Chandrakant Patel v Salman Mirza [2014] EWCA 1047

The Court of Appeal has handed down judgment in Patel v Mirza [2014] EWCA 1047.

Illegality – insider trading – spread betting -whether recovery of £620,000 paid by Claimant to Defendant barred by reliance on illegal agreement – agreement not performed – whether Claimant within locus poenitentiae so could recover paid to Defendant to place spread bet– policy considerations and illegality defence.

Philip Shepherd QC acted for the successful appellant/claimant (“C) in this important 64 page review by the Court of Appeal of the complex and inconsistent law of illegality.

In allowing an appeal that enabled C to recover £620,000 given to the Defendant/Respondent (“D”) to invest in a spreadbetting scheme. All 3 Lords Justices Rimer, Gloster and Vos LJs handed down judgments the Court of Appeal acknowledged that this area of the law was fraught with difficulty “As any hapless law student attempting to grapple with the concept of illegality knows, it is almost impossible to ascertain or articulate principled rules from the authorities relating to the recovery of money or other assets paid or transferred under illegal contracts”[1].

The facts of Patel v Mirza [2014]

C was a property dealer. D was a forex trader and senior director of Tullet Prebon Plc. D told C that he had advance access to information that would affect the price of RBS shares and that he could place a spread bet using his IG Index account. C duly handed over £620,000 to D. In the event D never placed the bet and told C that the scheme would not proceed. When C asked for the return of the money D told C that his bank had mistakenly paid G, a mutual friend who had since become bankrupt.

The pleadings of Patel v Mirza [2014]

When C sued D for the return of the money he pleaded the illegal agreement but asserted that he was entitled to the return of the money as money had and received and that D was the agent of C and accountable to him as such. C also pleaded a Quistclosetrust.

The trial

D advanced a “change of position” defence but did not plead illegality. This was raised by the Judge at trial and then embraced by D when his change of position defence crumbled under cross examination. D argued that C was not entitled to return of the money due to the illegality and because C had not withdrawn from the scheme as it was D who had decided not to proceed. C asserted that he was entitled to the return of the money as the illegality lay in intention only and hence he was within the locus poenitentiae relying on Tribe v Tribe[2]. C denied that illegality was relevant as the illegality lay in intention only.

Judgment of Deputy High Court Judge David Donaldson QC

The Judge dismissed the change of position defence as false but held that illegality barred recovery upholding D’s argument that C was relying on an illegal agreement and could not claim to be within the locus poenitentiae and because C had not initiated withdrawal from the scheme as in Bigos v Bousted[3].

Judgments of the Court of Appeal

The Court of Appeal allowed the appeal and gave judgment for C for the full amount of his claim. Rimer LJ held that although C was relying on an illegal agreement and hence would have been refused recovery C was entitled to relief. This was because, agreeing with Millett LJ in Tribe repentance was not required and it made no difference who had initiated withdrawal so long as the illegal agreement had not been carried into effect.

Gloster LJ disagreed with Rimer LJ holding that it did not matter whether an illegal agreement was stated in the pleadings – what did matter was whether the illegal agreement was an ingredient of C’s cause of action or whether he was attempting to enforce that illegal agreement and here this was not the case. What was key was to examine the policy considerations in play following the House of Lords in Stone & Rolls Limited (in liquidation) v Moore Stephens[4] and Gray v Thames Trains Limited[5] . Gloster LJ in a powerful judgment held that the policy underlying the criminal law that applied to insider trading namely s.52 of the Criminal Justice Act 1993 (“the Act”) was not engaged nor did it require an investor to lose all his rights when, for whatever reason, no insider information was received and no insider dealing took place. C’s claim was not seeking to enforce an illegal agreement. This was supported by s62 of the Act that provided that no contract shall be void or unenforceable by reason only of s52. C was not seeking to enforce the illegal agreement at all but was simply enforcing his right to recover the money when the illegal transaction did not proceed. There was no express finding that C knew that the scheme was illegal – by contrast D was a senior director of Tullet Prebon Plc whereas C was a property dealer who had no idea that what was proposed was illegal. Gloster LJ could see no warrant for holding that even if the original agreement amounted to a criminal conspiracy no policy underlying s63(2) of the Act demanded that C be denied recovery. D was under a common law duty as agent to return money paid to him by his principal[6] and in any event C was within the locus poenitentiae and entitled to recovery on that ground as well.

Vos LJ agreed with Rimer LJ.

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