Though Much is Taken, Much Abides: Illegality after Patel v Mirza

Kevin Kee

Patel v Mirza [2017] AC 467 was a pivot point for the illegality doctrine in English law. It represents an attempt to re-orient the law to enable the courts to discuss more transparently the policy factors undergirding their decisions and to reach outcomes that are more just.

At the heart of the Patel v Mirza revolution is the judgment of Lord Toulson, who identified that a central rationale for precluding a claimant from recovery based on the claimant’s illegal conduct is that allowing recovery would produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system (at [100]). In deciding whether allowing recovery would have this result, Lord Toulson advanced a “range of factors” approach, which requires the court to consider: (a) the underlying purpose of the prohibition that has been transgressed, (b) competing public policies, and (c) proportionality (at [101]).

While revolutionary, Patel v Mirza does not, however, represent an end of history. How the range of factors approach will apply will need to be hammered out on the anvil of particular cases. Further questions remain. Does this approach apply in all or only some areas of private law? And what is the effect of Patel v Mirza on past authorities – are they to be consigned to the dustbin of history?

There have been a few English Court of Appeal decisions this year that illuminate issues raised by the illegality doctrine post Patel v Mirza. Two of these cases emphasise that Patel v Mirza has not swept away the accumulated learning of decided cases across all domains in which the illegality doctrine operates (see Headings A and B). A third case suggests that appellate courts should be slow to overturn a trial judge’s decision in applying the range of factors approach; this suggestion is open to cogent criticism (see Heading C).

A. Henderson v Dorset Healthcare University NHS Foundation Trust [2018] EWCA Civ 1841 (03 August 2018)

The claimant, Ms Henderson, who suffered schizophrenia, had a psychotic episode and stabbed her mother to death. In her criminal trial, the prosecution accepted a plea of manslaughter by reason of diminished responsibility. At the time of the offence, Ms Henderson was in the care of the defendant Trust. Ms Henderson sued the Trust in negligence. The Trust admitted liability, but contested all Ms Henderson’s claims for damages on the basis of illegality.

The Court of Appeal held that Ms Henderson’s claims were precluded by two binding authorities, being the Court of Appeal decision in Clunis v Camden and Islington HA [1998] QB 978 (“Clunis“) and the House of Lords decision in Gray v Thames Trains Ltd [2009] 1 AC 1339 (“Gray“). These cases stood for a narrow and a wider form of public policy that precludes a claim in tort based on the claimant’s criminal act:

  • a narrow form that there can be no recovery for damage which flows from loss of liberty, a fine or other punishment lawfully imposed in consequence of the unlawful act; and
  • a wider form that a claimant should not be compensated for damage suffered where the immediate cause of the damage was a criminal act.

The Court of Appeal further held that the Supreme Court in Patel v Mirza had not overruled Clunis and had not decided to depart in a material respect from Gray. The specific issue considered by the Supreme Court in Patel v Mirza was whether a claim in restitution was barred when the claimant paid money under a contract tainted by illegality (at [79]-[80]). Although the Supreme Court did not confine its analysis of the law to contract cases and Lord Toulson’s range of factors approach was framed in general terms (at [81]-[85]), the Supreme Court did not expressly overrule or derogate from other decisions, with the exception of Tinsley v Mulligan, which it held to be no longer good law (at [86]).

In light of the above, the Court of Appeal said that “considerable caution” must be taken in determining whether Patel v Mirza has affected the law in other areas (at [87]):

“Nevertheless, in view of the actual contractual and unjust enrichment issue in Patel, considerable caution must be taken, in the context of the rules of binding precedent, in determining whether there are any other cases in other areas of the law which the Supreme Court in Patel held by necessary implication to be overruled or such that they should no longer be followed.”

In light of the above, the Court of Appeal held that Ms Henderson’s claims were precluded by Clunis and Gray, which had not been disturbed by Patel v Mirza, and therefore dismissed her claim without conducting an assessment by reference to the range of factors approach.

B. Stoffel & Co v Grondona [2018] EWCA Civ 2031 (13 September 2018)

The claimant, Ms Grondona, was a participant in a mortgage fraud by which she allowed her name to be used to obtain money fraudulently from a lender for the benefit of her co-conspirator. Unfortunately for Ms Grondona, her solicitor, Stoffel, negligently failed to register the land transfer and the lender’s charge with the Land Registry. As a result, Ms Grondona was left with liability to repay the loan money, but no title over the mortgaged property, which could not be used to reduce the amount owing to the lender.

Ms Grondona claimed in negligence against her solicitor, Stoffel, who contended that Ms Grondona’s claim was precluded due to her participation in the illegal mortgage fraud.

The parties proceeded on the basis that the Court of Appeal should apply the range of factors approach in Patel v Mirza (at [24]). Despite this, Gloster LJ did not simply approach the question as if working from a blank slate. The starting point of her Ladyship’s analysis was the body of decided cases where the courts have considered whether the court should give effect to a transferee’s interest where property has been transferred under an illegal agreement. Following a review of the authorities, her Ladyship concluded (at [33]):

“In my judgment, it is clear from the analysis above, that, in general (and no doubt there are exceptions), once property, or an interest in the relevant property, has passed to the illegal transferee, he has all of the remedies available to him as the valid holder of that property or interest. This applies both in relation to the illegal transferor and to third parties; it is because the transferee is entitled to all the benefits of a holder of the relevant property or interest, as against all the world, save those who could prove a better title.”

Her Ladyship then went on to consider whether there was any reason why the claimant should not be entitled to relief by reference to the range of factors approach. Her Ladyship concluded these factors did not preclude the claimant’s entitlement. A key theme underlying her Ladyship’s reasoning was the public interest in solicitors performing their duties with care, and being held accountable when they fail to do so, at least where the client is not seeking to profit from their wrongdoing (at [37]-[39]).

C. Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84 (01 February 2018)

A comment by Vos C in this Court of Appeal decision suggests that an appellate court should be slow to overturn a trial judge’s decision in applying the range of factors approach, namely where the trial judge has proceeded on an erroneous legal basis (at [64]-[65]):

“It seems to me quite clear that an appellate court should not interfere merely because it would have taken a different view had it been undertaking the evaluation. The test involves balancing multiple policy considerations and applying a proportionality approach. Accordingly, an appellate court should only interfere if the first instance judge has proceeded on an erroneous legal basis, taken into account matters that were legally irrelevant, or failed to take into account matters that were legally relevant. That would be the approach in any other situation where proportionality was in issue on an appeal and should, therefore, be the case here.”

This comment was the subject of criticism in a recent note of Nicholas Strauss QC in the Law Quarterly Review ((2018) 134 LQR 538). Aside from criticisms of the Chancellor’s reasoning that, with respect, appear cogent, Mr Strauss further made the powerful point that:

“An issue as to whether a claim should be barred for illegality seems too important to be left to a potentially arbitrary and unpredictable discretion of the first instance judge which may not be open to reconsideration on appeal. Nor was any such position envisaged in the majority judgment in Patel…

To extend the ambit of judicial discretion in this way would, it is submitted, be undesirable. The Chancellor’s statement is obiter and deserves reconsideration.”

Leave has been granted to appeal this decision to the Supreme Court, so there may be yet another decision on the illegality doctrine before too long.

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