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Tainting illegality

Published online by Cambridge University Press:  02 January 2018

Alexander F H Loke
Alexander F H Loke*
Affiliation:
National University of Singapore
*
Alexander F H Loke, National University of Singapore, Faculty of Law, 469G Bukit Timah Road, Eu Tong Sen Building, Singapore 259776. Email: [email protected]
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Abstract

The assertion of contractual rights may be defeated by the illegality defence, not because their creation is offensive to public policy but by reason of an illegality that ‘taints’ these rights. To date, no analytical framework has been developed for understanding how these tainting rules are connected to one another. The Tainting Illegality Framework (TIF) presented in this paper seeks to fill this gap in current legal scholarship by exploring, first, the linkages between the rules by which contract rights are tainted and, secondly, the theoretical underpinnings that explain the existing tensions and that will continue to shape the law in this area. The suggested analytical approach enriches and increases the sophistication of the current approaches by considering how their application is shaped by considerations of proximity and the nature of the contaminating illegality. The framework recognises the value of the existing rules, and seeks to enrich the analytical approach by suggesting how their application can more transparently reflect the policy rationale for applying the illegality defence.

Type
Research Article
Information
Legal Studies , Volume 34 , Issue 4 , December 2014 , pp. 560 - 581
Copyright
Copyright © Society of Legal Scholars 2014

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Footnotes

*

Many thanks to Mindy Chen-Wishart, Sandra Booysen and the two anonymous referees for their valuable comments on earlier drafts of this paper. Thanks are also due to Benjamin Ng for his able research assistance.

References

Notes

1. Alexander v Rayson [1936] 1 KB 169; Miller v Karlinski (1945) 62 TLR 85; Napier v National Business Agency Ltd, [1951] 2 All ER 264.

2. Pearce v Brooks (1866) LR 1 Exch 213; Ashmore Benson Pease & Co Ltd v A V Dawson [1973] 1 WLR 828; Anglo Petroleum Ltd v TFB (Mortgages) Ltd [2007] EWCA Civ 456, (2007) BCC 407.

3. Beresford v Royal Insurance Company Ltd [1938] AC 586.

4. [2004] EWHC 231 (QB), [2004] 2 Lloyd's Rep 92.

5. [2012] EWCA Civ 1338.

6. Sir Robin Jacob did not regard the illegality defence as capable of applying to ‘any intended illegality of performance, however partial or peripheral’: ibid, at [31]. Toulson LJ regarded the ‘centrality of the illegality’ as an important factor in deciding whether the illegality defence is to be invoked: ibid, at [69].

7. Hodgson v Temple (1813) 5 Taunt 181 (‘sharer in the illegal transaction’); Anglo Petroleum Ltd v TFB (Mortgages) Ltd [2007] EWCA Civ 456, (2007) BCC 407 at [79] (‘shared the unlawful purpose’).

8. Newland v Simon & Willer (Hairdressers) Ltd [1981] ICR 521; Wheeler v Quality Deep Ltd [2004] EWCA Civ 1085, [2005] ICR 265.

9. As the Law Commission pointed out, ‘… it is necessary but difficult to establish the scope of the rule. Probably it applies only to serious crimes that were committed intentionally.’ Law Commission The Illegality Defence Consultation Paper No. 189 (‘CP 189’) (2009) at [3.45].

10. In this paper, ‘proximity’ and ‘remoteness’ are used interchangeably to denote the distance or the closeness of the relationship between the contaminating illegality and the contractual right.

11. See s 3(a) (which examines, inter alia, the rule against indemnities for criminal penalties) and s 3(b) (which investigates tainting by participation).

12. CP 189, above 9. The Consultation Paper (amongst other matters) reviewed its earlier recommendation that legislation should be introduced to give courts a statutory discretion to decide whether the illegality defence should be applied to private law rights: see Law Commission Illegal Transactions: the Effect of Illegality on Contracts and Trusts Consultation Paper No. 154 (1999). In CP 189, the Law Commission took the view that a broad statutory scheme would introduce new uncertainties into the law, and that except for certain trusts, the illegality defence as applied to other private law rights can be satisfactorily developed through judicial decisions. A statutory discretion to decide on the effect of illegality was thus recommended only for a limited class of trusts. The final report tracks those of the consultation paper: Law Commission The Illegality Defence, No. 320 (2010).

13. CP 189, at [3.15].

14. Ibid. Echoed in Les Laboritoires Servier v Apotex Inc [2012] EWCA Civ 593 at [66]; and Parkingeye v Somerfield Stores, above 5, at [39].

