Signed in as:

Access is brought to you by

Sign in to an additional subscriber account

This account has no valid subscription for this site.

Oxford Law Citator

Part V Illegality and Public Policy, 16 Illegality

From: Contract Law in Practice

Neil Andrews

Content type:: Book content

Product:: International Commercial Law [ICML]

Published in print:: 27 May 2021

ISBN:: 9780192897947

Prev | Next

Subject(s):: Breach of contract — Illegality and contract — Contract and transfer of title

(p. 319) 16 Illegality

Outline of Illegality and Public Policy

Main Propositions.¹

16.01 (1) Neither party can sue on a contract if: (a) the contract is expressly or by necessary implication prohibited by statute [16.24]; or (b) the contract is illegal because the common purpose of the transaction was to commit a crime or other (serious) civil wrong; (c) nor can a claimant sue on a contract if that party was implicated in wrongdoing after discovering that the contract will be performed illegally [16.39].

16.02 (2) A contractual claim will fail if the claimant, having become aware that the contract will in fact be performed illegally, became implicated in that wrongdoing [16.39]. Conversely, a contractual claim is valid and enforceable if the claimant was ignorant of, and not implicated in, the defendant’s decision to perform it in an illegal fashion, or the claimant was guilty of only incidental illegality during performance [16.36].

16.03 (3) Even if the main contract is illegal or contrary to public policy, and hence not legally binding, the following claims (not being founded on the main contract) might be available: a claim in the tort of deceit, Shelley v Paddock (1980);² or breach of a collateral contract, Strongman (1945) Ltd v Sincock (1955) [16.32]); for restitutionary or unjust enrichment claims [16.87].

16.04 (4) The fact that possession (as distinct from proprietary title) has been acquired under an illegal contract does not prevent the owner recovering that property, or obtaining damages for conversion, in the case of goods.³ And title to property can pass under an illegal contract whereby ownership is to be transferred.⁴

16.05 (5) The court or tribunal must refuse to give effect to a transaction even if its illegal nature only emerges incidentally during the course of the case (on this point see notably the case law concerning tax evasion [16.45]).⁵ In Re Mahmoud and Ispahani (1921) Scrutton LJ said:⁶

(p. 320)

In my view the court is bound, once it knows that the contract is illegal, to take the objection and to refuse to enforce the contract, whether its knowledge comes from the statement of the party who was guilty of the illegality, or whether its knowledge comes from outside sources.

16.06 (7) The court can sever the illegal part of a transaction and give effect to the lawful part. Taylor v Bhail (1996)⁷ demonstrates that the court will not sever parts of an undertaking if it perceives that they are in substance inextricably linked, and that severance would emit the ‘wrong message’ to the commercial community, by condoning an unacceptable practice. No severance was permitted in Miller v Karlinski (1945)⁸ where the employment contract was held to be illegal because the parties had concocted a tax reduction scam and had thus cheated the Revenue [16.45]. Furthermore, ‘[i]t can hardly be imagined that a Court would enforce a promise, however inherently valid and however severable, if contained in a contract one of the terms of which provided for assassination’.⁹ It follows that the proposed severance must be assessed by considering the heinousness of the relevant transaction.

16.07 In the context of covenants unlawfully in restraint of trade so as to constrain a former employee, the following severance rules were stated by the Supreme Court in Egon Zehnder Ltd v Tillman (2019)¹⁰ [16.73]: (i) proposed excision of the offending text must leave a syntactically free-standing covenant; this is the ‘blue-pencil’ test; the excision must thus operate cleanly at one stroke (or more than one stroke) of the pencil; (ii) provided also that removal of the offending portion does not render the surviving contract a different arrangement so as to ‘generate any major change in the overall effect of all the post-employment restraints in the contract’.¹¹

Main Heads of Illegality or Public Policy.

16.08 These will now be listed.

(1) Gross Immorality.

16.09 Agreements for the supply of facilities for use by prostitutes (`sex workers’) in their ‘immoral calling’ are illegal, and hence not legally binding, if the supplier was aware of that use [16.84].

(2) Procuring Marriage.

16.10 An agreement involving marriage brokerage is contrary to public policy and hence not legally binding. The Court of Appeal in Hermann v Charlesworth (1905)¹² held that an agreement to find a potential spouse for a fee is contrary to public policy. But the decision appears archaic, and it is persuasively condemned as outmoded.¹³

(3) Preventing Marriage.

16.11 An agreement in restraint of marriage is contrary to public policy and hence not legally binding.¹⁴ By contrast, ante-nuptial and post-nuptial agreements concerning future property arrangements between spouses or prospective spouses, in the event (p. 321) of future separation, are no longer contrary to public policy.¹⁵ In Brack v Brack (2018)¹⁶ the Court of Appeal gave guidance concerning the effect of a valid pre-nuptial agreement which excludes sharing of assets. The Court of Appeal in Versteegh v Versteegh (2018) held that a pre-nuptial agreement made in a foreign country was not invalid just because the relevant party had not received legal advice.¹⁷

(4) Surrogacy Agreements Within the United Kingdom.

16.12 Section 1A of the Surrogacy Arrangements Act 1985 (as amended) states: ‘No surrogacy arrangement is enforceable by or against any of the persons making it’. Section 2(1) of the same statute provides:

No person shall on a commercial basis do any of the following acts in the United Kingdom, that is—(a) initiate … any negotiations with a view to the making of a surrogacy arrangement, (aa) take part in any negotiations with a view to the making of a surrogacy arrangement, (b) offer or agree to negotiate the making of a surrogacy arrangement, or (c) compile any information with a view to its use in making, or negotiating the making of, surrogacy arrangements; and no person shall in the United Kingdom knowingly cause another to do any of those acts on a commercial basis.

16.13 Whittington Hospital NHS Trust v XX (2020)¹⁸ involved a tort claim arising from medical negligence. The Supreme Court, by a majority, held that section 2(1) of the Surrogacy Arrangements Act 1985 (cited above) does not render contrary to public policy the award of damages in respect of commercial surrogacy expenses incurred, or to be incurred, outside the United Kingdom. It is surprising that ‘offshore’ commercial surrogacy arrangements are not contrary to UK public policy, so that UK damages can be awarded as compensation for that form of expenditure. The dissentients¹⁹ perceived an inconsistency which the law should not tolerate. But the majority have on their side of the argument the clear geographical delineation of public policy within section 2(1) as between intra-UK commercial surrogacy (which is banned) and foreign commercial surrogacy which is not subject to a ban and thus can be undertaken by UK residents or citizens without any form of legal objection (subject to the various constraining strands of reasonableness outlined by Baroness Hale).²⁰

(5) Economic and Personal Enslavement.

16.14 A loan is contrary to public policy and hence not legally binding if a party cedes total or overwhelming control to the lender so as to have fallen into a state of economic enslavement. In Horwood v Millar’s Timber and Trading Co Ltd (1917)²¹ a borrower, Bunyan, agreed that, until he had repaid the loan, he would pay all his earnings towards repayment, and furthermore that he would not take another job, and finally that he would not move house without the lender’s permission. The court held that these severe restrictions offended the Common Law’s protection of the liberty to earn (p. 322) a living and the related freedom to move residence for that purpose. Therefore, the loan was illegal.

16.15 More broadly, it would appear that an agreement is contrary to public policy and hence not legally binding if a party commits himself to a wholly unreasonable restriction upon his personal liberty. The argument proceeds a fortiori from the strong denunciation of the terms of the contract in the Horwood case, where Lord Cozens-Hardy referred²² to slavery with obvious condemnation. There is also a statutory offence of slavery (including servitude and forced or compulsory labour): Modern Slavery Act 2015.

(6) Unreasonable Restraint of Trade, etc.

16.16 An agreement is contrary to public policy and hence not legally binding if it unreasonably stultifies a person’s legitimate interest in pursuing a trade, profession, or engaging in other useful economic activity.²³ Agreements in restraint of trade must be justified as reasonable having regard to the interests of both the contracting parties and the public: see notably, Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) (HL) [16.72].

(7) Trading with the Enemy.

16.17 Contracts involving trade with the enemy are contrary to public policy and hence not legally binding.²⁴

(8) Bribery and Corruption and Cheating of Public Authorities.

16.18 The Bribery Act 2010²⁵ creates offences concerning agreements involving bribery, including bribery of foreign public officials.²⁶ Such agreements are invalid and hence not legally binding. The Bribery Act 2010 (sections 1 and 2) creates offences concerning the offer, giving, requesting, or receipt of a bribe, contrary to reasonable expectations (section 5), for the purpose of causing a function (not confined to public functions, section 3) to be exercised ‘improperly’ (section 4). The 2010 Act also addresses the problem of bribery of foreign public officials (section 6), and makes provision for the problem of foreign customs and expectations (section 5(2)).²⁷ Bribery committed by an agent of one of the parties to complex financial arrangements was held to render the relevant transactions voidable in UBS AG (London Branch) v Kommunale Wasserwerke Leipzig GmbH (2017).²⁸ The corrupt agent’s principal was held to have been (p. 323) sufficiently aware of the misconduct. A contract is also contrary to public policy and hence not legally binding if it involves corruption within public office. The Common Law also invalidates certain forms of agreements involving corruption. In Amalgamated Society of Railway Servants v Osborne (1910)²⁹ the House of Lords held that a Member of Parliament cannot contract with a third party that he will cast his vote in Parliament in a particular way. An agreement to pay for a public honour is tainted by corruption and is contrary to public policy and hence not legally binding. In Parkinson v College of Ambulance Ltd (1925)³⁰ an agreement foundered under this head because it involved payment for a knighthood. This type of sordid practice is now an offence: Honours (Prevention of Abuse) Act 1925. Agreements to cheat or deceive public authorities are contrary to public policy and hence not legally binding.³¹

(9) Suborning of Adjudicators or Witnesses, etc.

16.19 An agreement will be contrary to public policy and hence not legally binding if made to procure false testimony,³² or suppress evidence,³³ or drop a charge,³⁴ or influence an adjudicator or a public or private decision-making process. This prohibition, or ground of invalidity, covers any agreement intended, or tending, to expose to unacceptable influence, in particular, a juror, court, tribunal, judge, court official, enforcement officer, arbitrator, public decision-maker, or (arguably) mediator.

(10) Maintenance and Champerty.

16.20 Agreements to take a financial stake in the outcome of the proceedings or to share the fruits of a civil action (damages, etc) are contrary to public policy and hence not legally binding at Common Law. However, statute has legitimated certain agreements where lawyers conduct civil proceedings on a no-win-no-fee basis: this complicated sub-topic is fully noted when examining Sibthorpe v Southwark LBC (2011) [16.58].³⁵

(11) Ousting the Courts’ Jurisdiction.

