Re-examining Illegality in Restitution: a reason to deny restitution, or to grant it?

Transcription

1 Re-examining Illegality in Restitution: a reason to deny restitution, or to grant it? Dr Niamh Connolly Trinity College Dublin niamh.connolly@tcd.ie This paper is currently a work in progress. Please excuse its unfinished state I apologise to readers in particular for the wordiness. I would be grateful for any comments relating to it. This paper revisits the effects of illegality in restitution law. It argues that ordering the mutual restitution of benefits conferred may be an appropriate response to the invalidity of illegal agreements, which would achieve better justice as between the parties, while also ensuring practical effect to the courts condemnation of the agreement. Treating restitution as the normal response when an agreement is invalid due to illegality offers the prospect of aligning the policy response and the just solution as between the parties. Such a solution is possible because the tests espoused by private law to determine when a cause of action is founded on illegal conduct and so should be prohibited can readily be passed in actions seeking restoration of a benefit transferred. The positive requirements of unjust enrichment law can universally be met in cases of a failed illegal agreement, either because of the transferor s impaired consent, or, alternatively, by introducing new unjust factors to respond to void or illegal agreements. However, the principle of restitution should be accompanied by a narrowly-drawn stultification defence in order to ensure that the law s prohibitions are upheld in practice. This responds to situations where restitution would in effect endorse an exchange of value for money, which is itself a prohibited exchange. Contents Contents... 1 Introduction... 3 I. Illegality in Private Law... 4 A. Criticism of the notion of an illegality defence Targeting the wrongdoer, or the wrong? From illegality to assumed culpability and punishment The tension between policy and corrective justice

2 4. Cases illustrating the flaws in the illegality defence Increasing judicial resistance to a sweeping denial of justice in the name of policy An action between the parties is not designed to cure the wrong to an outside victim The possibility of aligning policy and corrective justice... 8 B. Examining the policy reasons for an illegality bar in private law Looking behind the maxims The policy rationales which inform private law s response to illegality The variable geometry of the policy rationales behind the rules on illegality C. Legal tests for an illegality bar in private law An affront to public conscience Causation and inextricably linked in tort Reliance on the illegal conduct to establish the claim II. Responding to illegality in restitution law A. The specificity of restitution Key differences from contract law Distinguishing between the enrichment and the contract which caused it B. Policy rationales applied to the restitutionary context Preventing profit and actions for restitution The aiding illegality point in the context of restitution Furthering the purpose of the prohibition and restitution law The dignity of the courts Punishment and restitution Which solution in restitution promotes deterrence? C. Applying the different private law tests for an illegality defence to enrichments Affront to public conscience Causation, inextricably linked and restitution Using - and passing - the reliance test in restitution actions III. Propositions concerning the effect of illegality in unjust enrichment law A. The illegality of a putative agreement is not a bar to restitution Policy reasons support restitution Authority for the proposition Achieving better justice between the parties The mere fact of performance should not be determinative of rights B. Illegality as a reason for restitution

3 1. Illegality merits a more serious response than unenforceability Why restitution is a logical consequence of declaring a contract void for illegality C. Establishing unjust enrichment in cases where a contract is void for illegality Unjust factors and illegal transactions How should relative culpability affect the response? D. The limits of automatic restitution: stultification and the illegal transfer E. Illegality and other parts of restitution law Conclusion: possible effects on contract law of a principle of restitution for illegality Introduction The defence of illegality can be raised to defeat actions across the branches of private law. At first glance, the need for consistency might imply that it must also be a defence to claims brought under the principle against unjust enrichment. However, the logic of the illegality defence, when placed in the unjust enrichment context, argues for the contrary solution: where a transfer is made in pursuance of an illegal objective, this is a reason why it ought to be restored. Despite some dicta to the contrary, there is ample authority for granting restitution in cases of illegality. This approach should be affirmed and amplified as the correct route for future development. Far from jettisoning the valid policy reasons why the law refuses to condone illegal or immoral conduct, viewing the illegality of a putative agreement as a trigger for restitution reinforces them. To demonstrate why this is so, this paper will first examine the place of the illegality defence in private law. What are the specific policy rationales which inform the principle, and what tests embody these justifications in different branches of law? The second part of the paper will focus on the law of restitution. It will identify which of private law s policy reasons for an illegality defence exist in the context of restitution claims, and which test of connexity should be used. This analysis leads to three propositions concerning the appropriate response to illegal conduct within restitution law: (i) the illegality of a failed contract should not be a defence to a claim for restitution of value transferred in an attempt to perform it; (ii) the illegality of the failed contract provides instead a persuasive argument in favour of mutual counter-restitution in order (a) to undo the effects of the attempted illicit scheme, while (b) doing justice as between the parties. This policy objective can be achieved through existing unjust factors, or, more radically, through a new unjust factor of illegality; and, 3

