Dear all,

Thanks, James, for bringing Jetivia to our attention. I agree that it is odd that, for the third time in as many years, the Supreme Court has not finally determined an important issue. More to the point, it seemed as though Lord Sumption had in fact settled it in Les Laboratoires Servier v Apotex, only for Jetivia to suggest that this might not be the last word. Since thee will doubtless be many more words on the issue again, might I be permitted to say that there is an Irish case?


Gerard Sadlier has brought the attention of this list to the contribution to this debate made recently by the Supreme Court of Ireland in Quinn v Irish Bank Resolution Corporation Ltd (In Special Liquidation) [2015] IESC 29 (27 March 2015) http://www.bailii.org/ie/cases/IESC/2015/S29.html In this case, Clarke J (Denham CJ, and Hardiman, O'Donnell and Laffoy JJ concurring) held that a series of loans made to Quinn by Anglo Irish Bank (the predecessor to the Irish Bank Resolution Corporation) were not void for illegality, even though the loans were made to allow Quinn to purchase shares in Anglo in breach of section 60 of the Companies Act, 1963 http://www.irishstatutebook.ie/1963/en/act/pub/0033/sec0060.html#sec60 and of the Market Abuse (Directive 2003/6/EC) Regulations 2005 (SI No 342 of 2005) http://www.irishstatutebook.ie/2005/en/si/0342.html A few paragraphs of Clarke J's judgment are particularly relevant to the extracts from Jetivia quoted by James.


First, in the course of a review of relevant Irish, English and Australian authorities, Clarke J considered Tinsley v Milligan and the speech of Lord Sumption in Servier, and concluded (as Lord Neuberger did at para 17 of his judgment in Jetivia, set out by James below):

"7.26 It is clear, therefore, that Tinsley v Milligan remains the law in the United Kingdom notwithstanding the fact that it has been criticised, and notwithstanding the fact that it is accepted that the general application of this area of law has been, perhaps, problematic."

Jetivia was argued on 14 and 15 October 2014, and Quinn was not handed down until 27 March 2015, so Clarke J's judgment was not able to be brought to Lord Neuberger's attention. But it is noteworthy that both Clarke J and Lord Neuberger independently came to the same conclusion about the impact of Servier on Tinsley v Milligan.


Second, on the question of the "proper approach" to the question of when infringing a statute renders a contract void for illegality, Clarke J declined to follow a strict Tinsley v Milligan approach:

"8.2 A starting point has to be to note that the question which was, at least for the time being, resolved in the United Kingdom in Tinsley has not been expressly considered in any detail in this jurisdiction in recent times. In my view, this Court is, therefore, free to consider the proper approach to adopt in the light of principle and precedent. I am also persuaded that there is much to be said for the criticism identified by Lord Sumption in Les Laboratoires Servier of the approach which sought to turn the principle of illegality from a rule of law into a power which could be exercised by the court on a discretionary basis depending on the merits of the case. Whatever may be the disadvantages of the rule of law approach, the uncertainty which would be created by leaving the question of enforceability up to a very broad consideration by a trial judge on the facts of any individual case would arguably be worse.

8.3 However, the approach adopted in cases such as Euro-Diam sought to solve the problem of attempting to balance, on the one hand, the public policy requirement that courts not act in aid of illegal activity with, on the other, the injustice to which a "lie where it falls" approach can give rise by inviting the court to decide each case on its own merits. An alternative approach, which seems to me to give rise to a much greater degree of certainty, seeks to reconcile the competing principles by having regard to what may be seen to be the policy requirements of the relevant statute which creates the illegality in the first place. On that basis, a court is required to assess whether the requirements of public policy, in respect of a particular statutory provision rendering, as a matter of the public law of the State, a particular type of activity illegal, require that contracts sufficiently connected with that particular type of illegality are to be regarded as unenforceable. Such an approach requires each statutory regime (or part of a statutory regime) to be independently assessed to determine whether policy requires particular types of contracts to be treated as unenforceable. However, such an approach does not mandate the court to take a different view as to whether one particular contract or another may be regarded as unenforceable by virtue of being in breach of the same statutory provision by reference to, for example, the severity of the breach concerned or the adverse consequences for the parties. The proper approach, in my judgement, is statute specific but is not case specific.

...