16.21 An agreement to oust the court’s jurisdiction is prima facie contrary to public policy and hence not legally binding.³⁶ However, arbitration agreements are legally binding. The Arbitration Act 1996 upholds a written arbitration agreement (section 4) and allows a party to seek a stay of English legal proceedings brought ‘in respect of a matter which under the [arbitration] agreement is to be referred to arbitration’ (section 9(1)). The court will grant a stay unless the arbitration agreement is ‘null and void, inoperative, or incapable of being performed’ (section 9(5)). As for points of English law determined by the arbitrator, the parties can agree that the arbitrator, in making his award, can ‘dispense with reasons’. That has the effect that the parties will have excluded the court’s power to hear an appeal on a point of English law (section 69). Or, more generally, the parties can agree simply to exclude section 69. Subject to that, section 69 of the 1996 Act provides that an appeal on a point of English law can be referred to the High Court, but only if the parties agree or if the court itself grants permission to appeal.³⁷

Lawful Transaction.

(p. 324) 16.22 Gambling contracts are legally binding agreements (a fairly recent statutory change, such transactions having previously been unlawful). It is an implied term of such a contract that neither party will cheat [18.19].

16.23 There has been case law concerning the Private International Law dimension of illegality.³⁸

Agreements Contrary to Statute

Legal Effect.

16.24 Where an agreement is prohibited by statute, whether expressly or by ‘necessary implication’, neither party can enforce it, even if unaware of this prohibition. The statutory prohibition operates as a peremptory norm, as the following case vividly illustrates.

Leading Case.

16.25 The Court of Appeal applied this rule in Re Mahmoud and Ispahani (1921).³⁹ A statute invalidated sales of linseed oil unless both parties held a licence. The invalidity applied even though the defendant buyer had falsely affirmed that he held a licence.

16.26 In greater detail, in Re Mahmoud and Ispahani statute required licences to have been obtained for the sale and purchase of linseed oil. The defendant purchaser falsely told the claimant vendor that he had a licence. In fact, only the claimant had a licence. When the defendant refused to accept delivery, the claimant sued for damages. The defendant successfully pleaded the defence of illegality. The Court of Appeal held that the defence should prevail. Unless both parties had a licence, the contract was expressly prohibited by statute.

Other Cases.

16.27 The question whether a contract’s very formation is prohibited by statute is not altogether straightforward. Browne-Wilkinson J in Nash v Halifax Building Society (1979) held⁴⁰ that a building society could recover money advanced under a contract of loan supported by a mortgage (the ‘second’ mortgage on the relevant property) even though statute prohibited building societies from making loans on the security of property already subject to a mortgage or charge in favour of a third party.

16.28 Similarly, the Court of Appeal in Hughes v Asset Managers plc (1995)⁴¹ drew back from construing a statute, requiring investment contracts to be drawn up only by licensed investment agents, as an implied prohibition upon formation of the relevant contracts. Otherwise, as Saville LJ observed,⁴² the invalidity of all such contracts would have catastrophic consequences not only for investment companies but, on the other side of this transaction, for investors, that is, institutions and ordinary members of the public.

(p. 325) 16.29 The Financial Services and Markets Act 2000 enables insured persons (but not insurance companies) to sue on insurance contracts, where the relevant insurance business is transacted in breach of the regulatory system.⁴³

Judicial Reluctance to Infer Statutory Prohibition of Contract.

16.30 In St John Shipping Corporation v Joseph Rank Ltd (1957)⁴⁴ a ship-owner took on too much weight by bunkers (fuel), in those days, coal, and so the safety line on the ship’s side, which was already loaded with cargo, dipped below the water-level. There were several cargo owners’ cargoes on board. The claimant shipper had been fined by magistrates for the statutory offence of overloading a ship, but the fine had not kept up with inflation. The defendant charterer withheld some of the freight payable under the contract of carriage, pleading as a defence that the claimant’s performance of the contract had been illegal. Devlin J declined to find that the contract had been impliedly prohibited. He held that it would be inappropriate and disproportionate for the offence committed by the ship-owner to be reinforced by this civil law consequence.⁴⁵ Secondly, Devlin J suggested that the high incidence of statutory regulation in modern times makes it necessary for courts to be disinclined to infer an implied statutory prohibition of the formation of a contract. On that point he said:⁴⁶

[A] court ought to be very slow to hold that a statute intends to interfere with the rights and remedies given by the ordinary law of contract. Caution in this respect is, I think, especially necessary in these times when so much of commercial life is governed by regulations of one sort or another, which may easily be broken without wicked intent.

16.31 That was said in 1957. Devlin J’s comments have particular force in the modern age of micro-hyper-regulation. The disinclination to find an implied statutory prohibition is also illustrated by Okedina v Chikale (2019).⁴⁷

Valid Collateral Contract Alongside Main Illegal Contract

16.32 In Strongman (1945) Ltd v Sincock (1955)⁴⁸ the Court of Appeal held that, even if the main contract is illegal, a claim might succeed upon a collateral contract, that is, an agreement independent of the main transaction. Here, by a side agreement, the defendant promised to (p. 326) obtain a licence, which would have rendered the contract lawful. It was not against public policy for a party in breach of that collateral agreement to be liable for losses consequent on the inability to sue in full on the main contract, which had become pro tanto illegal, to the extent that the work was statutorily unlicensed.

16.33 The Court of Appeal held that, because of the absence of a complete licence, the main building contract was illegal in so far as the work exceeded the amount of the licence. And thus, to that extent, the action founded on the main contract was bad because that part of the agreement was not legally binding. (It will be seen that the analysis is that the licence creates the upper limit for a claim in debt in respect of building work.) Even so, the defendant was liable under a collateral contract, having given an assurance that the full licence would be obtained. The claimant recovered payment for the unpaid part of his work as damages for breach of that collateral contract.

16.34 In greater detail, in the Strongman case (1955) the claimant sued in respect of building work carried out at the request of the defendant on the latter’s property. The defence relied on was the fact that the defendant (an architect by profession) had not obtained a licence for the whole of this work, but only for part. But the defendant had undertaken to obtain such a licence for the whole work. Two licences were in fact obtained by the defendant architect, for £1690 and £460 respectively, making a total of £2150 authorized costs. Total payments of £2900 were made to the builders by the architect owner on account by October 1949, but the total value of the work carried out was alleged by the builders to be £6905. In February 1950, the builders sued the defendant for the balance of £4005 which was alleged to be owed.

16.35 Had it not been for the collateral agreement, which rescued the builder in this case, the defence of illegality, although good in law, would have operated in a shocking fashion. As both Denning and Birkett LJJ emphasized, the defendant was absolutely ‘without merits’, having trapped the claimants into believing that a licence would be procured by the defendant. This is the plainest example, therefore, of the Common Law equitable device of finding a side-contract in order to achieve justice. The court considered the facts were sufficiently unusual that the present decision would not generally undermine this regulatory system.⁴⁹

Innocent Party Can Sue Despite Defendant’s Unilateral Decision to Perform Illegally

Position of Innocent Party.⁵⁰

16.36 The Court of Appeal in Archbolds (Freightage) Ltd v S Spanglett Ltd (1961)⁵¹ held that, unless the contract is prohibited by statute, a claimant can sue on a contract if (i) he can show that he has no knowledge of the defendant’s illegal performance and (ii) performance of the agreement would not necessarily entail illegality.

16.37 Here the claimant had contracted for the defendant to transport goods by van, not knowing that the defendant’s particular van was unlicensed for this purpose and that its use in this way would involve an offence. The claimant’s goods were lost in transit (they were stolen (p. 327) because of the defendant’s negligence). The claimant sued for loss on the basis of contractual breach.

16.38 The Court of Appeal rejected the defence based on illegality: the claimant had been unaware that use of this particular van in this transaction would involve a criminal wrong and the transaction was not statutorily prohibited. It would be different if the claimant became aware that the contract will be performed in an illegal fashion and if the claimant became implicated in that wrongdoing.

Other Party Aware and Participates.

16.39 By contrast, in Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd (1973)⁵² the defendant agreed to transport the claimant’s goods, but the defendant overloaded its lorry, contrary to statute. The defendant knew that this was an offence. The claimant’s goods were damaged when the lorry toppled over. The claimant’s manager had been implicated in the defendant’s illegal performance: he knew that the loading involved breach of the relevant statute (indeed this had happened before) and, furthermore, the claimant company’s connivance in this criminal activity enabled it to make a saving on its transport costs. In the light of these facts the court held that the claimant’s contractual claim for this loss must fail.

16.40 In Hall v Woolston Hall Leisure (2001)⁵³ Mance LJ suggested that the ratio of the Ashmore case involved participation in that wrongdoing, because the claimant had collusively made a gain from this acquiescence, and thus the facts did not involve merely turning a blind eye to the wrong. Similarly, in Anglo Petroleum Ltd v TFB (Mortgages) Ltd (2007)⁵⁴ Mummery LJ noted that participation does not arise solely from knowledge of the other’s criminal or unlawful conduct. It had earlier been suggested that the law remains malleable.⁵⁵ However, obiter remarks by Lord Hamblen in 2020⁵⁶ make clear that the Court of Appeal has settled in favour of the double requirement of knowledge and participation, at least in the employment context.

Minor Act of Illegality Not Entitling Other Party to End the Contract

16.41 In ParkingEye Ltd v Somerfield Stores Ltd (2012)⁵⁷ the Court of Appeal held that it would be unjust to treat one party’s minor act of illegality as sufficient to render the whole contract illegal.

(p. 328) 16.42 The claimant had agreed for fifteen months to provide the defendant supermarket chain with an automated car-park monitoring and control system: for further litigation involving the same company [22.77]. This automated system enabled the claimant to collect charges from any customer whose vehicle remained parked beyond the free parking period. The claimant would keep these charges. And so, it had an incentive to pursue these claims aggressively.

16.43 After several months, the defendant terminated the contract on the basis that the claimant had made illegal representations in demand letters (the third demand letter in the escalating sequence) sent to customers, thereby committing the tort of deceit vis-à-vis those customers. In this third demand letter the car-park company dishonestly told motorists that it had authority to bring civil proceedings against the overstaying parties who failed to pay the relevant charges.⁵⁸ This minor illegality did not justify the supermarket’s decision to terminate the contract. The Court of Appeal emphasized the need to avoid a mechanical, ‘unduly sanctimonious’,⁵⁹ and disproportionate⁶⁰ application of principles of public policy and illegality. Toulson LJ refused⁶¹ to recognize ‘a fixed rule that any intention from the outset to do something in the performance of the contract which would in fact be illegal must vitiate any claim by the party’ because such an approach would be ‘too crude and capable of giving rise to injustice’.