4 (iii) since the legal system aspires to consistency and refuses to assist wrongful acts, a narrow defence of stultification or illegality must remain, limited to cases in which the transfer itself is illegal and ordering restitution in monetary form of the value of the benefit transferred would equate to implementing an exchange prohibited by law. I. Illegality in Private Law A. Criticism of the notion of an illegality defence Criticisms of a general illegality defence are familiar. The illegality defence has, in the past, had draconian effect. 1 It is unsatisfactory for the courts simply to let the estate lie where it falls in cases of illegality. This attaches too much weight to the fact - or happenstance - of performance, allowing it to be determinative of legal rights. Rose describes the rules as crude and capricious. 2 As the Law Commission indicates, the dual functions of the courts are to apply the law and so to offer just solutions to disputes. 3 The courts ought to intervene in a positive manner to do justice. The logic of judicial abstinence may work appropriately in the case of executory contracts, when the court is being asked to sanction or enforce the parties unlawful plans. It does not translate well to unjust enrichment. 1. Targeting the wrongdoer, or the wrong? There is much support in the authorities, especially older cases, for the proposition that the courts will refuse to act to assist a wrongdoer. 4 Thus, for example, Wilmot CJ said in Collins v Blantern in 1767, no polluted hand shall touch the pure fountains of justice. However, the blanket refusal of justice which this dictum implies is too broadly drawn. For the civil law to attach severe legal consequences to a status of wrongdoer recalls the historic concept of outlawry. Modern law recognises that even wrongdoers do not lose their fundamental rights; they should also retain a right to avail of private law mechanisms to protect their rights. Refusing otherwise well-grounded claims risks inflicting disproportionate penalties for minor infringements. A blanket refusal to assist persons implicated in wrongdoing is unfair, pointless and a source of injustice. The law s sound policy of not condoning wrongful conduct can be pursued through narrower policy rules, some of which may be specific to individual branches of the law of obligations. 5 It may be that the dicta which speak of refusing justice to the guilty should be interpreted as meaning refusing justice to the guilty in connection with their illicit schemes. Modern tests for the illegality defence move in this direction. 1 FD Rose, Confining Illegality [1996] LQR 545, FD Rose, Gratuitous Transfers and illegal Purposes (1996) LQR 386, Law Commission No 189, The Illegality Defence: a Consultative Report (2009), para Harry Parker v Mason [1940] 2 KB 590, Moore Stephens v Stone & Rolls Ltd [2008] EWCA Civ 644; Gray v Thames Trains Ltd [2008] EWCA Civ

5 2. From illegality to assumed culpability and punishment Under the illegality defence, one party is punished for the wrongdoing, though the punishment may be disproportionate to his culpability. The Law Commission has highlighted the great array of circumstances which might fall under the umbrella of illegality, a fact which, it argued, militates against firm universal rules. Accordingly, scenarios raising the issue of illegality vary in terms of the gravity of the wrongdoing, the connection between the wrongdoing and the legal action, relative culpability of the parties, and the justice of denying a remedy. 6 The Law Commission warns also that not all parties to illegality are wrongdoers. 7 The theoretical equality which underpins contract law might seem to justify imposing a shared and equal responsibility for illegal conduct. However, experience shows that the inequality in bargaining power between the parties may allow one party to impose the objectionable elements of the deal on the other, as in the employment context. Even in contracts between roughly equal parties, despite the consent of both to the deal, the facts may show that one party bears the greater share of moral responsibility. In Anzal v Ellahi, the defendant seems to have been the main instigator of the wrongdoing. For him to be allowed to keep the claimants money would be doubly unfair. 3. The tension between policy and corrective justice In a much cited dictum from Holman v Johnson, Lord Mansfield CJ acknowledged that the rules about illegality were motivated by policy reasons, not attaining justice. 8 Much more recently, Lord Goff acknowledged that its indiscriminate application can create unfair results. 9 Millett LJ agreed that it often leads to a denial of justice. 10 Perhaps the borrower under an unlawful loan is allowed to keep the money. 11 Perhaps a builder who inflates a quote to defraud an insurer will not receive any payment great than he happens to have received already. 12 Perhaps a solicitor who attempted to agree unlawful fees will not be paid at all. 13 The party to the illegality who finds himself in the fortunate position of raising the defence benefits from a windfall gain. 14 Where the parties together intended to defraud a third party, it is not fair or just that one such wrongdoer should arbitrarily profit at the expense of the other. 15 The application of an illegality bar in such cases denies corrective justice as between the parties. Worse, this is so even though the beneficiary may be equally culpable for the wrongdoing. The courts traditional aloofness concerning illegal acts may appear to preserve their dignity from close contact with grubby dealings, but it allows them to resile from doing justice, either in the narrow sense of achieving corrective justice between the parties, or the broader sense of destroying illegal bargains. 6 Law Commission No 189, The Illegality Defence: a Consultative Report (2009), para Law Commission No 189, The Illegality Defence: a Consultative Report (2009), para Holman v Johnson (1775) 1 Cowp 341, Tinsley v Milligan [1994] 1 A.C. 340, Tribe v Tribe [1996] Ch. 107, Boissevain v Weil [1950] AC Taylor v Bhail [1996] CLC Awwad v Geraghty & Co [2001] QB Singh v Ali [1960] A.C. 167, Taylor v Bhail [1996] CLC