15. Ibid, at [39].

16. Ibid, at [39].

17. CP 189, at [3.144].

18. [1957] 1 QB 267.

19. Ibid, at 284.

20. Colen v Cebrian [2003] EWCA Civ 1676, cited CP 189 at [3.35].

21. Moore Stephens v Stone Rolls Ltd [2009] 1 AC 1391 at [129], per Lord Walker; K/S Lincoln v CB Richard Ellis Hotels Ltd (2009) 127 Con LR 188 at [16], [24] and [28], per Coulson J; Colen v Cebrian (UK) Ltd [2003] EWCA Civ 1676 in particular, [1] and [53]; Tinsley v Milligan [1994] 1 AC 340 at 363, per Lord Goff (dissenting) citing Lord Mansfield CJ in Holman v Johnson (1775) 1 Cowp. 341, 98 ER 1120; Shirlstar Container Transport Ltd [1990] 1 WLR 1292 at 1298, per Staughton LJ; Regazzoni v K C Sethia (1944) Ltd [1957] 3 All ER 286 at 293, [1958] AC 301 at 323, per Lord Reid; Brown Jenkinson & Co Ltd v Percy Dalton (London) Ltd [1957] 2 QB 621 at 641–642, per Lord Evershed.

22. [1990] 1 QB 1 at 15.

23. Above 22, at 20.

24. Under the Bowmakers principle, a plaintiff is entitled to assert his property rights over chattels that came into the defendant's possession by reason of an illegal contract, ‘provided that the plaintiff does not seek, and is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support his claim’: Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 at 71, per Du Parcq LJ.

25. Beresford v Royal Insurance Company, above 3. For a discussion of the rule represented by Beresford, see text to 69.

26. Above 22, at 35.

27. [1994] 1 AC 340.

28. Chitty J Chitty on Contracts (London: Sweet & Maxwell, 31st edn, 2012) at [16–168].

29. Buckley Ra, Illegality and Public Policy (London: Sweet & Maxwell, 2nd edn, 2009) at [4.14].

30. Ibid.

31. (1787) 1 Cox Eq 318.

32. Above 21, at 362. This is consistent with the unlawful purpose rule at common law, in which there is no requirement that its application depends on the claimant pleading or relying on the unlawful purpose in its claim: see Tinsley v Milligan, ibid, at 366C, per Lord Jauncey.

33. N Enonchong ‘Title claims and illegal transactions’ (1995) 111 LQR 135 (arguing that Tinsley v Milligan discloses a ‘reliance for title’ theory, namely that a party is entitled to assert his property claim if he can establish it by relying on the contract or its illegality: at 136).

34. EnonchongN ‘Effects of illegality: a comparative study in French and English Law’ (1995) 44 ICLQ 196 at 206.

35. Alexander v Rayson, above 1, at 183–184, per Scott LJ; Taylor v Bhail (1995) 50 Con LR 70 at 77, per Millett LJ; Mahonia Limited v JP Morgan Chase Bank [2003] 2 Lloyd's Rep 911, [2003] EWHC 1927 (Comm) at [11], per Colman J; Nayyar v Sapte, above 53, at [12], per Hamblen J.

36. Regazzoni v Sethia [1958] AC 301 at 323–324, per Lord Reid.

37. MP Furmston ‘The analysis of illegal contracts’ (1966) 16 U Toronto L J 267 at 287.

38. [2004] EWHC 231 (QB), [2004] 2 Lloyd's Rep 92.

39. Chitty, above 28, ch 16; FurmstonMp Cheshire, Fifoot & Furmston's Law of Contract (Oxford: Oxford University Press, 16th edn, 2012) chs 10, 11 and 12; Buckley, above 29, esp [1.08]; CarterJw, PedenE and TolhurstGj Contract Law in Australia (Sydney: LexisNexis Butterworths, 5th edn, 2007) ch 25; WaddamsSm The Law of Contracts (Toronto: Canada Law Book, 6th edn, 2010) ch 15.

40. See s 3(c) and (d).

41. CP 189 at [3.33] and [3.34].

42. Above 18, at 284.

43. B and B Viennese Fashions v Losane [1952] 1 All E R 909 at 913 (‘[O]ne has to consider whether the mode in which the contract was performed, or purported to be performed, in this case sufficed to turn it into an illegal contract’, per Jenkins LJ); Ashmore Benson Ltd VA v Dawson Ltd [1973] 1 WLR 828 at 836 (Scarman LJ adopting Jenkins LJ's dictum in B and B Viennese Fashions v Losane); Hall v Woolston Hall Leisure Ltd [2001] ICR 99 at [34] (Peter Gibson LJ, referring to Newland v Simons & Willer (Hairdressers) Ltd [1981] ICR 521, opined, ‘the contract was turned into one prohibited by statute or common law’); Colen v Cebrian [2003] EWCA Civ 1676 at [26] (Waller LJ, adopting the aforementioned dicta, framed the issue as whether ‘the transgressions were such as to turn by its illegal performance a valid contract into an illegal contract’. See also the employment of the notion that the illegality ‘turns’ the contract into an illegal one at [22] and [23].)

