Contracts: a Change in the Illegality Defence

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Illegality on the part of one contractual party may not prevent that party successfully asserting their legal rights against the other. At top Bahamas law firm ParrisWhittaker, the experienced commercial lawyers advise businesses of all sizes on their commercial contracts and their rights and obligations.

Illegality on the part of one contractual party may not prevent that party successfully asserting their legal rights against the other. At top Bahamas law firm ParrisWhittaker, the experienced commercial lawyers advise businesses of all sizes on their commercial contracts and their rights and obligations.

An important ruling1 from the UK’s Supreme Court has overturned a rule of more than 20 years’ standing, in relation to the illegality defence.  This is an important ruling with persuasive effect on the courts in The Bahamas.

Under the so-called ‘reliance test’, where a claimant is obliged to rely on his own illegal act in support of his contract or tort claim, a defence of illegality could generally be successful so as to stop the claimant asserting his rights.  However, the Supreme Court has rejected this test and has, instead, adopted a more flexible, policy-based approach.

What was the case about?

The Appellant (A) gave the Respondent (R) £620,000 to place bets on a bank’s share prices with the benefit of insider information. A expected his contacts to tell him about a government announcement involving the bank, but this did not happen and the intended betting did not take place.  However, R failed to return the money to A – who therefore brought proceedings to recover the money.

R argued that the claim should fail because of the illegality of the arrangement that they had agreed.  At issue for the courts was when does involvement in illegality bar such a claim.  The Court of Appeal found in favour of A.  R appealed to the Supreme Court.

What did the court decide?

The Supreme Court also found in favour of A, and R was required to return the money to A in furtherance of an illegal contract that was ultimately not performed.

The Court ruled that a claimant such as R, who satisfied 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 was paid for an unlawful purpose.  The court acknowledged that there may be rare instances where the enforcement of such a claim might be regarded as undermining the integrity of the justice system – but this was not the case here.

Restitution, as was ordered here, simply returns the parties to the positon they would have been, had no such illegal arrangement been made.

Under the earlier ‘reliance’ test, the claimant is barred if he relies on illegality in order to bring his claim.  However, the essence of the Supreme Court’s ruling is that this test should no longer be followed – unless doing so undermines the integrity of the justice system,

What does this mean?

Illegality on the part of one contractual party will not necessarily bar it from seeking to enforce their legal rights.  However, expert legal advice must be taken.  If you are party to a contract that is in dispute and there is a evidence of illegality by one of the parties, it is important to ask expert commercial lawyers to look at the circumstances of the contract before taking steps to enforce your rights (or defend the claim).

How can we help?

For expert, strategic legal advice on all your commercial contracts and disputes, call the experienced commercial lawyers at ParrisWhittaker.  We can help you with clear, effective legal advice and representation to fully protect your interests.

^{1 Patel v Mirza [2016] UKSC 42}