The Law Commission Consultation Paper No 154 ILLEGAL TRANSACTIONS: THE EFFECT OF ILLEGALITY ON CONTRACTS AND TRUSTS A Consultation Paper London: The Stationery Office
m THE LAW COMMISSION 30-188-01 ILLEGAL TRANSACTIONS: THE EFFECT OF ILLEGALITY ON CONTRACTS AND TRUSTS CONTENTS PART I: INTRODUCTION 1. THE SCOPE OF THIS PROJECT 1.1-1. 24 1.1-1. 11 1 1 (1) Transactions which involve the commission of a légal wrong (2) Transactions which are otherwise contrary to public policy 2. AN OVERVIEW OF THE AIM OF THIS PROJECT 3. STRUCTURE OF THE PAPER 4. AN OVERVIEW OF OUR PROVISIONAL PROPOSALS 5. COMPATIBILITE OF OUR PROVISIONAL PROPOSALS WITH THE EUROPEAN CONVENTION ON HUMAN RIGHTS 6. ACKNOWLEDGEMENTS 1.24 10 PART II: THE EFFECT OF ILLEGALITY I: 2.1-2.78 il CONTRACTS 1. THE ENFORCEMENT OF CONTRACTUAL 2.2-2.31 11 OBLIGATIONS (1) Contracts rendered unenforceable by statute 2.3-2.19 12 (2) Contracts rendered unenforceable at common law 2.20-2.31 21 (a) Contracts to commit a légal wrong or carry out conduct which 2.20-2.23 21 is otherwise contrary to public policy (b) Where one or both parties enter into the contract for the purpose 2.24-2.28 24 offurthering the commission of a légal wrong or carrying out conduct which is otherwise contrary to public policy (c) Where one or both parties commits a légal wrong or acts in a 2.29-2.31 26 manner which is otherwise contrary to public policy in the course of performing the contract 2. THE REVERSAL OF UNJUST ENRICHMENT 2.32-2.56 27 1.6 1.7-1. 11 1.12-1.15 1.16-1.17 1.18-1.21 1.22-1.23 3 3 7 8 9 10
IV (1) Illegality as a defence to restitutionary claims (a) Failure of considération (b) Mistake (c) Duress (d) Vulnerability (2) Illegality as a restitutionary cause of action: the doctrine of locus poenitentiae 3. THE RECOGNITION OF CONTRACTUALLY TRANSFERRED OR CREATED PROPERTY RIGHTS (1) Title may pass under an illégal contract (2) The recovery of property in which a limited interest has been 2.62-2.67 created under an illégal contract - the reliance principle (3) Exceptions 4. THREE OTHER ISSUES (1) Damages for a différent cause of action (2) Severance (3) Linked contracts may be tainted by illegality PART III: THE EFFECT OF ILLEGALITY II: TRUSTS 1. THE GENERAL SCOPE OF THIS PART 2. "APPARENT GIFTS" AND RESULTING TRUSTS (1) Where a resulting trust is unenforceable because its existence 3.8-3.24 can only be shown by "relying" on illegality: the "reliance principle" (a) The reliance principle (b) The withdrawal exception (c) The application of the principles illustrated (2) Where a resulting trust will not arise, or will be unenforceable, for some reason other than the reliance principle (a) A resulting trust will not arise, or will be unenforceable, where the turpitude of the beneficiary is gross (b) A resulting trust will not arise, or will be unenforceable, where statute expressly or impliedly so provides 3. EXPRESS TRUSTS AND RESULTING TRUSTS ARISING ON FAILURE OF EXPRESS TRUSTS (1) Express trusts which are invalid (or "void") for illegality (a) Express trusts which fall within this category 2.34-2.48 2.35-2.37 2.38-2.42 2.43-2.44 2.45-2.48 2.49-2.56 2.57-2.69 2.57-2.61 2.68-2.69 2.70-2.78 2.70-2.72 2.73-2.74 2.75-2.78 3.1-3.68 3.1-3.4 3.5-3.31 3.9-3.13 3.14-3.18 3.19-3.24 3.25-3.31 3.26-3.27 3.28-3.31 3.32-3.58 3.33-3.50 3.33-3.34 (b) The implications of an express trust or condition being "invalid" 3.35-3.50 (i) The ordinary proprietary conséquences of a décision that 3.37-3.39 an express trust or condition is "void" 28 29 30 32 33 35 38 38 41 44 44 44 46 46 49 49 50 51 52 54 56 58 59 59 61 61 61 61 62
