Illegality defence is a legal doctrine which prevents a claimant from pursuing a claim if it arises in connection with some illegal act on the part of the claimant. Such doctrine is underpinned by the principle that one should not be able to benefit from his or her own wrongdoing. The English Supreme Court reconsidered the illegality defence in Patel v Mirza  AC 467, more than 20 years after the traditional formulation had been laid down by the House of Lords in Tinsley v Milligan  1 AC 340. This article examines the question of whether the legal position in Hong Kong has changed after Patel.
Three different approaches
There are at least three possibilities in the approach to illegality offered by the case law across the common law world. The first is the approach of the House of Lords in Tinsley v Milligan. The second is the approach of Sir Anthony Mason in Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, which was adopted in Nelson v Nelson (1995) 184 CLR 538. The third is the recent formulation of principle by Lord Toulson in Patel v Mirza.
Tinsley v Milligan
This case stands for the proposition that a claimant to an interest in property may recover it if not obliged to rely on an illegality and that this is so even if that interest was acquired when carrying out an illegal transaction. Miss Tinsley sought possession of a property in which Miss Milligan had been living. The property had been in Miss Milligan’s sole name as they defrauded the Department of Social Security by claiming more social security benefits. It was held that Miss Milligan had a share in the property because she had contributed to the purchase price and there had been a common intention that the property should belong to both of them. Miss Milligan did not have to rely on the illegality (i.e. the fraud on the Department of Social Security) to prove her interest.
As identified by McHugh J in Nelson v Nelson, the difficulties inherent in Tinsley’s approach are that it “has no regard to the legal and equitable rights of the parties, the merits of the case, the effect of the transaction in undermining the policy of the relevant legislation or the question whether the sanctions imposed by the legislation sufficiently protect the purpose of the legislation. Regard is had only to the procedural issue”. In other words, Tinsley’s approach simply looks at whether the claimant has to rely on the illegality to establish his or her claim.
Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd
and Nelson v Nelson
This case held that neither a mortgage nor guarantee given to a corporation carrying on banking business without the licence required by statute was void or unenforceable by that corporation. The reasons were that (i) the terms of the statute did not prohibit the making of the loan; (ii) neither as a matter of necessary inference nor implication, did the statute go beyond penalising the party who contravened its prohibition on carrying on an unlicensed business, so as to prohibit contracts the making of which constituted the conduct of that business; to do so would deny recovery by innocent depositors; and (ii) public policy did not support any different outcome.
In Nelson, Yango was described as drawing a distinction between:
“(i) an express statutory provision against the making of a contract or creation or implication of a trust by fastening upon some act which is essential to its formation, whether or not the prohibition be absolute or subject to some qualification such as the issue of a licence; (ii) an express statutory prohibition, not of the formation of a contract or creation or implication of a trust, but of the doing of a particular act; an agreement that the act be done is treated as impliedly prohibited by the statute and illegal; and (iii) contracts and trusts not directly contrary to the provisions of the statute by reason of any express or implied prohibition in the statute but which are ‘associated with or in furtherance of illegal purposes’.”
It was added that as to class (iii), “the courts act not in response to a direct legislative prohibition but, as it is said, from ‘the policy of the law’. The finding of such policy involves consideration of the scope and purpose of the particular statute. The formulation of the appropriate public policy in this class of case may more readily accommodate equitable doctrines and remedies and restitutionary money claims than is possible where the making of the contract offends an express or implied statutory prohibition.”
In Nelson, Mrs Nelson claimed to be entitled to the proceeds of a house sold. Mrs Nelson provided the purchase money for the house but it was in the names of her son and daughter because Mrs Nelson wanted to obtain a subsidised advance on favourable terms under the relevant legislation. Mrs Nelson would not have been able to apply for the subsidised advance if she had been the owner of another house. Mrs Nelson later falsely declared that she did not own or have interest in any other house and received a subsidised advance for buying another house for herself. The declaration was obviously false as Mrs Nelson was claiming that she was the beneficial owner of the house for which she had provided the purchase money.
It was held that Mrs Nelson was entitled to the proceeds of sale because the policy of the legislation, which was to provide public moneys to facilitate the purchase of housing by eligible persons, would not be defeated if the Court enforced Mrs Nelson’s interest. In addition, the legislation contained internal mechanisms for dealing with false declarations.
Patel v Mirza
In Patel, Mr Patel sought to recover from Mr Mirza moneys paid for a failed consideration which was their application by Mr Mirza in insider trading which did not materialise. The Supreme Court held that Mr Patel should not be debarred from enforcing his claim as the fact that the money had been paid for an unlawful purpose would not undermine the integrity of the justice system.
Lord Toulson, with whom the majority agreed, concluded his reasons as follows:
“The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system … In assessing whether the public interest would be harmed in that way, it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.”
