Court: Supreme Court
Judgment Date: 20 July 2016
Where Reported: [2016] UKSC 42; [2017] A.C. 467; [2016] 3 W.L.R. 399; [2017] 1 All E.R. 191
Legal Issue in Patel v Mirza
The core legal issue in Patel v Mirza revolved around the application of the illegality doctrine in contract law, specifically regarding the enforcement of claims arising from illegal acts.
The case of Patel v Mirza concerned the scope of the illegality principle as it relates to insider trading under the Criminal Justice Act 1993.
This doctrine, also known as “ex turpi causa non oritur actio” (from a dishonourable cause an action does not arise), traditionally barred claimants from pursuing claims that arose from their own illegal actions.
Material Facts in Patel v Mirza
The case arose when Mr. Patel gave Mr. Mirza £620,000 to bet on the shares of the Royal Bank of Scotland using inside information Mr. Mirza had from his contacts at the bank.
This agreement constituted a conspiracy to commit the offence of insider dealing, which is an offence under section 52 of the Criminal Justice Act 1993. The inside information was mistaken, and the illegal act was not committed.
When Mr. Mirza did not return the funds as promised, Mr. Patel sought to recover them, claiming breach of contract and unjust enrichment​​​​​​.
Judgment in Patel v Mirza
The UK Supreme Court unanimously dismissed Mr. Mirza’s appeal, allowing Mr. Patel to recover the money he had paid.
This decision marked a significant departure from the formal test established in Tinsley v Milligan, which previously guided the law in such matters.
The Court held that a person should not be debarred from recovering their property just because the consideration which had failed was unlawful.
The ruling emphasised that allowing Mr. Patel’s claim would return the parties to their original positions and prevent Mr. Mirza from being unjustly enriched.
The Reason for the Decision in Patel v Mirza
The Supreme Court introduced a new approach to the illegality doctrine, the “trio of considerations,” which requires courts to assess:
- Whether the denial of the claim would enhance the purpose of the prohibition transgressed.
- The impact of the denial of the claim on any other relevant public policy.
- Whether denying the claim would be a proportionate response to the illegality, considering that punishment is a matter for the criminal courts.
This new approach aims for a more principled and transparent assessment, moving away from a formal approach that could yield arbitrary or disproportionate results​​​​ – see Blackpool and Fylde Aero Club v Blackpool Borough Council (1990).
Conclusion and Analysis
Patel v Mirza represents a key development in English contract law’s equitable treatment of the illegality doctrine.
The case illustrates the evolution of legal principles to address concerns of justice and fairness in contract enforcement, especially when illegality is involved.
By abandoning the formal reliance test of Tinsley v Milligan and adopting the trio of considerations, the Supreme Court in Patel v Mirza has provided a more nuanced and equitable framework for dealing with claims arising from illegal contracts.
This judgment is significant as it shifts the focus from a rigid application of the illegality doctrine to a more balanced consideration of the public interest, the underlying purpose of the prohibition, and the proportionality of denying a claim.
It highlights the legal system’s capacity to adapt to changing perceptions of justice and fairness, ensuring that the law does not inadvertently reward wrongdoing or result in unjust enrichment.
Patel v Mirza thus marks a crucial step in the modernisation of English equity law, aligning it more closely with contemporary values and societal expectations.
