Birkett v Acorn Business Machines Ltd

A court must refuse to enforce a contract whose object is to deceive a third party, even where the illegality emerges without having been pleaded. The duty arises from public policy and the court’s obligation not to lend its process to enforcing an illegal transaction.

Where illegality is raised for the first time at trial, the court must ensure that the relevant circumstances are fully before it and that refusing enforcement creates no material risk of injustice through the claimant’s inability to answer the allegation. That procedural safeguard does not prevent refusal of enforcement where the contract itself is clearly founded on an intended fraud. Actual deception of the third party need not be proved if the contractual object was that the third party should be deceived.

David Birkett, an estate agent, claimed that Acorn Business Machines Ltd had agreed to discharge the charge arising from the early termination of an existing photocopier lease. In return, he was to enter into new financing and maintenance arrangements.

The proposed finance company would finance telecommunications equipment but not an ordinary photocopier. The parties therefore agreed that the finance documents should describe a Ricoh fax/photocopier, although the equipment supplied would be a Panasonic photocopier. The claimant signed the revised finance agreement.

The Central London County Court dismissed the claim on the ground that the agreement had been illegally performed. The central issue on appeal was whether the agreement was unenforceable because its object involved an intended deception of the finance company, and how the court should deal with an unpleaded allegation of illegality.

1. Appeal dismissed. The agreement was unenforceable because, as varied, it required the claimant to sign a false description of the equipment in order to obtain finance. It therefore had at least one illegal object and was contrary to public policy.
2. Per Mr Justice Colman, the relevant distinction was between an agreement whose terms were manifestly illegal and one shown to be illegal by persuasive and comprehensive evidence. In either case, the court may and, once the illegality is established, must refuse enforcement so that its process is not used to enforce an illegal contract. This reflected the principles stated in Bank of India v Trans Continental Commodity Merchants [1982] 1 LR 427 and In re Mahmoud and Ispahani [1921] 2 KB 716.
3. Where illegality first emerges at trial, the court must proceed with particular care. It should not act on unpleaded facts unless satisfied that the whole of the relevant circumstances are before it and that refusal would involve no material risk of injustice to the claimant. The approach in Edler v Auerbach [1950] 1 KB 359 was applied.
4. Actual deception of the finance company was immaterial. The claimant had agreed to a transaction under which the finance company was to be deceived. That intended object was sufficient to make the agreement unenforceable. The evidence also made the inference of actual deception sufficiently strong to eliminate any material risk of injustice.
5. Lord Justice Sedley agreed in the result. He considered that the contract had been varied so that the illegality was illegality of agreement, rather than merely illegality in performance. He expressed serious concern about the defendant’s failure to plead the issue and its reliance on its own wrongdoing, but concluded that the public interest required the court to refuse enforcement once the intended fraud was established. No order for costs was made between the parties in the Court of Appeal; the respondent was ordered to pay the appellant’s county-court costs.

• Central London County Court: His Honour Judge Wakefield dismissed the claimant’s claim on the ground of illegality.
• Court of Appeal (Civil Division): The appeal was dismissed. The court held that the agreement was unenforceable because it was founded on an intended deception of the finance company.