44. [1924] 1 KB 138. As Banks LJ acknowledged (at p 145), ‘[The] vendor of fertilisers must comply with the provisions as to invoice in order to take advantage of the contract of sale’.

45. Fertilisers and Feeding Stuffs Act 1906, s 1(1).

46. [1924] 1 KB 138 at 145.

47. Ibid, at 144.

48. Above 18, at 284.

49. [1954] 1 QB 29 (CA).

50. Ibid, at 32.

51. Ibid, at 37.

52. Whether or not the earlier contravening conduct continues to taint a contracting party's rights will depend on whether the purposes behind the regulatory scheme would be compromised by the latter compliant action rendering the earlier harmless to private law rights.

53. Above 4. Applied: K/S Lincoln v CB Richard Ellis Hotels Ltd 127 Con LR 188, [2010] PNLR 5, [2009] BLR 591, [2009] EWHC 2344 (TCC); Miah v Islam [2010] EWHC 1569 (Ch). Distinguished: SQ v RQ [2009] 1 FLR 935, [2008] EWHC 1874 (Fam); Nayyar v Sapte [2009] EWHC 3218 (QB).

54. [2004] EWHC 231 (QB), [2004] 2 Lloyd's Rep 92 at [18], agreeing with Furmston, above 37, at 287 (‘… it is clear that there must come a point when the connection with the plaintiffs intention is too remote’).

55. CP 189 at [3.25].

56. [1936] 1 KB 169. See also Palaniappa Chettiar v Arunasalam Chettiar [1962] AC 294, Spector v Ageda [1973] ch 30 (creditor made a loan to the borrower to repay an indebtedness owed to the creditor's sister, with knowledge that the earlier loan was unenforceable for illegality); Cannan v Bryce (1819) 2 B & Ald 179 (loan made to enable the borrower to make payment on losses incurred in illegal stock-jobbing transactions).

57. Above 18, at 283.

58. Above 53, at [19].

59. Ibid, at [19].

60. Ibid, at [20].

61. Gray v Thames Trains Limited and Network Rail Infrastructure Limited [2008] EWCA Civ 713.

62. Criminal Attempts Act 1981, s 1. See further AshworthA Principles of Criminal Law (Oxford: Oxford University Press, 2009) §11.3; SimesterAp et al Simester and Sullivan's Criminal Law: Theory and Doctrine (Oxford: Hart, 2010) §9.4. For a comparative discussion, see FletcherGp Rethinking Criminal Law (Boston: Little Brown, 1978) §3.3.2.

63. (1867) LR 2 Ex 230.

64. Ibid, at 234.

65. This would be consistent with Cunard v Hyde (No. 2) (1859) 2 El & Bl 1, which implicates tainting illegality by participation (s 3(d)). Here, the master of a vessel contravened the Customs Consolidation Act 1853 by carrying cargo on the deck of the ship during the winter months. The insured's claim against the insurer was denied on the ground that ‘the insured knew of the master's act, in the sense of consenting to it and wanting it to be done’. (Cunard v Hyde (No. 1) (1858) El & Bl 670 at 677 where the insurer's plea of illegality was initially found to be defective because it had failed to plead these matters.)

66. The times 5 March 1994.

67. Nourse LJ opined, ‘… I think that if the plaintiff had formed that intention at or before that time he would have been unable to recover against the defendant. the contract would have been tainted by the plaintiff's intention partially to perform it by doing an illegal act.’ Beldam and Simon Brown LJJ expressed similar sentiments in their separate judgments.

68. See s 3(c) and (d).

69. Above 3.

70. CP 189 at [3.43].

71. Compare Beresford v Royal Insurance Company, above 3, and Gray v Barr [1971] 2 QB 554 with Tinline v White Cross Insurance [1921] 3 KB 327 (‘motor manslaughter’ equivalent to causing death by criminal negligence). See further s 3(c).

72. [1913] 2 KB 220 (reversed on other grounds [1914] WN 46). The offence was constituted by having on the premises an article that was ‘diseased, or unsound, or unwholesome, or unfit for food of man’ and was one of strict liability.

