Patel v Mirza

The common law illegality defence requires a principled assessment of whether granting relief would harm the integrity of the legal system. The court must consider the purpose of the prohibition transgressed, any countervailing public policies and whether refusing relief would be proportionate. Relevant circumstances may include the seriousness and centrality of the conduct, intention and the parties’ relative culpability.

The procedural rule which made relief depend on whether the claimant had to rely on the illegality should no longer be followed. A claimant who satisfies the ordinary requirements of unjust enrichment is not barred merely because money was paid for an unlawful purpose. Refusal may still be justified in rare cases where recovery would undermine the integrity of the justice system.

Mr Patel transferred £620,000 to Mr Mirza under an agreement to bet on movements in RBS shares using anticipated inside information. The agreement amounted to a conspiracy to commit insider dealing contrary to section 52 of the Criminal Justice Act 1993. The information did not materialise, no betting occurred and Mr Mirza failed to return the money.

The trial judge held that the unjust enrichment claim was barred under the reliance principle in Tinsley v Milligan [1994] 1 AC 340, unless Mr Patel could establish the locus poenitentiae exception. The Court of Appeal, [2014] EWCA Civ 1047, held that he could recover because the illegal scheme had not been executed. Gloster LJ reached the same result by assessing the policies underlying the illegality defence and the proportionality of refusing recovery.

The Supreme Court had to determine the proper approach to illegality and whether it barred recovery of money paid under the unperformed unlawful arrangement.

1. Disposition. The appeal was dismissed unanimously. Mr Patel remained entitled to judgment for £620,000 with interest.

2. The controlling illegality framework. Lord Toulson, with whom Lady Hale, Lord Kerr, Lord Wilson and Lord Hodge agreed, held that the doctrine protects the integrity and coherence of the legal system. A court must consider: the purpose of the prohibition transgressed and whether denying relief would further it; any countervailing public policy affected by denial; and whether denial would be proportionate. Relevant circumstances may include the seriousness and centrality of the illegality, whether it was intentional and any marked disparity in culpability. Punishment ordinarily belongs to the criminal courts and regulators. Lord Kerr emphasised that this was a structured approach rather than an open discretion. Lord Neuberger also accepted this framework.

3. Reliance on illegality. The procedural reliance rule associated with Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 and Tinsley v Milligan [1994] 1 AC 340 could produce arbitrary results unrelated to the policies underlying the defence. It should no longer be followed. Unless legislation provides otherwise, expressly or by necessary implication, property may pass under an illegal transaction. Whether relief is available should not depend on pleading rules, burdens of proof or equitable presumptions.

4. Unjust enrichment. A claimant satisfying the ordinary requirements of unjust enrichment is not prima facie barred merely because the failed consideration was unlawful. Particular circumstances may justify refusal, but such cases are likely to be rare. Recovery ordinarily unwinds the arrangement rather than enforcing it or enabling the claimant to profit from wrongdoing.

5. Application. Denying repayment would not further the policy against insider dealing. The anticipated information never materialised, no bet was placed and Mr Patel sought only the return of his money. Forfeiture of the entire sum to Mr Mirza would be disproportionate and would unjustly enrich him. Section 63(2) of the Criminal Justice Act 1993, which prevented contracts being void or unenforceable by reason only of section 52, also formed part of the statutory context.

6. Alternative reasoning. Lord Mance, Lord Clarke and Lord Sumption agreed in the result but rejected the majority’s general balancing framework. They preferred a rule-based analysis: the law will not enforce rights derived from an illegal transaction, but restitution which merely reverses it is available while mutual restoration remains possible. Lord Neuberger considered that restitution in integrum should be the prima facie outcome, while accepting Lord Toulson’s framework for identifying exceptions.

1. United Kingdom Supreme Court: In Patel v Mirza [2016] UKSC 42 , the court unanimously dismissed Mr Mirza’s appeal and affirmed the judgment requiring repayment of £620,000 with interest.

2. Court of Appeal: In [2014] EWCA Civ 1047 , the majority held that Mr Patel could recover because the unlawful scheme had not been executed. Gloster LJ agreed with the outcome but applied a policy-based and proportionate approach to illegality.

3. First instance: The deputy judge held that the claim depended on Mr Patel’s own illegality and that the locus poenitentiae exception was unavailable because he had not voluntarily withdrawn from the scheme.