Patel v Mirza

A claimant may recover money paid under an unlawful agreement where the unlawful purpose has not been carried into effect. The claimant need not show genuine repentance. It is sufficient that the transaction is no longer needed or cannot be performed, provided that the unlawful purpose remains unperformed.

Payment of money to prepare for an unlawful venture does not itself necessarily amount to part-performance of its unlawful purpose. A claim framed as restitution for total failure of consideration may, however, require reliance on the unlawful agreement and so engage the illegality principle. On the facts, payment into a commingled bank account for possible spread betting created neither a resulting trust nor a Quistclose-type trust.

The claimant paid £620,000 to the defendant under an agreement that the defendant would use the money, through his spread-betting account, to profit from movements in RBS shares using expected insider information. No information was received, no bet was placed and the proposed venture was not performed.

The Chancery Division dismissed the claimant’s claim for repayment on the ground of illegality. It held that the claimant had not voluntarily withdrawn before the venture was frustrated: [2013] EWHC 1892 (Ch).

The appeal raised whether the claimant had to rely on the unlawful agreement to recover the money and, if so, whether the exception commonly called locus poenitentiae permitted recovery despite the absence of a voluntary withdrawal before performance became impossible.

1. Appeal allowed. All members of the court agreed that the claimant was entitled to repayment of £620,000. Rimer and Vos LJJ agreed that the claim engaged the illegality principle but fell within the exception for an unperformed unlawful purpose. Gloster LJ also agreed that recovery was available, and additionally considered that the illegality defence was not engaged on a proper analysis of the claim.

2. The money was not held on a resulting trust from the moment of payment. It was paid voluntarily into the defendant’s commingled bank account and was intended to be available for use in the proposed spread bet. Those facts were inconsistent with a resulting trust. Nor did the arrangement create a Quistclose-type trust. The first-instance finding that there was no trust was not shown to be wrong.

3. By a majority, the claimant’s pleaded claim for recovery based on total failure of consideration necessarily relied on the unlawful agreement. He had to prove both the agreed purpose of the payment and the failure of that purpose. The claim therefore engaged the public-policy rule stated in Holman v Johnson and applied in Tinsley v Milligan.

4. That did not bar recovery. The authorities establish that a party may recover property transferred under an unlawful agreement if the unlawful purpose has not been carried into effect. The relevant question is performance of the unlawful purpose, not whether the claimant’s motive for withdrawal was genuine repentance. A distinction between an agreement no longer needed and one no longer capable of performance would introduce an unattractive requirement of penitence.

5. The payment was preparatory only. No insider information was obtained and no shares were purchased or bet placed using it. Thus no part of the intended insider-dealing purpose had been performed. The claimant could rely on the wholly unperformed agreement to recover his money. Bigos v Bousted was distinguishable because its unlawful purpose had partly been carried into effect.

6. Gloster LJ, dissenting on the reliance issue, further held that repayment of unapplied money by an agent did not enforce the unlawful speculation and that denying recovery would not further the policies underlying the insider-dealing prohibition in the Criminal Justice Act 1993.

• Court of Appeal (Civil Division) — allowed the claimant’s appeal and ordered repayment of £620,000: [2014] EWCA Civ 1047.
• High Court of Justice, Chancery Division — David Donaldson QC, sitting as a Deputy High Court Judge, dismissed the claim on illegality grounds: [2013] EWHC 1892 (Ch).