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The Law Commission

Consultation Paper No 160

THE ILLEGALITY DEFENCE IN TORT

A Consultation Paper

London: The Stationery Office

The Law Commission was set up by section 1 of the Law Commissions Act 1965

for the purpose of promoting the reform of the law.

The Law Commissioners are:

The Honourable Mr Justice Carnwath CVO, Chairman

Professor Hugh Beale

Mr Charles Harpum

Professor Martin Partington

Judge Alan Wilkie, QC

The Secretary of the Law Commission is Mr Michael Sayers and its offices are at

Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ.

This consultation paper, completed on 17 May 2001, is circulated for comment

and criticism only. It does not represent the final views of the Law Commission.

The Law Commission would be grateful for comments on this consultation paper

before 28 September 2001. Comments may be sent either –

(i) Until 31 July 2001:

By post to James Robinson Tel: 020-7453-

Law Commission Fax: 020-7453-

Conquest House

37-38 John Street

Theobalds Road

London WC1N 2BQ

By e-mail to james.robinson@lawcommission.gsi.gov.uk

(ii) From 1 August 2001:

By post to Helen Hall Tel: 020-7453-

Law Commission Fax: 020-7453-

Conquest House

37-38 John Street

Theobalds Road

London WC1N 2BQ

By e-mail to helen.hall@lawcommission.gsi.gov.uk

It would be helpful if, where possible, comments sent by post could also be sent

on disk, or by e-mail to the above address, in any commonly used format.

It may be helpful, either in discussion with others concerned or in any subsequent

recommendations, for the Law Commission to be able to refer to and attribute

comments submitted in response to this consultation paper. Any request to treat

all, or part, of a response in confidence will, of course, be respected, but if no such

request is made the Law Commission will assume that the response is not

intended to be confidential.

The text of this consultation paper is available on the Internet at:

http://www.lawcom.gov.uk

iv

(2) In what situations will illegality prevent the duty

PART IV: POLICY RATIONALES UNDERLYING

v

Paragraph Page

1. INTRODUCTION 4.1-4.7 65
2. THE POLICY RATIONALES 4.8-4.102 66 (1) Rejection of punishment 4.10-4.24 67 (i) Report No 247, Aggravated, Exemplary and Restitutionary Damages

(ii) Consultation Paper No 154 4.13-4.14 68 (iii) Our current view 4.15-4.20 68 (iv) The need to avoid “double punishment” 4.21-4.24 70 (2) The need to preserve the dignity and reputation of the courts and legal system

(3) The need to deter unlawful or immoral conduct 4.28-4.35 72 (4) The need to prevent a claimant profiting from his or her own wrongdoing

(5) Not condoning the illegal activity or encouraging others

(6) “Consistency” 4.56-4.74 79 (i) Furthering the purpose of the rule 4.56-4.59 79 (ii) Consistency 4.60-4.74 80 (7) “Responsibility” 4.75-4.81 85 (8) Particular cases 4.82-4.102 87 (i) Injuries suffered in the course of illegal activity

(ii) “No reliance” cases 4.99-4.102 91

3. CONCLUSION 4.103-4.107 92

PART V: THE CASE FOR REFORM 5.1-5.37^93

1. IS AN ILLEGALITY DEFENCE NEEDED IN TORT?

2. REASONS FOR REFORM 5.8-5.35 95

(1) The need to avoid different regimes for overlapping or closely related claims

(2) Lack of clarity 5.15-5.23 97 (i) The duty of care approach 5.16-5.18 97 (ii) The “public conscience” test 5.19 97 (iii) Causation or ‘direct connection’ 5.20 98 (iv) Seriousness of illegality 5.21 98

vii

Paragraph Page

6. THE EFFECT OF OUR PROVISIONAL PROPOSALS

PART VII: SUMMARY OF PROVISIONAL PROPOSALS AND CONSULTATION ISSUES

APPENDIX A: SUMMARY OF PROVISIONAL RECOMMENDATIONS AND CONSULTATION

ISSUES FROM CONSULTATION PAPER NO 154

A.1-A.44 125

APPENDIX B: SELECT BIBLIOGRAPHY^134

viii

PART I INTRODUCTION

1. THE AIM OF THIS PAPER

1.1 In 1999 we published Consultation Paper No 154, Illegal Transactions: the Effect of Illegality on Contracts and Trusts.^1 In that paper we considered the law relating to the doctrine of illegality as it operated in contract and trusts, and proposed that the current rules-based approach should be reformed by the introduction of a statutory discretion, structured around a number of factors. In the consultation paper we stated that we did not propose to address the question of illegality as it operated in tort.^2 We considered that tort gave rise to different issues from those raised by contract and trusts, and we were not aware that the area was one that gave rise to concern.