Cii) Does the reliance principle hâve any rôle to play in the event that an express trust or condition is void for illegality? (2) Express trusts which are valid, notwithstanding illegality Ca) Express trusts which fail within this category Ci) Express trusts createdfor an "illégal considération" Cii) Express trusts created to facilitate fraud on a thirdparty (b) The implications of an express trust being not invalid but "unenforceable " 4. CONSTRUCTIVE TRUSTS GIVING EFFECT TO INTENTIONS (1) Common intention constructive trusts (2) Trusts (including "secret trusts") imposed on persons who receive property on the faith of an undertaking to hold for another (3) The constructive trust arising from a specifically enforceable contract (4) The constructive trust in Re Rosé which gives effect to incomplète transfers 3.40-3.50 3.51-3.58 3.52-3.56 3.53-3.54 3.55-3.56 3.57-3.58 3.59-3.68 3.61-3.64 3.65-3.66 3.67 3.68 64 68 69 69 71 72 73 73 75 76 77 PART IV: THE EFFECT OF ILLEGALITY III: THE 4.1-4.5 78 REJECTION OF THE "PUBLIC CONSCIENCE" TEST PART V: THE CASE FOR LEGISLATIVE REFORM 1. COMPLEXITY 2. INJUSTICE 3. UNCERTAINTY 4. UNLIKELIHOODOFJUDICIAL REFORM 5. CONCLUSION 5.1-5.13 5.2 5.3-5.7 5.8-5.9 5.10 5.11-5.13 81 81 81 83 84 84 PART VI: SHOULD ANY DOCTRINE OF ILLEGALITY BE MAINTAINED? 1. UPHOLDING THE DIGNITY OF THE COURTS 2. THE PLAINTIFF SHOULD NOT PROFIT FROM HIS OR HER OWN WRONGDOING 3. DETERRENCE 4. PUNISHMENT 5. CONCLUSION PART VII: OPTIONS FOR REFORM I: CONTRACTS 1. OUR PROVISIONALLY PREFERRED BASIC APPROACH TO REFORMING ILLEGALITY: DISCRETION RATHER THAN STRICT RULES 6.1-6.12 6.4-6.6 6.7-6.8 6.9-6.10 6.11 6.12 7.1-7.117 7.2-7.26 86 87 88 88 89 90 91 91
(1) The enforcement of contractual obligations 7.5-7.16 93 Ca) Contracts which involve the commission of a légal wrong 7.5-7.12 93 (b) Contracts which are otherwise contrary to public policy 7.13-7.16 96 (2) The reversai ofunjust enrichment (where a contract is 7.17-7.22 98 unenforceable for illegality) (3) The récognition of contractually transferred or created 7.23-7.26 100 property rights 2. STRUCTURING THE DISCRETION 7.27-7.43 102 (1) The seriousness of the illegality 7.29-7.32 102 (2) The knowledge and intention of the plaintiff 7.33-7.37 103 (3) Whether denying relief will act as a déterrent 7.38 105 (4) Whether denying relief will further the purpose of the rule 7.39-7.40 105 which renders the contract illégal (5) Whether denying relief is proportionate to the illegality 7.41-7.42 106 involved 3. WHAT SHOULD BE THE STARTING POINT OF THE 7.44-7.57 107 PROVISIONALLY PROPOSED DISCRETION? 4. ILLEGALITY AS A RESTITUTIONARY CAUSE OF 7.58-7.69 111 ACTION: THE DOCTRINE OF LOCUS POENITENTIAE 5. THE SCOPE OF THE PROVISIONALLY PROPOSED 7.70-7.72 115 DISCRETION 6. GIVING THE COURTS A DISCRETION TO GO BEYOND 7.73-7.87 116 TREATING ILLEGALITY AS A DEFENCE TO STANDARD RIGHTS AND REMEDIES 7. SHOULD THE COURT BE GIVEN A DISCRETION IN 7.88-7.93 122 CONTRACTUAL DISPUTES INVOLVING ILLEGALITY TO MAKE AN AWARD ON TERMS THAT THE PLAINTIFF MAKES A PAYMENT OR TRANSFERS PROPERTY TO A PERSON WHO IS NOT A PARTY TO THE ILLEGAL CONTRACT? 8. THE INTERACTION OF THE PROVISIONALLY 7.94-7.102 124 PROPOSED DISCRETION AND STATUTORY PROVISIONS WHICH DEAL WITH THE EFFECTS OF ILLEGALITY 9. MISCELLANEOUS ISSUES 7.103-7.106 128 (1) Severance 7.103 128 (2) Tainting 7.104 128 (3) Changes in the law 7.105-7.106 129 10. THE EFFECT OF OUR PROVISIONAL PROPOSALS 7.107-7.116 130 (1) How our provisional proposais might hâve operated in 7.108-7.113 130 relation to some past cases (2) How our provisional proposais might apply to hypothetical 7.114-7.116 132 examples
vii 11. GENERAL QUESTION ON DISCRETIONARY APPROACH PART VIII: OPTIONS FOR REFORM II: TRUSTS 1. ABANDONING THE RELIANCE PRINCIPLE (1) The diffîculties with the reliance principle Ca) The lack of convincing rationale and the arbitrariness ofthe principle (b) The uncertainties of the reliance principle Ce) Conclusion (2) Options for reform, if the reliance principle is abandoned 7.117 8.1-8.131 8.4-8.20 8.5-8.13 8.5-8.7 8.8-8.11 8.12-8.13 8.14-8.20 132 134 134 135 135 136 137 137 2. A DISCRETIONARY MODEL FOR ILLEGAL TRUSTS (1) What do we mean by an "illégal trust"? Ca) Trusts which are "illégal trusts" Cthat is, ourproposed "définition" of illégal trusts) Ci) Trusts which it is legally wrongful to create or to impose Cii) Trusts which are created tofacilitate afraud, or which arise out of a transaction or arrangement with thaï purpose 8.21-8.125 8.21-8.41 8.22-8.32 8.24 8.25-8.26 Ciii) Trusts which are created in order tofacilitate some other 8.27 142 légal wrong, or which arise out of a transaction or arrangement with that purpose Civ) Trusts which are created in retumfor an "illégal considération" Cv) Trusts which expressly or