Otkritie International Investment Management Ltd & Ors v Urumov & Ors

On an application to amend a defence to plead ex turpi causa non oritur actio, manifest or obvious illegality must be raised by the court itself. Where illegality depends on disputed facts or inferences, ordinary amendment principles apply. The court balances the apparent merits of the proposed amendment against forensic prejudice, delay, cost and consequences for the court and public interest. If no properly pleadable case exists, refusal is not discretionary. An appellate court should interfere only for legal error or a material flaw in the exercise of discretion, while respecting the trial judge’s superior position after hearing the evidence.

The claimants alleged that the defendants had conspired to cause them to buy Argentinian warrants at inflated prices. During the trial before Eder J, the appellants sought permission to amend their defence to allege that the claimants’ own intended resale of the warrants to Threadneedle involved fraud, so that the claims were barred by illegality.

The first application was refused after hearings on 9 and 12 July 2013, with reasons given on 25 July. A further application based on additional evidence was refused on 31 July, with reasons given on 12 August. The Court of Appeal considered the applicable approach to amendments pleading illegality, the proper appellate standard, and whether the proposed defence was properly pleadable.

1. Disposition. Sir Stanley Burnton delivered the judgment of the court. Lord Justice Moore-Bick agreed. Permission to appeal was granted, but both appeals were dismissed.
2. Applicable principles. If the alleged illegality is manifest or obvious, the court must take the point of its own motion to prevent its process being abused. If the illegality is not manifest or obvious, including because it depends on disputed facts or inferences, the normal rules for amendments apply. The court must balance the apparent merits of the proposed amendment against the forensic and other consequences for the parties, the court and the public. If the proposed case is not properly pleadable, refusal is not a discretionary decision.
3. Appellate approach. The Court of Appeal may interfere with an interlocutory decision only for an error of law or a materially flawed exercise of discretion. It must be particularly cautious where the trial judge has heard substantial evidence and is better placed to assess the issues in context. A provisional assessment of the merits and relevance of existing evidence is permissible, and may be necessary, when a late amendment would disrupt the trial.
4. Substantive illegality point. The court regarded Standard Chartered Bank v Pakistan National Shipping Corporation [1999] EWCA Civ 3028 [2000] 1 Lloyd’s Rep 218 as binding and saw no good basis for distinguishing it. If necessary, it would apply the principle that a claim is not founded on an illegal act where it can be pleaded and proved without reliance on that act. The court also shared the doubt expressed in that case that an intention to defraud a third party necessarily makes a prior transaction illegal. The appeals were, however, decided on broader grounds.
5. Application. The judge was entitled to find that the proposed case had no proper basis. The evidence relied on consisted in part of selective snippets, and the evidence that the claimants would have appreciated the dishonesty of the proposed profit if they had considered it did not establish that they had in fact done so. The telephone transcript did not show an intention to defraud Threadneedle when the warrants were acquired. The underlying pricing point had also been known to the appellants for a considerable time.
6. Alternative discretionary conclusion. Even if the proposed defence had been regarded more favourably, it was evidentially weak and legally fragile. The late amendment would have delayed the trial, required substantial additional evidence and caused potentially irrecoverable costs. The only sensible decision would still have been to refuse permission.

• Court of Appeal (Civil Division) — On 24 September 2013, permission to appeal was granted at a rolled-up hearing and the appeals were dismissed. Reasons were handed down on 8 October 2013 in [2013] EWCA Civ 1196.
• High Court of Justice, Queen’s Bench Division, Commercial Court — Eder J refused the first application to amend the defence to plead illegality, giving reasons on 25 July 2013. He refused a further application on 31 July 2013, giving reasons on 12 August 2013.