1.2 We received just over fifty responses from individuals, institutions and organisations. One of our questions was whether consultees agreed with our provisional view that the law relating to illegality in contract and trusts is in need of reform, and that legislative reform is to be preferred to judicially-based reform of the common law. Of those who gave a clear response to this question (thirty seven consultees), the vast majority agreed with our provisional view. There was broad support for our provisional proposal to introduce a structured discretion to replace the current rules. We are considering our proposed reforms to the law relating to contract and trusts in the light of these responses, but it is likely that our final report will recommend the adoption of some form of structured discretionary regime.

1.3 Several of those who responded to the consultation paper questioned whether it was appropriate to omit tort from the scope of our consideration and the consultation process. The broad thrust of the comments was that it would be desirable to have the same principles relating to illegality applying in all branches of the law, to prevent what would be seen as the odd situation of having a carefully structured discretion for contract and trusts law but leaving tortious remedies subject to the perceived uncertainties of the concept of ex turpi causa non oritur actio.^3 Since the publication of the consultation paper we have also had our own misgivings about this omission. In the light of both consultees’ and our own concerns we decided to extend our examination of the law to consider the effects of the illegality doctrine as it operates in tort.

1.4 Our change of view as to the appropriateness of including tort within the scope of the project has been prompted by two main factors. First, we appreciate the comments made by some consultees about the inconsistency that would arise as

(^1) Below we refer to this as the “consultation paper” or “Consultation Paper No 154”. (^2) Consultation Paper No 154, para 1.3. (^3) We explain the operation of this doctrine later in this paper. See below, Part II.

between our provisional proposals for legislative reform in contract and trusts and the common law of tort, were we to exclude consideration of tort. We think that there is particular force in this point where there are concurrent or parallel claims in contract and tort (for example, a claim for breach of contract coupled with a claim for fraudulent misrepresentation or an alternative claim in conversion). If our provisional proposals for contract and trusts were to be implemented, but the defence in tort left untouched, a court might be required to apply both a statutory discretion and a series of common law rules in relation to the same illegal conduct in the same case, depending on which cause of action it was considering.^4 We do not think this outcome would fulfil our statutory duty to work towards the “systematic development and reform” of the law. 5 Secondly, a number of important tort cases have been reported since the decision was taken to exclude tort from the scope of Consultation Paper No 154. Some of these cases are potentially controversial, and merit examination.

1.5 In addition, an important point we raise at this stage is that the problems with the clarity of the current law - which we discuss in Parts II, IV and V - mean that it is difficult to predict an outcome or to explain the outcome in terms of the apparent rationale for the illegality defence, with the result that there is a risk of arbitrariness or possibly disproportionality. Arbitrary or disproportionate results could lead to conflict with the European Convention on Human Rights (ECHR):

In a democratic society subscribing to the rule of law, no determination that is arbitrary can ever be regarded as lawful.^6

1.6 Proportionality is also a fundamental principle in ECHR jurisprudence.^7 Lester and Pannick^8 suggest that:

Interpretation of the Human Rights Act should strive to give effect to the general principle, ‘inherent in the whole of the Convention’, that it is seeking to strike a ‘fair balance...between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights’.^9

They go on to state:^10

(^4) See below, paras 5.9-5.11. (^5) See Law Commissions Act 1965, s 3. See below, para 5.12 n 16. (^6) Winterwerp v Netherlands (1979) 2 EHRR 387, para 39. See Lord Lester of Herne Hill and D Pannick (ed), Human Rights Law and Practice (1999) para 4.19.20. (^7) See Consultation Paper No 154, para 1.23. See also R Clayton and H Tomlinson, The Law of Human Rights (2000) vol 1, paras 6.40-6.85, and K Starmer, European Human Rights Law (1999) paras 4.37 ff. (^8) Lord Lester of Herne Hill and D Pannick (ed), Human Rights Law and Practice (1999). (^9) Ibid , at para 3.09 (footnotes omitted). Sporrong and Lönnroth v Sweden (1982) 5 EHRR 35, 52 and Soering v United Kingdom (1989) 11 EHRR 439, 468 are cited. (^10) Ibid , at para 3.10.

