Why Is The "illegality" Defence Back In The Spotlight?

It is not uncommon for defendants to professional negligence claims to argue that the claimant should be barred from recovering damages because his or her cause of action is tarred by illegality.
UK Litigation, Mediation & Arbitration
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It is not uncommon for defendants to professional negligence claims to argue that the claimant should be barred from recovering damages because his or her cause of action is tarred by illegality. However, over recent years, the law has taken a variety of approaches to when illegality will provide a defence. With the issue about to come before the Supreme Court again, Helen Evans and Ian McDonald of 4 New Square explain.

What is the relevant test for illegality and where does it come from?

Until 2016, the defence only worked if the defendant could show that the claimant had to rely on the illegality in order to bring the claim: Tinsley v Milligan [1994] 1 AC 340. In Patel v Mirza [2016] UKSC 42, the Supreme Court decided that this approach was too formulaic.

In Patel, the claimant gave the defendant £620,000 to bet on a bank's share prices with the benefit of insider information. The betting did not take place, but the defendant did not return the money. The claimant sued, but the defendant argued that the claim should fail because the claimant had to rely on an illegal agreement. The Supreme Court disagreed and established a new framework for deciding when illegality will prevent a claim. The new approach required the court to consider:

  • The underlying purpose of the prohibition which has been transgressed and whether that purpose would be enhanced by denial of the claim;
  • Any other relevant public policy on which the denial of the claim may have an impact; and
  • Whether denial of the claim would be a proportionate response to the illegality.

The Supreme Court pointed out, however, that a judge is not free to decide a case in an undisciplined way. It emphasised that the court should always give a principled and transparent assessment of the considerations identified.

What is the potential problem with this new approach to the illegality defence?

Supporters of having more broad-based legal tests argue that they allow more nuanced outcomes. However, the trouble with taking a more liberal approach is that it can make the outcome of cases less predictable. The fact that the illegality defence has come before the Court of Appeal and Supreme Court so frequently in 2019 and 2020 suggests that the consequences of the Patel approach are yet to become clear. Below we explain three of the recent cases that have grappled with the issue, before returning to the case being argued before the Supreme Court this week.

The three recent cases are a good indication of the variety of contexts in which an illegality defence can arise - from the running of a company, to abusive re-litigation. They also demonstrate how the public policy considerations can lead to different outcomes in different spheres.

Starting with the running of a company, in Singularis Holdings v Daiwa Capital Markets [2019] UKSC 50, a company sued a bank for breaching its Quincecare duty not to execute a customer's order in circumstances of apparent dishonesty without making inquiries. The sole shareholder/board chairman of Singularis made fraudulent transfers of the company's assets via the bank Daiwa. Singularis sued the bank, and the bank relied on an illegality defence (because the chairman had acted in breach of fiduciary duty owed to the company). The Supreme Court decided that illegality did not bar the claim. Applying the Patel v Mirza approach, it pointed out that fiduciary duties are intended to protect a company from becoming the victim of the wrongful exercise of power by the company's officers. That purpose would not be enhanced by preventing the company's recovery of the money wrongfully removed from its account. Indeed, the Supreme Court decided that denying the claim would undermine the public interest in requiring banks to play an important part in uncovering financial crime and money laundering.

Turning to abusive litigation, in Day v Womble Bond Dickinson [2020] EWCA Civ 447, an unsuccessful appellant in criminal proceedings brought a professional negligence claim against his former solicitors, WBD, for their purported failure properly to defend him. His action was struck out on the basis that (among other things) it breached the doctrine of illegality. This was because the judge held that in order to succeed, the claimant would have to prove outcomes which were inconsistent with his criminal conviction and sentence.

The Court of Appeal was asked to determine whether WBD's alleged failure to pursue certain arguments on the appellant's behalf was indeed barred by the illegality defence. The Court of Appeal - relying upon both Patel v Mirza and Gray v Thames Trains Ltd [2009] UKHL 331 - dismissed this part of the appeal. It held that awarding damages in a civil claim for a disadvantage imposed on a claimant by the criminal courts as punishment for his criminal act would result in an inconsistency between the law causing the loss and the law ordering compensation. In other words, allowing a convicted criminal later to attack his conviction in a civil claim was contrary to public policy.