6 There is a limit to how much injustice we should be willing to do (or to sanction) in the interests of the public good. Individuals matter. If there must inevitably be a tension between how policy requires us to treat parties to illegal contracts and the private law rights of those parties, we should carefully examine the balance we have struck. We should examine the specific policy rationales at play, and assess whether they are advanced by the rules we have developed. Perhaps the balance should now be shifted in favour of corrective justice. In a preliminary ruling on the availability of a defence of illegality in the Irish High Court, Charleton J suggested that the principle of justice upon which our legal system is based, under our Constitution, and the true social order which it thereby seeks to achieve might be undermined if a declaration of unenforceability allowed one party to an illegal contract to be enriched at the expense of the other. 16 Indeed, in the Irish context, he asked, Would such a result be consistent with the vindication of property rights as personal rights under Article 40.3 of the Constitution, or otherwise? 17 Regardless of the particularities of national constitutions, common law courts in all jurisdictions seek to do justice and protect the private law rights of citizens. Charleton J later observes that there is potential for manifest injustice if a powerful party s illicit scheming can deprive the contracting party of legal recourse. 18 In recent decades, the courts in different jurisdictions set themselves the task of preventing the manifest injustice which arose from refusing restitution in cases of corporate incapacity. 19 Perhaps moving towards a response in cases of illegality which places a greater emphasis on corrective justice is the next step in the same direction. The lenient approach to withdrawal in Tribe v Tribe shows judicial reluctance to allow the courts distaste for illegal conduct to be used as a means of one person enriching himself unfairly at the expense of the other. That is to say, modern courts are reluctant to wash their hands of the whole affair and let the estate lie where it will, as Lord Eldon might have wished. 4. Cases illustrating the flaws in the illegality defence In Taylor v Bhail, the two parties conspired to inflate the price of repair work to defraud an insurance company. While the trial judge found that the plaintiff should be paid for the work he had actually done, the court of appeal not only found that the defendant should pay back any money received from his insurer, but that the plaintiff could not be paid for the work he had done. As it happened, he had already been paid 7,400, and could keep this. Various commentators indicate that this effective division of the loss between the two culpable parties make have made the solution more palatable to the court, despite its fortuitous character. 20 The outcome in Taylor v Bhail seems both unfair and arbitrary. It is unfair that the plaintiff should not be paid at all for the work done and that, as between him and the defendant, the defendant should be able to retain the benefit of his labour for free. The defendant had even instigated the wrongdoing. The plaintiff should be paid for his work and the wrongdoing published by the criminal law and by the insurance company not being required to pay out on the claim. Secondly, the decision is arbitrary in that the plaintiff was allowed to retain the sum of money which it so 16 Quinn v IBRC [2012] IEHC 36, para E4. 17 Quinn v IBRC [2012] IEHC 36, para E4. 18 Quinn v IBRC [2012] IEHC 36, para L1. 19 In re PMPA Garage (Longmile) Ltd (in receivership and in liquidation) [1992] I.L.R.M PS Davies, The Illegality Defence Two Steps Forward, One Step Back? (2009) Conveyancer and Property Lawyer 182,

7 happened he had already received, without any principled basis. What is the principled ground for allowing him to keep this amount? Either he was entitled to it in return for work done, or he was not. There is no explanation of why he should be entitled to the sum of 7,400. The solution favoured in Taylor v Bhail allows the happenstance of performance to determine the response of the courts. Worse, it means that if the parties choose to perform an illegal bargain, it has the illegal effect desired. The courts resign themselves to being mere bystanders, leaving the parties to the mercies of each other. They conspicuously resile from doing justice, either in the narrow sense of achieving corrective justice between the parties, or the broader sense of destroying illegal bargains. Another example where the denial of remedy does not seem to be the best solution is Bigos v Boustead. The defendant set up an illegal scheme to avoid exchange controls. He gave a share certificate to the claimant, who was to provide foreign currency in return. The claimant did not proceed with the arrangement. The defendant was refused a remedy because he did not repent of his illegal conduct. This meant that the other party to the illegal bargain got a windfall. It is unfair as between these two parties. It seems to be justified on the basis of punishing wrongdoing. A narrow principle of stultification would not prevent the defendant from recovering his share certificate. For him to recover his property would not assist him in attaining his illegal objective. 5. Increasing judicial resistance to a sweeping denial of justice in the name of policy The increasing complexity and contradictions of the case law on illegality may be explained by a growing judicial reluctance to leave the parties without access to a remedy. A set of cases which begin in the mid-twentieth century, such as Bowmakers v Barnet Instruments, 21 Singh v Ali 22 and Kiriri Cotton Co Ltd v Dewani, 23 seem to prioritise corrective justice and adapt the rules on illegality to achieve it. Likewise more recent authorities such as Tinsley v Milligan 24 and Tribe v Tribe 25 seem to confirm the trend. Each, in its own way, shows the courts straining to achieve a more lenient approach and more just outcomes. In Tribe v Tribe, Nourse LJ views the repentance exception as testimony of the courts reluctance to engage the harsh effects of the illegality principle, which would create unjust outcomes as between parties. He comments, since such consequences are in general unacceptable to them, the courts have made exceptions to the rule. 26 As a corollary and consequence of reformulating the policy-motivated exclusion to reflect shifting priorities and more focused concerns, the relevance of the illegality barrier may begin to fade when applied to restitution. While different tests to connect the illegality to the cause of action are still used in different areas of law, the Tinsley v Milligan reliance test has come to the fore. It is suitable to answer the needs of unjust enrichment cases arising in the aftermath of failed attempts to contract. Importantly, under a reliance test, most claims in unjust enrichment should be permissible because the claim does not rely on the validity of the illegal bargain. Now-outdated implied contract thinking may have reinforced the denial of restitutionary remedies in cases where a contract is void 21 Bowmakers Ltd v Barnet Instruments Ltd [1945] KB Singh v Ali [1960] A.C Kiriri Cotton Co. Ltd. v Dewani [1960] A.C Tinsley v Milligan [1994] 1 AC Tribe v Tribe [1996] Ch Tribe v Tribe [1996] Ch. 107,