16.44 The Court of Appeal concluded that the defendant supermarket’s termination of the contract had not been justified. And so, the supermarket had to pay substantial damages for breach.⁶² The illegality here did not provide the defendant with a basis for not performing its obligations and for purporting to terminate for good cause.⁶³ This was because the claimant’s unlawful act had formed only a minor part within the overall performance.

Arrangements Designed to Cheat the Revenue

16.45 The Court of Appeal in Miller v Karlinski (1945)⁶⁴ applied a policy of zero tolerance to an arrangement involving a tax scam. A conspiracy to misrepresent the true level of earnings by paying allowances for fictitious travel expenses, thereby reducing the employee’s income tax liability, invalidated the employee’s claim for unpaid wages. The court refused to apply the principle of severance [16.73] in favour of an employee because the relevant contract of employment had included an illicit Inland Revenue-cheating arrangement. It had been agreed that the employee would be paid a specified weekly sum as salary and would recover from his employer the amount payable out of that sum in respect of income tax by including it in an account for travelling expenses. The result was that the whole contract was illegal, and (p. 329) the courts would not entertain an action to enforce any of its terms. No action will, therefore, lie to recover arrears of salary alleged to be due.

16.46 In greater detail, in Miller v Karlinski (1945) the claimant was employed under an oral agreement and was paid a salary of £10 a week. It was agreed that the amount of the tax paid by him on that salary would be recoverable by him as travelling expenses. The employee claimed arrears for ten weeks’ wages (£100) and expenses of £21, 2s, 8d. Of those expenses, only £4 was for actual travel, the rest being attributable to income tax reimbursement. At first instance, the claim succeeded, the judge taking the view that there was a small loss only to the Revenue attributable to the travelling expenses/income tax dodge. But the Court of Appeal reversed this. It held that the claim was based on a contract which was contrary to public policy. The travel expenses element could not be severed [16.73] from the rest of the remuneration package.

16.47 Du Parcq LJ said⁶⁵ that although it is lawful to pay an employee in respect of his income tax, the current arrangement involved a disguise and hence a defrauding of the Revenue. Whether or not either, or both, parties were ignorant of the fact that this would involve an illegal reduction in the amount of tax payable, the employee’s true level of remuneration would be distorted by the expenses formula. Furthermore, it was incumbent on the court, once the matter was revealed, to refuse to assist the claimant. The agreement was contrary to policy. As for the suggestion that it could be severed from the main entitlement to salary, and although the judges were sympathetic to the claimant, the court decided to take a firm and unequivocal stand against such arrangements.

16.48 The approach adopted in Miller v Karlinski (1945) can operate very harshly on employees or others who adopt such fictions in order to ‘minimize’ tax liability. It is notable that the Court of Appeal held that this was not severable and that the whole contract was illegal as being contrary to public policy. Therefore, no action was possible to recover arrears of salary. Suppose that a similar arrangement is concocted by a bank trader, and the net gain to him is £1000. He brings a claim against his employer, the bank, for a bonus payment to which he is entitled. The bonus is worth £3 million. Will the ‘no severance’ approach of the Miller case preclude the claim for £3 million? There is no mention in the Miller case of a proportionality principle (such a principle is discernible in ParkingEye Ltd v Somerfield Stores Ltd (2012) [16.41], and in the leading decision concerning restitution consequent on illegality, Patel v Mirza (2016) [16.87]). The evident problem in introducing a proportionality principle is that this would soon be acted upon cynically by employers and employees so as to sail as close to the wind as possible. It seems sound, because unavoidable, that a policy of zero tolerance must be adopted, given Mankind’s inexhaustible appetite to evade taxes.

16.49 A similar case is Napier v National Business Agency Ltd (1951)⁶⁶ where the employment arrangement involved the following illegal element: the employee’s weekly wages were stated as £13, and £6 a week for expenses; but no such expenses were genuinely incurred; and so the payment was a fictitious element designed to cheat the Revenue. It was held (consistent with the decision in Miller v Karlinski (1945), above) that it was not possible to sever (p. 330) this fictitious and noxious feature from the ordinary wages genuinely earned, and so the employee’s claim for wages was dismissed.

16.50 In a post-Patel case, Al-Dowaisan v Al-Salam (2019) Judge Hodge QC barred,⁶⁷ on the basis of illegality, a counterclaim to recover from a transferee funds which the counterclaimant had transferred for the purpose of tax evasion.

16.51 No unlawful tax evasion was disclosed (and indeed illegality was not raised) in McGill v The Sports and Entertainment Media Group (2016), where a footballer entered into an oral agency agreement because he was concerned that a written contract would increase the chances that he would be personally liable to pay tax. Tax would be payable on the following benefit in kind: the new club agreeing to reimburse the player for the agent’s fee. That process of reimbursement would be achieved by an enhancement of his wages so that he would not be out-of-pocket vis-à-vis the commission and the income tax with respect to this benefit in kind.⁶⁸

16.52 In Hall v Woolston Hall Leisure (2001)⁶⁹ the Court of Appeal considered a tax fraud. The employee was aware of, but not a participant in, the employer’s fraudulent avoidance of tax and national insurance payments. It was held that the employee was not precluded from seeking compensation for sex discrimination.

16.53 The Court of Appeal in Skilton v Sullivan (1994)⁷⁰ noted that an agreement is illegal if the parties have shared the purpose of avoiding or postponing VAT (value added tax). The background tax rule was that VAT applied to Koi carp, but not to trout. After delivery of Koi carp, the seller sent an invoice for trout. This was a manifest misdescription of the subject-matter adopted in order to avoid VAT. But, independent of this tax dodge, litigation ensued. The buyer then raised a defence to an action for the price by pleading that the deal was corrupted by illegality. The Court of Appeal rejected the defence because no such shared purpose subsisted when the contract was formed or at the time of delivery. Instead the fraudulent misdescription of the subject-matter had been inserted ex post facto on the invoice once delivery had already been made (it appears to have been a corrupt act of kindness by the seller, no doubt in the interest of winning customer loyalty). The claimant vendor was entitled to sue for the balance in respect of a supply of Koi carp.

16.54 In Alexander v Rayson (1936)⁷¹ the rent payable under a tenancy for a flat at 142 Piccadilly, London, was misstated in documents collusively concocted by the landlord and tenant to enable the landlord to mislead a third party rent assessment committee. The lease stated that the rent was £450 a year. This would enable the landlord to reduce his liability to income tax and rates. A service agreement stated that the tenant would pay £750 a year (in fact all the services therein listed were already part of the tenancy agreement, with the sole exception of the supply of a frigidaire, and that was enough to constitute consideration for (p. 331) the service agreement). The plan was implemented, the landlord representing that the lease was for £450. But the scam was later uncovered by the authorities. The landlord’s fraudulent stratagem had been adopted at the very start of the tenancy. It was not a case where an initially innocent set of arrangements had subsequently been bent to a party’s deceitful purpose, by unilateral alteration of a document. And so the Court of Appeal held, reversing Du Parcq J, that the arrangement was sufficiently contaminated by an unlawful purpose so that the landlord was prevented from suing for past rent. Nor would the landlord have any right to claim for the services element, because that was contaminated by the overall tax fraud. The tenant was prepared, without being legally required to do so, to pay the rent at the rate of £450 a quarter. Once paid, it could not be recovered. The Court of Appeal remitted to the trial judge the application for permission to amend the pleadings to add a claim based on an oral agreement. That oral agreement would not involve reliance on the concocted documentation.

16.55 Alexander v Rayson was distinguished in 21st Century Logistic Solutions Ltd v Madysen Ltd (2004)⁷² by Field J, where a scheme for VAT evasion was regarded as too remote from the present transaction. This was a claim for computer goods bought for nearly £1 million.

Financial Interest in Outcome of Litigation: Champerty and Maintenance

Doctrine.

16.56 The background to this is that agreements to take a financial stake in the outcome of civil proceedings or to share the fruits of a civil action (damages, etc) are contrary to public policy and hence not legally binding at Common Law. However, statute has legitimated certain agreements where lawyers conduct civil proceedings on a ‘no-win no-fee’ basis.⁷³ The Common Law public policy bar concerning agreements conferring a financial stake in the outcome of the proceedings, or to share the fruits of a civil action (damages, etc), is known as ‘maintenance and champerty’.⁷⁴

Statutory Exceptions.

16.57 The Courts and Legal Services Act 1990 (as amended) allows lawyers to agree to conduct a case on a no-win-no-fee basis. This has been the foundation for the introduction of (i) conditional fee agreements (‘CFAs’), since 1995, and (ii) damages-based agreements (‘DBAs’) since April 2013.⁷⁵

No Expansion of Doctrine at Common Law.

16.58 The Court of Appeal in Sibthorpe v Southwark LBC (2011)⁷⁶ held that a solicitor’s agreement (a contingent costs indemnity) to bear the risk of liability to pay a client’s costs liability, in the event that the case is lost, falls outside the Common Law doctrine of champerty. This case reflects the modern tendency not to expand (p. 332) the doctrine of champerty. This decision is attractive because it promotes access to justice,⁷⁷ and it involves a pragmatic appreciation of the lawyer’s capacity to maintain professional standards of probity even when conducting a case in which he or she personally has a real financial interest (in the sense that defeat will involve an aggravated form of loss for his firm).

16.59 The central point in reaching this conclusion was that the law of champerty should not be extended. As Lord Neuberger MR noted, the champerty doctrine concerns arrangements where the non-litigant funder (here, the client’s lawyer) agrees to gain positively from the relevant litigation. This was not so on the present facts. The lawyer would suffer a loss if the case were lost because he would have to indemnify his client (on the other hand, a point not made by the Court of Appeal, the lawyer stands to make an overall gain (although not a contingent one) in the sense that the case would not have been attracted if the lawyer had not been able to offer the present contingent costs indemnity). The court concluded that there was no sound public policy reason to invalidate the indemnity. This had the consequence that the conditional fee agreement between that client and his lawyer was also valid.

Restraint of Trade

Nature.⁷⁸

16.60 An agreement is contrary to public policy and hence not legally binding if it unreasonably stultifies a person’s legitimate interest in pursuing a trade, profession, or engaging in other economic activity. Agreements in restraint of trade must be justified as reasonable, the court having regard to the interests of both the contracting parties and the public.

