Patel v Mirza [2016] UKSC 42

Legal Case Summary

Patel v Mirza [2016] UKSC 42; [2017] AC 467

Illegality and restitution: recovery of money paid for an insider-dealing scheme that was never carried out.

Facts and procedural history

Mr Patel paid Mr Mirza £620,000 for a proposed scheme involving bets on movements in Royal Bank of Scotland shares. Mirza expected to obtain inside information about an anticipated government announcement affecting the bank. The parties intended to use that information for their joint benefit. Their agreement amounted to a conspiracy to commit insider dealing, an offence under section 52 of the Criminal Justice Act 1993.

The expected information did not materialise and the bets were never placed. Mirza nevertheless failed to return the money, despite promising to do so. Patel brought proceedings for repayment. His claim included unjust enrichment: the purpose for which the money had been transferred had failed. The fact that the bets were not placed did not make the original agreement lawful.

The trial judge dismissed the claim. Applying the reliance rule associated with Tinsley v Milligan [1994] 1 AC 340, he considered that Patel had to rely on his own unlawful agreement to establish his case. He also rejected an exception based on withdrawal from the illegal arrangement because Patel had not withdrawn voluntarily.

The Court of Appeal allowed Patel’s appeal, although its judges differed in their reasoning. The majority considered recovery possible because the intended illegal activity had not been carried out. Gloster LJ principally distinguished repayment from enforcing or profiting from the unlawful bargain. Mirza appealed to the Supreme Court.

The issue

The question was whether Patel’s participation in an unlawful agreement prevented him from recovering money paid under it. That required the Court to reconsider the basis of the illegality defence in civil proceedings. Should recovery turn on whether the claimant needed to rely on the illegality, or on the policies underlying the prohibition and the consequences of refusing relief?

There was also an important distinction between obtaining the promised profits and recovering the original payment. Patel sought the return of his stake, rather than the profits the insider-dealing scheme was intended to produce.

Decision and majority reasoning

The Supreme Court unanimously dismissed Mirza’s appeal. Patel was entitled to recover £620,000 with interest. The nine justices agreed on that outcome but not on a single explanation of the law.

Lord Toulson gave the leading judgment, with which Lady Hale, Lord Kerr, Lord Wilson and Lord Hodge agreed. He rejected reliance on illegality as the decisive test. The underlying concern was the integrity of the legal system: whether allowing the particular claim would undermine that integrity. He identified three considerations:

• The purpose of the prohibition that had been infringed, and whether refusing the claim would advance that purpose.
• Other relevant public policies that refusing the claim might undermine.
• Whether refusing relief would be a proportionate response to the illegality.

The third consideration concerned the consequences of denying an otherwise available remedy. Relevant factors could include the seriousness of the wrongdoing, its centrality to the transaction, whether it was intentional, and any marked difference in the parties’ culpability. These were not an exhaustive checklist. Lord Toulson stressed that courts must still comply with applicable legislation.

Applied to Patel’s claim, the approach did not justify allowing Mirza to retain the money. Repayment would unwind the transaction rather than reward successful insider dealing. Patel sought no profit from the intended offence, and the ordinary requirements of his restitutionary claim were satisfied. Lord Toulson endorsed Gloster LJ’s conclusion that there was no public-policy reason to forfeit the unused money to Mirza.

The civil court’s task was not to impose an additional punishment for entering the unlawful arrangement. Punishment belonged to the criminal law and relevant regulatory schemes. Lord Toulson concluded that the reliance rule in Tinsley should no longer be followed. This did not make illegality irrelevant or guarantee recovery whenever a claimant sought restitution: relief could still be refused where granting it would undermine the legal system’s integrity.

The separate judgments

Lord Neuberger supported Lord Toulson’s structured approach, while also emphasising a general starting point that money paid under an unperformed illegal contract should be returned. He considered the three considerations to provide the best available guidance for deciding when that starting point should give way.

Lords Mance, Clarke and Sumption agreed that Patel should recover but opposed the wider policy-based reformulation. They favoured a more rule-based explanation: restitution recognised the ineffectiveness of the transaction and restored the parties to their previous position. It did not enforce the unlawful bargain or give Patel a right to its profits. They were concerned that a broad balancing exercise would create uncertainty and give judges excessive discretion.

The agreement on repayment therefore should not obscure the disagreement about method. The majority adopted a structured assessment of policy and proportionality; the other three justices considered established restitutionary principles sufficient to decide the appeal.

Significance of the decision

Patel illustrates why illegality and the remedy sought must be examined together. An unlawful purpose did not automatically entitle the recipient to keep another person’s money. The decision replaced a mechanical reliance test with the majority’s assessment of the purpose of the prohibition, competing policies and proportionality. Its central distinction was between giving effect to an illegal venture and reversing a transfer made for a venture that did not proceed.

Judgment: Patel v Mirza [2016] UKSC 42, Supreme Court, 20 July 2016.