73. [1948] 2 All ER 35 at 38.

74. Osman v J Ralph Moss Ltd [1970] 1 Lloyd's Rep 313. TreitelGh The Law of Contract (Sweet & Maxwell, 13th edn, 2011) at [11–022]. Contra. R Leslie v Reliable Advertising and Addressing Agency [1915] 1 KB 652, where Rowlatt J took the view that there should be ‘no difference between cases where the Legislature had made an act or default punishable as a crime without the existence of a guilty mind and any other class of offence’ (at 658). The actual grounds for the decision – that the claimant did not have reasonable grounds for his belief that the conduct was legal – comports with the suggested rationalisation offered later in this paper: see text following 78.

75. [1921] 3 KB 327.

76. Safeway Stores v Twigger [2010] EWCA Civ 1472 at [18].

77. In Askey v Golden Wine, Denning J distinguished Tinline v White as a case in which ‘the act to be indemnified was one intended by the law that people should insure against’ ([1948] 2 All ER 35 at 39). The argument here develops the distinction further.

78. [2010] EWCA Civ 1472.

79. [1948] 2 All ER 35.

80. Ibid, at 38.

81. [1970] 1 Lloyd's Rep 313 (motorist convicted of driving without requisite insurance was permitted to claim the fine against the insurance agent who had assured him that he was properly insured).

82. [2010] EWHC 146 (Ch) (director who was fined for acting as a director of a company bearing the trade name of a liquidated company succeeded in preventing his professional negligence claim against the accountant from being struck out).

83. Safeway Stores v Twigger [2010] EWCA Civ 1472 at [51], per Pill LJ.

84. CP 189 at [3.15].

85. Above 27, at 362.

86. Ibid, at 362.

87. Ibid, citing Dering v Earl of Winchelsea (1787) 1 Cox Eq 318 at 319–320.

88. See eg Buckley, above 29, pp 76–86. As Buckley points out, the maxim ‘no person may benefit from his or her crime’ is ‘inherently question-begging and misleadingly wide’: ibid, at [5.39]. The tainting illegality analysis posited in this paper paves the way for a more nuanced explanation of the forfeiture rule.

89. [1973] 1 WLR 828.

90. Ibid, at 835–836.

91. (1813) 1 M & S 593.

92. (1866) LR 1 Exch 213. The two questions put to the jury were: (1) Did the defendant hire the brougham for the purpose of her prostitution? (2) If she did, did the plaintiffs know the purpose for which it was hired? (at 215).

93. [2007] EWCA Civ 456, (2007) BCC 407.

94. (1813) 5 Taunt 181. See text to 101.

95. Newland v Simon & Willer (Hairdressers) Ltd [1981] ICR 521; Wheeler v Quality Deep Ltd [2004] EWCA Civ 1085, [2005] ICR 265.

96. Hewcastle Catering Ltd v Ahmed and Elkamath [1992] ICR 626; Hall v Woolston Hall Leisure [2001] 1 WLR 225.

97. [1981] ICR 521.

98. Ibid, at [29].

99. Ibid, at [18].

100. [2001] 1 WLR 225 (CA).

101. Hodgon v Temple (1813) 5 Taunt 181.

102. (1866) LR 1 Exch 213 at 215 (per Bramwell B.) See also Lloyd v Johnson (1789) 1 Bos & P 340 (action for work and labour in laundering clothes belonging to prostitute upheld); Bowry v Bennett (1808) 1 Camp 348 (suit for price of clothes sold to prostitute upheld).

103. [2007] EWCA Civ 456, (2007) BCC 407 at [81].

104. The linkage with remoteness was referred to in Anglo Petroleum [2007] EWCA Civ 456, (2007) BCC 407 at [81].

105. Buckley is sympathetic to the notion that the ‘degree of turpitude’ of an illegality impacts on the participation rule. (‘The insistence that mere “knowledge” is insufficient, in the absence of participation, to warrant forfeiture of an “innocent” party's claim, is only tenable if the other party's illegal scheme is not of such gravity that anyone becoming aware of it should immediately refuse to proceed with the transaction’: above 29 at [4.21].) The argument here develops Buckley's instinct that Lord Goff's ‘no degrees of iniquity’ dictum is often interpreted too broadly. However, while Buckley seems to see “degrees of turpitude” as featuring in a discretionary approach, this paper suggests that the nature of the offence as a material consideration in determining the correct common law rule to be applied. This does not involve a ‘discretionary approach’ sensu stricto.