16.61 There are three leading judicial discussions of this doctrine in the modern case law. (i) In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968)⁷⁹ the House of Lords held that the restraint of trade doctrine invalidated a twenty-one-year solus agreement whereby a filling-station owner could purchase only from the Esso company, albeit at discount, but a four-year agreement was valid. That case is summarized at [16.72] below. (ii) Egon Zehnder Ltd v Tillman (2019)⁸⁰ concerns, in particular, the principles governing severance of offending restraints. (iii) Jonathan Parker J gave a magisterial discussion of the doctrine in Panayiotou v Sony Music Entertainment (1994).⁸¹ On the facts of that case the judge held that the restraint of trade doctrine was not engaged because⁸² the relevant agreement was a compromise of an earlier challenge to an agreement in which the restraint of trade doctrine had been invoked already. The artist (George Michael) was thus attempting to unpick the compromise and the public interest in upholding void settlements precluded this.

Sale of Business.

16.62 In the case of the sale of a business, the buyer has a legitimate interest in preventing the established client base from being diverted, snatched, or eroded, by rival competition by the seller. The client base’s custom (goodwill) is part of the value of the (p. 333) business which the buyer has acquired. A well-established form of restraint of trade arises when the seller of a business, transferred along with its goodwill (the benefit of its established client base), agrees with the purchaser not to carry on a business which will compete with the buyer’s newly acquired business. In cases concerning the sale of a business with goodwill, the length of the period of restraint and its area of operation must be reasonable.⁸³

16.63 However, in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd (1894),⁸⁴ the sale of an armaments business contained a restrictive covenant preventing the vendor from engaging in rival trade for twenty-five years anywhere else in the world. The House of Lords held that this was not excessive, because the vendor, a Swedish millionaire arms manufacturer, had already achieved a worldwide sales base.

Employment Contracts.

16.64 Employment contracts might provide that upon ceasing to be an employee the former employee will not exploit his ex-employer’s trade secrets, or confidential information, or solicit custom from the contacts acquired by the employee during his employment with the covenantee. There is a detailed examination of the principles in Argus Media Ltd v Halim (2019).⁸⁵ The restraint of trade doctrine can extend to other forms of association, such as partnerships.

16.65 An employer has no legitimate interest in stopping its former employee from setting up a rival business. Instead, its protection is confined to its interests in protecting its trade secrets, or other confidential information, and in preventing the employee from filching his custom by taking advantage of customer details and contacts acquired during the period of employment. The employee’s covenant cannot catch types of business different from the covenantee’s (ie outside the scope of the employer’s commercial or other type of activity).

16.66 In Medenta Finance Ltd v Hitachi Capital (UK) plc (2019), Stephen Hofmeyr QC summarized the principles governing restraint of trade in the context of employment (but on the facts the contract did not contain any unreasonable restraint).⁸⁶ An unreasonable restraint would have existed if, post-termination, the relevant clause had prevented a party from soliciting former customers of the relevant company (but the clause was construed not to include former clients).

16.67 Furthermore, the covenant must not contain a restriction which is excessive in geographical scope. For example, in Mason v Provident Clothing & Supply Co (1913)⁸⁷ the restriction concerned work as a commercial canvasser within twenty-five miles of London (an area (p. 334) over a thousand times larger than the employee’s usual field of work), and this was held to be too broad.

16.68 Nor should the restriction endure too long. Thus a five-year period was held to be unreasonable in M & S Drapers v Reynolds (1957).⁸⁸ But an eighteen-month covenant was upheld in Ideal Standard International SA v Herbert (2018) by Sir Ross Cranston.⁸⁹ The relevant ex-employee had a ‘not insignificant’ share interest in the claimant company. The non-compete clause (to endure for eighteen months) stated:⁹⁰ ‘[the defendant shall not] … carry on or be engaged in or concerned or interested in any business within the jurisdictions in which the Group carries on business … as at the Cessation Date … that is in competition with Business as carried on at the Cessation Date’.

Restraining Competition Between Law Firms.

16.69 The Court of Appeal in Harcus Sinclair llp v Your Lawyers Ltd (2019) held⁹¹ that an agreement between solicitor firms X and Y that firm Y would not pursue rival group litigation proceedings as a reasonable restraint of trade (the background to the case was the VW emissions scandal). In the Court of Appeal’s view,⁹² this was an unreasonable restraint of trade, which could not be justified in the public interest. It was incommensurate to the interest which the main contract sought to protect. And the restraint would endure for six years within a legal market where experience and competence amongst legal firms to run sophisticated litigation was scarce.

Restraint of Trade: Constraining Creative Talent.

16.70 An agreement might unacceptably preclude a party from exercising a freedom that he might otherwise have.⁹³ In A Schroeder Music Publishing Co Ltd v Macaulay (1974)⁹⁴ the House of Lords invalidated a music agency agreement under which a twenty-one-year-old songwriter agreed to assign copyright in all his songs composed over the next five years. The agreement could be extended to ten years if his royalties exceeded £5000 in the first period. The publisher was not obliged to publish his works. Although the songwriter was committed to the contract for five, or even ten, years, the publisher could terminate the contract on one-month’s notice. The songwriter, Macaulay, proved to be a success. The publisher failed to show that this restraint of trade could be justified as reasonable and, for this reason, it was held that the arrangement was not legally binding.

16.71 The Schroeder case was considered by the Court of Appeal in Proactive Sports Management Ltd v Rooney (2011).⁹⁵ In the Rooney case the Court of Appeal held that a contract to (p. 335) promote the ‘image’ of a talented footballer (the ‘Wayne Rooney’ case), an ‘off-field’ agency contract, was an unreasonable restraint of trade on the facts. Gross LJ confessed to finding the case a narrow victory for the footballer. The main factors which enabled the footballer to cross the line were: the duration (eight years) was excessive (a two-year duration being the norm in the case of ‘on-field’ agency contracts); the contract had been agreed without the footballer or his family receiving legal advice; the footballer had been seventeen, and his parents lacked commercial sophistication; there was no tapering of the 20 per cent commission rate during the contract. The Court of Appeal declared the agreement to be unenforceable because it was contrary to public policy under the restraint of trade doctrine. There had been no justification put forward, and thus the agreement was held to be unenforceable, although a quantum meruit would be granted in favour of the agent, for its services, the amount of which would be determined in a separate inquiry.

Filling Station ‘Solus Agreements’: Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968).

16.72 Here the House of Lords struck down a twenty-one-year solus agreement (the Corner Garage) which required the petrol retailer, the owner of the site, not to buy fuel from anyone other than Esso. In return, the retailer received a reduction in the wholesale price. But, in the same litigation, it was held that a four-year solus agreement (Mustow Green Garage) was acceptable: the petrol company was justified, for that period, in protecting its interest by securing a reasonable degree of continuity in its supply to retailers.⁹⁶

16.73 In Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd (2020)⁹⁷ the Supreme Court rejected the so-called pre-existing freedom test which had been suggested in Esso v Harper (1968) (but not supported by Lord Wilberforce in that case). This test involved the contention that a party can suffer a restraint on its trading liberty only if it had enjoyed the relevant freedom prior to the transaction which imposed the restraint. This conceptual approach was rejected in the Peninsula case (2020). Instead the Supreme Court (adopting the so-called trading society test) held that a covenant relating to the use of land cannot be challenged under the restraint of trade doctrine if such a covenant has ‘passed into the accepted and normal currency of commercial or contractual or conveyancing relations’ and which has ‘assumed a form which satisfies the test of public policy’.⁹⁸ Applying this test, a lessor of a shopping mall could not challenge a covenant restraining that party from permitting more than one ‘anchor store’ to trade in competition with the claimant lessee. Such a restraint has received the blessing of ‘accepted and normal’ commercial practice.

Severance and Post-Employment Restrictive Covenants.

16.74 The doctrine of ‘restraint of trade’ can invalidate the whole agreement, or a free-standing clause, or at least part of a clause which can be excised using the process of ‘severance’, leaving the remaining portion of the clause operative. The law concerning ‘severance’ of unreasonable restraints, in the context of post-employment restrictive covenants, was carefully reviewed by Lord Wilson in Egon Zehnder Ltd v Tillman (2019).⁹⁹

(p. 336) 16.75 The case concerned Tillman’s departure from employment with EZ in the executive recruitment industry. The contract contained a six-month restrictive covenant. The relevant restraint was that, for a period of six months after leaving EZ, Tillman would not ‘directly or indirectly engage or be concerned or interested in any business carried on in competition with any of [the claimant’s] businesses’. Tillman contended successfully that ‘interested in’ involved an unreasonable restraint because it contained a prohibition on holding even a minority shareholding in a rival business during that six-month period. The Supreme Court held that the injunction had been validly granted, but with that offending part of the text severed. In short, the words ‘or interested in’ would be excised.

16.76 In the Tillman case the Supreme Court explored at length the complicated line of case law in this post-employment context concerning ‘severance’. The Supreme Court’s conclusion is that severance can occur: (i) provided the proposed excision of the offending text leaves a syntactically free-standing covenant; this is the ‘blue-pencil’ test; the excision must thus operate cleanly at one stroke (or more than one stroke) of the pencil; the court will not rewrite the text so as to combine subtraction and verbal rearrangement; (ii) the remaining portion of the clause is supported by adequate consideration; and (iii) the removal of the offending portion does not render the surviving contract a different arrangement so as to ‘generate any major change in the overall effect of all the post-employment restraints in the contract’.¹⁰⁰ Lord Wilson said¹⁰¹ that the old case of Attwood v Lamont (1920)¹⁰² had ceased to be compelling because it involved an approach to severance which was too restrictive, and so it would be necessary to overrule it. In its place the Supreme Court endorsed the Court of Appeal’s threefold guidance in Beckett Investment Management Group Ltd v Hall (2007).¹⁰³

Evaluation: Wrongfully Dismissed Employee Released from Restrictive Covenants.

16.77 The current law, based on the rule in General Billposting Co Ltd v Atkinson (1909)¹⁰⁴ is that an employee is released by operation of law from such a restrictive covenant if he or she is wrongfully dismissed by the employer.¹⁰⁵ And thus restrictive covenants do not survive in favour of employers who have become the guilty party so that the contract has been discharged by reason of the employer’s breach. In Geys v Société Générale (2012), Lord Wilson noted that this point is the subject of ‘debate’ (in fact this alludes to one judge’s obiter doubts: see ensuing text).¹⁰⁶

16.78 And so, General Billposting Co Ltd v Atkinson (1909) remains (and, see below, should remain) the law. The ‘debate’ concerns Lord Phillips MR’s doubts in Campbell v Frisbee (p. 337) (2002),¹⁰⁷ where he noted his earlier sceptical obiter comments in Rock Refrigeration Ltd v Jones Rock Refrigeration Ltd v Jones (1997).¹⁰⁸ In the Rock case, in obiter remarks, he had (i) drawn attention to the general analysis in the Photo Production case of the nature of discharge for breach (see [24.253]) and, against that background, of the (suggested) anomalous nature of the Billposting rule; and (ii) in the same case Phillips LJ had contended (rather boldly) that there would be no real harshness suffered by an employee if that 1909 rule were to be judicially reversed so that instead the employer could have his cake and eat it, that is, succeed in wrongfully terminating the contract and yet remain entitled to uphold the restrictive covenant against the employee.

16.79 As for (i) (mentioned in the preceding paragraph, ie the general analysis in the Photo Production case of the nature of discharge for breach), the fact that ancillary clauses, such as a restrictive covenant, generally survive discharge of the contract for breach does not lead inexorably to the conclusion that such an ancillary clause in all circumstances must necessarily survive that type of discharge. Instead there might be particular considerations relevant to a specific context which justify an exception to the general analysis.

16.80 This takes us to the second point raised by Phillips LJ, as he then was, in the Rock case, noted above: his contention that the employer should not be deprived of the protection of the restrictive covenant just because his conduct has led to wrongful dismissal. However, with respect, and against Lord Phillips’ comment, it is submitted that the Billposting rule is a matter of elementary justice. It reflects the view that the employer’s serious or repudiatory breach should disentitle that party from taking advantage of the constraint contained in the restrictive covenant. Moreover, the rule has stood for over 100 years. It would be inappropriate for even the Supreme Court to cast aside this rule in the abstract interest of doctrinal symmetry or consistent conceptual analysis. The underlying merits of the attempted refutation presented by Lord Phillips are a matter for debate. This is quintessentially an area where the courts should desist from changing the law. Only Parliament can legitimately grasp this nettle.

16.81 The present author’s suggestion is also consistent with the following judicial comment. In Brown v Neon Management Services Ltd (2018) Choudbury J poured¹⁰⁹ cold water on the idea that the General Billposting rule is ripe for reversal. Choudbury J upheld a claim for damages made by former employees of the defendant company. The breaches comprised¹¹⁰ failing to pay salary increases and discretionary bonuses that had been awarded to them, making the salary increases and bonuses conditional upon acceptance of detrimental new contractual terms, and the removal of profit commission agreed at the time of their recruitment. The claimants succeeded in establishing that these breaches individually and cumulatively amounted to a repudiatory breach of contract entitling them to resign, which they did ‘on notice’, and that further breaches occurred during that notice period. The case contains, therefore, a rich treatment of repudiatory breach in the employment context.

(p. 338) 16.82 Freedland, a commentator on employment contracts, has proposed a more nuanced approach to the General Billposting issue.¹¹¹ In this discussion, Freedland first notes a different suggestion made by Linda Clarke, the latter suggesting that the equitable duty of confidentiality does survive termination, but not an express confidentiality clause. Instead Freedland proposes this change: that the issue whether, in the post-termination context, the restrictive covenant (or express confidentiality clause) survives or lapses (this being the current law) following wrongful dismissal by the employer, or other repudiatory breach, should be addressed:

not according to the comprehensive all-or-nothing approach which was taken on the facts of [General Billposting v Atkinson], but instead by asking whether there had been such a total failure of consideration on the part of the employer, for the particular obligation which it was now sought to enforce, as to make it inappropriate to enforce that obligation. If the claim to damages survives that scrutiny, it should be subjected to the controls of contribution and mitigation. (Freedland’s emphasis.)

16.83 Freedland’s proposal would appear to require (both for the purpose of injunctive relief and damages) judicial assessment of the gravity of the employer’s breach and a comparison of the benefit to the employee (and consequent detriment to the employer) if the relevant covenant or clause ceases to apply post-termination. Such a balancing might be effected, Freedland suggests, under the court’s discretionary power to grant or withhold an injunction (but query whether, under the current law, the courts would not simply approach the matter by leaning strongly in favour of the grant of an injunction).¹¹² But, if such a balancing were to extend to the availability of damages, this would render the award of compensation essentially discretionary. There are, admittedly, contexts in which damages are discretionary (see section 2(2) of the Misrepresentation Act 1967 and the discretionary award of damages in lieu of an injunction under section 50 of the Senior Courts Act 1981). But the modern tendency is not to expand the discretionary element in the availability of damages for breach of contract. As Lord Reed said in One-Step Support Ltd v Morris-Garner (2018):¹¹³ ‘Common Law damages for breach of contract are not a matter of discretion. They are claimed as of right, and they are awarded or refused on the basis of legal principle.’

Prostitution (‘Sex Working’)

Equipment Supplied.

16.84 In Pearce v Brooks (1866)¹¹⁴ it was held that an agreement for the supply of facilities for use by prostitutes (`sex workers’) in their ‘immoral calling’ is illegal, and hence not legally binding, if the supplier was aware of that use. The claimant made available for consideration a carriage for use (as the claimant knew) in the defendant’s activity (p. 339) as a prostitute. The supplier could not recover hire charges for the carriage. It was enough that the claimant knew that the contract involved assistance in her ‘immoral calling’. There was no need for the parties to have agreed that the hire would be paid directly from the prostitute’s illicit earnings.

Whole Contract Not Tainted.

16.85 In Coral Leisure Group Ltd v Barnett (1981), Barnett brought a claim for unfair dismissal against a casino company. In his written claim, Barnett had alleged (potentially self-defeatingly, but see below) that part of his duties was to pay for prostitutes to be used by the casino’s rich clientele. But the Employment Appeal Tribunal held that the illegal element in the performance of this contract did not render the entire contract unenforceable for illegality.¹¹⁵ For a similar outcome, but in a quite different context, see ParkingEye Ltd v Somerfield Stores Ltd (2012) [16.41].

Early Twentieth-Century Public Morality.

16.86 In Upfill v Wright (1911)¹¹⁶ Darling J refused, on the ground of public morality, to give effect to a rent claim. The tenant was a third party’s mistress, and that third party visited her there. The rent was payable by her but the court inferred that the third party was the real funder. The landlord knew of the circumstances of this letting. The landlord’s claim for rent was denied on the basis of public policy. Dwyer rightly considers that the case is unlikely to be followed in modern times.¹¹⁷ Darling J said:¹¹⁸

one has to see whether the flat was let either for an illegal or for an immoral purpose, for if so the rent cannot be recovered. The flat was let to the defendant for the purpose of enabling her to receive the visits of the man whose mistress she was and to commit fornication with him there. … [F]ornication is immoral, so that Courts of law take cognizance of the fact that it is immoral.

Restitution or Unjust Enrichment and Illegal Contracts: Patel v Mirza

Restitution Prima Facie Available.

16.87 The Supreme Court held in Patel v Mirza (2016)¹¹⁹ that unjust enrichment or restitutionary claims with respect to illegal contracts are prima facie available, in the absence of strong policy reasons. Money paid under an illegal contract can be recovered even though the payor was privy to the illegal purpose and hoping to benefit from it. This decision declares that illegality is no bar to such a claim (but there might be extreme exceptions). The issue is whether the recovery of the money would conflict with the (p. 340) policy within which the illegality is rooted. On this basis the Supreme Court held that a payment was recoverable even though the payor and payee had criminally conspired to make an investment founded on insider information. And so the decision breaks new ground by creating a presumption, perhaps a rule, that a payor under an illegal contract is entitled to recover the money even if the only reason he makes this claim is because the illegal purpose has proved incapable of being achieved. This is a radical recasting of the law in favour of the payor.

Disarray before Patel v Mirza.

16.88 Patel v Mirza (2016), which has just been summarized and which is examined below in detail, was expected to resolve a long-standing tension¹²⁰ and complexity in the law of illegality and unjust enrichment: whether (i) the basis of restitution arises in accordance with rule and principle (see the next paragraph of the text for a summary of the old, pre-Patel v Mirza law), or (ii) whether the courts should be open in all cases to a ‘range of factors’ inquiry to determine whether restitution should be permitted in the present case. The majority in this case has opted firmly for approach (ii).

The Old Law: Situations Where Payor Could Recover in Restitution before Patel v Mirza.

16.89 The following complicated categories are now overtaken by the Patel case (2016). Pre-Patel v Mirza, a party could recover money paid, or obtain recompense in respect of goods or services, where:

(1) the party seeking restitution belongs to a class of persons intended to be protected by the relevant illegality rule;¹²¹ or
(2) the party seeking restitution was ignorant of a fact which caused the transaction to be illegal;¹²² or
(3) the party seeking restitution had been induced to enter the contract by the defendant’s misrepresentation of fact, or fraudulent misrepresentation of law;¹²³ or
(4) the party seeking restitution had been induced to enter the contract by the defendant’s duress;¹²⁴ or
(5) restitution is sought before the transaction’s illegal purpose has been achieved;¹²⁵ but the Supreme Court in Patel v Mirza (2016) rejected the repentance criterion.¹²⁶

Patel v Mirza in Greater Detail.

16.90 The agreement in Patel v Mirza (2016) was a conspiracy to commit the offence of insider dealing, contrary to section 52 of the Criminal Justice Act 1993. Patel paid £620,000 to Mirza to enable him to trade in Royal Bank of Scotland (RBS) shares. The parties were acting on insider information that the Government would make a (p. 341) particular announcement concerning RBS. The parties expected to make large gains from buying these shares. But no such announcement in fact occurred. Although the loan was paid to Mirza, the illegal scheme had not been implemented at all. Mirza refused to repay. The Supreme Court held that the money could be recovered by the claimant because the defendant on these facts could not defend on the basis of illegality. The majority’s reasoning involved a refashioning of doctrine, six members adopting a policy-based assessment of the merits of awarding restitution.¹²⁷

16.91 Although agreeing with the result, an impressively rigorous minority chose a different route.¹²⁸ They favoured a doctrinally more cogent approach, based on a newly rejuvenated principle of rescission or restitution under an illegal transaction: the claim to restitution is prima facie sound and is rooted in the need to undo an illegal transaction. But this minority approach has already been discarded in judicial discussion subsequent to the Patel case: see text below.

Majority Analysis in Patel v Mirza.

16.92 The Supreme Court in Henderson v Dorset Healthcare University NHS Foundation Trust (2020) and the Supreme Court in Grondona v Stoffel & Co (2020) identified specific passages (now to be quoted in the text) in the Patel case as the kernel of the decision, especially Lord Toulson’s analysis at [101].¹²⁹

16.93 In Patel v Mirza Lord Toulson said:¹³⁰

[101] … [One] cannot judge whether allowing a claim which is in some way tainted by illegality would be contrary to the public interest, because it would be harmful to the integrity of the legal system, without (a) considering the underlying purpose of the prohibition which has been transgressed, (b) considering conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and (c) keeping in mind the possibility of overkill unless the law is applied with a due sense of proportionality. We are, after all, in the area of public policy. That trio of necessary considerations can be found in the case law.

16.94 Lord Toulson added:¹³¹

[109] … it is right for a court which is considering the application of the common law doctrine of illegality to have regard to the policy factors involved and to the nature and circumstances of the illegal conduct in determining whether the public interest in preserving the integrity of the justice system should result in denial of the relief claimed. I put it in that way rather than whether the contract should be regarded as tainted by illegality, because the question is whether the relief claimed should be granted.

(p. 342) 16.95 Lord Toulson continued:¹³²

[120] The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system (or, possibly, certain aspects of public morality, the boundaries of which have never been made entirely clear and which do not arise for consideration in this case). In assessing whether the public interest would be harmed in that way, it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather by than the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate.

16.96 Lord Kerr¹³³ supported Lord Toulson’s approach, and strongly criticized the alternatives of (i) allowing a claim to proceed if there is no reliance on the relevant illegal transaction and/or (ii) allowing unjust enrichment claims to proceed on the basis that this category of obligation operates without reference to the wider context of policy.

The Range of Factors or Multi-factorial Approach in Patel v Mirza.

16.97 Adopting the majority approach in Patel v Mirza to the general application of the illegality doctrine, Sir Geoffrey Vos, C, in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd (2018) summarized that decision.¹³⁴ Sir Geoffrey Vos then explained that the appellate court’s review of a first instance judge’s application of this test will involve a ‘light-touch’ approach. However, this approach is debatable and the remarks are dicta.

Are There any Types of Illegal Transaction Where Restitution is Inappropriate?

16.98 Lord Toulson’s majority analysis in Patel v Mirza (2016) suggests that there will be situations where restitution will be inappropriate, although such a case will be ‘rare’:¹³⁵

[121] A claimant, such as Mr Patel, who satisfies the ordinary requirements of a claim for unjust enrichment, should not be debarred from enforcing his claim by reason only of the fact that the money which he seeks to recover was paid for an unlawful purpose. There may be rare cases where for some particular reason the enforcement of such a claim might be regarded as undermining the integrity of the justice system, but there are no such circumstances in this case. I would dismiss the appeal.

16.99 In the same case Lord Neuberger, in elevating the right to restitution in this context to a ‘Rule’, seems to have contemplated no exceptions by reference to the heinousness of the (p. 343) illegality.¹³⁶ But a reality check is required. Should the payor recover from the assassin (the ‘contract killer’) because the payor has found a superior assassin; or because they have fallen out; or because the work can be done more cheaply by another? It seems impossible to imagine that the courts would treat this as a valid cause of action. Lord Sumption’s answer to this problem is to note¹³⁷ that in: ‘a case involving heinous crimes, both parties would be exposed to confiscation orders under the Proceeds of Crime Act 2002’. Confiscation would nullify any theoretical ‘right to restitution’.

Minority Analysis in Patel v Mirza.

16.100 Lord Mance in Patel v Mirza favoured a prima facie recovery in restitution, whether or not the claimant has repented, and even if there has been part (or perhaps complete) performance. Lord Mance explained¹³⁸ that the locus poenitentiae category (the payor’s power to claim restitution if that party has spontaneously resiled and thus earned the right to clemency from the court, ‘poenitentia’: see the case law authorities summarized at The Old Law category (5) above at [16.89]) is a narrowing of a category of restitution. That category should be restored to its proper width. Earlier cases had indeed recognized this wide principle. The relevant head of restitution is the dismantling by ‘rescission’ of a contract (an unfortunate usage, best understood as a reference to restitution of benefits conferred under), that contract having become unenforceable by reason of illegality (or sometimes is void at its inception). The law cannot enforce the illegal transaction, nor allow a party to profit from his illegal conduct. But the law can order restitution, even if the contract had been partly or fully performed.

16.101 In Patel v Mirza Lord Sumption, in a minority judgment, with which Lord Clarke agreed, declared that the law of restitution or unjust enrichment permits an illegal transaction to be unpicked even though the payor has sought recovery only because the illegal purpose has not been carried out. The basis of the restitutionary claim is that the contract is illegal and needs to be undone.

Case Law Reception of Patel v Mirza.

16.102 Norris J in Ronelp Marine Ltd v STX Offshore and Shipbuilding Co Ltd (2016)¹³⁹ commented on the fluid state of the post-Patel state of the law. However, some clarity has been injected by the Supreme Court in the following case and in the Stoffel case (on which see [16.92]). In Henderson v Dorset Healthcare University NHS Foundation Trust the Supreme Court held¹⁴⁰ that the Patel case had not unsettled two¹⁴¹ pre-Patel cases concerning the illegality doctrine and the tort of negligence. Also in the Henderson litigation, the Court of Appeal,¹⁴² regarded the Patel decision as having addressed the following four points:

(1) a restitution claim will nearly always arise from an illegal contract (the discussion in the Patel case had not been specifically addressed at a tort case);
(p. 344) (2) Patel v Mirza did not disturb settled tort cases concerning illegality;¹⁴³ (this same point was central to the Supreme Court’s decision in the Henderson case) (but note the next paragraph of the text);
(3) the Supreme Court in the Patel case rejected the reliance test in Tinsley v Milligan (1994);¹⁴⁴
(4) instead the majority’s analysis in the Patel case should be identified as that contained in three passages within Lord Toulson’s judgment in the Patel case (2016).¹⁴⁵

16.103 In fact, Patel v Mirza has become a general source of discussion across the various categories of private law, including tort law. Thus Lord Hamblen in the Henderson case (2020) said¹⁴⁶ that the Patel case ‘was intended to provide guidance as to the proper approach to the common law illegality defence across civil law more generally’. Consistent with this, the Patel case was extensively examined by the Supreme Court in Whittington Hospital NHS Trust v XX (2020) when dealing with a shift in the public policy concerning recovery in tort of compensation with respect to surrogate birth expenses (incurred or anticipated).¹⁴⁷ Similarly, Martin Spencer J, on appeal, in Gujra v Roath (2018) held¹⁴⁸ that a tort claim for malicious prosecution had been rightly struck out, applying the range of factors approach enunciated by the majority of the Supreme Court in Patel v Mirza (2016) (above).

16.104 As the following two cases demonstrate, the courts now regard it as inappropriate to deny civil relief to fraudsters where such a denial would involve ‘overkill’, that is, a disproportionate withdrawal of civil protection.

16.105 First, the Supreme Court in Grondona v Stoffel & Co (2020)¹⁴⁹ held that a claim for professional negligence against a solicitor should not be barred by reason of the mortgage fraud incidentally committed by its client, the claimant (there is an appeal pending before the Supreme Court).

16.106 Secondly, Judge Simon Barker QC, in Saeed v Ibrahim (2018) held¹⁵⁰ that the guidance contained in the Patel case permitted the court to order the defendant trustee to hand over property to the claimant, even though the circumstances in which the trust was orally agreed involved fraudulent concealment, deceit, and forgery. The defendant was no less implicated in this illegality than the claimant. The judge concluded¹⁵¹ that to bar the claim and thus to allow the property to be retained by the defendant would not be consistent with the policies underpinning the Patel decision.

16.107 By contrast, in Al-Dowaisan v Al-Salam (2019) Judge Hodges QC barred¹⁵² on the basis of illegality, a counterclaim to recover from a transferee funds which the counterclaimant had transferred for the purpose of tax evasion (and see [16.45] for other cases concerning Revenue, or related, evasion). This type of wrongdoing (which was aggravated on the facts (p. 345) by misconduct which led to the collapse of a prosecution) inspires a strongly censorious judicial response: see discussion.¹⁵³

Singaporean Criticism.

16.108 For a critical analysis of Patel v Mirza (2016) by the Singapore Court of Appeal, see Ochroid Trading Ltd v Chua Siok Lui (2018).¹⁵⁴ (p. 346)

Footnotes:

¹ For literature, Bibliography, Part II, section (22).

² [1980] QB 384, 357 (CA).

³ Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 (CA); Law Commission, ‘The Illegality Defence’ (Law Commission Consultation Paper No 189, 2009), Part 5, at 86–93.

⁴ Grondona v Stoffel & Co [2020] UKSC 22, [2020] 3 WLR 1156 at [33] and [34]; Singh v Ali [1960] AC 167, 176, PC; Belvoir Finance Co v Stapleton [1971] 1 QB 210 (CA). For reasons of space, propositions (5) and (6) will not be elaborated elsewhere in this text.

⁵ Re Mahmoud and Ispahani [1921] 2 KB 716, 729 (CA) (Scrutton LJ); Birkett v Acorn Business Machines Ltd [1999] 2 All ER 429, 433 (Colman J, sitting with Sedley LJ), and the latter was applied in Pickering v Deacon [2003] EWCA Civ 554; The Times, 19 April 2003; similarly, in Skilton v Sullivan, The Times, 25 March 1994 (see the end of Beldam LJ’s judgment).

⁶ [1921] 2 KB 716, 729 (CA). The 1921 discussion was approved by the Court of Appeal in Birkett v Acorn Business Machines Ltd [1999] 2 All ER 429, 433 (Colman J, sitting with Sedley LJ), and the latter was applied in Pickering v Deacon [2003] EWCA Civ 554; The Times, 19 April 2003. Similarly, in Skilton v Sullivan, The Times, 25 March 1994, the Court of Appeal said that, if the VAT authorities had not already been informed, the court would have been obliged to report to those authorities the fact that one of the parties had dishonestly violated the VAT rules (see the end of Beldam LJ’s judgment)

⁷ [1996] CLC 377 (CA).

⁸ (1945) 62 TLR 85 (CA).

⁹ McFarlane v Daniell (1938) 38 SR (NSW) 337 (Jordan CJ).

¹⁰ [2019] UKSC 32, [2020] AC 154.

¹¹ ibid, at [87] (Lord Wilson; with the agreement of each of Baroness Hale, Lords Kerr and Briggs, Lady Arden).

¹² [1905] 2 KB 123, CA

¹³ RA Buckley, Illegality and Public Policy (5th edn, Sweet and Maxwell 2019) 6–20.

¹⁴ Chitty on Contracts (HG Beale gen ed, 33rd edn, Sweet and Maxwell 2018) 16-103, citing Lowe v Peers (1768) 4 Burr 2225; affirmed Wilmot 364.

¹⁵ Granatino v Radmacher [2010] UKSC 42, [2011] 1 AC 534; noted J Miles (2011) 74 MLR 430 and by J Herring, PG Harris, and RH George (2011) 127 LQR 335; generally on this topic, J Scherpe (ed), Marital Agreements and Private Autonomy in Comparative Perspective (Oxford, Bloomsbury Publishing, 2012).