8 for illegality, as it did for incapacity in Sinclair v Brougham. 27 However, the restitutionary cause of action does not depend on the invalid contract. 28 Rather, the invalidity of the impugned agreement clears the way for a claim in unjust enrichment. The focus is on the transfer, not any putative contract, and, most frequently, on the integrity of the transferor s consent to the transfer. Thus, for example, the basis for the claim in Taylor v Bhail was really the fact of doing the work, not the agreement as to price. This observation is highly significant for the place of illegality in unjust enrichment law. 6. An action between the parties is not designed to cure the wrong to an outside victim Altering the balance between the two parties will not remedy a wrong to another person or to society. Usually, in cases of illegal contracts, the wrong is not between the parties, but, between the parties and a third party to the dispute. Civil law actions between the two parties are not designed to protect the interests of outsiders to the transaction. For the courts to dismiss the action allows the benefit of the sanction they impose on a wrongdoer to accrue in an unjustified manner to another private law party, but does nothing to assist the person whom the plan was designed to wrong. Logically, if the focus is on the relationship between the parties to the contract, it is not on the interaction which has wronged another. It may be possible for the courts to insist on the rights of these outside victims, though they are not represented in court. For example, in Taylor v Bhail, the third party insurance company was properly entitled not to pay out on the fraudulent insurance claim. 29 In Nelson v Nelson, the Australian High Court allowed the plaintiff to retain a transfer from the defendant, while requiring her to repay a government subsidy. 30 In Tinsley v Milligan, a settlement with the Department of Social Security was required. 31 For this reason, in Anzal v Ellahi, Wilson J suggested that the distaste which the courts feel for fraudulent dealings can be tempered by making every effort to ensure that any fraud is exposed and rectified. 32 Specifically, he recommended that the court might sent a copy of its transcript to the Department of Social Security, for the Department to consider whether it would seek repayment of benefits. However, even if the courts can make orders affecting the interests of the outside victims, this does not convert the dispute between the parties to the contract into the proper forum to consider the wrong and the victim, located elsewhere. 7. The possibility of aligning policy and corrective justice The illegality defence expresses a compelling intuition and certain of the policy justifications for it are valid. The fact that an illegality defence in a civil action between the parties to a contract may not help the person whom they have wronged, might not strip it of its usefulness if it were not for the high price which we pay for the policy benefits. The most serious objections are tied to its 27 Sinclair v Brougham [1914] AC Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC Taylor v Bhail [1996] CLC Nelson v Nelson (1995) 70 ALJR Tinsley v Milligan [1994] 1 AC Anzal v Ellahi Court of Appeal (Civil Division) 21 July

9 gravely deleterious effect on corrective justice between the parties: endorsing a windfall for one at the expense of the other, in roles which are assigned between them without any principled basis. If we examine the true policy justifications for the rule, in the light of the law s contemporary attachment to providing outcomes which are as just as possible, it seems likely that we would choose to shift the balance struck between policy and justice, and restrict the cases in which the courts turn claimants away empty-handed. But it may be that we can go further than moderating the trade-off between justice and policy. It is questionable whether policy really contradicts the requirements of justice within restitution law. Instead, perhaps, in this field, policy and justice may be aligned. Examining the specific policies behind vague maxims such as ex turpi causa opens the door to a new solution. The proposal to treating restitution as the normal response when an agreement is invalid due to illegality offers the prospect of aligning the policy response and the just solution, so that both can be enhanced. The idea that a sound policy approach to illegal conduct can be aligned with achieving just results between the parties echoes the view expressed by Millett LJ in Tribe v Tribe, where he upheld the repentance exception. He indicated that this exception simultaneously serves the policy objective of encouraging withdrawal from illegal activities with enabling justice to be done. 33 B. Examining the policy reasons for an illegality bar in private law 1. Looking behind the maxims The vague Latin maxims of ex turpi causa non oritur actio and nemo auditur propriam turpitudinem allegans give effect to a number of distinct policy considerations. As Davies says, there is no principled reason why such broad Latin phrases should be used in modern law as indiscriminate bars. 34 Rather than sweeping refusals of justice in the name of vague policy, it is imperative to identify specific policy considerations and define rules which focus directly on the relevant concerns as they apply in the different contexts of each branch of law. The Law Commission recommended that the courts focus specifically on the policies which justify the illegality defence, as they apply to the cases before them. 35 Its Consultation Paper identifies six distinct policy reasons why the law might hesitate to grant a legal remedy to a person engaged in unlawful conduct. 36 These are: (i) to further the object of the legal rule which has been breached, (ii) to ensure consistency between different branches of the law, (iii) to prevent a person profiting from his wrongdoing, (iv) to deter prospective wrongdoers, (v) to protect the dignity or integrity of the legal system by ensuring that it not seen to assist wrongdoing, and (vi) punishment. 33 Tribe v Tribe [1996] Ch. 107, PS Davies, The Illegality Defence Two Steps Forward, One Step Back? (2009) Conveyancer and Property Lawyer 182, Law Commission No 189, The Illegality Defence: a Consultative Report (2009), para Law Commission No 189, The Illegality Defence: a Consultative Report (2009). 9