The Position in Hong Kong
The Hong Kong Court of Appeal has ruled that it is only by the Court of Final Appeal that the conflict between the reasoning in Tinsley and Nelson is to be resolved. In Loyal Luck Trading Ltd v Tam Chun Wah  4 HKLRD 681, the plaintiff claimed against the defendant a right of way over the road built within the defendant’s land (which existed before the defendant acquired the land) for the purpose of vehicular access on the bases of the rule in Wheeldon v Burrows (1879) 12 Ch D 31 and s.16 of the Conveyancing and Property Ordinance (Cap. 219). The defendant appealed to the Court of Appeal contending that a right of way could not have been acquired because the user of the plaintiff’s land for the parking of container lorries was illegal contrary to the Town Planning Ordinance (Cap. 131). In dismissing the defendant’s appeal, the Court of Appeal held that, among others, the use of the access road was not illegal under the Town Planning Ordinance. Furthermore, following Tinsley, it was not necessary for the plaintiff to plead the illegal use of the plaintiff’s land in support of the easement. The potential conflict between Tinsley and Nelson can only be resolved by the Court of Final Appeal.
Kan Wai Chung v Hau Wun Fai  5 HKC 585, a case involving agreements to sell ding rights to developers, held the same. Under the then Small House Policy of the government, indigenous male villagers over 18 years old and descended through the male line from residents in 1898 of recognised villages in the New Territories are entitled to apply for building licence to build one village-type house on their land (i.e. ding rights). In Kan Wai Chung, the plaintiffs who were indigenous villagers only had the ding rights without the land. By reason of the agreements among them and the developers, the developers supplied them with the land without consideration in order for them to exercise their ding rights. The developers were responsible for the costs of the construction of the houses which were later sold, while the plaintiffs were to apply for the license to build. It was held that the agreements were illegal as they involved a misrepresentation by the plaintiffs, when they applied for the licence to build, that they were the beneficial owners of the land when in fact the developers were. It was concluded that the plaintiffs did not have any interest in the houses as they would have to rely on the agreements to establish their claim. In coming to this conclusion the court held that Nelson was not an authority which would preclude the Court from following Tinsley.
In HKSAR v Lau Kam Ying (2013) 16 HKCFAR 595, a case also involving an agreement to take advantage of ding rights, the Appeal Committee of the Court of Final Appeal indicated agreement with the approach relying on Tinsley, but said that it was unnecessary to come to a concluded view on the matter.
In Tse Chun Wai v Leung Kwok Kin Joseph  4 HKLRD 563, Bebe Chu J indicated that after Patel, Tinsley remained the present authority in Hong Kong. Tse Chun Wai is a case involving an agreement (the “Commission Agreement”) whereby the plaintiff, a non-legally qualified person, agreed to introduce clients to engage the defendant, the sole practitioner of a solicitor’s firm in Hong Kong, for legal services whilst retaining “extensive contact” with them and maintaining “exclusive control” over their cases and in return the defendant agreed to pay the plaintiff commission and/or remuneration calculated with reference to legal costs. The defendant terminated the agreement and the plaintiff claimed that the defendant was in breach of such agreement in failing to pay him commission and/or remuneration.
In dismissing the plaintiff’s contractual claim, Bebe Chu J ruled that even though the Supreme Court in Patel decided that the “reliance rule” in Tinsley should no longer be followed, in terms of the application of precedents, the Court in Tse Chun Wai was bound by the Court of Final Appeal which adopted Tinsley. The plaintiff’s contractual claim was dismissed as the plaintiff sought loss and damages by reason of his performance of an illegal contract. Further, Bebe Chu J indicated that even if Patel were to be applied, the plaintiff’s claim must also fail. The Commission Agreement relied on by the plaintiff did not only seek to share the profit costs of a solicitor but the “extensive contact” with the clients and “exclusive control” over their cases, and such was plainly intended to undermine the independence of a solicitor in handling clients’ cases and the integrity of a solicitor with the ultimate goal of guaranteeing that the clients’ interest, and the public interest would give way to the plaintiff’s financial or other interests without ensuring that client’s interests were protected. The Commission Agreement sought to ensure that the solicitor would be subject to every external pressure from non-qualified persons not subject to the same professional code as a solicitor. However, Bebe Chu J held that the plaintiff should have been allowed to pursue a claim for reasonable remuneration, or quantum meruit, for the services provided by him.
On the face of it, Patel has changed the law of illegality fundamentally. The test has been changed from one of reliance to one which emphasises an assessment of public policy considerations on a case by case basis. In the United Kingdom, the majority in Patel were agreed that Tinsley should no longer be followed. In Hong Kong, notwithstanding Patel, it seems that illegality is still governed by the principle laid down in Tinsley. It remains to be seen whether the Court of Final Appeal will follow the Supreme Court and adopt Patel.
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This article was originally published on ONC Lawyers.
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