¹⁶ [2018] EWCA Civ 2862, [2019] 1 WLR 3438.

¹⁷ [2018] EWCA Civ 1050, [2019] Fam 518.

¹⁸ [2020] UKSC 14, [2020] 2 WLR 972 (Baroness Hale, Lords Kerr and Wilson; dissenting, Lords Carnwath and Reed).

¹⁹ ibid, at [66].

²⁰ ibid, at [53].

²¹ [1917] 1 KB 305 (CA); P Saprai, ‘The Principle against Self-Enslavement in Contract Law’ (2009) 25 JCL 26.

²² ibid, 317; see also the quotations in Buckley, Illegality and Public Policy, 15-1015; and compare the appalling facts of Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889 at [56].

²³ Wyatt v Krelinger and Fernau [1933] 1 KB 793 (CA); also Horwood v Millar’s Timber and Trading Co Ltd [1917] 1 KB 305 (CA), above.

²⁴ s 2, Trading with the Enemy Act 1939 (as amended) defines ‘enemy’; for an example, note the facts of Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (HL); see also Chitty (2018) 12-025 ff; GH Treitel, Frustration and Force Majeure (3rd edn, Sweet and Maxwell 2014) 8-004 to 8-006.

²⁵ N Cropp, ‘The Bribery Act 2010: A Comparison with the Foreign Corrupt Practices Act: Nuance v Nous’ [2011] Crim L Rev 122; S Gentle, ‘The Bribery Act 2010: the Corporate Offence’ [2011] Crim L Rev 101; J Horder, ‘On Her Majesty’s Commercial Service: Bribery, Public Officials and the UK Intelligence Service’ (2011) 74 MLR 911 and ‘Bribery as a Form of Criminal Wrongdoing’ (2011) 127 LQR 37; C Monteith, ‘The Bribery Act 2010: Enforcement’ [2011] Crim L Rev 111; E O’Shea, The Bribery Act 2010: A Practical Guide (Bristol, Jordans Publishing, 2011); G Sullivan, ‘The Bribery Act 2010: an Overview’ [2011] Crim L Rev 87; A Wells, ‘Corporate Crime: Bribery Act Guidelines’ (2011) Business Law Review 186; C Wells, ‘Who’s Afraid of the Bribery Act 2010?’ [2012] JBL 420.

²⁶ There were statutory predecessors to the Bribery Act 2010: R v J [2013] EWCA Crim 2287, [2014] 1 WLR 1857 at [9] ff (on the Prevention of Corruption Act 1906, Public Bodies Corrupt Practices Act 1889, and the Prevention of Corruption Act 1916).

²⁷ Phillips J had grappled with this problem in Lemenda Trading Co Ltd v African Middle East Petroleum Co Ltd [1988] QB 448.

²⁸ [2017] EWCA Civ 1567, [2017] 2 CLC 584, [2017] 2 Lloyd’s Rep 621 (Lord Briggs, Hamblen LJ; Gloster LJ dissenting).

²⁹ [1910] AC 87 (HL).

³⁰ [1925] 2 KB 1 (Lush J).

³¹ For example, Miller v Karlinski (1945) 62 TLR 85 (CA).

³² R v Andrews [1973] QB 422 (CA).

³³ R v Ali [1993] Crim LR 396 (CA).

³⁴ R v Panayiotou [1973] 3 All ER 112 (CA).

³⁵ [2011] EWCA Civ 25, [2011] 1 WLR 2111.

³⁶ Compare the upholding of gentlemen’s agreements, D Allen, ‘The Gentleman’s Agreement in Legal Theory and in Modern Practice’ (2000) Anglo-American Law Review 204, 206.

³⁷ Generally, on arbitration, Andrews on Civil Processes (2nd edn, Intersentia Publishing 2019) chs 30 to 43, and see Bibliography (therein) at 1151–61, Sections V to VIII.

³⁸ Dana Gas PJSC v Dana Gas Sukuk Ltd [2017] EWHC 2928 (Comm), [2017] 2 CLC 735, [2018] 2 Lloyd’s Rep 177 at [79] ff (Leggatt J); and Dana Gas PJSC v Dana Gas Sukuk Ltd [2018] EWHC 278 (Comm), [2018] 2 Lloyd’s Rep 16 at [29] ff (Leggatt J); Vannin Capital PCC v RBOS Shareholders Action Group Ltd [2018] EWHC 2821 (Ch) at [115] ff.

³⁹ [1921] 2 KB 716 (CA), notably, 723–6 (Bankes LJ), 726–729 (Scrutton LJ), 732 (Atkin LJ). For a similar instance, see Chai Sau Yin v Liew Kwee Sam [1962] AC 304 (PC), noted by Law Commission, ‘Illegal Transactions: The Effect of Illegality on Contracts and Trusts’ (Law Commission Consultation Paper No 154, 1999) 2.18.

⁴⁰ [1979] Ch 584, 591; considering s 32, Building Societies Act 1962.

⁴¹ [1995] 3 All ER 669; see also Lord Toulson’s comments in Patel v Mirza [2016] UKSC 42, [2017] AC 467 at [40].

⁴² [1995] 3 All ER 669, 674.

⁴³ s 28, Financial Services and Markets Act 2000 (the response to Phoenix General Insurance Co of Greece SA v Halvanon [1988] QB 216, 273 (CA): see Law Commission, ‘The Illegality Defence’ (Law Commission Consultation Paper No 189, 2009) 3.101).

⁴⁴ [1957] 1 QB 267.

⁴⁵ This point, in particular, was noted by Toulson LJ in ParkingEye Ltd v Somerfield Stores Ltd [2012] EWCA Civ 1338, [2013] QB 840 at [60] to [64] and Lord Toulson in Patel v Mirza [2016] UKSC 42, [2017] AC 467 at [6], summarized the St John Shipping case.

⁴⁶ [1957] 1 QB 267, 288; for similar remarks on the proliferation of statutory offences of varying heinousness and technicality, Shaw v Groom [1970] 2 QB 504, 523 (CA) (Sachs LJ).

⁴⁷ [2019] EWCA Civ 1393; [2019] ICR 1635, at [16] to [58], notably at [49] (Underhill LJ) (employment claim; statutory immigration rules). At [49] he said: `It does not seem to me that public policy requires a construction of these sections which would have the effect of depriving the innocent employee of all contractual remedies against the employer in circumstances of that kind. The observations of Pearce LJ quoted at [24] above are apposite. We are only concerned here with whether the blunt weapon of statutory illegality requires to be deployed. The common law illegality rule remains available in cases in which the employee knowingly participates in the illegality in question; and that rule appears to give the courts and tribunals all they need in order to reach a proportionate result in a particular case.’

⁴⁸ [1955] 2 QB 525 (CA); the main passages are: 533–37 (Denning LJ), 538–40 (Birkett LJ), 540 (Romer LJ).

⁴⁹ On this point, Birkett LJ was sanguine, [1955] 2 QB 525, 540.

⁵⁰ AFH Loke, ‘Tainting Illegality’ (2014) 34 LS 560.

⁵¹ [1961] 1 QB 374 (CA); the leading passages are: 384–8 (Pearce LJ), and 389–93 (Devlin LJ).

⁵² [1973] 1 WLR 828 (CA); summarized by Lord Toulson in Patel v Mirza [2016] UKSC 42, [2017] AC 467 at [7].

⁵³ [2001] 1 WLR 225 at [80].

⁵⁴ [2007] EWCA Civ 456, [2007] BCC 407.

⁵⁵ ibid, at [73] to [82]. Per contra Pearce LJ in Archbolds (Freightage) Ltd v S Spanglett [1961] 1 QB 373, 387, noting Blackburn J in Waugh v Morris (1873) LR 8 QB 202, 209–08, where (mere) knowledge is emphasized (parties not privy to a contract to land prohibited foreign hay at English port; but contract would be void if both had intent to break the law).

⁵⁶ Henderson v Dorset Healthcare University NHS Foundation Trust [2020] UKSC 43, [2020] 3 WLR 1124, at [78], noting the decision in Okedina v Chikale [2019] EWCA Civ 1393; [2019] ICR 1635, at [62] (Underhill LJ).

⁵⁷ [2012] EWCA Civ 1338, [2013] QB 840; the main passages in Toulson LJ’s judgment are: [45] to [48], [54], [57], [66], [69], [72], [73], notably [77] and [78], (in these two paragraphs, providing the conclusion), and [79]. And see the comment on this case by Lord Toulson in Patel v Mirza [2016] UKSC 42, [2017] AC 467 at [68]. Generally, Loke, ‘Tainting Illegality’.

⁵⁸ [2012] EWCA Civ 1338, [2013] QB 840 at [59] (Toulson LJ); see [11] (Jacob LJ) for details of other false information contained in the claimant’s ‘third’ standard letter.

⁵⁹ ibid, at [38] (Jacob LJ).

⁶⁰ ibid, at [38] and [39] (Jacob LJ), [79] (Toulson LJ).

⁶¹ ibid, at [63].

⁶² ibid, at [23] ff.

⁶³ Notably, ibid, at [30] to [32], [35], [37] to [40], [63] to [65], [69], [72], [75], and [77] to [79].

⁶⁴ (1945) 62 TLR 85 (CA); Loke, ‘Tainting Illegality’; A Bogg, ‘Illegality, Public Policy, and the Contract of Employment’ in M Freedland (ed), The Contract of Employment (OUP 2016) ch 19.

⁶⁵ (1945) 62 TLR 85, 86.

⁶⁶ [1951] 2 All ER 264 (CA); this and the Miller case were considered in 21st Century Logistic Solutions Ltd v Madysen Ltd [2004] EWHC (QB) at [13] (Field J); on which, Loke, ‘Tainting Illegality’.

⁶⁷ [2019] EWHC 301 (Ch), [2019] 2 BCLC 328, notably at [233] and [234].

⁶⁸ McGill v The Sports and Entertainment Media Group [2016] EWCA Civ 1063, [2017] 1 WLR 989 at [36], [48], [77], sub-para (g).

⁶⁹ [2001] 1 WLR 225 (CA); summarized by Lord Toulson in Patel v Mirza [2016] UKSC 42, [2017] AC 467 at [38].

⁷⁰ The Times, 25 March 1994 (CA); considered in 21st Century Logistic Solutions Ltd v Madysen Ltd [2004] EWHC (QB) at [14] (Field J).

⁷¹ [1936] 1 KB 169 (CA).

⁷² [2004] EWHC (QB) at [15] to [22] (Field J); Loke, ‘Tainting Illegality’; the judge at [17], considered M Furmston, ‘The Analysis of Illegal Contracts’ (1966) 16 U Tor LJ 267.