10 2. The policy rationales which inform private law s response to illegality a) Preventing profiting from wrongdoing The European Court of Justice indicated in Courage v Crehan that legal systems throughout Europe recognise the principle that a litigant should not profit from his own unlawful conduct, and endorsed this principle. 37 This notion can be discerned in the refusal to enforce contracts or trusts which form part of illegal schemes, or in the cases where a criminal seeks tortious damages for losses arising from his crime. b) The courts will not aid illegality In Selangor United Rubber Estates v Cradock, 38 Ungoed-Thomas J described it as a deep-rooted policy which extended to all branches of law that the courts are not to be instruments for aiding illegality. 39 This is sound policy. It appears to present a more focused concern with which to address illegality than a broad disdain for wrongdoers. The trust and contract scenarios frequently concern the law being used as the tool permitting the commission of the illegal act. In tort and unjust enrichment, the cause of action is likely not be being used as a means of committing the illegal act. The authorities have long taken the stance that helping wrongdoers resolve their difficulties or disputes in the aftermath of an illicit act would assist them in that act. This is not the narrowest possible definition of assisting the illegal conduct, but it is a reasonable one. The answer is especially evident in the case of dividing spoils of illegal venture: here, the court lending its authority to ensure the venture runs smoothly and to the satisfaction of the participants really is assisting them in the project. 40 c) Punishment Another justification implicit in the authorities is that losing the benefit of the state s justice apparatus is a fitting punishment for those who choose to break the law. If it is a punishment, it can be a harsh and unfair one. Depriving people of their private law rights risks inflicting disproportionate penalties for minor infringements. The value of the loss inflicted can be arbitrary, depending on the happenstance of how much a party has already performed. It is in no way proportioned according to the gravity of the offence or the culpability of the party affected. As a result, such a punishment is out of line with the criminal punishments which exist in our legal system, and which are required to be related to the gravity of the offence. It is perhaps because of concerns about the possible disproportionality of the civil sanction that tort law limits the illegality defence to cases where the claim is inextricably linked with the unlawful conduct. Dismissing civil claims also, unlike criminal penalties or the payment of tortious compensation, allows the benefit of the sanction on the wrongdoer to accrue to another party with whom he is in private law relations, with no justification for this. This renders it an arbitrary punishment. 37 Courage v Crehan [2002] Q.B. 507, Selangor United Rubber Estates v Cradock [1968] 1 WLR Selangor United Rubber Estates v Cradock [1968] 1 WLR 1555, Sykes v Beadon (1879) L.R. 11 Ch. D. 170,

11 Modern law recognises that wrongdoers do not lose their fundamental rights; it is consistent with this to acknowledge also that they retain a right to avail of private law mechanisms which further corrective justice between individuals. The law is perfectly capable of targeting specific wrong conduct through the criminal law, tort and, it is suggested, restitution. Anzal v Ellahi illustrates the unsatisfactory effect of the punishment motive. The claimants gave a sum of money to the defendant so as fraudulently to obtain social security. The Court of Appeal found that there was a resulting trust. But, as the Law Commission Report discusses and Davies points out, the parties would not have got a personal remedy in unjust enrichment, which is inconsistent. The argument against allowing the claimants to recover their money must boil down to punishing them, but the punishment of losing 12,000 is not proportionate to their offence. Surely the right solution is for the claimants to recover the money from the defendant and then the State to act against them for their fraudulent obtention of benefits, either by instituting sanctions or seeking restitution of overpayments. For these reasons, using the interpersonal dealings within the civil law as a vehicle to sanction wrongdoing is problematic. Wrongdoing should be sanctioned by some other part of the law. Where appropriate, Parliament should introduce appropriate and proportionate criminal or administrative sanctions, consistent with the principle that penal rules should be known in advance. d) Deterrence One objective of the law s avowed hostility to illegal activity is to deter legal actors from engaging in any activity which risks attracting the penalties at issue. Millett LJ suggests that the policy behind the illegality rule might be to discourage fraud. 41 In Taylor v Bhail, he expressed his hope that the commercial community would heed the severe consequences of intending to defraud third parties. 42 Yet he considers it somewhat artificial to think that the existence of the reliance rule would discourage wrongdoers from committing fraud. 43 Du Parcq LJ explained this logic in Miller v Karlinski: It is as well that people who enter into this kind of agreement should know that if either party fails to observe any of its terms the courts will not entertain an action to enforce them. 44 From this angle, the worse the punishment, the more arbitrary and disproportionate it is, the stronger the deterrent effect it might be expected to have on prospective transgressors. However, to what extent is it fair to sacrifice the interests of certain guilty individuals to make an example of them pour encourager les autres? In the Victorian period, the common law was conceived as serving an important instructive purpose. 45 It prioritised the maintenance of consistent principles, even where they operated harshly in an individual case, in the longer-term interests of all. 46 This reflected utilitarian priorities: the interests of an individual may need to be sacrificed to secure a benefit to all legal actors. From this perspective, it is appropriate that the interests of an individual wrongdoer should suffer perhaps disproportionately if it ensures that others will take note of the consequences of wrongdoing, and thereby secures the greater good. These arguments are less 41 Tribe v Tribe [1996] Ch. 107, Taylor v Bhail [1996] CLC 377, Tribe v Tribe [1996] Ch. 107, Miller v Karlinski (1945) 62 TLR P.S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Clarendon, 1979) P.S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Clarendon, 1979) ,

