The Illegality Defence after Patel v Mirza Lord Burrows Speech

The Illegality Defence after Patel v Mirza

The Professor Jill Poole Memorial Lecture 2022

Aston University, 24 October 2022*

1. Introduction

Before I ever met Jill Poole, I was a great admirer of her Textbook and Casebook on Contract Law.

Her infectious enthusiasm for contract law shone through those books and in her famous prefaces

we glimpsed her dedication to her children, Becky and Alex, and her students. When I finally did

meet her – she accepted my invitation to attend a conference on Contract Terms in Oxford in 2006 -

it was a delight to see that she was just the person I had expected. Modest and unassuming, she

loved contract law not at some high theoretical level but as a practical subject where the fun lies in

exploring and understanding the detail of the rules and principles. In other words, like me, she was a

doctrinal scholar or as one might otherwise put it she was dedicated to practical legal scholarship.

When she died so tragically young in 2016, in my capacity as President of the Society of Legal

Scholars, I attended her funeral – she had been a stalwart of the SLS Executive Committee for many

years – and it was a deeply moving and yet uplifting occasion. I therefore consider it an honour and

privilege to be asked to deliver the Jill Poole Memorial Lecture for 2022.

Illegality as a defence, which is the topic I have chosen for tonight’s lecture, includes contract law

but extends beyond it to, for example, tort and unjust enrichment. Jill of course covered the contract

aspects of it in her contract books but the leading case of Patel v Mirza came after her death so that,

unfortunately, we are deprived of her views on it.

Prior to Patel v Mirza

the conventional approach to the illegality defence required the courts to

apply various Latin maxims. So when I studied illegality as a student, I learned that much of the

relevant law stemmed from the ideas that ex turpi causa non oritur actio (‘no action arises from a

disgraceful cause’) and in pari delicto potior est conditio defendentis (‘where both parties are equally

in the wrong the position of the defendant is the stronger’) and that there is a locus poenitentiae

(‘time for repentance’). We were also taught that there was a reliance rule so that illegality would be

a defence where the claimant had to rely on the illegality to establish or to plead its cause of action.

In addition, in the context of contract, rules developed from the Latin maxims tended to draw

distinctions between illegality in formation and illegality in performance. And in the realm of tort,

illegality became linked with particular rules of causation. But there were also exceptions to these

rules. The truth is that the common law in this area had become a nightmarish mess that was not

only complex and unclear but also produced a mode of reasoning that did not appear to reflect the

underlying issues that, standing back from the detail, one would have expected to be relevant.

Not surprisingly, therefore, there were calls for reform and this led to extensive work over several

years by the Law Commission. I was the Law Commissioner in charge of this project in its early days.

During my time it was thought that the common law had become so entrenched that the only way

forward would be legislative reform and in the first consultation paper our provisional

recommendation was for legislation to introduce a statutory discretion under which the traditional

unsatisfactory rules would be swept away and the courts would be required to take into account

various factors in deciding whether illegality should be a defence.

But subsequently in its report

(widened to include tort as well as contract and trusts) and no doubt influenced by the lack of

Governmental enthusiasm for legislative reform of this area of the common law, the Law

Commission changed tack so that, while still favouring a range of factors approach, the strategy

became one of largely calling on the courts to implement the necessary reform.

There then followed a series of cases in the Supreme Court which revealed an underlying split of

view between those Justices who thought that the existing rules were basically fine albeit needing

some refinements and those who thought that the only satisfactory way forward was to abandon

the conventional rules in favour of a policy-based or range of factors approach along the lines

recommended by the Law Commission. So the scene was set for the show-down in the Supreme

Court in Patel v Mirza heard by a panel of nine Justices.

Mr Patel, the claimant, paid sums totalling £620,000 to Mr Mirza, the defendant, pursuant to an

agreement under which the defendant agreed to use the money to bet on the movement of shares

using inside information. The use of inside information to deal in shares (as, for example, by betting

on their movement) constitutes the offence of insider dealing contrary to s 52 of the Criminal Justice

Act 1993. This was therefore a contract for the commission of a crime. In the event, the agreement

could not be carried out because the expected inside information was not forthcoming. When that

became clear, the claimant sought repayment of the £620,000 as restitution of an unjust

enrichment. Applying the normal rules of unjust enrichment, the claimant would be entitled to

restitution of the £620,000 because the money had been paid for a consideration that had totally

failed ie the claimant had obtained nothing in return for his £620,000 and equally the defendant had

obtained £620,000 for doing nothing. However, the defendant argued that the defence of illegality

meant that the claim should fail so that he did not have to repay the money. The illegality defence

succeeded before the trial judge applying the reliance rule that the claimant had to rely on the

illegality to make out the claim but failed before the Court of Appeal who applied the locus

poenitentiae doctrine. The defendant then appealed to the Supreme Court.

The Supreme Court unanimously dismissed the appeal – that is, the defence of illegality failed - but

for different reasoning than that of the Court of Appeal. By a majority of 6-3, the Supreme Court

favoured a new policy-based approach to the illegality defence which drew on the work of the Law

Commission. Lord Toulson (who had been Chair of the Law Commission for part of the time that the

illegality project was ongoing) gave the leading judgment with whom Lady Hale, Lord Kerr, Lord

Wilson, and Lord Hodge agreed (as did Lord Neuberger albeit with some differences). In contrast,

Lords Sumption, Mance and Clarke favoured retaining the traditional rules, with some tweaking,

and, rather ironically, given the state of the common law, feared that the new approach would

create unacceptable uncertainty.

Lord Toulson explained that, at a high level of generality, a court in deciding on the defence of

illegality should seek to avoid inconsistency in the law, thereby maintaining the integrity of the legal

system,

and that a “trio of necessary considerations” should be taken into account in achieving that

high level goal. These were, first, the purpose of the illegality in question; second, any conflicting

relevant policies; and third, the need to avoid a result that was disproportionate. In deciding on

whether the result was disproportionate, a number of factors might be relevant including the

seriousness of the illegal conduct, its centrality to the claim, whether the conduct was intentional

and whether there was a marked disparity in the blameworthiness of the parties’ conduct.

In Lord Toulson’s words:

‘[O]ne cannot judge whether allowing a claim which is in some way tainted by illegality would be

contrary to the public interest, because it would be harmful to the integrity of the legal system,

without (a) considering the underlying purpose of the prohibition which has been transgressed, (b)

considering conversely any other relevant public policies which may be rendered ineffective or less

effective by denial of the claim, and (c) keeping in mind the possibility of overkill unless the law is

applied with a due sense of proportionality. … That trio of necessary considerations can be found in

the case law.’

With that by way of introduction, I want to go on to explore how the defence of illegality is operating

in the courts today and, in particular, how Lord Toulson’s approach in Patel v Mirza has

subsequently been interpreted and applied in the courts. In doing so, I shall be referring to two

important Supreme Court cases that were heard before I joined the court and in relation to which I

therefore had no input. They were heard within a short time of each other and the judgments were

plainly crafted to provide further clarity to the practical application of Lord Toulson’s approach.

These cases were Grondona v Stoffel & Co

and Henderson v Dorset Healthcare University NHS

Foundation Trust.

In the former, the illegality defence failed. In the latter, it succeeded.

2. Grondona v Stoffel & Co

This was a professional negligence claim, brought in contract and tort, against a firm of solicitors

retained to carry out conveyancing. Ms Grondona had participated with a Mr Mitchell in a mortgage

fraud whereby, inter alia, a lender (Birmingham Midshires) had been deceived into lending money

for the purchase of a lease of a flat by Grondona from Mitchell. By the negligence of the solicitors,

the lease of the flat was not registered in Grondona’s name. In her claim for negligence against

them, it was not in dispute that, if there were no defence of illegality, the claim would succeed

entitling Grondona to damages of £78,000 plus interest. But the solicitors argued that the illegal

conduct of Grondona – she and Mitchell were guilty of conspiracy to commit a mortgage fraud –

meant that there was a defence of illegality to her claim. It was held by the Supreme Court,

upholding the decision of the lower courts, that, applying Patel v Mirza, illegality was not here a

defence.

The leading judgment was given by Lord Lloyd-Jones (with whom Lord Reed, Lord Hodge, Lady Black

and Lady Arden agreed). He sought to apply Lord Toulson’s trio of considerations. In doing so, four

particularly important points may be said to emerge from his judgment.

First, at a high level, the goal in applying the illegality defence is to avoid inconsistency within the

legal system.

