Patel v Mirza

The Supreme Court held that a claimant who satisfies the ordinary requirements of a claim in unjust enrichment is not prima facie debarred from recovering money paid or property transferred merely because the consideration which failed was unlawful. The court rejected the rigid application of the Tinsley v Milligan reliance rule and endorsed an approach founded on public policy and legal coherence: the court should ask whether allowing the claim would harm the integrity of the legal system, having regard to (i) the purpose of the prohibition transgressed, (ii) any other relevant public policies that denial of the claim might affect, and (iii) proportionality between the illegality and the civil consequence.

The court applied this framework to a payment made to fund a proposed insider dealing scheme contrary to section 52 of the Criminal Justice Act 1993 and held that, because the intended illegal dealing did not occur and restitution was possible, public policy did not require that the claimant forfeit the sums paid. Therefore restitution for unjust enrichment was ordered.

Background and relief sought. The claimant (Mr Patel) paid £620,000 to the defendant (Mr Mirza) to place bets on RBS shares on the basis of anticipated insider information. The insider information did not materialise and the bets were not placed. Mr Patel sued for repayment of the sums paid, advancing claims in contract and unjust enrichment.

Procedural history. The claim was dismissed at first instance on reliance grounds. The Court of Appeal (majority) agreed with the reliance analysis but differed on a narrow exception; Gloster LJ would have allowed restitution on public policy grounds. The case proceeded to the Supreme Court ([2016] UKSC 42) on appeal.

Issues for decision.

• Whether the claimant’s restitutionary claim was barred by the illegality principle as articulated in Holman v Johnson and later cases, notably Tinsley v Milligan.
• Whether the reliance principle (that a claimant cannot rely on his own illegality to establish a claim) should continue to be the determinative test.
• If the reliance test is not definitive, what framework should the courts employ to decide whether illegality bars relief?

Decision and reasoning. The court concluded that the reliance rule in Tinsley v Milligan should no longer be followed. The proper approach is to treat the illegality defence as an instrument of public policy aimed at preserving the coherence and integrity of the legal system. In determining whether public policy requires denial of relief the court must, openly and transparently, assess (i) the purpose of the prohibition which has been transgressed and whether denial of the claim would further that purpose, (ii) any other public policies that would be undermined by denial, and (iii) proportionality between the seriousness and centrality of the illegality and the civil consequence of denying relief. Applying those considerations to the present case, the court held that denying restitution would be disproportionate and would not advance the purpose of the insider-dealing prohibition. Restitution was therefore available.

Wider significance. The court emphasised that restitutionary relief will be unavailable in the rare cases where enforcing it would itself undermine the integrity of the legal system (for example, cases involving drug trafficking or where some specific countervailing statutory policy requires denial), but those instances should be exceptional.

Appeal dismissed. The Supreme Court held that the rigid reliance rule in Tinsley v Milligan should no longer be followed; instead the illegality defence is to be applied as an instrument of public policy by asking whether allowing the claim would harm the integrity of the legal system, having regard to (i) the purpose of the prohibition transgressed, (ii) other relevant public policies, and (iii) proportionality. Applying that test, restitution for unjust enrichment was available to Mr Patel and the sums paid must be returned.

First instance: claim considered by a deputy High Court judge (not separately cited in this judgment). Court of Appeal: [2014] EWCA Civ 1047 (majority and a dissenting approach by Gloster LJ). Final appeal to the Supreme Court: [2016] UKSC 42 (this judgment).