Ireland: Illegality And The Enforcement Of Contract

Last Updated: 3 November 2015
Article by John Breslin

Regulation is a fact of life for every financial service provider ("FSP"). FSPs face an ever-increasing volume of regulation. Regulatory requirements range from those which go to the root of the FSP's business (solvency, fitness and probity, proper governance) to more technical requirements (such as financial reporting and record keeping). What is the effect of a breach of a regulatory provision on an FSP's rights to enforce a contract with its customer or counterparty? If the FSP breaches a regulatory provision associated with a transaction is the underlying contract unenforceable by it? If this is a loan does it mean that the FSP lender cannot compel repayment, or enforce security? If it is a trade in securities or derivatives does it mean that the FSP cannot compel its counterparty to complete? It is clear that the answer will often have significant commercial implications.

The question is simple but the answer is complicated. The key difficulty facing the FSP is that it has (in legal terms) put a foot wrong and yet it is looking to the law (and ultimately a court of law) to assist it to compel the customer or counterparty to perform obligations it has signed up to. Like many complex legal doctrines there is an elegant Latin phrase to summarise it – ex turpi causa non oritur actio. A related doctrine is that where each party is in breach of the law, the defendant is always in a better position – the pari delictu doctrine. The main policy will be referred to in this article as the "ex turpi policy".

The ex turpi policy can cause injustice. (The case law makes it clear that this policy is not about doing justice between the parties.) A regulatory breach may cause no loss or prejudice to the FSP's customer or counterparty. The FSP's regulator may well impose sanctions on the FSP for the breach. However to allow the customer or counterparty to exploit the breach so as to resile from its contractual obligations is unfair. This unfairness is exacerbated where the FSP has been subject to a fine or other penalty for in that case the FSP suffers a "double whammy" – the regulatory sanction, and the inability to recover what is otherwise contractually due from the customer or counterparty.

The law dealing with these issues has never been clear. A contract can be affected by illegality in many different factual circumstances. Therefore it is difficult to find a common thread in all of the relevant case law.

Irish Supreme Court decision - overview

However a recent decision of the Irish Supreme Court helps in understanding how a court should resolve such dilemmas. In brief, there are two key messages:

  • the ex turpi policy has to be tempered in the light of the sheer volume of regulation prevalent in modern commercial life; and
  • in many cases justice is achieved by upholding the contract rather than declaring it to be unenforceable by reason of the regulatory breach.

In more detail

In Quinn v Irish Bank Resolution Corporation Limited [2015] IESC 29 guarantors of loans made by Anglo Irish Bank ("Anglo") sought to repudiate their liability because they claimed that the loans which they had guaranteed had an illegal purpose – namely a scheme by Anglo (then a listed company) to prop up its share price. It was alleged that the Anglo loans were used by the borrowers to purchase shares in Anglo thereby creating a false market. The borrowers were companies in the Quinn group. The guarantors were the spouse and children of the controller of the Quinn Group, Sean Quinn. (By the time the litigation was commenced Anglo had been nationalised and changed its name, and eventually went into special liquidation and was acting through its joint liquidators.)

If a listed company lent money to third parties to enable them to buy shares in the company so as to prop up its price on the stock exchange this would be illegal on a number of fronts. First, it would amount to market manipulation. Secondly, it would amount to unlawful financial assistance by a company in connection with/for the purpose of the purchase of its own shares. Market manipulation and unlawful financial assistance are criminal offences.

Anglo sought trial of a preliminary issue – namely whether the Quinns could rely on Anglo's alleged illegal conduct to support their claim that their guarantees were invalid. The High Court held that they could. Anglo appealed to the Supreme Court. The Supreme Court held that even if it was proved that the underlying loans had an illegal purpose, it did not follow that the Quinns' liability as guarantors would be unenforceable.

The Supreme Court held that the effect of any breach of law is determined primarily by reference to the intention of the legislature in outlawing the particular act or omission. In this regard, a key question is whether the legislature intended that contracts sufficiently connected with the illegality must be regarded as unenforceable.

The Supreme Court described the outcome in each case as "statute specific but ... not case specific". Accordingly, the outcome will depend on analysis of the particular statute which has been breached. The ex turpi policy is not an absolute rule: much will depend on the nature of the wrongdoing concerned. The court will be mindful that commercial entities operate in a highly regulated environment.

Where the statute spells out the statutory consequences of a breach, then the result is predictable. However, many (if not most) statutes do not do so. The court will then have to see if the legislature implied that certain consequences were to follow. The court will also bear in mind that public policy, understood in the widest sense, may at times be better served by upholding a contract rather than declaring it to be unenforceable. The court will also consider how closely connected the transaction is to the relevant illegality. Further the absence of a provision stipulating that a contract entered into in breach of the statute is to be rendered void or unenforceable could itself suggest that a court should not treat it to be so.

Conclusion

In conclusion, the Quinn judgment cautions against the automatic application of the ex turpi policy. The court's role should be more nuanced: unlike the ex turpi policy, it should engage with the legislative intent and the justice of the case. The primary role of the court is to give effect to the legislation in question. If the legislation does not provide a clear answer then the court will balance the ex turpi policy with the risk of an injustice should the contract be declared unenforceable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions