In England and Wales, there is the common law doctrine of illegality. Its formulation and application have caused problems for the law. Illegality might arise in most areas of the law (contracts, property, torts etc). This article will focus on a claimant seeking to assert the existance of a beneficial interest in a property, but there being a taint of illegality, engaging the doctrine of illegality, generating a question-mark as to whether the Court will be willing to enforce the beneficial interest/assist the beneficial interest holder. 

This will be explored, in light of:

(1) Patel v Mirza [2016] UKSC 42 [2017] AC 467 [2016] 3 WLR 399 ('Patel v Mirza'), Supreme Court (Lord Neuberger PSC; Lady Hale DPSC; Lord Mance JSC; Lord Kerr JSC; Lord Clarke JSC; Lord Wilson JSC; Lord Sumption JSC; Lord Toulson JSC; Lord Hodge JSC) on 20.7.16; Lord Toulson gave the lead judgment (with whom Lady Hale; Lord Kerr, Lord Wilson and Lord Hodge agreed)[1].

(2) Kliers v Schmerler [2018] EWHC 1350 (Ch) ('Kliers 1350'), High Court (Mr M H Rosen QC (sitting as a Deputy Judge of the Chancery Division)) on 30.4.18;

(3) Al-Dowaisan v Al-Salam [2019] EWHC 301 (Ch) [2019] 2 BCLC 328 ('Al-Dowaisan'), High Court (HH Judge Hodge KC, sitting as a High Court judge) on 7.2.19;

(4) Ball v De Marzo [2019] EWHC 1587 ('Ball'), High Court (Morgan J) on 21.6.19;

(5) Kliers v Kliers [2020] EWHC 1026 (Fam); [2020] 2 FLR 1276 ('Kliers 1026'), High Court (Mr Nicholas Cusworth QC (sitting as a Deputy High Court Judge) on 7.4.20;

(5) Stoffel and Co v Grondona [2021] AC 540 ('Stoffel'), Supreme Court (Lord Reed PSC; Lord Hodge DPSC; Lady Black JSC; Lord Lloyd-Jones JSC; Lady Arden JSC) [2020] UKSC 42; [2021] AC 540; [2020] 3 WLR 1156 on 30.10.20

(6) Discovery Land Co LLC v Jones [2022] EWHC 1234 (Ch) ('Discovery'), High Court (Master Pester) on 4.3.22;

(7) Heating Trade Supplies Group Ltd v Matteo [2022] EWHC 1070 (Ch) ('Heating Trade'), High Court (HHJ Kramer sitting as a Judge of the High Court) on 6.5.22;

(8) Bhabra v Suri [2022] EWHC 1652 (Ch) ('Bhabra'), High Court (Robin Vos (sitting as a Deputy Judge of the High Court)) on 28.6.22;

(9) Islam v Islam [2024] EWHC 1082 (Ch) ('Islam'), High Court (Rajah J) on 8.5.24; 

(10) AB v CB [2025] EWFC 191 (B) ('AB v CB'), Family Court (HHJ Farquhar) on 14.4.25;

(11) Hevedi v Hevedi [2025] EWHC 1976 (Ch) ('Hevedi'), High Court (Master McQuail) on 1.8.25;

(12) Shayler v Yeo [2025] UKFTT 1298 (PC) ('Shayler'), First-tier Tribunal (Property Chamber) (Judge Michael Michell) on 14.10.25.

To the raising of the doctrine, 'Illegality is an issue which the court can take of its own motion even where...it is not pleaded; Otkitrie International v Urumov & Ors [2013] EWCA Civ 1196 at paragraph 11, [Les Laboratoires Servier v Apotex Inc [2014] UKSC 55], at paragraph 23.' - Islam, paragraph 147[2]

SUMMARY 

Patel v Mirza remains the leading authority in this area. It set out that the doctrine is based on public policy, adopting a structured, principled and transparent 'range of factors' approach[3] (or 'new policy-based approach' - Stoffel, paragraph 1), rather than a formal, less flexible, mechanical (basic rule and limited exceptions) process approach (as favoured in Tinsley v Milligan [1994] 1 AC 340; Heating Trade, paragraph 140; sometimes called the 'reliance principle'[4]), to determining where the defence arises. The 'range of factors' approach involves a 'trio of necessary considerations' (paragraph 101). Lord Toulson's summary, at paragraph 120, remains authoritative:

'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.'

'Lord Toulson's conclusion at [101] was that it is necessary for a court to look at a range of factors in order to determine whether allowing the claim would cause damage to the integrity of the legal system but that the Court should keep in mind the possibility of overkill unless the law is applied with a due sense of proportionality.' - Bhabra, paragraph 309

Lord LLoyd-Jones in Stoffel said that '...the evaluation of the factors described in para 101 is directed specifically at determining whether there might be inconsistency damaging to the integrity of the legal system.' (paragraph 23) and, at stages 1 and 2: 'A balancing of the policy considerations in either direction is...an important element of the decision-making process' (paragraph 24), before the Court moves on to '...the third stage of the process, namely the assessment of proportionality...' (paragraph 25). Lord LLoyd-Jones said that '...when applying the “trio of necessary considerations” ... they are relevant not because it may be considered desirable that a given policy should be promoted but because of their bearing on determining whether to allow a claim would damage the integrity of the law by permitting incoherent contradictions.' (paragraph 26). '...the overriding consideration is the damage that might be done to the integrity of the legal system by its adopting contradictory positions' (paragraph 26)

Master Pester in Discovery said that Patel v Mirza had '...identified the central question as being whether allowing recovery despite some illegality would produce inconsistency and disharmony in the law, and so damage the integrity of the legal system.' An alternative central question might be: which would be more harmful to the integrity of the legal system, to give effect, or not to give effect (as the case maybe), to the rights which one party seeks to assert against another, in light of the illegality, whilst only denying Court assistance to the extent proportional? (see Singh Bains v Irshad [2025] EWHC 491 (Ch), HHJ Paul Matthews (sitting as a Judge of the High Court), paragraph 313)[5]. For Lord LLoyd-Jones in Stoffel, the question was (as noted above) '...whether to allow a claim would damage the integrity of the law by permitting incoherent contradictions.' (paragraph 26) (or '...to the integrity of the legal system by its adopting contradictory positions' (paragraph 26)).

PATEL V MIRZA

The starting point for a discussion on the doctrine of illegality, is Patel v Mirza, 10 years ago in the Supreme Court. As stated, Lord Toulson gave the lead judgment, a case about the doctrine of illegality and whether it precludes a party to a contract tainted by illegality from recovering money paid under the contract from the other party under the law of unjust enrichment (paragraph 9) - see below.

Historical grounding

Lord Toulson started with a reference to a seminal maxim propounded by Lord Mansfield CJ. Lord Toulson in Patel v Mirza said, at paragraph 1:

'“No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act.” So spoke Lord Mansfield CJ in Holman v Johnson (1775) 1 Cowp 341, 343, ushering in two centuries and more of case law about the extent and effect of this maxim. He stated that the reason was one of public policy:

“If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditio defendentis.”'

('potior est conditio defendentis' is latin and translates to: The position of the defendant is stronger). 

Accordingly, on this approach, the law favoured those who were lucky enough to find they were defendants, rather than claimants, in any dispute. Because the Courts would not assist those who needed, to found a causes of action, to plead/rely upon an immoral or an illegal act. A criticism can immediately be raised by this. It rather blindly places the misfortune of being without the law and its protection (through Court orders) on whoever, by happenstance, needs the Court's involvement. It denies assistance: (a) whatever the wider moral picture might be, and (b) whether that is a fair outcome / a good outcome for the integrity of the legal system. If the Court declines to assist, it leaves the loss sought to be remedied/redressed by claim, where it lies, whatever the overall merits/justice of that is, when viewed holistically.

Following Lord Mansfield CJ seminal maxim, the law developed, but was criticised for being 'very unclear' (Patel v Mirza, paragraph 8) 

At paragraph 9, Lord Toulson identified the issue in Patel v Mirza as (as stated above):

'...whether Lord Mansfield CJ's maxim precludes a party to a contract tainted by illegality from recovering money paid under the contract from the other party under the law of unjust enrichment (to use the term now generally favoured by scholars for what used previously to be labelled restitution and, before that, quasi-contract).' 

He recorded, in brief that:

'On one side it is argued that the maxim applies as much to such a claim as to a claim in contract, and that the court must give no assistance to a party which has engaged in any form of illegality. On the other side it is argued that such an approach would not advance the public policy which underlies Lord Mansfield CJ's maxim, once the underlying policy is properly understood.' (paragraph 9)

Reviews 

Lord Toulson undertook a wide survey of this area of law. Distilling it under the following categories:

(1) the facts of Mr Patel's claim and how it was decided in the courts below: see paragraphs 11 to 16;

(2) approach of the House of Lords in Tinsley v Milligan [1994] 1 AC 340: see paragraphs 17 to 20;

(3) Law Commission report - and its review and proposals, to address what it perceived to be the unsatisfactory features: see paragraphs 21 to 49.

(4) European law and its potential impact on our domestic law: see paraparagraphss 33 to 39;

(5) Approach adopted in Australia, Canada and the USA: see paragraphs 50 to 66

(6) address developments since the Law Commission's report, including three then recent decisions of the court, which laid bare a division of opinion about the framework for deciding issues of illegality: see paragraphs 67 to 81

(7) “The law at a crossroads”: see paragraphs 82 to 94.

Readers can consider those, should they wish to.

PATEL V MIRZA - CRITICAL PART OF THE JUDGMENT

This then lead to the critical part of the judgment (as labelled in paragraph 10) - which Lord Toulson gives, under the headings: (a) 'The way forward' (paragraphs 95 to 119); and (b) 'Summary and disposal' (paragraph 120 to 121). The quotations are extensive, but are worth setting out in full.

The way forward maxims ex turpi causa non oritur actio (no action arises from a disgraceful cause) and in pari delicto potior est conditio defendentis (where both parties are equally in the wrong the position of the defendant is the stronger)

Lord Toulson: 

(1) noted that maxims can be misleading (paragraphs 95 to 98[6]), and this includes the maxims[7]:

(a) 'ex turpi causa' (meaning 'from a disgraceful cause'; with 'ex turpi causa non oritur actio' meaning 'no action arises from a disgraceful cause'); and

(b) 'in pari delicto' (roughly translating into 'in equal fault' and 'in pari delicto potior est conditio defendentis' meaning 'where both parties are equally in the wrong the position of the defendant is the stronger'),

(2) identified two broad discernable policy reasons or the common law doctrine of illegality as a defence to a civil claim. Lord Toulson said, at paragraph 99:

'Looking behind the maxims, there are two broad discernible policy reasons for the common law doctrine of illegality as a defence to a civil claim. One is that a person should not be allowed to profit from his own wrongdoing. The other, linked, consideration is that the law should be coherent and not self-defeating, condoning illegality by giving with the left hand what it takes with the right hand.'

(3) held that the focus should be on the question whether allowing recovery for something which was illegal would produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system, not whether the claimant (plaintiff) is “getting something” out of the wrongdoing. Lord Toulson said, at paragraphs 100 and 101:

'Lord Goff observed in the Spycatcher case, Attorney General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, 286, that the “statement that a man shall not be allowed to profit from his own wrong is in very general terms, and does not of itself provide any sure guidance to the solution of a problem in any particular case”. In Hall v Hebert [1993] 2 SCR 159 McLachlin J favoured giving a narrow meaning to profit but, more fundamentally, she expressed the view, at pp 175–176, that, as a rationale, the statement that a plaintiff will not be allowed to profit from his or her own wrongdoing does not fully explain why particular claims have been rejected, and that it may have the undesirable effect of tempting judges to focus on whether the plaintiff is “getting something” out of the wrongdoing, rather than on the question whether allowing recovery for something which was illegal would produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system.

That is a valuable insight, with which I agree.'

(4) accepted that 'inconsistency and disharmony in the law' is rather open, but that this was not a weakness (to its utility). He said 'I agree ... that this expression leaves open what is meant by inconsistency (or disharmony) in a particular case, but I do not see this as a weakness.' (paragraph 101)

(5) was able to give some guidance as to how to resolve whether, to allow a particular claim, it would result in 'inconsistency and disharmony in the law'. Part of this is to ask: whether allowing the 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. On this, Lord Toulson identified 3 necessary considerations. Lord Toulson said, at paragraph 101 [note: the subparagraphs (a), (b) and (c) to paragraph 101 have been separated out into separate subparagraphs, to aid comprehension]:

'It is not a matter which can be determined mechanistically. So how is the court to determine the matter if not by some mechanistic process? In answer to that question I would say that 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.'

