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Advising on the Enforceability of Criminally Tainted Contracts

Illegal FeeJonathan Fisher QC discusses the implications of the recent Supreme Court decision in Patel v Mirza [2014] EWCA Civil 1047 involving the enforceability of a contract which had been tainted by criminal conduct.

SPEED READ


Jonathan Fisher QC discusses the implications of the recent Supreme Court decision in Patel v Mirza [2014] EWCA Civil 1047 involving the enforceability of a contract which had been tainted by criminal conduct. The Supreme Court held that a discretionary multi-factorial approach should be taken. The decision is a timely reminder to practitioners specialising in financial crime cases that they should consider the implications of criminal conduct on commercial transactions. Failure to advise could amount to professional negligence in certain circumstances.

COMMENTARY


This article explores two aspects of the Patel v Mirza decision. First, the article considers how the illegality defence in civil law should be assessed. Secondly, the article examines the interrelated issue of how a failure to take professional care when advising a client about the consequences of criminal conduct in a commercial context might give rise to an allegation of negligence.

As regards the impact of criminal illegality on commercial transactions, the interaction between the normative aspirations of the civil law and the criminal law comes into sharp focus. In the Supreme Court, Lord Toulson explained the general approach of the courts towards this issue in the following terms:

“…  Part of the harmony of the law is its division of responsibility between the criminal and civil courts and tribunals. Punishment for wrongdoing is the responsibility of the criminal courts and, in some instances, statutory regulators …Punishment is not generally the function of the civil courts, which are concerned with determining private rights and obligations. The broad principle is not in doubt that the public interest requires that the civil courts should not undermine the effectiveness of the criminal law; but nor should they impose what would amount in substance to an additional penalty disproportionate to the nature and seriousness of any wrongdoing” (at paragraph 108).

Civil law is not intended to express retribution in the same sense as that of criminal law. Civil law needs to be informed by the policy objectives of criminal law and cannot be used as an instrument to condone unlawfulness, triggering the doctrine of illegality. But it would undermine the coherence and integrity of the legal system as a whole, if civil law was to be used in a manner pursuing outcomes which are sanctioned or prohibited by criminal law.

The doctrine of illegality has allowed a court to refuse to enforce a contractual obligation when the transaction is illegal, either because of public policy under the common law, or because of a legislative provision which prohibited the conduct in question. The doctrine is derived from the Latin phrase "ex turpi causa non oritur actio" which means that "no cause of action arises from a wrong".

Historically, the law of illegality has been characterised by a variety of doctrinal nomenclature. However, recent decisions show that there is a change in the illegality jurisprudence, particularly the move away from a purely rules-based approach towards a discretionary multi-factorial determination of the question of enforceability. For example, in Parking Eye v Somerfield Stores Ltd [2013] 2 WLR 939 the Court of Appeal (Civil Division) applied a multifaceted approach to the issue of contractual enforceability, focussing on the object and intent of the claimant, the centrality of the illegality and the nature of the illegality (see paragraphs 65-74 of the Court of Appeal’s judgment). This line of thought accorded with suggestions made by the Law Commission Report in 2009 in its review of this area of law (Unfair Terms in Contracts, Cmnd 323).

The Supreme Court’s decision in Patel v Mirza [2014] EWCA Civil 1047 endorsed this approach at the highest level, holding that a claimant who satisfies the ordinary requirements of a claim should not be barred from enforcing his claim simply because it was a case of insider dealing.  The majority view was that the court should identify the implications for the justice system if a decision not to enforce a commercial obligation is to be made. In this case, the Supreme Court recognised the point that if the claimant’s action was barred for illegality, the defendant would have been enriched as a result of his criminal conduct. Even though the criminality struck at the core of the share dealing contract, the contract to purchase shares was not intrinsically unlawful. There will, however, be other cases where criminal conduct will operate to vitiate the contract, such as where the contractual arrangement is made in order to achieve a criminal purpose.

Against this background, financial crime practitioners are well advised to consider the implications of criminal conduct on the enforceability of commercial transactions. Plainly, clients need to know whether criminal conduct in the context of financial crime has any consequences in civil law, and if so what. The issue becomes particularly pertinent in a bribery case, or a case involving breach of economic sanctions, where there will be multiple considerations about the impact of the criminality in question.

The failure of a professional adviser to advise a client about the enforceability or otherwise of a commercial transaction could potentially expose the practitioner to civil liability in negligence. Although solicitors owe their clients a duty of care in the work they are contracted to perform, the courts have held on a number of occasions that this duty can extend to advising on satellite aspects which may not be at the forefront of the client’s mind. As Lord Justice Lawton explained in Boyce v Rendells [1983] 268 EG 268 at page 272:

“if, in the course of taking instructions, a professional man like … a solicitor learns of facts which reveal to him as a professional man the existence of obvious risks, then he should do more than merely advise within the strict limits of his retainer. He should call attention to and advise upon the risks”.

This principle would surely apply to a practitioner specialising in a financial crime case where the enforceability or otherwise of a commercial transaction might be in issue.
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The views expressed in this article represent those of the author and not Bright Line Law.

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