United Kingdom Judiciary Speeches

• 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.

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.

‘[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.’

• 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.

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.

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

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.

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.