Skip to content

Place your bets: contract, restitution and illegality

Headlines in this article

​The Supreme Court ruled that the “illegality defence” would not prevent restitution of money which had been paid as part of an attempted crime which was never carried out. The majority in Patel v Mirza [2016] UKSC 42, identified factors to be considered when deciding whether the illegality defence should apply. These factors are an attempt to clarify what has always been a complicated, and often contradictory, area of law. 

The “illegality defence” may prevent a claimant from bringing a claim if he has been involved in illegal activity associated with the claim: “No court will lend its aid to a man who founds his case upon an immoral or an illegal act” (Lord Mansfield Holman v Johnson (1775) 1 Cowp 341). However, the exact degree and nature of illegality which is required under English law to defeat such a claim has never been certain.

Money paid for illegal bet

The respondent (Patel) had given the appellant (Mirza) GBP 620,000 to place a bet on RBS shares on the understanding that Mirza was going to obtain insider information from RBS contacts. This agreement amounted to a crime of conspiracy to commit insider dealing contrary to s52 Criminal Justice Act 1993.

The insider information did not materialise and so the bet did not take place. However, Mirza refused to repay Patel. Patel brought a claim to recover the money on various bases including contract and unjust enrichment.

The Court of Appeal held that Patel’s claim for return of the money should succeed, and Mirza appealed against this.

Illegality defence fails

The Supreme Court judges all agreed that the appeal should be dismissed and that Patel was entitled to restitution of the full GBP 620,000. However, they arrived at the decision in different ways.

The majority agreed with Lord Toulson, who gave the leading judgment, that the essence of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if doing so would harm the integrity of the legal system. Lord Toulson set out guidelines for assessing whether allowing a claim would harm the public interest. The majority held that allowing Patel’s claim would not undermine the integrity of the justice system. However, although the minority agreed with the outcome, they criticised this approach.

Majority reasoning

The majority held that there were two main policy reasons for allowing illegality to be a defence to civil claims. First, no one should be allowed to profit from their own wrongdoing. Secondly, “the law should be coherent and not self defeating, condoning illegality by giving with the left hand what it takes with the right hand”.

Lord Toulson compared two different approaches to the illegality defence: a “rule based approach” and a “range of factors approach”. The majority favoured the latter: “the public interest is best served by a principled and transparent assessment of the considerations identified, rather than by the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate”.

There were three key considerations when assessing whether allowing a claim would be contrary to the public interest and so harm the integrity of the judicial system:

  1. The underlying purpose of the law which has been broken, and whether that purpose would be enhanced by denying the claim.
  2. Whether there were any other relevant public policies which might be made ineffective or less effective by denying the claim.
  3. Whether denying the claim would be a proportionate response to the illegality.

When considering proportionality, there were various different factors to be considered such as the seriousness of the conduct, its centrality to any agreement, whether it was intentional and whether there was a marked disparity in the parties’ culpability.

On the facts of the case, Lord Toulson agreed with Gloster LJ in the Court of Appeal 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”. “[S]uch a result would not be a just and proportionate response to the illegality.” Lord Toulson noted that, in re claiming the money, Patel was trying to unravel the contract rather than profit from it.

Lord Toulson criticised the reliance rule set out in Tinsley v Milligan [1994] 1 AC 340 and held that it should no longer be followed. In essence, this rule was that a claim cannot be brought if a claimant has to rely on his own illegality when asserting his claim. Lord Toulson felt the reliance rule turned on a “procedural technicality which had nothing to do with the underlying policies” and was a “narrow rule based approach”. Application of the illegality defence “is not a matter which can be determined mechanistically” and doing so can lead to arbitrary results.

Minority reasoning

Lords Mance, Clarke and Sumption criticised the approach suggested by the majority on the basis that “it is far too vague and potentially far too wide to serve as the basis on which a person may be denied his legal rights. It converts a legal principle into an exercise of judicial discretion”.

Lord Sumption disagreed with the majority’s criticisms of the reliance test. He felt that it “accords with principle” and that “every alternative test which has been proposed would widen the application of the defence as well as render its application more uncertain”. In particular, the reliance test:

  • gives effect to the principle that a person may not derive a legal right from his own illegal act;
  • establishes a direct causal link between the illegality and the claim; and  
  • ensures that the illegality principle applies no more widely than is necessary to give effect to its purpose of preventing legal rights from being derived from illegal acts.  

Lord Clarke felt that: “The correct response is not for us to leave the problem to a case by case evaluation by the lower courts by reference to a potentially unlimited range of factors, but to address the problem by supplying a framework of principle which accommodates legitimate concerns about the present law.”


The earlier case law on the illegality defence was complex, incoherent and lacking in clear principles. In the recent case of Bilta (UK) Ltd v Nazir (No 2) [2016] AC 1, Lord Neuberger had called for the issue to be brought before a Supreme Court bench.

This has now happened, but, as the minority said, it is questionable whether greater clarity and coherence will be the result. 

On the facts, the Supreme Court had little difficulty in deciding that Mr Patel should succeed. He was not seeking to enforce an illegal contract. He was merely seeking restitution of the money he had provided to Mr Mirza. Although he had been party to an illegal agreement, the court did not feel this was any reason why the other party to the agreement should be entitled to keep Mr Patel’s money. It was no part of the civil justice system to punish Mr Patel and allow Mr Mirza a windfall. Granting restitution, and putting the parties back into their original position, would not prevent the criminal courts applying any appropriate sanction.

However, even on these relatively straightforward facts, the court arguably contradicted, or at least ignored, other legal principles. Thus, restitution is an equitable remedy, but it is a rule of equity that a party seeking a remedy must come to the court with “clean hands”. It is hard to see how Mr Patel could claim to have done this. Further, as the minority pointed out, the effect is to replace the stark simplicity and certainty of the “reliance” rule with a more flexible set of rules with – as yet – uncertain application.

Having said that, the illegality defence has been invoked in circumstances ranging from highway men disputing how to allocate the spoils of robbery, to social security fraud, attempts to put assets beyond the reach of creditors and, as here, conspiracy to commit insider dealing. Given this, it may be asking too much of a single rule that it should do justice, and produce proportionate results, in all possible cases. As things stand, until a body of relevant case law has been built up, the scope and effect of an illegality defence may remain highly uncertain.

Further information 

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey, or tel +44 20 3088 3710.