UK: The Illegality Defence - Not Always A Complete Bar To Recovery

Last Updated: 17 November 2009
Article by Jonathan Thorpe, Anna Briggs and Rob Morris

In a recent judgment, the High Court has revisited the principle that a claimant cannot rely on its own illegal act to make a claim (the illegality defence). The illegality defence was discussed at length in the recent decision of the House of Lords in Stone & Rolls Ltd v Moore Stephens (to read our Law Now on the House of Lords' decision click here). The High Court applied the principles set down by the House of Lords in Stone & Rolls but also indicated that:

  • A claim can still succeed if the alleged illegality is sufficiently remote to the claim being made; and
  • It is possible for the illegality defence to apply to defeat a particular head of loss or portion of the quantum claimed but for the remainder of a claim to succeed.

Background

The claimants alleged that the defendant over-valued a number of hotels, which caused the claimants to pay too high a price for them. One method for calculating loss was the difference between the actual price paid for the hotels and the true valuation (the other method involved comparing the defendant's valuation with the true valuation). Of the total price the claimants paid for the hotels 92% was paid direct to the seller and 8% was paid to a property location agent.

The defendant alleged that the additional 8% paid to the property location agent had been added to the purchase price for illegal tax evasion purposes. Accordingly, the whole claim should fail on the basis of the illegality defence.The claimants applied to have this allegation struck out on the grounds that even if the motivation for paying the additional 8% was illegal tax evasion, the illegality defence did not apply to defeat their claim.

Decision

The Court found that, even if illegal tax evasion was established in relation to the 8% fee paid to the agent, the claimant would not be seeking to rely on or enforce a contract based on illegal intention. The claim against the defendant relied on the defendant's contract with the claimants to value the hotels; the alleged illegality was contained in the contracts for sale of the hotels. Although there may have been some element of illegality to the arrangements as a whole, the alleged fraud was too remote from the alleged breach of contract / negligence of the defendant, which lay at the heart of the case. As a result, Mr Justice Coulson concluded that the illegality defence was "very likely" to fail in relation to the claim as a whole.

However, Mr Justice Coulson was not prepared to strike out the allegation. In his view although the whole claim was unlikely to fail for illegality, the claim for the additional 8% might. This meant that it was possible for the claim for the portion of the loss tainted with illegality to fail but for the remaining portion of the loss to be recoverable.

Comment

This decision confirms that the illegality defence can apply to prevent a claimant from recovering the benefit of his own wrongdoing even if he has not pleaded or expressly relied on the illegality in making the claim. However, it also highlights the limits of the illegality defence and demonstrates that a claimant potentially tainted with illegality will not always be prevented from bringing successful claims.

Further reading: K/S Lincoln and others v CB Richard Ellis Hotels Limited [2009] EWHC 2344 (TCC) Moore Stephens (a firm) v Stone & Rolls Ltd (in liquidation) [2009] UKHL 39

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 17/11/2009.

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