Secondly, the identification and assessment of the relevant policies in play normally falls within the

competence of judges to carry out without the need for expert evidence.

Thirdly, that process of identifying and assessing the relevant policies should be flexible and should

not become too mechanistic.

Fourthly, one may not need to move on to consider proportionality where it is clear from the first

two of Lord Touslon’s trio of consideration, ie stages (a) and (b), that the defence of illegality should

not be allowed.

Applying this approach to the facts, Lord Lloyd Jones considered that allowing the defence would not

seriously deter mortgage fraud. On the other hand, denying the defence would undermine the good

reasons why the law imposes duties of care on solicitors, would tend to increase the prospect of

reducing mortgage fraud, would on the facts help to protect other victims of fraud (ie the lenders

who could pursue Grondona if she succeeded in recovering compensation) and would recognise that

Grondona had a valid property interest (that could be registered). It was also thought relevant that

what Grondona was here seeking was compensation for loss not profit from wrongdoing.

Given that the policies clearly favoured denying the defence, there was no need to go on to consider

proportionality. But if one did so, to allow the defence would be a disproportionate response

because the illegality was not at all central to the negligence of the solicitors or, put another way,

the negligence of the solicitors was conceptually entirely separate from the illegality.

The defence of illegality was therefore held to be inapplicable and the claim for professional

negligence succeeded.

3. Henderson v Dorset Healthcare Foundation Trust

The claimant stabbed her mother to death while suffering a psychotic episode. She was convicted of

manslaughter by reason of diminished responsibility. The defendant health authority admitted

negligence in failing to have the claimant returned to hospital. The claimant brought an action in the

tort of negligence against the health authority in which she claimed as damages the loss she had

suffered consequent on having killed her mother, which included damages for her loss of liberty and

the loss of her share of her mother’s estate by reason of the Forfeiture Act 1982. The sole issue was

whether the defendant had a defence of illegality to the claim for negligence. The Supreme Court

held that it did have that defence.

In contrast to Stoffel, a complication in this case in applying Patel v Mirza – and it was for this reason

that a panel of seven Justices heard the case - was that there was a previous decision of the House

of Lords in Gray v Thames Trains Ltd

which, on somewhat similar facts, had allowed the defence of

illegality. Although the negligence in that case had been very different – it concerned negligence in

relation to a train accident in which the claimant had suffered PTSD – the essential similarity was

that, as a consequence of the negligence, the claimant had killed someone and had been convicted

of manslaughter, by reason of diminished responsibility, for that death.

The leading judgment in Henderson was given by Lord Hamblen (with whom Lord Reed, Lord Hodge,

Lady Black, Lord Lloyd-Jones, Lady Arden and Lord Kitchin agreed). In relation to the application of

Patel v Mirza Lord Hamblen made a number of important points. I here mention six of them.

(i) Although this was implicit in Stoffel, he explicitly stated

that the policy-based approach of Patel v

Mirza applies across civil law and is not confined to claims in unjust enrichment or contract. It

applies as in Stoffel and in this case to torts but also to claims based on property law.

(ii) As was also made clear in Stoffel, Lord Hamblen was of the view that usually evidence as to the

policy considerations would be unnecessary.

(iii) He clarified that the consideration of policies at stages (a) and (b) requires one to consider all the

relevant policies in favour of applying the defence (ie denying the claim) at (a) and then all the

relevant policies for denying the defence (ie allowing the claim) at (b).

(iv) As was said in Stoffel, Lord Hamblen was of the view that, where the balancing of policy

considerations comes down clearly against applying the defence of illegality, there is no need to go

on to consider proportionality.

(v) Lord Hamblen made clear that Patel v Mirza was concerned with what can be labelled common

law illegality and not statutory illegality.

I will return to this point later.

(vi) As regards precedent, the adoption of the new policy-based approach in Patel v Mirza did not

wipe away existing precedent.

Patel v Mirza did not represent ‘year zero’. The exercise was one of

checking whether past precedents were ‘Patel-compliant’.