12 palatable in modern legal culture, which attaches greater weight to protecting the rights of individuals. In addition, the Law Commission pointed out that the illegality ban may have a perversely alluring effect for the truly amoral, since it allows the party who instigates the illegality to deprive the other party of legal recourse. 47 This effect, whereby one contracting party benefits from the other losing his legal action, has been seen, for example, in employment cases. In Aspel v Fame Clothing Company Ltd, the chairman of the Irish Employment Appeals Tribunal stated that it, "may seem unfair that an employer who unfairly dismisses an employee has (by accident) the advantage of this rule which is often contrary to the real justice between the parties." 48 e) Preserving the dignity of the legal system Concern to maintain the dignity of the legal system, and not place it at the service of criminals, is a clear current in older case law. The traditional English position seems to refuse the aid of the legal system to wrongdoers. In Harry Parker v Mason, Luxmoore LJ articulated a very broad proposition, that this court will not assist either party once the illegality of the transaction has been brought to its notice. 49 In Sykes v Beadon, Jessel MR s declaration that it is is no part of the duty of a Court of Justice to aid either in carrying out an illegal contract, or in dividing the proceeds arising from an illegal contract, between the parties to that illegal contract, may go beyond not assisting in the wrongdoing and seems to evoke instead the dignity of the court. 50 The proposition that the law should not assist wrongdoers is too broad. Rather, the legal system should not assist in the commission of wrongs. Wrongdoers are entitled to the protection of the law, as we see when they seek vindication of their human rights. Indeed, this principle is deeply rooted in the common law s rules requiring fairness in criminal law. It may well be that the law should not be used in aid of the commission of an illegal act, but not that those persons who are involved in the commission of illegality should therefore be deprived of the cloak of protection of the law. The law is available to do justice for all, good and bad. Justice is not a privilege, but a right. As Millett LJ said in Tribe v Tribe: Justice is not a reward for merit. 51 Even some older authorities suggests that there was not universally the great hostility to granting justice to wrongdoers that one might imagine. The courts did not necessarily refuse civil justice to criminals. In Farmer v Russell, the court was unwilling to allow a courier to keep money given to him to deliver to a counterfeiter. 52 The diminishing importance attached to this status-based concern is reflected in the courts increasing requirements for a close connection between the wrongdoing and the cause of action. This is seen both in the reliance test and in the causality test sometimes used in tort law. It is also suggested in the exception made for involvement in some collateral or insignificant illegality or unlawful act. 53 On occasion, legislatures have acted on the basis that participation in an illegality is not sufficient reason to deprive a person of legal rights. In Ireland, the Unfair Dismissals 47 Law Commission No 189, The Illegality Defence: a Consultative Report (2009), para Aspel (claimant) v Fame Clothing Company Ltd (respondent) [1993] E.L.R Harry Parker v Mason [1940] 2 KB 590, Sykes v Beadon (1879) L.R. 11 Ch. D. 170, Tribe v Tribe [1996] Ch 107 CA. 52 Farmer v Russell (1798) 1 Bosanquet and Puller Hewison v Meridian Shipping Services PTE Ltd [2002] EWCA 1821, para

