21st Century Logistic Solutions Ltd v Madysen Ltd

A contract is not unenforceable merely because one party enters it intending to use the transaction as part of a fraud. The intended illegality must have sufficient proximity to the contract. A straightforward sale of goods remains lawful where the fraud would only be completed by the seller’s later failure to account for VAT. Acts connected with the transaction do not establish illegality where they are lawful in themselves and are not overt steps in carrying out the fraud under the contract.

The claimant, a company in liquidation, sued for the price of computer processors sold and delivered to the defendant. The defendant accepted delivery and quality but pleaded illegality. It was agreed that the claimant’s directing mind intended, when the contract was made, not to account to HM Customs & Excise for the VAT arising on the sale, while the defendant was unaware of that intention.

The central issue was whether the claimant’s fraudulent purpose rendered the sale contract unenforceable, having regard to the transaction’s structure and the subsequent acts relied upon by the defendant.

1. Claim succeeded. The claimant was entitled to judgment for £905,220.
2. The principle that a party cannot enforce a contract entered into for an illegal purpose does not apply to every contract made with an intention that an illegal act will later be committed. There must be sufficient proximity between the intention and the contract.
3. The sale contract was a straightforward and lawful agreement for the supply of goods. The VAT element of the price was not held on trust for HM Customs & Excise. The supplier’s relevant statutory obligations were to account for VAT at the end of the accounting period and to keep proper records. The intended fraud would therefore only have been completed when the claimant failed to account for the VAT.
4. The acts relied upon by the defendant, including VAT registration, arranging the sale and delivery, issuing the VAT invoice and payment instructions, were not themselves unlawful and did not constitute overt steps in carrying out the fraud through the transaction. The request to refund the sub-sale proceeds was not made in furtherance of the fraud. The connection with the intended fraud was consequently too remote.
5. The case was distinguishable from Napier v National Business Agency Ltd, Alexander v Rayson and Miller v Karlinski, where the contracts themselves misrepresented the true position or were performed unlawfully.
6. The claimant could not rely on a locus poenitentiae, but did not need to do so because the fraud had not been carried out and the intention was too remote to make the contract illegal.
7. The court declined to determine additional arguments based on the statutory sanctions under the VAT Act 1994, because they were unnecessary to the decision.