28 July 2016

The defence of illegality has long been a difficult subject for the courts. Whilst the maxim "no court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act" is, on its face, straightforward, in practice it has been applied inconsistently and, in the words of Lord Sumption in Jetivia v Bilta (2015), incoherently.

The challenge comes from the nature and degree of the illegal act involved: on the one hand, the courts cannot legitimise the actions of a party seeking or enforcing an illegal object or agreement, but on the other, they cannot refuse entirely to assist a party simply because their dealings have been tainted by unlawfulness.

The House of Lords made a difficult and much criticised ruling on the illegality defence in Tinsley v Milligan (1994); since then there have been many calls for the law to be revisited and clarified. Those calls have now been answered in the July 2016 decision of Patel v Mirza, in which the Supreme Court has formulated a new test to assess the scope of an illegality defence in a claim. Although the court unanimously agreed the practical outcome of the appeal, namely that Mr Mirza should not be entitled to rely on the illegality defence so as to retain a windfall of some £620,000 at the expense of Mr Patel, there was strong dissent on the test to be applied.

Toulson LJ gave the 5-4 majority judgment, concluding that the illegality defence should be available only where, as a matter of public policy, upholding the claim would harm the integrity of the legal system. Thus, the appropriate test was whether it would be disproportionate to refuse relief to which the claimant would otherwise be entitled, taking into account:

  • The underlying purpose of the law which has been broken
  • Any relevant public policies which might be rendered ineffective or less effective should the claim be denied
  • The possibility of overkill unless the law is applied with a due sense of proportionality.

This is a highly flexible approach to which numerous factors may be relevant, and there was some criticism amongst the dissenting judges that such an approach essentially amounted to little more than judicial discretion. The dissenting judges preferred a narrower, simpler, test based on whether the parties could be returned to the position they would have been in but for the illegal enterprise. Certainly, the flexibility of Toulson LJ’s new "range of factors" test is inherently challenging, and, in practice, it may prove no easier to apply than the Tinsley reliance test.

Going forward, we expect to see further decisions considering the application of the “range of factors” test, particularly in relation to which factors should or should not be taken into account when assessing a potential illegality defence. The old, difficult, test, has been replaced by a new, but still difficult, test – if the Supreme Court was aiming for clarity and consistency going forward, it may have missed the mark.

Patel v Mirza [2016] UKSC 42

Key contact

Paul Haggett

Paul Haggett Partner

  • General Counsel
  • DPO

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