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Contract Law Client Update 

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December 15 2016

Illegal Contracts and Restitution – Do they Go Hand in Hand?

Recently, a new and important decision has been handed down by the Supreme Court in England (aka the House of Lords) by a bench comprising 10 judges. This judgment has set new norms and standards for the English courts (and also where English law has an impact in other countries) concerning contracts found to be illegal.  In the judgment in the matter of Patel v Mirza [1], the facts were simple:  Patel transferred to Mirza an amount of some 620,000 Pounds Sterling for speculating on the RBS shares, using inside information from Mirza which Mirza was going to obtain using his connections with the Government.  As it turned out, the substantial increase in the value of the shares which was expected to result from the Government's declaration was not realized. Mirza, who was requested to return the monies, did not.
 
It was accepted by all that this agreement was a conspiracy to use insider information, which is contrary to Section 52 of the English criminal law.    Such an agreement is considered in law to be illegal and void ab initio.  Nevertheless, Patel filed a statement of claim for return of the money, claiming breach of contract and unjust enrichment.   The court at first instance denied the claim, on the grounds that the plaintiff is forced to rely on an illegal claim.  The Court of Appeal accepted the appeal against this decision and decided that there is no unambiguous rule according to which 'a wrongful act will not give rise to a claim' [2]. Accordingly, the court is required to examine the involvement of the plaintiff in the illegality.

At the end of the day, the Supreme Court rejected the claim and in so doing handed down a far reaching important precedent in the laws of restitution.  It should be remembered that Section 9 of the Israeli Contracts (Remedies for Breach of Contract) Law -1970 provides that: 'where a contract is cancelled the breaching party is obliged to return to the injured party that which it received according to the contract. …' The situation under consideration is not entirely on all fours with the Israeli Section 9 since there is no 'cancellation of a contract' but rather the non-existence of a contract due to it being void.  It should be remembered in this context that Section 21 of the Contracts (General Part) Law 1973 provides that: 'where a contract is void, each party must return to the other party that which it received according to the contract.' The law applicable to illegal contracts is contained in Section 30 of the 1973 Contracts Law, which provides that: 'a contract the entering into, contents or object of which is illegal, immoral or contrary to public policy – is void.'   Having said that, Section 31 of the same Law eases the severity of Section 30 and enables the Court 'if it sees just to do so and on such conditions as it sees fit, to exempt a party from a contract according to s. 21 …'  In such case, the contrary is valid – and the court orders restitution (and did not prevent restitution) on grounds of justice, notwithstanding the illegality of the contract.

The English judgment, dealt with in this newsletter, has made a new furrow in virgin soil, by deciding that not every contract entered into for an illegal purpose prevents restitution.  It is interesting that not one of the Lords, each one of which wrote a separate judgment, examined the precedents in the light of the maxim – in equal fault, better is the condition of the possessor[3] – a saying which, had it been applied, might have brought about the approval of a decision of the bench which rejected the claim.

Notwithstanding the multiple judgments of the Supreme Court ('speeches' as separate judgements are known in uncharacteristic modesty), it is possible to summarize the precedent in the words of Lord Sumption [4], who was joined by Lord Clarke, in his reiteration of the principle that – for reasons of consistency, the court did not give hand to the claim of a person who committed an illegal act to take advantage of this act.  However – and in this is the innovation – the question was whether the plaintiff was forced to rely on the illegal act in order to found his claim.  If he could have based his claim without the illegal act (to which he was a party) forming the basis of the claim but only as a background fact – the right of restitution would prevail. To a certain extent this involves the application of the 'blue pencil' [5] – again without expressing mentioning this rule by name.

This decision continues a chain of innovative judgments of the English court, led by Lord Sumption, similar to the judgment in the matter of Verslot Dredging BV – HDI Gerling, in which the rule that every fraud, including minor ones, should lead to the rejection of an insurance claim was abandoned.  In that case as well, which we covered in a Newsletter under the title "Can you Lie just a Little?', the court decided that if the fraud or the failure to disclose, are collateral to the claim[1], and the insured can base his claim without directly relying on the fraud, the claim should not be dismissed.

Incidentally, Lord Sumption was one of the leading barristers in England, who refused twice to be appointed to the House of Lords, until he agreed to do so.

[1] Collateral



[1] 2016 LL.L.R. 300
[2] EX TURPI CAUSA NON ORITUR ACTIO
[3] IN PARI DELICTO POTIOR EST CONDITIO POSSIDENTIS
[4] Lord Jonathan Sumption
[5] The Blue Pencil Rule
[6] Collateral
Disclaimer: This Newsletter is intended only to provide general updates to clients and for no other purpose. Nothing in this Newsletter constitutes any opinion or advice on the subject matter dealt with therein. For any advice or opinion, clients are advised to approach the relevant lawyer at Naschitz, Brandes Amir & Co.

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Shimon Chertow
Adv. Orli Naschitz
tel: 972-3-6235076
mail: onaschitz@nblaw.com
Gad Naschitz
Written by Adv. Peter Gad Naschitz
Edited by Dr. Sharon Yadin, Adv.
English version by Adv. Helen Raziel