Patel v Mirza [2017] AC 467 (UKSC)

Facts

• Mr. Patel paid £620,000 to Mr. Mirza under an agreement to bet on Royal Bank of Scotland shares based on insider information.
• The anticipated insider trading did not occur, and the agreement went unperformed.
• Mr. Patel sought recovery of the money he had paid to Mr. Mirza.
• Historically, the ex turpi causa principle barred recovery of money where an illegal contract was involved.
• The Supreme Court considered whether Mr. Patel could recover his money despite the illegal purpose of the agreement.

Issues

1. Whether a person can recover money or property transferred under an illegal contract, particularly where the contract remains unperformed.
2. Whether the ex turpi causa (illegality) doctrine should operate as an automatic bar to recovery in such cases.
3. What approach the courts should adopt in determining the availability of relief in the context of illegality.

Decision

• The Supreme Court held that Mr. Patel was entitled to recover the £620,000 paid under the unperformed illegal agreement.
• The Court rejected the rigid application of the ex turpi causa doctrine as an automatic bar to recovery.
• A new three-stage, policy-based test was articulated for resolving claims involving illegality.
• Recovery was permitted on the basis that denying relief would not further the purpose of the law prohibiting insider dealing and would be disproportionate in the circumstances.

Legal Principles

• The Court adopted a flexible, policy-based approach to illegality, moving away from the strict ex turpi causa rule.
• The three-stage test requires courts to consider:
  • The purpose of the law that makes the contract illegal.
  • Whether denying the claim would further the purpose of that law.
  • Whether denial of the claim would be proportionate regarding both parties' conduct and relevant policy considerations.
• Recovery may be available in unjust enrichment if consistent with the objectives of the illegality doctrine.
• The judgment acknowledges the importance of proportionality, deterrence, and maintaining the integrity of the legal system.

Conclusion

The Supreme Court in Patel v Mirza established a modern, policy-based framework for the illegality doctrine, allowing recovery in some cases involving illegal contracts if denying relief would be disproportionate and inconsistent with public policy. This decision significantly shapes the approach to illegality in English contract, trusts, and restitution law.