Emma_Cross_phFactual Background

Mr Patel (the respondent) became aware of a deal offered by Mr Mirza (the appellant) involving the use of Mr Mirza’s spread betting account to bet on the movement of Royal Bank of Scotland Plc shares.

According to Mr Patel, Mr Mirza confirmed that he had contacts at RBS who could supply him with information of meetings with government officials and, in particular, a public statement expected from the Chancellor which would have an effect on the RBS share price. Between 9 September and 26 December 2009 Mr Patel transferred a total of £620,000 to Mr Mirza’s bank account – funds to be bet on the movement of RBS shares. In the end, nothing ever came of Mr Mirza’s proposal and, in late January or February 2010, Mr Mirza told Mr Patel that there was no longer expected to be a government statement about RBS and that he would return the money to Mr Patel at the beginning of March 2010. However, in March 2010, Mr Patel was told by Mr Mirza that the £620,000 had, by mistake, been paid to a related third party. Mr Patel subsequently failed in his attempts to recover the money from this third party and so sued Mr Mirza for the money.

First Instance Decision

On 5 July 2013, David Donaldson QC, sitting as a Deputy High Court Judge, dismissed Mr Patel’s claim. Mr Patel had acknowledged that he had paid the money to Mr Mirza for the purposes of an illegal agreement that sought to take advantage of insider information. Insider dealing is an offence under Part V of the Criminal Justice Act 1993 and Mr Patel’s claimed agreement with Mr Mirza fell within its prohibitions. The Deputy Judge noted the principles that:

  1. the court will refuse relief claimed in reliance on an agreement with an illegal object; but
  2. the court will grant relief if the claimant voluntarily withdraws from the agreement before it is performed.

In this case, the reason that the illegal purpose was not achieved was because it could not be, not because of any voluntary action of Mr Patel. As Mr Patel did not withdraw from the illegal agreement voluntarily he was therefore barred by illegality from recovering the money he paid and his claim was dismissed.

Court of Appeal

Mr Patel appealed to the Court of Appeal on the grounds that: (a) the judge was wrong to find that Mr Patel needed to rely on any illegality in making his claim; and (b) the fact he had not withdrawn from the agreement before its performance was frustrated was no bar to his claim.

On the first ground Mr Patel maintained that he did not need to plead, or otherwise rely on, the illegal agreement with Mr Mirza to recover the money, since the money was held on a resulting trust. It was unnecessary to plead any more than: the fact that Mr Patel had paid the money to Mr Mriza, Mr Mirza had received it, Mr Patel had demanded its repayment and Mr Mirza had not returned it. The Court of Appeal had doubts over this argument, as the money was not paid to be held on a resulting trust; it was paid to be mixed with other moneys on terms under which Mr Mirza was entitled and expected to dispose of it in betting on the movement of RBS shares.

In any event, it was also clear that Mr Patel was positively relying on the illegal agreement in order to make good his claim for the return of the money, namely that the money had been paid as part of an insider information scheme and that, when it became apparent that the agreement could not be carried out, he was entitled to the repayment of the money on the basis that it was held for a consideration that had wholly failed, alternatively that it was then held upon a Quistclose trust for him. Mr Patel’s case deliberately advanced, and relied upon, the illegal agreement and therefore ran into the public policy principle that the court will not lend aid to a claimant whose case is reliant on illegality.

Mr Patel’s second submission was that, as the illegal purpose was not carried out, the Deputy Judge was wrong to bar the claim on the public policy ground. The question here was whether it was open to Mr Patel to recover money paid under an illegal agreement in circumstances in which the claimant neither repudiated nor withdrew from the agreement before its performance, but in which the performance became frustrated.

The authorities show clearly that, if before he had learnt that his venture with Mr Mirza could not be carried out, Mr Patel had repudiated and withdrawn from the agreement, then he would have been entitled to recover the £620,000 (notwithstanding the illegality of the underlying agreement).

The Court of Appeal found no reason to distinguish between refusing to allow a claimant to recover funds by relying on an illegal agreement on the basis that it was neither performed nor could be performed (as was the case here), from the classic principle that voluntary withdrawal from an illegal agreement is sufficient to entitle the claimant to recover funds. A sense of repentance was not required; so long as the illegal agreement has not been carried into effect to any extent, the claimant should be able to recover. Accordingly, Mr Patel’s appeal was allowed and the Court of Appeal ordered the repayment to him of the £620,000 he paid to Mr Mirza.

Dissenting judgment

Lady Justice Gloster offered a partially dissenting judgment in respect of the first ground of appeal, considering that the reliance test should not automatically be applied. In order to decide whether the ex turpi causa principle applied, the degree of connection between the wrongful conduct and the claim made is an important consideration, as is the question of how disproportionate the claimant’s loss is to the unlawfulness of his conduct. In this case, in order to maintain his claim either in unjust enrichment or on agency grounds, Mr Patel did not need to rely on the illegal and improper purpose of the underlying “insider trading conspiracy” to obtain recovery of the monies which had been remitted to Mr Mirza. All he needed to establish, according to Gloster LJ, was that the funds had been remitted for the purpose of speculating in the RBS share price, and that such speculation had never accorded, with the result that Mr Mirza had an obligation as agent to repay Mr Patel. On that basis, it would have been for Mr Mirza to raise and rely upon illegality.

Supreme Court

On 16 February 2016, a panel of nine Supreme Justices heard Mr Mirza’s appeal. A full case comment on the decision will be provided on this blog once judgment has been handed down.