Supreme Court judgment in ‘Patel v Mirza’: illegality and restitution

The Supreme Court has handed down judgment in Patel v Mirza [2016] UKSC 42. The lead judgment was by Lord Toulson JSC. Full judgment text available here.

The case involved the use of a spread-betting account to speculate on price movements of Royal Bank of Scotland Plc (“RBS”) shares. The account holder (the appellant) intended to use inside information for this purpose, via contacts at RBS. The information in this case was a government statement about RBS that may have led to profits on its share price.

The buyer (the respondent) made an outlay of funds totalling £620,000. When the account holder no longer expected the said inside information to materialize, he did not return the £620,000 to the buyer, since it had been paid to a third party. The buyer failed to recover these sums from that third party and so sued the account holder for the £620,000. The account holder’s main contention was that the claim should fail because of the illegality of the arrangement.

The Supreme Court concluded that a claimant who satisfies the requirements of a claim for unjust enrichment should not be debarred from enforcing that claim on the ground that the failed consideration was unlawful. A claimant can recover sums paid under an illegal arrangement, so long as restitution is possible, as it simply returns the parties to the position they would have been in had no such illegal arrangement been made, whilst preventing the defendant being unjustly enriched.

The Supreme Court declined to follow Tinsley v Milligan [1994] 1 AC 340, which applied the rigid ‘reliance’ test, viz that a party to an illegal contract cannot enforce a claim against his counter-party if he has to rely on his own illegal conduct as an element of his claim. The rigid approach often led to incoherent and arbitrary results. Instead, the Court should make a more flexible assessment of whether the public interest would be harmed by enforcement of the illegal contract. Relevant factors included (a) the underlying purpose of the prohibition which was illegally contravened, (b) public policy and (c) whether denial of the claim would be proportionate, bearing in mind that punishment was not a concern of the civil courts.

On these facts, the mischief at which the offence of insider trading was aimed at was market abuse.  Since no such activity occurred, there was no public policy basis to bar the return of money which had previously been intended to be used for that purpose.

This ‘re-writing’ of the law on illegality, based on balancing a range of factors and ultimately making a value judgment, was rejected by a minority of the Supreme Court (Lord Sumption, Lord Clarke and Lord Mance).

See detailed summary of reasoning here.