8.55 In summary, the principal criteria are as follows:-

1. The first question to be addressed is as to whether the relevant legislation expressly states that contracts of a particular class or type are to be treated as void or unenforceable. If the legislation does so provide then it is unnecessary to address any further questions other than to determine whether the contract in question in the relevant proceedings comes within the category of contract which is expressly deemed void or unenforceable by the legislation concerned. (para. 8.9)

2. Where, however, the relevant legislation is silent as to whether any particular type of contract is to be regarded as void or unenforceable, the court must consider whether the requirements of public policy (which suggest that a court refrain from enforcing a contract tainted by illegality) and the policy of the legislation concerned, gleaned from its terms, are such as require that, in addition to whatever express consequences are provided for in the relevant legislation, an additional sanction or consequence in the form of treating relevant contracts as being void or unenforceable must be imposed. For the avoidance of doubt it must be recalled that all appropriate weight should, in carrying out such an assessment, be attributed to the general undesirability of courts becoming involved in the enforcement of contracts tainted by illegality (especially where that illegality stems from serious criminality) unless there are significant countervailing factors to be gleaned from the language or policy of the statute concerned. (para. 8.9)

3. In assessing the criteria or factors to be taken into account in determining whether the balancing exercise identified at 2 requires unenforceability in the context of a particular statutory measure, the court should assess at least the following matters:-
3(a) Whether the contract in question is designed to carry out the very act which the relevant legislation is designed to prevent (para. 8.32)
3(b) Whether the wording of the statute itself might be taken to strongly imply that the remedies or consequences specified in the statute are sufficient to meet the statutory end. (para. 8.34)
3(c) Whether the policy of the legislation is designed to apply equally or substantially to both parties to a relevant contract or whether that policy is exclusively or principally directed towards one party. Therefore, legislation which is designed to impose burdens on one category of persons for the purposes of protecting another category may be considered differently from legislation which is designed to place a burden of compliance with an appropriate regulatory regime on both participants. (para. 8.37)
3(d) Whether the imposition of voidness or unenforceability may be counterproductive to the statutory aim as found in the statute itself.(para. 8.39)

4. The aforementioned criteria or factors are, for reasons which will become apparent, sufficient to resolve this case. However, the following further factors may well be properly taken into account in an appropriate case:-
4(a) Whether, having regard to the purpose of the statute, the range of adverse consequences for which express provision is made might be considered, in the absence of treating relevant contracts as unenforceable, to be adequate to secure those purposes. (para. 8.44)
4(b) Whether the imposition of voidness or unenforceability may be disproportionate to the seriousness of the unlawful conduct in question in the context of the relevant statutory regime in general. (para. 8.47)

5. Doubtless other factors will come to be defined as the jurisprudence develops."


Third, Clarke J clearly distinguished the question of whether a contract is void for illegality from the separate question of what remedies might follow if it is, and commented that failure to make this distinction may be at the heart of some of the problems in difficult cases:

"7.34 However, it seems clear that much of the evolution of the common law as it is understood in the United Kingdom is not so much concerned with the enforceability of illegal contracts as such, but rather is concerned with the extent to which the consequences of partly or completely executed contracts, which may be tainted by illegality, can be undone or reversed. That question is, of course, relevant to one of the issues which potentially arises on this appeal, which concerns the question as to whether the Quinns are entitled, as moving parties, to seek to have the effect of the various securities which were put in place declared invalid or unenforceable."


There is a great deal in Clarke J's judgment in Quinn which engages with the judgments in Servier and Jetivia, and his approach statute-specific but not case-specific non-Tinsley approach may prove useful if the UK Supreme Court revisits the issue and decides to depart from a strict-Tinsley v Milligan approach.

All the best from Dublin.

Eoin.





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Dr Eoin O'Dell

School of Law, Trinity College, Dublin 2, Ireland

+353-1-896 1178 // +353-87-202 1120
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________________________________________
From: Lee, James [james.lee@kcl.ac.uk]
Sent: 22 April 2015 10:31
To: obligations@uwo.ca
Subject: [Spam?] UK Supreme Court on Illegality Defence and Attribution

Dear Colleagues,

A seven-Justice panel of the UK Supreme Court has today handed down judgment in Jetivia SA v Bilta (UK) Limited [2015] UKSC 23 https://www.supremecourt.uk/decided-cases/docs/UKSC_2013_0206_Judgment.pdf. It is yet another case on the operation of the illegality defence, this time in the context of the attribution of conduct of the fraudulent directors. The company had been wound up at the petition of HMRC as a result of the appellants involving the company in the a carousel fraud. The company’s liquidators then sued the directors and another company involved in the scheme. The court is unanimous as to the outcome – the defence does not bar the claims as the directors’ conduct cannot be attributed to the company when it comes to a claim by the company against the directors themselves.

