebut a plea of illegality would fail.
Watermeyer JA quoted Wilmot LCJ as follows: “All writers upon our law agree on this, no polluted hand shall touch the pure fountains of justice. Whoever is a party to an unlawful contract, if he hath once paid the money stipulated to be paid in pursuance thereof, he shall not have the help of a court to fetch it back again. You shall not have a right of action when you come to a court of justice in this unclean manner to recover it back – “procul, o procul, este profani”.
He also quoted Street, quoting Reynell v Sprye: “where the parties to a contract against public policy or illegal are not in pari delicto (and they are not always so), and where public policy is considered as advanced by allowing either, or at least the more excusable of the two, to sue for relief against the transaction, relief is given.”
Jajbhay v Cassim overruled and earlier Cape Case, Brandt v Bergstedt where the in pari delicto rule was strictly applied which had the result of allowing a party to an illegal sale to retain the purchase price without delivering the cow sold.
On the development of the common law, Stratford CJ in Jajbhay v Cassim said as follows:
“Now the Roman Dutch Law, which we must apply, is a living system capable of growth and development to allow adaptation to the increasing complexities and activities of modern civilized life. The instruments of that development are our own courts of law. In saying that of course I do not mean that it is permissible for a court of law to alter the law; its functions are to elucidate, expound and apply the law. But it would be idle to deny that in the process of the exercise of those functions rules of law have slowly and beneficially evolved. That evolution, to be proper, must come from, and be in harmony with, sound first principles which are binding upon us.” In these sentiments, he echoes the insight of Cardinal Newman in the Development of Christian Doctrine, where he compares development of a system of thought to that of a human being: the baby grows into an adult but remains the same person.
Lord Sumption said as follows:
“[This case] raises one of the most basic problems of a system of judge-made customary law such as the common law. The common law is not an uninhabited island on which judges are at liberty at to plant whatever suits their personal tastes. It is a body of instincts and principles which, barring some radical change in the values of our society, is developed organically, building on what was there before. It has a greater inherent flexibility and capacity to develop independently of legislation than codified systems do. But there is a price to be paid for this advantage in terms of certainty and accessibility to those who are not professional lawyers. The equities of a particular case are important. But there are pragmatic limits to what law can achieve without becoming arbitrary, incoherent and unpredictable even to the best advised citizen, and without inviting unforeseen and undesirable collateral consequences.”
In Patel, as in Brandt v Bergstedt, Lord Mansfield’s dictum in Holman v Johnson is repeated:
“The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident if I may so say. The principle of public policy is this; ex dolo malo non oritur actio. No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, on plaintiff’s own stating or otherwise, a cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted.”
An inconsistent aspect of Lord Sumption’s speech is his reference to St. Thomas Aquinas’ solution in the case of serious illegality e.g. conspiracy to murder: the proceeds are forfeited to the state irrespective of whether the contract is carried out.
The degrees of illegality which inevitably arise, is a factor which militates against a fixed rule, one size fits all, and is, as pointed out by Lord Toulson, one of the reasons why a discretion is necessary.
Also, it usually involves some artifice to separate out one good element and to ignore an unlawful fundamental purpose.
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