Skip to main content

Will the law enforce an illegal contract?

A recent case reminds us of the uncertainty as to the extent to which a court will enforce a contract entered into for an illegal purpose.

A recent case reminds us of the uncertainty as to the extent to which a court will enforce a contract entered into for an illegal purpose.

This may be of particular interest if you suspect that someone in your company may have committed the company to such a contract.

The facts

Mr Patel paid £620,000 to Mr Mirza. The purpose of the arrangement was that Mr Mirza should bet on shares in a bank using inside information Mr Mirza expected to receive. The bargain amounted to a conspiracy to commit insider dealing contrary to the Criminal Justice Act 1993. However, the inside information did not materialise and no betting took place.

Could Mr Patel enforce recovery of the £620,000 or could Mr Mirza keep it?

In order to claim back his £620,000, Mr Patel argued that Mr Mirza had been unjustly enriched because the consideration for the payment had failed. This required Mr Patel to explain the nature of the agreement.

The Court considered an earlier case, Tinsley v Milligan. Miss Tinsley and Miss Milligan had bought a property together.  The property was put in Miss Tinsley’s sole name so that Miss Milligan could pretend to be a tenant and claim social security benefits to help with the household expenses. When Miss Tinsley gave Miss Milligan notice to quit, could Miss Milligan ask the Court for a declaration that the property was owned in equal shares?

Miss Milligan had won her case and, eventually, Mr Patel won his.

What is the rule in these circumstances?

Where both parties are equally culpable, the rule is that the Court will not assist a claimant who is relying on his own wrongdoing. It is the party wishing to enforce its rights which is confronted by this rule. The rule does not protect a defendant, but rather acts against the claimant. Why was it, then, that Mr Mirza could not keep the money?

In Tinsley v Milligan, the solution to the problem was to say that title to the property could pass under an unlawful transaction and then say that the Court would only stop a claimant from proving title if she had to rely on her own illegality to do so. It was sufficient for Miss Milligan to show that she had contributed to the purchase of the property and there was a common understanding that she and Miss Tinsley were to be joint owners. She did not have to explain why the property had been put in Miss Tinsley’s sole name. In other words, she did not need to rely on her own fraud.

The judgment

Was Mr Patel in the same position as Miss Milligan?

The Judge at first instance followed Tinsley v Milligan and refused to award Mr Patel the return of his money, on the basis that he would have to rely on his own wrongdoing to do so. The Court of Appeal and Supreme Court took different views. One view was that Mr Patel only had to show that the contract was to pay the money for speculation on the shares which never took place. He didn’t have to show that he had acted illegally. Other views were also advanced but with the same result. One such view was that the Court did not have to give effect to the illegal contract in order to decide that the money should be paid back. In so deciding, it put the parties back to the position that they would have been in had they not acted unlawfully.

Comment

There are many circumstances in which the issue of illegality will arise, and there is no one rule which will suit all cases.

Whatever the law says, it will not be easy to apply it in practice, and predicting the outcome in a case will continue to remain uncertain.

If you are interested in finding out more about this subject or if you find yourself in a commercial dispute, please contact Mark Surguy, a partner in the commercial dispute resolution team, on 0121 616 6587 or email mark.surguy@weightmans.com.