13 (Amendment) Act 1993 was enacted to correct the harsh effect of case law on the effect of illegality on workers rights, by providing that transgressions relating to tax or social insurance did not deprive employees of a right to redress. 3. The variable geometry of the policy rationales behind the rules on illegality Identifying which of the possible policy objectives is at issue may assist in outlining the contours of the specific rules required to achieve it. Different justifications for the illegality defence are more or less persuasive. These different policy considerations have different weights in different branches of private law. They may have also varied over time, so that new emphases and balances become appropriate in contemporary times. Sachs LJ acknowledged in Shaw v Groom that the effect of public policy can properly evolve over time, saying that sound policy must be flexible enough to take into account the circumstances of its own generation. 54 Different formulations of the rules on legal recourse after illegal conduct give expression to different policy considerations from among the full set of possible rationales. a) Specific responses to illegal conduct in different areas of private law While the law s disapproval of wrongdoing is not limited to any one part of private law, the relevance of the policy concerns which underpin it varies from area to area. As we shall see, tort law sometimes employs a criterion of causality between the crime and the claimant s loss, which catches some cases in the illegality net which would not be caught by reliance. The use of different tests in the different branches of obligations reflects the relative importance of the different policy considerations which underlie the illegality bar within each context. We can distinguish a principle of crime shouldn t pay, or the criminal should not be allowed to deflect from his personal responsibility in tort cases, but these same principles don t apply in restitution. b) The evolution of these policy concerns The Law Commission makes a very modern enumeration of the policies behind the illegality defence. With changing legal culture and values, the relative importance attached to these rationales may have evolved. There is room to suspect that older cases may represent a broader reluctance to allow wrongdoers the benefit of the legal system, rather than being concerned merely to refuse to assist in an illegal scheme. Modern legal culture considers that all citizens have legal rights, and may demand vindication of those rights, even wrongdoers and convicted persons. We have moved a long way from the idea that justice is the King s prerogative. On this view, the more narrowly-focused formulations of the illegality defence which we find in cases since the 1990s (exemplified by the Tinsley v Milligan reliance approach) represent a new attitude to wrongdoers and a shift from an ancient concern with protecting the dignity of the court to a narrower concern that the court should not directly assist in an illicit scheme. C. Legal tests for an illegality bar in private law The policy reasons for condemning illegality have been channelled into the rules which frequently deny a person who is a party to an illegal act the benefit of his legal rights. Lord Mansfield CJ in Holman v Johnson said, No court will lend its aid to a man who founds his cause of action upon an 54 Shaw v Groom [1970] 2 QB 504,

14 immoral or an illegal act. 55 What does it mean to found your cause of action on an illegal act? What relationship must exist between the claim and any wrongful conduct for the illegality bar to arise? The scope and import of the illegality principle have been defined differently, at different moments and in different contexts. Competing adaptations of the illegality principle reflect a greater emphasis on different policy objectives, and may be more suitable for different branches of law. Both the principle nemo auditur propriam turpitudinem allegans and that of ex turpi causa non oritur actio seem to incorporate a criterion of reliance. It is reasonable to prohibit a person from relying on his wrongful conduct as the basis for his request for the courts to recognise his right. It would be as if the thief could ground ownership on the validity of his theft. However, there is a distinction between prohibiting claims grounded on illegal conduct and potentially wider rejection of claims connected with illegal conduct, in which the party does not need to plead the illegality to establish his claim. Singh v Ali 56 shows the possible tension between the broader and more focused conceptions of public policy in relation to illegality. The parties had been party to a scheme to enable the plaintiff to operate as a haulier without the required licence. The trial judge took notice of this illegality without it being pleaded. He ruled that it was the duty of the court when it realised that a litigant was setting up his own fraud, to refuse him aid. 57 This expresses the policy that it is not befitting to the dignity of the court to assist wrongdoers. By contrast, the Court of Appeal and Privy Council found for the plaintiff, notwithstanding the illegality. Lord Denning said that when an illegal transaction was fully executed and carried out it could not be revisited. This decision seems designed to avoid an unjust outcome as between the parties. In so doing, it implicitly opts for a more limited view of the policy rationales for countering illegality. We must be careful with language. The language used to relate the wrongdoing to the legal claim can sometimes loosen to embrace far wider connections than that the claim is founded on the wrongful act. For example, a broader formulation referring to the turpitude that lay at the heart of a claim, does not specify a precise link between the misconduct and the claim An affront to public conscience An older approach which considered whether it would offend the public conscience to assist the claimant is no longer accepted in England and Wales. Langley J at first instance in Stone & Rolls seems to have employed such a test, related to the level of objectionability of the wrongdoing. He concluded, the conscience of the ordinary citizen would not find the pursuit of the claim so repugnant that it ought to be prevented by use of the unforgiving and uncompromising operation of the ex turpi maxim. 59 On appeal, both sides agreed this was a misapplication of the law. The House of Lords found that the public conscience test had been abolished and rejected the proposition that judges enjoy discretion in cases of wrongdoing. 55 Holman v Johnson (1775) 1 Cowp. 341, Singh v Ali [1960] A.C Singh v Ali [1960] A.C. 167, Anglo Irish Bank Corporation Limited v Denis Collins [2011] IEHC Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2008] EWCA Civ 644, para 4. 14

