Patel v Mirza

A claimant cannot recover money paid under an agreement with an illegal object where recovery requires reliance on that agreement. The locus poenitentiae exception permits recovery only where the claimant voluntarily withdraws before the illegal purpose is performed. It does not apply where performance fails because the purpose is frustrated by the defendant or external circumstances. Money paid to an agent for a specified purpose may be recoverable as an obligation to account, independently of contractual consideration, but illegality may still prevent enforcement where establishing the right requires reliance on the illegal arrangement. A trust will not readily be inferred where money is paid into the agent’s ordinary account and mixed with other funds.

The claimant paid £620,000 to the defendant for use in a proposed spread bet on Royal Bank of Scotland shares, based on anticipated confidential information concerning a government announcement. The contemplated transaction involved insider dealing. The defendant said that the money had been provided by a mutual acquaintance for general trading and had been returned to him. The court found that the claimant’s account of the intended transaction was substantially correct, but held that the claim for repayment depended on an illegal agreement. The central questions were whether illegality barred recovery, whether the claimant could rely on a failed consideration or unjust enrichment analysis, whether the money was held on trust, and whether the claimant had voluntarily withdrawn before performance.

1. The claimant’s pleaded arrangement fell within Part V of the Criminal Justice Act 1993. A spread bet constituted a contract for differences and therefore a security under Schedule 2. The customer relied on IG Index as a professional intermediary within section 59(4), so a further dealing on a regulated market was unnecessary. The arrangement also amounted to criminal conspiracy under section 1 of the Criminal Law Act 1977.

2. The claim for money paid for a failed consideration, or its modern equivalent in unjust enrichment, required the claimant to establish the illegal agreement and therefore could not succeed. Recasting the cause of action did not avoid the illegality rule.

3. Although an agent receiving money for a specified purpose is ordinarily obliged to account for and return money not used for that purpose, enforcement of that obligation could not be separated from the illegality where the specified purpose itself was criminal. The court considered that the present case was legally indistinguishable from Harry Parker Limited v Mason.

4. The evidence did not establish a Quistclose or resulting trust. The money had been paid into the defendant’s ordinary current account, where it was mixed with his other funds. In the absence of exceptional circumstances or an intention to keep the money separate, no trust was inferred.

5. The locus poenitentiae exception did not assist the claimant. No bet had been placed, but the claimant had not voluntarily withdrawn. The proposed transaction failed because the anticipated information was no longer expected to become available. Frustration by the defendant or external circumstances was insufficient.

6. The claim therefore failed even if the claimant established all matters pleaded. The action was dismissed.

First-instance decision. No appellate history was stated in the judgment.