Returning to the commercial context, in Bank St Petersburg PJSC v Arkhangelsky [2020] EWCA Civ 408, the claimant bank brought a claim against a husband and wife under personal guarantees and a personal loan. The couple counterclaimed against the bank and its chairman for damages for an alleged unlawful conspiracy to seize the assets of two of their businesses in Russia. The trial judge dismissed their counterclaims on the evidence (but declined to make the declarations sought as to their bad faith in bringing them). The couple appealed. On that (ultimately successful) appeal, the bank and its chairman argued that the trial judge had misapplied Patel v Mirza and should have dismissed the counterclaims on grounds of illegality (since the first defendant had admitted paying bribes to obtain licences for the businesses). The Court of Appeal disagreed, finding that:

  • It would do nothing to prevent or discourage bribery to deny the couple's claim for damages for a subsequent dishonest conspiracy;
  • There was a strong additional public policy in allowing them to vindicate their rights (if entitled to do so) for that dishonest conspiracy; and
  • Denial of the counterclaim would be a disproportionate approach to the illegality (particularly given that punishment for bribery is generally a criminal matter).

What illegality issue is going to the Supreme Court this week?

This week (on 5 May 2020), the Supreme Court is hearing the appeal from the Court of Appeal's decision in Stoffel & Co v Grondona [2018] EWCA Civ 2031. The appeal also focuses on whether the Court of Appeal erred in its application of the Patel v Mirza guidelines.

In Stoffel, the claimant Ms Grondona and a Mr Mitchell agreed contrived arrangements between them to purchase a property, which were really a mechanism for her lending her name to Mr Mitchell for mortgage applications. The defendant, Stoffel & Co, negligently failed to register the transfer of the property to Ms Grondona or the new lender's charge. Ms Grondona was left liable for the mortgage without any interest in the property. She sued Stoffel & Co, who argued that the property transaction had been a fraud aimed at deceiving the lender.

The Court of Appeal, applying Patel v Mirza, concluded that:

  • While mortgage fraud was clearly "a canker on society" and it was "extremely important that dishonest applicants for mortgages should not be empowered by the law to abuse the system",2 the purpose of prohibiting mortgage fraud would not be enhanced by excusing negligent solicitors for their negligence;
  • Public policy required professionals to be held to high standards; and
  • Denying Ms Grondona a claim against her solicitors would be disproportionate particularly in circumstances where the new lender had not complained, and Ms Grondona would not have been the party profiting from the fraud.

We see some similarity to the approach adopted by the Court of Appeal in Stoffel to the analysis of when a solicitor who has acted in breach of trust can rely on s. 61 of the Trustee Act 1925 to reduce or extinguish his liability, most notably in in Dreamvar v Mishcon de Reya [2018] PNLR 29. In that case, the judge decided that the defendant solicitors were better placed to absorb the liability for failing to take further steps to protect their client against fraud. This was partly because they had deeper pockets, but partly also because the law has high expectations of solicitors.

What can we take from the above?

Plainly, the outcome in Day v WBD will be of some comfort to solicitors. However, it was very much context-specific - indeed, the Court of Appeal sought to distinguish cases such as Gray and Day from Patel v Mirza. The Day decision can be taken as an indication of the law's unease with allowing inconsistent decisions from different courts. Such unease does not arise in commercial cases.

The common theme in the decisions in the commercial context (in particular Singularis and Stoffel in the Court of Appeal) is that the law expects some defendants to police wrongdoing in some situations (such as dishonest transactions). Whether the correct balance has been struck between a professional person's duty to prevent fraud, and a claimant's right to recover, is likely to be a key issue for the Supreme Court in Stoffel.


1. In that case, the House of Lords allowed an appeal to prevent the claimant from recovering damages for loss of earnings after he had been detained for killing another man

2. Judgment of Gloster LJ.

Originally published 4 May 2020 .

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.

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