Consideration (a)

Lord Toulson addressed Consideration (a) - 'considering the underlying purpose of the prohibition which has been transgressed' - at paragraph 102:

'The relevance of taking into account the purpose of the relevant prohibition is self-evident. The importance of taking account of the relevant statutory context is illustrated by Hardy v Motor Insurers' Bureau [1964] 2 QB 745. The Road Traffic Act 1960 required a motorist to be insured against the risk of causing death or personal injury through the use of a vehicle on a road, but a line of authorities established that a contract to indemnify a person against the consequences of a deliberate criminal act is unenforceable. The plaintiff, a security officer at a factory, was injured when he was trying to question the driver of a van, who drove off at speed and dragged him along the road. The driver was convicted of unlawfully causing grievous bodily harm. The driver being uninsured, the plaintiff sued the defendant under an agreement between the defendant and the Minister of Transport, by which the defendant agreed to satisfy any judgment against a motorist for a liability required to be covered under a motor insurance policy. The defendant relied on the maxim ex turpi causa, arguing that a contract purporting to insure the driver against his own deliberate criminal conduct would have been unlawful. The defence was rejected. Diplock LJ said [1964] 2 QB 745, 767:

“The rule of law on which the major premise is based—ex turpi causa non oritur actio—is concerned not specifically with the lawfulness of contracts but generally with the enforcement of rights by the courts, whether or not such rights arise under contract. All that the rule means is that the courts will not enforce a right which would otherwise be enforceable if the right arises out of an act committed by the person asserting the right (or by someone who is regarded in law as his successor) which is regarded by the court as sufficiently anti-social to justify the court's refusing to enforce that right.”

He observed that the purpose of the relevant statutory provision was the protection of persons who suffered injury on the road by the wrongful acts of motorists. This purpose would have been defeated if the common law doctrine of illegality had been applied so as to bar the plaintiff's claim.'

Consideration (b)

Lord Toulson addressed, briefly, Consideration (b) - 'considering conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim' - at paragraph 103:

'Hounga v Allen [2014] 1 WLR 2889 and R (Best) v Chief Land Registrar [2016] QB 23 are illustrations of cases in which there were countervailing public interest considerations, which needed to be balanced.'

Consideration (c)

Lord Toulson addressed, briefly, Consideration (c) - '...possibility of overkill unless the law is applied with a due sense of proportionality' - at paragraphs 104 to 108:

'As to the dangers of overkill, Lord Wright gave a salutary warning in Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277, 293:

“Nor must it be forgotten that the rule by which contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds.”

To similar effect Devlin J questioned “whether public policy is well served by driving from the seat of judgment everyone who has been guilty of a minor transgression” in St John Shipping Corpn v Joseph Rank Ltd [1957] 1 QB 267, 288–289.

In Saunders v Edwards [1987] 1 WLR 1116, 1134 Bingham LJ said:

“Where issues of illegality are raised, the courts have (as it seems to me) to steer a middle course between two unacceptable positions. On the one hand it is unacceptable that any court of law should aid or lend its authority to a party seeking to pursue or enforce an object or agreement which the law prohibits. On the other hand, it is unacceptable that the court should, on the first indication of unlawfulness affecting any aspect of a transaction, draw up its skirts and refuse all assistance to the plaintiff, no matter how serious his loss nor how disproportionate his loss to the unlawfulness of his conduct.”

In considering whether it would be disproportionate to refuse relief to which the claimant would otherwise be entitled, as a matter of public policy, various factors may be relevant. Professor Burrows' list is helpful but I would not attempt to lay down a prescriptive or definitive list because of the infinite possible variety of cases. Potentially relevant factors include the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties' respective culpability.'

The integrity and harmony of the law permit—and I would say require—such flexibility. Part of the harmony of the law is its division of responsibility between the criminal and civil courts and tribunals. Punishment for wrongdoing is the responsibility of the criminal courts and, in some instances, statutory regulators. It should also be noted that under the Proceeds of Crime Act 2002 the state has wide powers to confiscate proceeds of crime, whether on a conviction or without a conviction. Punishment is not generally the function of the civil courts, which are concerned with determining private rights and obligations. The broad principle is not in doubt that the public interest requires that the civil courts should not undermine the effectiveness of the criminal law; but nor should they impose what would amount in substance to an additional penalty disproportionate to the nature and seriousness of any wrongdoing. The ParkingEye case [2013] QB 840 is a good example of a case where denial of claim would have been disproportionate. The claimant did not set out to break the law. If it had realised that the letters which it was proposing to send were legally objectionable, the text would have been changed. The illegality did not affect the main performance of the contract. Denial of the claim would have given the defendant a very substantial unjust reward. Respect for the integrity of the justice system is not enhanced if it appears to produce results which are arbitrary, unjust or disproportionate.'

The reference to 'Professor Burrows' list is helpful' in paragraph 107 above, is to Professor Burrows' list, as Lord Toulson set out in paragraph 93. At paragraph 93, Lord Toulson said:

'If a “range of factors” approach were preferred, Professor Burrows suggested, at pp 229–230, that a possible formulation would read as follows:

“If the formation, purpose or performance of a contract involves conduct that is illegal (such as a crime) or contrary to public policy (such as a restraint of trade), the contract is unenforceable by one or either party if to deny enforcement would be an appropriate response to that conduct, taking into account where relevant— (a) how seriously illegal or contrary to public policy the conduct was; (b) whether the party seeking enforcement knew of, or intended, the conduct; (c) how central to the contract or its performance the conduct was; (d) how serious a sanction the denial of enforcement is for the party seeking enforcement; (e) whether denying enforcement will further the purpose of the rule which the conduct has infringed; (f) whether denying enforcement will act as a deterrent to conduct that is illegal or contrary to public policy; (g) whether denying enforcement will ensure that the party seeking enforcement does not profit from the conduct; (h) whether denying enforcement will avoid inconsistency in the law thereby maintaining the integrity of the legal system.”

Professor Burrows noted that the final factor is capable of a wider or narrower approach, depending on what one understands by inconsistency.'

(6) spoke more broadly. Lord Toulson in Patel v Mirza said, at paragraphs 109 onwards:

'The courts must obviously abide by the terms of any statute, but I conclude that 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.'

(7) said that the 'the reliance rule', as laid down in: (a) Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65; and (b) Tinsley v Milligan [1994] 1 AC 340, should no longer be followed (paragraph 110) and that 'Unless a statute provides otherwise (expressly or by necessary implication), property can pass under a transaction which is illegal as a contract...' (paragraph 110)

(8) dealt with the particular circumstances of an owner seeking to enforce his title - recognising that 'There may be circumstances in which a court will refuse to lend its assistance to an owner to enforce his title as, for example, where to do so would be to assist the claimant in a drug trafficking operation, but the outcome should not depend on a procedural question.' Continuing on the same point, Lord Toulson, at paragraphs 111 and 112, said:

'In Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 the claim was for conversion of goods which had been obtained by the plaintiffs and supplied to the defendant under transactions which were assumed to be tainted by illegality. The Court of Appeal rightly said, at p 71, that 

“a man's right to possess his own chattels will as a general rule be enforced against one who, without any claim of right, is detaining them, or has converted them to his own use, even though it may appear either from the pleadings, or in the course of the trial, that the chattels in question came into the defendant's possession by reason of an illegal contract between himself and the plaintiff …”

but it added the qualifying words

“provided that the plaintiff does not seek, and is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support his claim.”

The objections to the proviso have already been identified. It makes the question whether the court will refuse its assistance to the claimant to enforce his title to his property depend on a procedural question and it has led to uncertain case law about what constitutes reliance. The court ended its judgment, at p 72, by saying:

“We are satisfied that no rule of law, and no considerations of public policy, compel the court to dismiss the plaintiffs' claim in the case before us, and to do so would be, in our opinion, a manifest injustice.”

That conclusion, rather than the answer to a procedural question, should have been the end of the illegality defence, since it is based on public policy.

In Tinsley v Milligan [1994] 1 AC 340, even if Miss Milligan had not owned up and come to terms with the DSS, it would have been disproportionate to have prevented her from enforcing her equitable interest in the property and conversely to have left Miss Tinsley unjustly enriched.'

(9) rejected the objection that the approach propounded above in Patel v Mirza - the 'range of factors' / flexiable approach - would involve unacceptable uncertainty. Lord Toulson said, at paragraph 113:

'Critics of the “range of factors” approach say that it would create unacceptable uncertainty. I would make three points in reply. First, one of the principal criticisms of the law has been its uncertainty and unpredictability. Doctrinally it is riven with uncertainties: see, for example, paras 4–8 above. There is also uncertainty how a court will in practice steer its way in order to reach what appears to be a just and reasonable result. Second, I am not aware of evidence that uncertainty has been a source of serious problems in those jurisdictions which have taken a relatively flexible approach. Third, there are areas in which certainty is particularly important. Ordinary citizens and businesses enter into all sorts of everyday lawful activities which are governed by well understood rules of law. Lord Mansfield CJ said in Vallejo v Wheeler (1774) 1 Cowp 143, 153:

“In all mercantile transactions the great object should be certainty: and therefore, it is of more consequence that a rule should be certain, than whether the rule is established one way or the other. Because speculators in trade then know what ground to go upon.”

The same considerations do not apply in the same way to people contemplating unlawful activity. When he came to decide cases involving illegality, Lord Mansfield CJ acted in accordance with his judgment about where the public interest lay: see paras 96–98.'

(10) considered, in essence, that it was right for the Court to remedy the unsatisfactory/defective state of the doctrine of illegality. Waiting for Parliament to grapple with law reform would/was taking too long. Lord Toulson said, at paragraphs 113 onwards:

'In Tinsley v Milligan Lord Goff considered that if the law was to move in a more flexible direction, to which he was not opposed in principle, there should be a full investigation by the Law Commission (which has happened) and that any reform should be through legislation. Realistically, the prospect of legislation can be ignored. The Government declined to take forward the commission's bill on trusts because it was not seen to be “a pressing priority for government” (a phrase familiar to the commission), and there is no reason for optimism that it would take a different view if presented with a wider bill. In Clayton v The Queen (2006) 231 ALR 500, para 119, Kirby J said that waiting for a modern Parliament to grapple with issues of law reform is like “waiting for the Greek Kalends. It will not happen” and that “Eventually courts must accept this reality and shoulder their own responsibility for the state of the common law”. The responsibility of the courts for dealing with defects in the common law was recently emphasised by this court in R v Jogee [2017] AC 387, para 85, and Knauer v Ministry of Justice [2016] AC 908, para 26. In each of those cases the court decided that it should depart from previous decisions of the House of Lords. That is never a step taken lightly. In departing from Tinsley v Milligan [1994] 1 AC 340 it is material that it has been widely criticised; that people cannot be said to have entered into lawful transactions in reliance on the law as then stated; and, most fundamentally, that the criticisms are well founded.'

(11) endorsed the approach and conclusion of Gloster LJ (in the Court of Appeal [2014] EWCA Civ 1047; [2015] Ch 271), remarking that Gloster LJ had rightly asked whether the policy underlying the rule which made the contract between Mr Patel and Mr Mirza illegal, would be stultified if Mr Patel's claim in unjust enrichment were allowed. Lord Toulson said, at paragraph 115:

'In the present case I would endorse the approach and conclusion of Gloster LJ. She correctly asked herself whether the policy underlying the rule which made the contract between Mr Patel and Mr Mirza illegal would be stultified if Mr Patel's claim in unjust enrichment were allowed.'

(12) agreed with Gloster LJ's approach:

(a) examination of the policy underlying the prohibition (the insider dealing statutory provisions); 

(b) asking - do considerations of public policy, require the claimant to forfeit the monies he paid over and now seeks an order for their return (pursuant to a unjust enrichment claim);

(c) asking - whether to refuse the claimant's claim, would be a just and proportionate response to the illegality. 

Lord Toulson said, at paragraph 115:

After examining the policy underlying the statutory provisions about insider dealing, she concluded that there was no logical basis why considerations of public policy should require Mr Patel to forfeit the moneys which he paid into Mr Mirza's account, and which were never used for the purpose for which they were paid. She said that such a result would not be a just and proportionate response to the illegality. I agree.'

Lord Toulson added:

'It seems likely that Lord Mansfield CJ would also have agreed: see Walker v Chapman (1773) Lofft 342. Mr Patel is seeking to unwind the arrangement, not to profit from it.' (paragraph 115)

(13) focusing on an unjust enrichment claim, said: '...a person who satisfies the ordinary requirements of a claim in unjust enrichment will not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration.' This replaced any need to consider locus poenitentiae (roughly translating into 'A place for repentance') (a basic rule and limited exceptions)

Lord Toulson made clear though that, if there is a particular reason for the court to refuse its assistance to the claimant, it may do so. This applies equally to:

(a) unjust enrichment claim;

(b) owner to enforce his title to property

though he noted that such cases are likely to be rare. The example of a drug trafficker was repeated. Another is seemingly a contract to commit murder. 

'It is not necessary to discuss the question of locus poenitentiae which troubled the courts below, as it has troubled other courts, because it assumed importance only because of a wrong approach to the issue whether Mr Patel was prima facie entitled to the recovery of his money. In place of the basic rule and limited exceptions to which I referred at para 44 above, I would hold that a person who satisfies the ordinary requirements of a claim in unjust enrichment will not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration. I do not exclude the possibility that there may be particular reason for the court to refuse its assistance to the claimant, applying the kind of exercise which Gloster LJ applied in this case, just as there may be a particular reason for the court to refuse to assist an owner to enforce his title to property, but such cases are likely to be rare. (At para 110 I gave the example of a drug trafficker.) In Tappenden v Randall (1801) 2 Bos & P 467, 471, a case of a successful claim for the repayment of money paid for an unenforceable consideration which failed, Heath J said obiter that there might be

“cases where the contract may be of a nature too grossly immoral for the court to enter into any discussion of it; as where one man has paid money by way of hire to another to murder a third person.”

The case was mentioned by the Law Commission (Consultation Paper No 189), para 4.53, but there is a dearth of later case law on the point. This is hardly surprising because a person who takes out a contract on the life of a third person is not likely to advertise his guilt by suing. But as a matter of legal analysis it is sufficient for present purposes to identify the framework within which such an issue may be decided.' 

On the facts, Lord Toulson noted that 'No particular reason has been advanced in this case to justify Mr Mirza's retention of the monies beyond the fact that it was paid to him for the unlawful purpose of placing an insider bet.' (paragraph 116).

(14) considered an analogy drawn with the case of Parkinson v College of Ambulance Ltd [1925] 2 KB 1, involving bribes to officials. He noted that 'Bribes of all kinds are odious and corrupting, but it does not follow that it is in the public interest to prevent their repayment.' (paragraph 118) but, 'There are two sides to the equation. If today it transpired that a bribe had been paid to a political party, a charity or a holder of public office, it might be regarded as more repugnant to the public interest that the recipient should keep it than that it should be returned' (paragraph 118)[8]. This is an example of the court considering Consideration (b) (identified as a consideration, above) - that is, considering conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim (i.e. it is worse to let a political party/charity/holder of public office keep a bribe, than have it returned)

Summary and disposal

Helpfully, Lord Toulson in Patel v Mirza gave a summary of the position, at paragraph 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.'

In relation to a claim for unjust enrichment, to recover money paid for an unlawful purpose, Lord Toulson said, at paragraph 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.'

KLIERS 1350

Judge Michell in Shayler gave a helpful summary of Kliers 1350, at paragraph 128:

'In [Kliers] the Claimant was party to an arrangement by which the house for which she paid the deposit with her husband and which was the home of the Claimant and her husband, was purchased in the name of her husband's brother for the purposes of facilitating fraud. The fraud was obtaining mortgage funds on the basis of a false declaration that the house was being bought for the brother's sole occupation and obtaining housing benefit to which the Claimant and her husband would not be entitled. The Court found that the Claimant had entered into the arrangement by reason of undue influence. The learned judge found that the public policy against fraud, though strong, did not militate against giving the Claimant the remedy of a declaration that she was beneficially entitled to a share in the house. The learned judges stated

"To leave matters where they stand is, in fact, to continue the perpetration of the fraud…The reality is that the illegal activities which have taken place have to be undone and remedied and part of that is assisted, not damaged, by the grant of declaratory relief".

The latter sentence is explained by the fact that the Claimant had undertaken to the Court to give disclosure to the authorities and to take steps to ensure both the mortgagee and the housing benefit authorities were repaid out of the house.'

So, accordingly, the Court did not refuse to assist a claimant/refuse to declare she held a beneficial interest in a property, on the grounds of illegality - namely: (a) mortgage fraud; and (b) housing benefits fraud (more accurately[8a], it was: (i) housing benefit fraud, (ii) HMRC overpaid tax credits fraud; (iii) Council Tax benefit fraud)

STOFFEL 

Stoffel is a mortgage fraud case, but because it is from the Supreme Court, it is considered here. Lord Lloyd-Jones (with whom Lord Reed PSC; Lord Hodge DPSC; Lady Black JSC; Lord  Lady Arden JSC agreed) said, under the heading 'The new approach to the illegality defence: Patel v Mirza', at paragraphs 22 to 26:

'It is necessary to examine in a little detail Lord Toulson JSC's exposition in Patel v Mirza [2017] AC 467 of the new approach to the illegality defence at common law. Having referred to the maxims ex turpi causa non oritur actio (no action arises from a disgraceful cause) and in pari delicto potior est conditio defendentis (where both parties are equally in the wrong the position of the defendant is the stronger), Lord Toulson JSC observed:

“99. Looking behind the maxims, there are two broad discernible policy reasons for the common law doctrine of illegality as a defence to a civil claim. One is that a person should not be allowed to profit from his own wrongdoing. The other, linked, consideration is that the law should be coherent and not self-defeating, condoning illegality by giving with the left hand what it takes with the right hand.

“100. Lord Goff observed in the Spycatcher case, Attorney General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, 286, that the ‘statement that a man shall not be allowed to profit from his own wrong is in very general terms, and does not of itself provide any sure guidance to the solution of a problem in any particular case’. In Hall v Hebert [1993] 2 SCR 159 McLachlin J favoured giving a narrow meaning to profit but, more fundamentally, she expressed the view, at pp 175–176, that, as a rationale, the statement that a plaintiff will not be allowed to profit from his or her own wrongdoing does not fully explain why particular claims have been rejected, and that it may have the undesirable effect of tempting judges to focus on whether the plaintiff is ‘getting something’ out of the wrongdoing, rather than on the question whether allowing recovery for something which was illegal would produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system.

“101. That is a valuable insight, with which I agree. I agree also with Professor Burrows’ observation that this expression leaves open what is meant by inconsistency (or disharmony) in a particular case, but I do not see this as a weakness. It is not a matter which can be determined mechanistically. So how is the court to determine the matter if not by some mechanistic process? In answer to that question I would say that 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.”

This passage makes clear that the evaluation of the factors described in para 101 is directed specifically at determining whether there might be inconsistency damaging to the integrity of the legal system. This is confirmed later in Lord Toulson JSC's judgment where he refers (at para 109) to the need when 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” and in the following passage at para 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.”

Earlier in his judgment in Patel (at para 76) Lord Toulson JSC had drawn support from the approach of Lord Wilson JSC in Hounga v Allen [2014] 1 WLR 2889, para 42 where Lord Wilson JSC had observed that the defence of illegality rests on the foundation of public policy and continued:

“So it is necessary, first, to ask ‘What is the aspect of public policy which founds the defence?’ and, second, to ask ‘But is there another aspect of public policy to which the application of the defence would run counter?’.” 

Lord Wilson JSC had weighed the policy considerations in that case and concluded that in so far as any public policy existed in favour of applying the illegality defence, it should give way to the public policy to which its application would be an affront. A balancing of the policy considerations in either direction is, therefore, an important element of the decision-making process.

With regard to the third stage of the process, namely the assessment of proportionality, Lord Toulson JSC observed (at para 107):

“In considering whether it would be disproportionate to refuse relief to which the claimant would otherwise be entitled, as a matter of public policy, various factors may be relevant. Professor Burrows’ list [set out at para 93 of Lord Toulson JSC's judgment] is helpful but I would not attempt to lay down a prescriptive or definitive list because of the infinite possible variety of cases. Potentially relevant factors include the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties’ respective culpability.”

It is important to bear in mind when applying the “trio of necessary considerations” described by Lord Toulson JSC in Patel (at para 101) that they are relevant not because it may be considered desirable that a given policy should be promoted but because of their bearing on determining whether to allow a claim would damage the integrity of the law by permitting incoherent contradictions. Equally such an evaluation of policy considerations, while necessarily structured, must not be permitted to become another mechanistic process. In the application of stages (a) and (b) of this trio a court will be concerned to identify the relevant policy considerations at a relatively high level of generality before considering their application to the situation before the court. In particular, I would not normally expect a court to admit or to address evidence on matters such as the effectiveness of the criminal law in particular situations or the likely social consequences of permitting a claim in specified circumstances.

The essential question is whether to allow the claim would damage the integrity of the legal system. The answer will depend on whether it would be inconsistent with the policies to which the legal system gives effect. The court is not concerned here to evaluate the policies in play or to carry out a policy-based evaluation of the relevant laws. It is simply seeking to identify the policies to which the law gives effect which are engaged by the question whether to allow the claim, to ascertain whether to allow it would be inconsistent with those policies or, where the policies compete, where the overall balance lies. In considering proportionality at stage (c), by contrast, it is likely that the court will have to give close scrutiny to the detail of the case in hand. Finally, in this regard, since the overriding consideration is the damage that might be done to the integrity of the legal system by its adopting contradictory positions, it may not be necessary in every case to complete an exhaustive examination of all stages of the trio of considerations. If, on an examination of the relevant policy considerations, the clear conclusion emerges that the defence should not be allowed, there will be no need to go on to consider proportionality, because there is no risk of disproportionate harm to the claimant by refusing relief to which he or she would otherwise be entitled. If, on the other hand, a balancing of the policy considerations suggests a denial of the claim, it will be necessary to go on to consider proportionality.'

Later, Lord LLoyd-Jones said, at paragraph 44:

'For one branch of the law to enable a person to profit from behaviour which another branch of the law treats as criminal or otherwise unlawful would tend to produce inconsistency and disharmony in the law and so cause damage to the integrity of the legal system.'

On the facts in Stoffel (summarised in Discovery[9]), though the claimant had participated in a mortgage fraud, the defence of illegality was not available to the the claimant's negligent solicitors, in defence of a claim based on their incompetent service to the claimant, post sale. So, accordingly, the Court did not refuse to assist a claimant on the grounds of illegality - namely, mortgage fraud.

AL-DOWAISAN

Judge Michell in Shayler gave a helpful summary of Al-Dowaisan, at paragraph 129[10]: 

In [Al-Dowaisan], a bank account was set up in the name of the Claimant as nominee for others, including the Defendant making a counterclaim. The learned judge, HH Judge Hodge KC, sitting as a High Court judge found that the bank account was set up for the purpose of concealing the beneficial entitlement of persons including the counterclaimant to the monies passing through the account. This was done for the purpose of tax evasion and the payment of tax due was evaded in this way. The counterclaimant claimed an order for payment to him of £400,000 in the account. The learned judge dismissed the counterclaim on the grounds of illegality for the following reasons:-

(1) for the Court to deny the counterclaim and to allow the Claimant to treat the £400,000 as his own would serve to discourage third parties from taking steps to facilitate tax evasion in the future and would therefore assist in ensuring HM Revenue and Customs receives the tax which is due;

(2) it would serve to discourage people from lying to the police; and

(3) it was not a disproportionate response or undue interference in property rights to deny the Counterclaimant his right to recover the £400,000.'

So, accordingly, the Court did refuse to assist a (counter)claimant on the grounds of illegality - namely, tax evasion.

HEATING TRADE

In Heating Trade:

(1) there was a company (HTS) with 100 issued shares. A Mr Baldudak claimed that he was the sole legal and beneficial owner of 100% of the shares in HTS (paragraph 2), whereas a Mr Matteo asserted that, he was the beneficial owner of 50% of the shares in HTS;

(2) by way of background, Mr Matteo had been married to Mrs Hava Polat ('Mrs Polat'), but Mr Matteo and Mrs Polat were going through divorce proceedings, in particular financial provision proceedings (a financial claim). At one point, Mr Baldudak had 50% of the shares in HTS (legal and beneficial); Mr Matteo had the other 50% of the shares in HTS (legal and beneficial). Later, 1 share was transferred by Mr Matteo to Mr Baldudak for an unrelated reason[11].

(3) then, with the intention of hidding them from Ms Polat, Mr Matteo transferred his 50% of the shares in HTS (44, then 5), to a Mr Baldudak (the 'Transferred Shares')(paragraphs 129 and 134[12]). Mr Matteo then lied on this (6.11.20) original Form E in financial provision proceedings (in essence, seeking to hid this asset from Mrs Polat). Later, on 6.12.20, Mr Matteo: (a) issued a new Form E, in which he admitted to the ownership of Transferred Shares (paragraphs 24, 66 and 144); and so (b) effectively abandoning the illegal purpose/scheme (to mislead the financial provisions court), before it was carried into effect (through a final financial provisions order). The reason for Mr Matteo's change of heart was: (a) not a sudden bout of contrition/benevolent attitude towards Mrs Polat; but rather because (b) Mr Baldudak was excluding Mr Matteo from HTS (paragraphs 20 to 24). The Judge rejected the suggest Mr Matteo '...was frank about his deception in relation to the Form E.' (paragraph 61), holding, rather, that Mr Matteo had been '...forced to admit that he had lied as what he had said did not accord with his subsequent statements.' (paragraph 61)

(4) the Judge held that Mr Matteo held the beneficial interests in the Transferred Shares, post transfer (paragraph 136-137). However, Mr Baldudak contended the Court should not recognise the trust and that Mr Matteo held the beneficial interest in the Transferred Shares, on the grounds of illegality (paragraph 138). After setting out extracts from Patel v Mirza (paragraphs 140), the Judge set out:

(a) the rival submissions (paragraphs 141 to 144), that:

(i) Mr Baldudak submitted that:

'...the illegality here is Mr Matteo's attempt to avoid his lawful obligations to his ex-wife by transferring shares so as to appear they were no longer his and the lies contained in the Form E of 6 November 2020. He says that it would be harmful to the integrity of the legal system if he could pray in aid his conduct to unwind the transfers.

(ii) Mr Matteo submitted that (and these were submission the Judge later stated he agreed with - see below): '...there is no general prohibition on giving a false appearance of poverty.', relying '...on a passage in Lewin, at 6-033, where it is stated:

"The majority [in Patel v Mirza] considered that it would be only in a rare case that the enforcement of a claim might be regarded as harmful to the integrity of the legal system, and thus declined by the court. We consider that in practice it will, as Lord Toulson suggested, now be only an exceptional case where the court will not entertain a claim at all, such that evidence of an illegal purpose is wholly inadmissible."

That Mr Matteo's case was  '...that a refusal to recognise the trusts would be a disproportionate response as it would result in a windfall for Mr Baldudak. It would be unjust and contrary to the public interest because Mr Baldudak was aware of the purposes of the trust, had proposed a similar arrangement in 2020 concerning a partnership in Turkey and part of the purpose of the trust was for his benefit. It the trust were not enforced it would prejudice [Mrs Polat] in the divorce proceedings by putting the shares out of her reach. The public interest is protected by the law of contempt. The court in the financial proceedings is best placed to determine the appropriate consequences.'

(c) the Judge in Heating Trade, at paragraph 144, said: 

'I have not been addressed upon the effect of Mr Matteo having issued a new Form E in which he admitted to the ownership of the shares. Thus the illegal purpose was abandoned before it was carried into effect, in the sense that the court in Mrs Polat's claim was not placed in the position of determining her financial entitlement whilst unaware of his shareholding. In Tribe v Tribe [1996] Ch 107 a father who transferred his shares to his son to protect them from claims by his creditors was held entitled to recover them after he had settled with the creditors as, on the facts, the creditors had not been deceived so the illegal purpose had not been carried into effect. Millet LJ, at 134 considered that the policy underlying the locus poenitentiae principle necessarily encourages "withdrawal from a fraud before it is implemented." Chitty on Contract (33rd Edition at paragraph 16-231) says:

"The decision in the Supreme Court in Patel v Mirza that, where a contract is unenforceable because of illegality, restitution should normally be available, at least where the contract has not been fully executed, appears to endorse the outcome in Tribe v Tribe."'

(d) in conclusion, the Judge said, at paragraphs 145 to 148, that:

(i) he agreed with the submission of Mr Matteo (paragraph 145); and that,

(ii) 'The underlying purpose of the prohibition on preventing Mr Matteo giving a false impression of his assets in matrimonial proceedings is to seek to ensure that his former wife receives that which is due to her in accordance with the provisions of the Matrimonial Proceedings Act 1973, which requires the court to take into account each party's assets and income when making a financial order. That purpose would be thwarted if the claim were to be denied. Neither side has argued that this consideration is not relevant as Mrs Polat could join Mr Baldudak in her financial claim in order to assert that he holds the shares in trust for Mr Matteo so as to be taken account in her claim. It would be a very roundabout way of vindicating her rights to financial provision and the fact that she would be put to the cost and trouble of having to do so justifies the conclusion that refusing relief would thwart the purpose of the prohibition.

The fact that Mr Matteo has taken steps which prevent him from relying on the false information in the original Form E is consistent with the policy because by allowing him to recover his shares in these circumstances encourages the prevention of fraud. It is likely that the change was brought about by the fact that his motive by then was to fight his exclusion from the company, but it was not forced upon him.

The refusal to recognise the trust would be disproportionate and unjust as it would reward Mr Baldudak for wrongdoing in which he was complicit and put his interests, as a joint wrongdoer, ahead of Mrs Polat, who is the innocent party as regards the shares.

I also agree with [counsel for Mr Matteo's] point that the public interest in preventing litigants lying as to their assets is protected by the law of contempt, and had Mr Matteo persisted in his fraud, the court dealing with the financial claim is best placed to determine the consequences.'

BHABRA

Very much obiter[13], the deputy Judge in Bhabra refused to deny a claim, on the ground of illegality for potential tax evasion - a claim for the recover of some company shares. 

In Bhabra, there was a successful (for a time) businessman Hardial and his wife Harbans. They had 2 sons, Dahl and Pom. Dahl married Makinder (who had a sisted call Niku). There was a company ('PML'), the shares of which, were put into Makinder and Niku's names. There was another company Hardial Limited. It was assumed that the beneficial ownership of the PML shares were held by a father Hardial. This placing into Makinder and Niku's names, of the shares, had the potential for misleading the Inland Revenue (paragraph 312). The deputy Judge said 'this may well have happened as the Revenue were told that PML was not associated with Hardial Limited, although this depends on whether common ownership was a sufficient association.' (paragraph 312). The deputy Judge rejected the proposition that this meant Pom's claim to recover the PML shares (said to have been assigned by Hardial to Pom[14]) must be refused, on grounds of illegality. The deputy Judge said, at paragraphs 313 and 314:

'...there is no suggestion that, when the PML shares were transferred to Makinder and Niku, any thought was given as to whether presenting PML as an independent company might in some way improve the tax position either of PML or the other Bhabra family companies. This should be contrasted with the position in Abdullah Al-Dowaisan v Imad Abdul AlSalam [2019] EWHC 301 (Ch) where the entire rationale for the transaction was to conceal taxable profits from the Revenue.

Taking these factors into account, it would in my view be disproportionate to deny Pom's claim. This is not a situation where allowing Pom to recover the PML shares (on the basis that they are now held on trust for him) would damage the integrity of the legal system. I accept that the position might be different if it were shown that the purpose of the transactions was to defraud the Revenue but, as I have said, there is no evidence that this was the case.'

AB v CB

In AB v CB, there was:

(1) Applicant AB - husband;

(2) First Respondent CD - wife;

(3) Second Respondent EF - wife's son.

The husband and wife were getting divorced, and the proceedings were financial remedy proceedings. The husband and wife disputed:

'...whether the assets which would be distributed between them include a piece of land which is adjacent to the former matrimonial home. The Applicant states that it is beneficially owned by the parties whereas the Respondent states that it is both legally and beneficially owned by her son, EF, the Second Respondent.' (paragraph 1).

To provide more details. On 5.4.12, the Applicant and First Respondent completed on the purchase of what became, their matrimonial home (the 'FMH'). At the same time as purchasing this property, an adjacent piece of land was purchased (the 'Land'). It was agreed by all that this Land was purchased in the name of the Second Respondent, but was funded by the Applicant and Respondent (paragraph 6).

The Applicant maintained that: (a) this was not a gift to the Second Respondent (paragraph 9); but rather, (b) there had been/was '...a common intention constructive trust or alternatively a resulting trust for the land to be held by the Applicant and [First Respondent] beneficially.' (paragraph 9); (c) '...the parties originally were intending to purchase both the family home and the land together and it was only once it was pointed out that there was an issue in relation to Stamp Duty thresholds that any consideration was given to placing the two parcels in separate names.' (paragraph 9).

The First Respondent (and Second Respondent position) was that: (a) the Applicant and First Respondent had gifted the Land to the Second Respondent; though (b) agreeing that the Applicant and First Respondent had initially intended to purchase FMH and Land in the joint names of Applicant and First Respondent.

As to who now held the beneficial interest in the Land, the Judge held that Second Respondent was holding the Land for the benefit of the Applicant and First Respondent (in other words, the beneficial interst in the Land was held by the Applicant and First Respondent, and not the Second Respondent). But, there was a question in respect to illegality. The question was whether illegality, in the form of stamp duty tax evasion, meant the Court would not assist, in essence, the Applicant, and recognise that the Second Respondent held the Land on trust for the Applicant (and First Respondent).