Applying all this to the case at hand, Lord Hamblen identified a number of policies supporting denial

of the claim (ie that the defence of illegality should apply). These included avoiding inconsistency in

the legal system (ie while recognising diminished responsibility, criminal law treated the defendant

as guilty of, and hence responsible for, the death), the close connection between the crime and the

claim, and the general deterrence of crimes. The polices going the other way – such as upholding

duties of care and providing compensation to the victims of torts – were plainly outweighed by the

former policies. As the policies favoured allowing the defence, one needed to move on to the third

stage, and here the denial of the claim would not be disproportionate taking into account, for

example, the centrality of the conduct to the claim and the criminal guilt of the defendant in that

she knew what she was doing and that it was legally and morally wrong. Applying the approach in

Patel v Mirza, therefore, that the defence of illegality should succeed.

Furthermore, this policy-based analysis was consistent with the decision and most of the reasoning

of the House of Lords in Gray, albeit that there had there been no consideration of proportionality

by their Lordships. This meant that Gray was ‘Patel-compliant’ and should be followed in this case.

It should be realised that the facts of Henderson and Gray may be considered somewhat exceptional.

In Patel v Mirza the tenor of the majority judgments was that, at least in restitution of unjust

enrichment cases - because one is seeking to restore the pre-illegality position rather than to

enforce a contractual obligation upholding an illegal position - there is a very strong argument for

applying normal civil law rules unaffected by illegality and leaving the criminal law to deal with the

criminality involved. The same may be said of claims in tort and this derives support from Stoffel. But

Henderson and Gray show that there are limits to that approach.

Taken together, Stoffel and Henderson in the Supreme Court have served to clarify and indeed

simplify the application of the trio of considerations laid down in Patel v Mirza. With the overall aim

of avoiding inconsistency, one must identify and weigh the relevant policies for and against the

illegality defence and then, if the former outweigh the latter (ie the policies favour allowing the

defence), one must go on to consider whether allowing the defence would be a disproportionate

response.

Having said all that, in the light of these two cases, I do have some lingering concerns as to whether

the attempt made in Patel v Mirza to structure the analysis through a trio of considerations is to be

preferred to an approach which would have allowed the courts, more freely, to consider and

articulate a range of factors in arriving at their decision. There is some danger of the courts being

unnecessarily strait-jacketed into a mechanical approach when it may have been preferable to have

permitted the courts to consider all relevant factors and to articulate those considered important in

applying or rejecting the illegality defence in the particular case. Not least because of the

requirement, as far as possible, to respect precedent, I doubt whether courts needed the structure

provided by the trio of considerations in order to marshal the relevant factors. This links to the

further point that, rather than viewing the overall aim as being to avoid inconsistency in the legal

system, one might regard that policy as merely one of the relevant policies in play which will more

obviously have a central role to play in some cases than in others. Similarly, proportionality might

have been best treated as one relevant factor to be considered because, again, it may have greater

resonance in some cases than others.

It is important to add that the new policy-based approach should ensure that, in contrast to the old

unsatisfactory rules, new rules on the illegality defence can in time be formulated that are fit for

purpose and reflect sound underlying policies. Those new rules need to be sufficiently flexible to

allow the relevant policy factors to be taken into account but also, so far as possible, should be

consistent with past decisions.

4. Statutory illegality and common law illegality

A further point made by Lord Hamblen in the Henderson case is that Patel v Mirza was concerned

with what he referred to, as ‘common law illegality rather than statutory illegality’.

He continued,

‘Where the effects of the illegality are dealt with by statute then the statute should be applied.’ And

as Lord Toulson said in Patel, ‘The courts must obviously abide by the terms of any statute.’

This relationship between statutory and common law illegality is not straightforward. However, it

must be stressed that it is in no sense a new issue created by Patel v Mirza.

What can cause initial confusion is that the terms common law and statutory illegality are not here

referring to the source of the illegality but to its effects on the claim in question. In most cases, at

least those involving crimes, the source of the illegality is statutory. That is, the crime is laid down in

statute rather than by common law. Indeed, that is true of Patel v Mirza itself whether one regards

the relevant crime as the statutory offence of insider dealing or the statutory offence of conspiracy

to commit insider dealing (the common law offence of conspiracy having been made a statutory

offence under the Criminal Law Act 1977). With statutory illegality, one is concerned with applying

whatever the statute lays down, expressly or impliedly, as to the effects of the illegality. This is

determined by ordinary statutory interpretation. Common law illegality is applied where the effects

of the illegality have not been laid down, expressly or impliedly, in the statute (ie the statute has not

dealt with the effects of the illegality). With common law illegality, one is concerned to determine

the effects of the illegality at common law and this is where Patel v Mirza applies.