⁷³ On CFAs (conditional fee agreements), DBAs (damages-based agreements), see the literature at Bibliography, Part II, section (27).

⁷⁴ On the history of the Common Law policy towards maintenance, J Rose, Maintenance in Medieval England (CUP 2017).

⁷⁵ Andrews on Civil Processes, ch 20.

⁷⁶ [2011] EWCA Civ 25, [2011] 1 WLR 2111 (also known as Morris v Southwark LBC); notably at [42] to [44], [47] to [49], [51] to [53], [55]; noted, A Sedgwick (2011) 30 CJQ 261.

⁷⁷ ibid, at [49].

⁷⁸ JD Heydon, The Restraint of Trade Doctrine (4th edn, LexisNexis 2018).

⁷⁹ [1968] AC 269 (HL).

⁸⁰ [2019] UKSC 32, [2020] AC 154; and on the history of the doctrine, ibid, at [22] to [30] (Lord Wilson).

⁸¹ [1994] EMLR 229, at 316 ff, Jonathan Parker J, viz, Part III of the judgment.

⁸² ibid, 345–47.

⁸³ Such a covenant was absent in East v Maurer [1991] 1 WLR 461 CA; noted, J Marks (1992) 108 LQR 386 [11.91]; but the purchaser of a hair salon business recovered in the tort of deceit because the vendor had dishonestly stated that he would be emigrating and so would not be able to recapture the clientele of the business being sold.

⁸⁴ [1894] AC 535 (HL).

⁸⁵ [2019] EWHC 42 (QB), [2019] IRLR 442 at [115] to [167] (Freedman J); the passages at [116] to [128], were distilled in Monex Europe Ltd v Pothecary [2019] EWHC 1714 (QB) at [43] (Clive Sheldon QC). And the topic was examined by Haddon-Cave J in QBE Management Services (UK) Ltd v Dymoke [2012] EWHC 80 (QB), [2012] IRLR 458 at [206] ff; S Bloch and K Brearley (eds), Employment Covenants and Confidential Information (4th edn, Bloomsbury Professional Publishing 2018); P Goulding (ed), Employee Competition: Covenants, Confidentiality, and Garden Leave (3rd edn, OUP 2016).

⁸⁶ [2019] EWHC 516 (Comm) at [125] ff, Stephen Hofmeyr QC); but on the facts the contract did not contain any unreasonable restraint: ibid, at [123].

⁸⁷ [1913] AC 724 (HL).

⁸⁸ [1957] 1 WLR 9 (CA).

⁸⁹ [2018] EWHC 3326 (Comm), [2019] IRLR 431 notably, [28], [31], [32], [40], [42] (Sir Ross Cranston).

⁹⁰ ibid, at [7].

⁹¹ [2019] EWCA Civ 335, [2019] PNLR 19, [2019] 4 WLR 81, [2019] 4 WLR 81 (appeal still pending: 13 January 2021).

⁹² ibid, at [82] to [89].

⁹³ As Lord Denning MR observed in Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 WLR 61, 64 (CA), such an agreement does not technically prevent exercise of a trade, but it inhibits trade by subjecting the relevant party to onerous conditions, and by binding him or to an exclusive tie-in.

⁹⁴ [1974] 1 WLR 1308 (HL). See also Lord Diplock’s references to the element of unconscionability and inequality of bargaining power in A Schroeder Music Publishing Co Ltd v Macaulay [1974] 1 WLR 1308, 1315 (HL), as well as remarks by Jonathan Parker J in Panayiotou v Sony Music Entertainment [1994] EMLR 229, 316–19, on Lord Diplock’s observations. In the Schroeder Music case, applying the restraint of trade doctrine, Lord Reid concluded that the transaction was void [1974] 1 WLR 1308, 1314–15 (with whom Viscount Dilhorne and Lords Simon and Kilbrandon agreed).

⁹⁵ [2011] EWCA Civ 1444, [2011] 2 All ER (Comm) 815, [2012] IRLR 241; notably at [144], [145], [150], [155], [158] (Gross LJ).

⁹⁶ [1968] AC 269; notably, 291–304 (Lord Reid); 331–42 (Lord Wilberforce: providing a wide-ranging historical and analytical survey of the doctrine).

⁹⁷ [2020] UKSC 36, [2020] 3 WLR 521.

⁹⁸ ibid, at [46] (Lord Wilson), citing Lord Wilberforce in the Esso case [1968] AC 269, 333 (HL).

⁹⁹ [2019] UKSC 32, [2020] AC 154.

¹⁰⁰ ibid, at [87] (Lord Wilson; Baroness Hale, Lords Kerr and Briggs, Lady Arden agreeing). The analysis given in the Tillmann case by the Supreme Court was applied in Monex Europe Ltd v Pothecary [2019] EWHC 1714 (QB) at [44] and [45] (Clive Sheldon QC).

¹⁰¹ [2019] UKSC 32, [2020] AC 154 at [79], [82], [85] to [88], the other judges agreeing.

¹⁰² [1920] 3 KB 571 (CA).

¹⁰³ [2007] EWCA Civ 613, [2007] ICR 1539 (paraphrased in the preceding paragraph of the text).

¹⁰⁴ [1909] AC 118 (HL); on the rule in the General Bill Posting case: Bloch and Brearley (eds), Employment Covenants and Confidential Information; Goulding (ed), Employee Competition: Covenants, Confidentiality, and Garden Leave; D Cabrelli, ‘The Effect of Termination upon Post-Employment Obligations’ in M Freedland (ed), The Contract of Employment (OUP 2016) ch 26.F or Commonwealth cases, F Dawson (2013) 129 LQR 508 (suggesting that, elsewhere, this is a presumption and not a rule).

¹⁰⁵ As noted in Argus Media Ltd v Halim [2019] EWHC 42 (QB), [2019] IRLR 442 at [167] (Freedman J); and Group Lotus plc v 1Malaysia Racing Team SDN BHD [2011] EWHC 1366 (Ch), [2011] ETMR 62 at [364] to [371] (Peter Smith J); Brown v Neon Management Services Ltd [2018] EWHC 2137 (QB), [2019] IRLR 30 (Choudbury J).

¹⁰⁶ [2012] UKSC 63, [2013] 1 AC 523 at [68].

¹⁰⁷ [2002] EWCA Civ 1374, [2003] ICR 141 at [17].

¹⁰⁸ [1997] ICR 938, 959–60 (CA).

¹⁰⁹ [2018] EWHC 2137 (QB), [2019] IRLR 30 at [170] to [173] (Choudbury J).

¹¹⁰ ibid, at [2] for summary of the breaches.

¹¹¹ Mark Freedland, ‘Repudiation of contract and breach of confidence: General Billposting v Atkinson revisited’ (2003) 32 ILJ 48, 52.

¹¹² See discussion of negative obligations generally at [29.31] in the context of Araci v Fallon [2011] EWCA Civ 668, [2011] LLR 440; not a restrictive covenant or employment case, but indicative of the long-standing tendency to award injunctions to uphold negative undertakings.

¹¹³ [2018] UKSC 20, [2019] AC 649 at [95], proposition (12).

¹¹⁴ (1866) LR 1 Exch 213 (Court of Exchequer); the facts and proceedings at first instance are summarized, 213–14; on appeal, in the Court of Exchequer, the main passages are: ibid, 217–18, and an addendum at 221 (both passages, Pollock CB); 218–19 (Martin B); 219–20 (Pigott B); 220–21 (Bramwell B).

¹¹⁵ [1981] ICR 503, 509; on this troublesome line of cases, see Law Commission, ‘The Illegality Defence’ (Law Commission Consultation Paper No 189, 2009) 3.37 to 3.42, and S Forshaw and M Pigerstorfer, ‘Illegally Formed Contracts of Employment and Equal Treatment at Work’ (2005) 34 ILJ 158.

¹¹⁶ [1911] 1 KB 506, 510, Darling J.

¹¹⁷ J Dwyer, ‘Immoral Contracts’ (1977) 93 LQR 386, 387–88.

¹¹⁸ [1911] 1 KB 506, 510.

¹¹⁹ [2016] UKSC 42, [2017] AC 467. the Patel case is noted by: J Goudkamp (2017) 133 LQR 14; A Grabiner [2017] CLJ 18; JC Fisher [2016] LMCLQ 483; E Lim (2017) 80 MLR 927. Earlier discussion: N Strauss, ‘Ex Turpi Causa Non Actio Oritur’ (2016) 132 LQR 236; RA Buckley (2015) 131 LQR 341. Generally: S Green and A Bogg (eds), Illegality after Patel v Mirza (Hart Publishing 2018); G Virgo, ‘The Illegality Revolution’ in S Worthington, A Robertson, and G Virgo (eds), Revolution and Evolution in Private Law (Hart Publishing 2018) ch 14 (at 307, 311–14, preferring the rule-based analysis of Lord Sumption in Patel v Mirza [2016] UKSC 42, [2017] AC 467 at [264]).

¹²⁰ Lord Neuberger noted various appellate decisions in which different views had been expressed: [2016] UKSC 42, [2017] AC 467 at [164]; N Strauss, ‘Ex Turpi Causa Non Actio Oritur’ (2016) 132 LQR 236; RA Buckley (case note) (2015) 131 LQR 341–43; J Goudkamp (case note) (2017) 133 LQR 14, 15; Goff and Jones, The Law of Unjust Enrichment (C Mitchell, P Mitchell, and S Watterson eds, 9th edn, Sweet and Maxwell 2016) 35.21 to 35.25; the literature on these pre-Patel Supreme Court decisions is collected by E Lim (2017) 80 MLR 927, 929, fn 20.

¹²¹ Kiriri Cotton Co Ltd v Dewani [1960] AC 192, 204 (PC); Green v Portsmouth Stadium [1953] 2 QB 190 (CA).

¹²² Oom v Bruce (1810) 12 East 225, 226; 104 ER 87, 88.

¹²³ Hughes v Liverpool Victoria Friendly Society [1916] 2 KB 482 (CA).

¹²⁴ Smith v Cuff (1817) 6 M & S 160, 165; 105 ER 1203, 1205 (Lord Ellenborough).

¹²⁵ Taylor v Bowers (1876) 1 QBD 291 (CA); Kearley v Thomson (1890) 24 QBD 291 (CA); Bigos v Boustead [1951] 1 All ER 92, 97 (Pritchard J); Tribe v Tribe [1996] Ch 107 (CA); Law Commission, ‘The Illegality Defence’ (Law Commission Consultation Paper No 189, 2009) 4.45 ff.

¹²⁶ Patel v Mirza [2016] UKSC 42, [2017] AC 467: notably, [156] (Lord Neuberger), [44] (Lord Toulson), [

Recently viewed (0)