Hughes & Ors v Asset Managers Plc

A statutory prohibition does not automatically make a contract void. The court must construe the legislation and decide whether Parliament intended to prohibit the contract itself. Relevant considerations include the statutory language, the target of the prohibition, its purpose and mischief, public policy, and the consequences of invalidity. A prohibition directed at an unlicensed representative’s dealing, backed by criminal penalties, did not make investment management agreements void where the principal was licensed. Invalidity could harm innocent parties and give the non-compliant dealer a defence to contractual claims. Authorities under different statutes, where the transaction or contracting party was prohibited, were distinguishable.

The appellants entered into five discretionary investment management agreements and remitted approximately £3 million to the respondent investment manager. After the investments were sold at a loss, they claimed the shortfall, arguing that the agreements were void because the individual who signed them lacked a representative’s licence under the Prevention of Fraud (Investments) Act 1958.

A Deputy High Court Judge refused summary relief, determined the statutory issue against the appellants under Order 14A, and granted leave to appeal. The central issue was whether contravention of section 1(1)(b) rendered the agreements void and, if so, whether the appellants could recover the claimed balance.

The appeal was dismissed unanimously. Lord Justice Saville delivered the leading judgment. Lord Justice Hirst agreed with his reasoning and added further reasons. Lord Justice Nourse agreed with both judgments.

1. The governing question was whether, on the proper construction of the statute, Parliament intended to prohibit the contract in the sense of rendering any purported contract void. The court applied the approach stated in Cope v Rowlands (1836) 2 M & W 149 and the formulation in St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267.
2. Section 1(1)(b) of the Prevention of Fraud (Investments) Act 1958 prohibited the servant or agent from dealing without a representative’s licence. It was directed at the agent’s conduct, rather than at the transaction or either contracting party. The language did not clearly make the agreements void, and no sufficient implication arose from the statutory purpose.
3. Re Cavalier Insurance Co Ltd [1989] 2 Lloyd's Rep 430 and Cornelius v Phillips [1918] AC 199 were distinguishable. They concerned different statutory prohibitions, including prohibitions directed at the transaction or the business carried on by a contracting party. Phoenix General Insurance Co. of Greece SA v Halvanon Insurance Co. Ltd. [1988] 1 QB 216 was persuasive, but its relevant insurance analysis depended on an express prohibition against carrying out contracts of insurance. Hirst LJ regarded that part of Phoenix as obiter, although highly persuasive.
4. Invalidity would affect innocent as well as culpable parties. It could deprive an innocent client of a contractual remedy and provide a defence for the party who had failed to comply with licensing requirements. The criminal penalties under section 1(2) adequately served the protective purpose of the Act. The contrary result would be inimical to public policy, consistent with Archbolds (Freightage) Ltd v Spanglett Ltd [1961] 1 QB 374.

The court therefore held that the agreements were not void. It expressed no view on whether the appellants could have recovered the balance on the alternative assumption that the agreements were void. The appeal was dismissed with costs, to be taxed and paid forthwith.

• Court of Appeal (Civil Division): in [1994] EWCA Civ 14, the appeal was dismissed unanimously, with costs to be taxed and paid forthwith.
• High Court of Justice, Queen's Bench Division: the Deputy High Court Judge refused summary relief, then determined the statutory issue against the appellants under Order 14A and granted leave to appeal.