Where the source of the illegality is statutory, one must first therefore consider whether the effects

of the illegality are dealt with, expressly or impliedly, in the statute. Where the statute does not

deal, expressly or impliedly, with the effects on the claim in question one must go on to consider

common law illegality and Patel v Mirza. Perhaps the best known case where a statutory illegality

defence succeeded was Re Mahmoud and Ispahani.

Here a wartime order, made by delegated

legislation, prohibited the purchase or sale of linseed oil without a licence from the Food Controller.

The claimant (who had a licence) contracted to sell linseed oil to the defendant, who did not have a

licence, although the claimant was told by the defendant that he did have a licence. The defendant

refused to accept the oil but the claimant’s action for damages for non-acceptance failed because

the contract was prohibited by the legislation and was therefore, by necessary implication,

unenforceable by either party. The statute therefore comprehensively dealt with the effects of the

illegality and there was no role for common law illegality.

The decision of the Privy Council in Energizer Supermarket Ltd v Holiday Snacks Ltd

is a useful

illustration of a post-Patel case that exemplifies this relationship between statutory illegality and

common law illegality. A principal issue in the case was whether an equitable easement allowing a

gas pipeline to run under the land of the defendant, in favour of the claimant, was unenforceable by

the claimant because of illegality in that no licence for the pipeline had been obtained by the

claimant (or its predecessors in title) contrary to the Petroleum Act in Trinidad and Tobago. It was

held that there was no illegality defence, whether statutory or common law.

There was no statutory illegality defence because, in contrast to Re Mahmoud and Ispahani, the

relevant statute, the Petroleum Act, on its proper interpretation, did not prohibit the granting of the

easement and did not impliedly render the easement unenforceable.

Turning to common law illegality (on the basis that the statute had not ousted the common law ie it

had not precluded unenforceability at common law) then, applying Patel v Mirza, as clarified in

Stoffel and Henderson, the policies, in favour of the illegality defence, were clearly outweighed by

the policies favouring denying the illegality defence.

5. Conclusion

Illegality as a defence raises many fascinating issues. In this lecture in memory of Jill Poole, I have

touched on the relationship between common law and statutory illegality but I have principally been

concerned to explain and evaluate the decisions of the Supreme Court in Stoffel and Henderson,

which have simplified and clarified the new approach to illegality laid down in Patel v Mirza.

* I am most grateful to Adam Shaw-Mellors, senior lecturer in law, Aston Law School, for the organisation of

the lecture; and to the Dean of Aston Law School, Jonathan Fortnam, for chairing the lecture. A video of the

lecture is available on the Aston University website.

[2016] UKSC 42, [2017] AC 467.

Law Commission Consultation Paper No 154 Illegal Transactions (1999).

Law Commission Consultation Paper No 189, The Illegality Defence (2009); Law Commission Report No 320,

The Illegality Defence (2010).

This was Justice McLachlin’s phrase in her influential judgment in the Supreme Court of Canada in Hall v

Hebert [1993] 2 SCR 159. This is the same idea as not ‘stultifying the law’ which was the language used by Lord

Radcliffe in Boissevain v Weil [1950] AC 327, HL.

[2016] UKSC 42, [2017] AC 467, at [101].

[2020] UKSC 42, [2021] AC 540.

[2020] UKSC 43, [2021] AC 563.

[2009] UKHL 33, [2009] AC 1339.

[2020] UKSC 43, [2021] AC 56, at [76].

Ibid at [115].

Ibid at [116]-[122].

Ibid at [123].

Ibid at [74]-[75].

Ibid at [77]-[78]. A useful analogy might be drawn with the recognition of the law of unjust enrichment in

Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548. It is not suggested that that decision at a stroke wiped away all

the decisions in past cases based on the rejected ‘implied contract’ approach to restitution. Rather, after that

decision, the courts should strive to arrive at the same decisions as bound them before but applying an unjust

enrichment analysis.

Ibid at [145].

Ibid at [74].

[2016] UKSC 42, [2017] AC 467, at [109].

[1921] 2 KB 716, CA.

[2022] UKPC 16.