The judgments run to [219] paragraphs. What is possibly of most general interest to members is that the scope of the illegality defence is still the subject of some disagreement amongst the Justices, especially over the correctness/standing of Tinsley v Milligan, as somewhat summarised by Lord Neuberger’s lead judgment:

13 First, then, there is the proper approach which should be adopted to a defence of illegality. This is a difficult and important topic on which, as the two main judgments in this case show, there can be strongly held differing views, and it is probably accurate to describe the debate on the topic as involving something of a spectrum of views. The debate can be seen as epitomising the familiar tension between the need for principle, clarity and certainty in the law with the equally important desire to achieve a fair and appropriate result in each case.

14. In these proceedings, Lord Sumption considers that the law is stated in the judgments in the House of Lords in Tinsley v Milligan [1994] 1 AC 340, which he followed and developed (with the agreement of three of the four other members of the court, including myself and Lord Clarke) in Les Laboratoires Servier v Apotex Inc [2014] UKSC 55, [2014] 3 WLR 1257. He distinguishes the judgment of Lord Wilson in Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889 as involving no departure from Tinsley v Milligan, but as turning on its own context in which “a competing public policy required that damages should be available even to a person who was privy to her own trafficking” (para 47). By contrast Lord Toulson (who dissented from that approach in Les Laboratoires) and Lord Hodge favour the approach adopted by the majority of the Court of Appeal in Tinsley and treat that of Lord Wilson in para 42ff of Hounga as supporting that approach.

15. In my view, while the proper approach to the defence of illegality needs to be addressed by this court (certainly with a panel of seven and conceivably with a panel of nine Justices) as soon as appropriately possible, this is not the case in which it should be decided. We have had no real argument on the topic: this case is concerned with attribution, and that is the issue on which the arguments have correctly focussed. Further, in this case, as in the two recent Supreme Court decisions of Les Laboratoires and Hounga, the outcome is the same irrespective of the correct approach to the illegality defence.

16. It would, in my view, be unwise to seek to decide such a difficult and controversial question in a case where it is not determinative of the outcome and where there has been little if any argument on the topic. In Les Laboratoires, the majority did opine on the proper approach not because it was necessary to decide the appeal, but because they considered that the Court of Appeal (who had reached the same actual decision) had adopted an approach which was inconsistent with Tinsley. Similarly in Hounga, as Lord Sumption has shown in para 99, it may well not have been necessary to Page 6 consider the proper approach to the illegality defence, but it nonetheless remains the fact that it was the subject of argument, and that Lord Wilson did express a view on the point, and two of the four other members of the court agreed with his judgment.

17. Les Laboratoires provides a basis for saying that the approach in Tinsley has recently been reaffirmed by this court and that it would be inappropriate for this court to visit the point again. However, it was not argued in Les Laboratoires that Tinsley was wrongly decided, and, as Lord Toulson pointed out in his judgment, the majority decision was reached without addressing the reasoning in Hounga. Lord Sumption is right to say that, unless and until this court refuses to follow Tinsley, it is at the very least difficult to say that the law is as flexible as Lords Toulson and Hodge suggest in their judgment, but (i) in the light of what the majority said in Hounga at paras 42-43, there is room for argument that this Court has refused to follow Tinsley, and (ii) in the light of the Law Commission report, the subsequent decisions of the Court of Appeal, and decisions of other common law courts, it appears to me to be appropriate for this court to address this difficult and controversial issue – but only after having heard and read full argument on the topic.

One may therefore pause to wonder why have a seven-Justice bench, and consider illegality again for the third time in three years, if not to consider the defence properly.

There is also a lot in the judgments for those interested in broader questions of attribution of conduct, the interaction between statute and common law, the contrasting reasoning of Lord Mance and Lord Sumption on illegality in previous cases, and even some material on extra-territorial application of s 213 of the Insolvency Act 1986.

Best wishes,
James

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James Lee
Senior Lecturer in Private Law
Director of UG Admissions and Scholarships
The Dickson Poon School of Law
King's College London
Strand
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