Under the heading 'Illegality', the Judge held that illegality was not a bar to the Court assisting, in essence, the Applicant, and recognising that the Second Respondent held the Land on trust for the Applicant (and First Respondent). The Judge said, at paragraphs 78 to 83:

'The sole purpose behind the creation of this trust was an attempt to evade Stamp Duty. The "device" that was used was illegal as there can be no doubt that this was a linked transaction to the purchase of the house. As such, the higher rate of Stamp Duty was due to be paid on the whole transaction. The Solicitor was aware of this and let both the Respondent and Second Respondent know his view.

In Tinsley v Milligan [1993] UKHL 3 it was held that parties could not rely on evidence of their own illegality to establish trust. This decision was overturned by the Supreme Court in Patel v Mirza [2016] UKSC 42 which set out a policy based 'range of factors' approach.

It was stated that a court should consider a "trio of necessary considerations" to determine whether or not the claim should be disallowed on the grounds that it would be contrary to the public interest because it would be harmful to the integrity of the legal system. These are:

a. The underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim;

b. Any other relevant public policy on which the denial of the claimant may have an impact;

c. 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.

The Patel case did not involve an equitable claim but it has been held in Ball v De Marzo [2019] EWHC 1587 that the same considerations apply to such cases.

In considering the above in relation to this claim:

a. The prohibition involved in this case relates to tax evasion which is undoubtedly widespread within the jurisdiction of England and Wales. It is difficult to see how a denial of this claim could possibly impact upon that underlying purpose.

b. No other public policy issue would impact upon this claim.

c. The Stamp Duty involved would have amounted to £12,750. There will no doubt be interest and penalties in relation to that sum. Even once those figures are added it is difficult to see how it could be a proportionate response not to allow a claim relating to land are valued at a gross figure of £137,500. In any event it is assumed that the sum will be paid following this judgment.

I am satisfied that the illegality behind this transaction cannot prevent the finding that the Second Respondent is holding the land for the benefit of the Applicant and Respondent.'

HEVEDI 

In Hevedi, under the heading 'Illegal purpose', Master McQuail said, at paragraphs 32 to 34:

'In a case where a purchaser purchases a property in the name of another for an illegal or wrongful purpose, the Court has to consider the question of illegality of its own motion and volition: Kliers v Schmerler [2018] EWHC 1350 (Ch) per Mr Murray Rosen QC (sitting as a Deputy HCJ) at [80].

In addressing illegality, the Court must consider various factors in order to determine whether the public interest will be harmed if the claim is enforced, having regard to:

(i) the underlying purpose of the prohibition that has been transgressed, and whether that purpose will be enhanced by denial of the claim;

(ii) any other relevant public policy on which the denial of the claim may have an impact; and

(iii) whether the denial of the claim would be a proportionate response to the illegality.

Patel v Mirza [2016] UKSC 42; [2017] A.C. 467 per Lord Toulson at [120].

Denial of a purchaser's claim to an equitable interest in property has been held to be disproportionate, even where it was purchased in the name of another for an illegal purpose: Patel v Mirza at [112]; Kliers at [86].'

On the facts, the Court did not disentitle the claimant to any remedy he was otherwise entitled to. Master McQuail, at paragraph 91,

(1) noted that the judgment creditors of the defendant did not put a positive on illegality (the judgment creditors of the defendant were interested parties; the defendant herself having been debarred from defending (paragraph 20)); and

(2) reasoned:

'In circumstances where the claimant is, on his case, seeking to undo and remedy what might be termed the illegal activities and where he has purchased the rights to his claims from his trustees in bankruptcy it would not be appropriate for the court to allow any illegality to disentitle him to any remedy to which he might otherwise be entitled.' (note, the claimant had gone bankrupt but then later, was able to purchase back, from this trustee in bankruptcy, his rights again (paragraph 3)).

SHAYLER 

In Shayler, a Ms Yeo was the registered proprietor of the Property (25 Naseby Close, Wellingborough). Mr Shayler claimed to have a beneficial interest in the Property under a constructive or resulting trust (paragraph 1). The Judge found that 'the Property was not held on trust for Mr Shayler' (paragraph 123) so the Judge's subsequent consideration of illegality is obiter. But, the Judge did go on to '...whether the Tribunal should refuse to uphold Mr Shayler's claim to a beneficial interest on the grounds of illegality.' (paragraph 123).

By way of background, in 1996, during the currency of Ms Yeo and Mr Shayler's relationship, the Property had been conveyed to Mrs Crooks, Mr Shayler's mother (paragraph 3).

On illegality as a bar to the Tribunal enforcing Mr Shayler beneficial interest in the Property (had he had one), Ms Yeo's submitted that '...the Property was purchased in the name of Mrs Crooks in order to launder the proceeds of Mr Shayler's crimes and to conceal the provenance of those proceeds from the authorities.'  (paragraph 123) and consequently, '...the Tribunal should refuse to  assist Mr Shayler to assert a beneficial interest in the Property.' (paragraph 123). 

After:

(a) stating that 'The applicable legal test for the defence of illegality is set out in the judgment of Lord Toulson in Patel v. Mirza' (paragraph 124) and quoting extract from Patel v Mirza[15];

(b) summarising the decisions in (i) Kliers; and (ii) Al-Dowaisan (set out above);

(c) the Judge in Shayler held, obiter, that '...public policy would require the Tribunal to deny Mr Shayler the right to assert a beneficial interest in the Property at the time it was registered in Ms Crooks's name if, contrary to my findings, the Property would otherwise be held on trust for him.' [bold added]

The Judge's reasons were:

'...Firstly, dealing in illegal drugs, especially class A drugs is a social evil. The consumption of drugs of the type trafficked by Mr Shayler damages the lives of those who become addicted or are otherwise damaged by consuming them, leads to anti-social and criminal behaviour as those addicted try to obtain money with which to purchase the drugs to feed their addiction and the effect is to undermine society. The purpose of the prohibition on the trafficking in class A drugs is to protect members of society from becoming addicted and from the evils that follow from people becoming addicted.'

'Secondly, to deny Mr Shayler an interest in the Property would serve to deter others from lying to the police and the authorities as well as from engaging in drug trafficking in the belief that they can hide the proceeds. I have had regard to the fact that the criminal law provides a means for the proceeds of crime to be confiscated. However, in this case Mr Shayler did not tell the prosecuting authorities or the Crown Court in 2000 that he was the beneficial owner of the Property. Had he done so, the amount of the confiscation order would have been greater because it would have included the value of the Property and not only the amount paid to buy it.'

'Thirdly, to deny Mr Shayler an interest would not be disproportionate.'

SIMON HILL 

BARRISTER 

33 BEDFORD ROW

Simon Hill practices in the following areas: insolvency, company and business law, with some tax and property law.

Further articles on topics relating to his practice areas can be read under his Insights. Should you wish to instruct Simon Hill then please do not hesitate to contact his clerk Geoff Carr. 

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