Taylor v Bhail

A court will not enforce an agreement by which parties conspire to defraud a third party, even if it includes a lawful obligation to carry out work for proper remuneration. Illegality is a question of substance, not form. Where the fraudulent arrangement is integral to the bargain and induces the agreement, the transaction is indivisible and the lawful component cannot be severed and enforced. A claimant cannot circumvent the illegality by claiming a quantum meruit. The refusal to enforce rests on public policy, despite any resulting benefit to the defendant.

A building contractor sued a school headmaster on three alleged contracts. Contract one concerned repair work for which the contractor submitted an estimate inflated by £1,000, enabling the defendant to defraud his insurers. The Brentford County Court found the arrangement fraudulent but enforced the claim for the work actually done after considering the quality of the illegality. It awarded the plaintiff £11,354.33 including interest and dismissed the counterclaim.

The appeal concerned principally whether the lawful building work could be separated from the fraudulent arrangement. The findings concerning contracts two and three were largely no longer in issue.

The appeal was allowed in relation to contract one. The President gave the principal judgment, with which Russell LJ agreed. Millett LJ agreed in the result and gave separate reasoning.

1. Indivisible fraudulent agreement. The parties agreed that the contractor would provide an inflated estimate so that the defendant could obtain money from his insurers by deception. The £1,000 arrangement was part of the inducement for awarding the work and could not be treated as collateral to the building obligation. The agreement was therefore a conspiracy to defraud and was unenforceable.
2. Substance and severance. The President applied the public-policy principle stated by Lord Mansfield CJ in Holman v Johnson (1775) 1 Cowp 341. Illegality depended on the substance of the transaction, not its form. The authorities relied on for a balancing exercise, including Saunders and Edwards [1987] 1 WLR 1987 and Tinsley and Milligan [1992] 2 All ER 391, did not assist where the fraudulent and lawful elements were inseparably intertwined.
3. Quantum meruit. Russell LJ held that the contractor could not use a quantum meruit to overcome the illegality of the contract. Millett LJ explained that where the illegal purpose had been carried out, the claimant could not repudiate the transaction and obtain payment or restitution indirectly.
4. Separate reasoning. Millett LJ stated that an apparently lawful contract may be unenforceable when it is intended for an illegal purpose or to be performed illegally. He considered the reasoning in Pearce v Brooks (1866) LR Ex 213 and Miller v Karlinski (1945) 62 TLR 85 analogous. The refusal to enforce was based on public policy, even though the result might benefit the defendant.
5. Orders. The appeal relating to contract one was allowed. £2,892.05 was substituted for the County Court judge’s order concerning contract two, and the appeal relating to contract two was dismissed. There was no order for costs, subject to legal aid taxation.

• Court of Appeal (Civil Division) — On 1 November 1995, allowed the appeal concerning contract one, substituted £2,892.05 in relation to contract two, and dismissed the appeal concerning contract two.
• Brentford County Court — HHJ Marcus Edwards, on 5 March 1993, awarded the plaintiff £11,354.33 including interest and dismissed the counterclaim. The judge found contract one fraudulent but enforceable after considering the quality of the illegality.