15 In the Irish courts, Charleton J has recently espoused (obiter) an old-fashioned conception of illegality. He states that its rationale is that courts will not assist a party who has been guilty of illegal (or grossly immoral) conduct, and retains the test of whether it would be an affront to public conscience to grant relief to a plaintiff because thereby encouragement would be offered to similar acts. 60 The test of affront to public conscience seems primarily to reflect the idea of the dignity of the law, coupled, perhaps with punishment and deterrence. Charleton J s conclusion in the Quinn case, referring to a remedy which it would be contrary to the conscience of the law to afford to that party clearly evokes the idea of the legal system s self-image. 61 Punishment seems to be more embodied in the public conscience test than the reliance test. For the courts to refuse a remedy where the claimant s conduct is an affront to public conscience increases uncertainty in the law and in transactions. It is perhaps in recognition of this fact that the public conscience test would limit sanction to quite serious offences. 2. Causation and inextricably linked in tort In Lilly Icos LLC v 8PM Chemists Limited, Arnold J identified the way in which the ex turpi causa principle operates with different effect in different branches of the law of obligations, namely contract and tort. 62 These different tests may be explained as reflecting different policy objectives in these different areas. For example, tort may be seen to be more about punishment. Thus, tort sometimes uses a causality test (Gray, 63 Vellino 64 ), but it also uses reliance (Hewison v Meridian, 65 Clunis v Camden and Islington Health Authority 66 ). In Stone & Rolls, it was not necessary to choose a test, as they were all fulfilled: in the present case, the company's claim relies upon, is based substantially on, arises out of and is inextricably linked with the fraud. 67 The causality test is used where the wrongdoer seeks damages for loss attributable to his own wrongdoing. 68 This is understandable as a means of reinforcing the concept of personal responsibility for wrongdoing which is at the heart of tort law. Cross v Kirby applied the causation test where the claimant, trespassing, armed, on the defendant s property, was injured by the defendant with his own implement. 69 It seems entirely appropriate in this scenario that the test of causation, rather than a test of reliance, was used. By any measure, the culpability of the claimant far outweighed any blame to be attached to the defendant. Judge LJ emphasised that the causation test in such cases is narrower than a simple but-for test, stating that the action will not be refused for ex turpi causa unless the facts which give rise to it are inextricably linked with his criminal conduct Quinn v IBRC [2012] IEHC 36, para F2. 61 Quinn v IBRC [2012] IEHC 36, para L1. 62 Lilly Icos LLC v 8PM Chemists Limited [2009] EWHC 1905 (Ch). 63 Gray v Thames Trains Ltd [2009] AC Vellino v Chief Constable of the Greater Manchester Police [2002] 1 WLR Hewison v Meridian Shipping Services PTE Ltd [2002] EWCA Clunis v Camden and Islington Health Authority [1998] QB Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2008] EWCA Civ 644, para Gray v Thames Trains Ltd [2009] AC 1339, para Cross v Kirkby The Times, 5 April 2000; [2000] CA Transcript No Cross v Kirkby The Times, 5 April 2000; [2000] CA Transcript No

16 In Vellino v Chief Constable of the Greater Manchester Police, the claimant was refused damages from the police for injuries suffered when he jumped out a window in order unlawfully to avoid arrest. 71 Stuart-Smith LJ described the distinction: The operation of the principle arises where the claimant's claim is founded upon his own criminal or immoral act. The facts which give rise to the claim must be inextricably linked with the criminal activity. It is not sufficient if the criminal activity merely gives occasion for tortious conduct of the defendant. 72 This description adopts the familiar language of founding the claim on the wrongful conduct, which we can trace back to Holman v Johnson. 73 However, founding cannot mean the same in the tortious context as in contract. Indeed, the direct cause of the injury will not be an act by the claimant, so that his illegal act can only be taken into account as a preceding cause in the chain of events. Vellino tells us a mere causal connection is not enough: where the wrongdoing merely gives occasion for the claim. The requirement that the action be inextricably linked with the wrongdoing is not entirely clear to the layman, and would be hard to transpose to contract or restitution as a useful test, although it is familiar within tort. 74 Lord Hoffmann regards the distinction as coming down to causation, and to a choice between attributing the damage to either the criminal act of the claimant or the tortious act of the defendant. 75 This indicates another reason why the causation test is appropriate in tort but not in contract. Tort law habitually endeavours to assign responsibility for events to one party, as between the two parties. Contract, on the other hand, is predicated on shared plans, and therefore shared responsibility. Both parties are presumed to have shared in the illegal design and in performance, though factual evidence to the contrary may elicit judicial sympathy. 3. Reliance on the illegal conduct to establish the claim The reliance test came to prominence in Tinsley v Milligan. Lord Browne-Wilkinson articulated the rule as allowing the claimant to recover, if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction. 76 Likewise, in Bowmakers Ltd v Barnet Instruments Ltd, the Court of Appeal had upheld a claim in conversion because it did not require reliance on the illegal agreements. 77 Moore Stephens v Stone & Rolls Ltd suggests that the reliance principle applies generally in diverse areas of private law. 78 However, Gray v Thames Trains Ltd subsequently confirmed that tort law can still use a wider test of a close connection between the illegal conduct and the litigation. 79 English decisions have 71 Vellino v Chief Constable of the Greater Manchester Police [2002] 1 WLR Vellino v Chief Constable of the Greater Manchester Police [2002] 1 WLR 218, para Holman v Johnson (1775) 1 Cowp Gray v Thames Trains Ltd [2009] UKHL 33, [2009] 3 WLR 167, para Gray v Thames Trains Ltd [2009] UKHL 33, [2009] 3 WLR 167, para Tinsley v Milligan [1994] 1 A.C. 340, Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 (CA). 78 Moore Stephens v Stone & Rolls Ltd [2008] EWCA Civ Gray v Thames Trains Ltd [2008] EWCA Civ