necessarily require trustées to commit a légal wrong or which tend or are intended to do so Cvi) Trusts which expressly or necessarily require a beneficiary 8.31 to commit a légal wrong or which tend or are intended to do so Cvii) Trusts which are otherwise contrary to public policy at common law Cb) Trusts which are not "illégal trusts" Ci) A trust which neither expressly nor necessarily requires a trustée to perform an illégal act nor tends nor is intended to do so does not become an "illégal trust" where the trustée in fact performs such an act 8.28-8.29 8.30 8.32 8.33-8.41 8.34 Cii) A trust which neither expressly nor necessarily requires a 8.35-8.37 145 beneficiary to perform an illégal act nor tends nor is intended to induce such an act does not become an "illégal trust" where the beneficiary purports to satisfy a condition by performing such an act Ciii) A trust where the trust property is used to achieve some 8.38-8.39 145 fraudulent or other illégal purpose is not an "illégal trust" where the intention to use the trust property for that purpose wasformed only after the date on which the trust was created or arose 140 140 140 141 141 142 143 143 143 144 144
vin (2) Trusts which involve the breach of a statutory prohibition where the statute expressly lays down what the conséquences of that breach should be (3) Should the provisionally proposed discrétion be a discrétion to "invalidate" an illégal trust, or a discrétion to render such trust simply "unenforceable"? (4) What factors should structure the discrétion? Ca) The seriousness of the illegality Cb) The knowledge and intention ofthe beneficiaries of the illégal trust Ce) Whether invalidity would tend to deter the illegality Cd) Whether invalidity would further the purpose of the rule which renders the trust "illégal" Ce) Whether invalidity is a proportionate response to the claimant's participation in the illegality (5) Should our provisionally proposed discrétion also apply to a "default trust" which takes effect in the event that an express illégal trust is held to be invalid under that discrétion? Ca) Should the law ever déclare invalid a "default trust" which takes effect in the event that an express illégal trust is invalid on grounds of illegality? Cb) A separate discrétion dealing with the validity of default interests in favour ofpersons who settle property on illégal trusts (6) Who should be entitled to the trust property if a resulting trust, constructive trust or "default trust" is held to be invalid under our provisionally proposed discrétion? Ca) Can a trustée take the benefit of property if a resulting trust, constructive trust or "default trust" is invalid, or is the property bona vacantia? Cb) A possible additional considération if a trustée is ever allowed to take the benefit (7) What should be the starting point of the provisionally proposed discrétion? (8) Should the court hâve a discrétion to recognise the validity of an illégal trust on ternis that the beneficiary makes a payment or transfers property to a third party? (9) How should the provisionally proposed discrétion interact with the équitable maxim that "he who cornes to equity must corne with clean hands"? (10) What should be the effect ofthe invalidity ofthe illégal trust in relation to acts carried out pursuant to that trust? Ca) The liability ofthe trustée for acts of administration occurring before any court order 8.42-8.43 8.44-8.50 8.51-8.63 8.53 8.54-8.56 8.57-8.58 8.59 8.60-8.62 8.64-8.74 8.64-8.71 8.72-8.74 8.75-8.82 8.75-8.79 8.80-8.82 8.83-8.85 8.86-8.88 8.89-8.91 8.92-8.115 8.96-8.100 147 147 149 150 150 151 151 152 153 153 155 156 156 158 158 159 160 161 162
(i) The effect of dispositions by trustées occurring before a court order and the recipient's title and liability Ce) The effect of dispositions by beneficiaries to "third parties" occurring before a court order (11) Severance 3. THE EFFECT OF OUR PROVISIONALLY PROPOSED DISCRETION 4. ILLEGAL TRANSACTIONS THAT ARE NEITHER CONTRACTS NOR TRUSTS PART IX: SUMMARY OF PROVISIONAL RECOMMENDATIONS AND CONSULTATION ISSUES 8.101-8.107 8.108-8.115 8.116-8.125 8.126-8.129 8.130-8.131 9.1-9.44 164 166 168 171 172 174 IX