1.9 This need for a clear link between the use of the illegality doctrine and the policies that underlie it caused us to re-examine those policies as part of our consideration of the law. 18 We have some doubts as to whether the policy rationales that had previously been examined in the consultation paper are always appropriate or adequate in their explanatory power, particularly when applied to tort. This aspect is considered further in Part IV of this paper.

1.10 On 22 March 2001 we held a seminar on “The Illegality Defence in Tort” at the Institute of Advanced Legal Studies in London, which we had organised jointly with the Society for Advanced Legal Studies and the Tort Section of the Society of Public Teachers of Law. 19 Prior to this seminar we had produced a draft version of this consultation paper which we circulated to those attending, as well as to other interested parties. The seminar was chaired by Professor Hugh Beale, one of the Law Commissioners, and the speakers were Lord Justice Mummery and Professor Michael Jones. The seminar took the form of a discussion of the draft version of this consultation paper. We are grateful to those who attended this seminar, and to those who gave us comments on the draft paper. In writing this final version we have taken account of the main issues raised and discussed in this seminar, as well as a number of other comments received about the draft from persons who were invited to the seminar but were unable to attend.

2. STRUCTURE OF THE PAPER

1.11 Following this Introduction, in Part II of this paper we review the doctrine of illegality as it currently affects claims in tort in England and Wales. In Part III we consider how the doctrine has operated in a number of other jurisdictions; we include this section because it has helped to inform our proposals for reform in our own jurisdiction. In Part IV we reappraise the policies that lie behind the doctrine both in tort and more generally. In Part V we consider whether reform is necessary, and conclude that it is necessary, or at least advantageous, to

pre-emption ‘ operated arbitrarily and selectively and was scarcely foreseeable , and it was not attended by the basic procedural safeguards’. (Emphasis added). For a recent example of a case in which the Court of Appeal has considered a submission that the use of the illegality defence contravened Article 1 of the First Protocol, see Al- Kishtaini v Shanshal, The Times 8 March 2001. The illegality in this case concerned the transfer of money in breach of Directions made in implementation of United Nations sanctions against Iraq. Argument on compatibility with the First Protocol focused on the “public interest” exception, and it was held that there was no inconsistency with the ECHR given that: [t]he Directions embody a very high public interest originating in the resolutions of the Security Council of the United Nations in an international emergency. ( per Mummery LJ, from transcript). In addition, the necessary proportionality and fair balance between the public interest and private right was afforded by the machinery for the claimant to apply to the Bank of England for permission to carry out the transaction in question. (^18) We had examined the policies in the context of contract and trusts in Part VI of Consultation Paper No 154. (^19) Below we refer to this seminar as the “consultation seminar”.

remedy what we perceive as problems with the current operation of the law, as well as for purposes of clarity and consistency. In Part VI we set out our provisional proposals for reform of this area, which, as with contract and trusts, consist of the introduction of a structured statutory discretion. In Part VII, we summarise our provisional proposals and the issues on which we invite responses. Finally, Appendix A reproduces the summary of recommendations and consultation issues from Consultation Paper No 154, and Appendix B provides a select bibliography.

3. THE MEANING OF “ILLEGALITY”

1.12 One important point that needs to be considered is what we mean by “illegality”. A Latin phrase that has often featured in cases involving a claimant who has acted in an illegal manner (particularly in tort cases) is ex turpi causa non oritur actio.^20 The appropriateness of this phrase has been questioned both by judges and by academic commentators.^21 Other Latin phrases have been used in this context.^22 As to the meaning of “illegal conduct” in tort, it seems to us that there are three possible interpretations. One would restrict the use of the phrase to those actions that were in breach of the criminal law; another would be to include both criminal actions and those that were in breach of the civil law, and a third would be to include criminal wrongs, civil wrongs, and immoral behaviour.

1.13 When we discussed what was meant by “illegal transaction” for the purposes of Consultation Paper No 154, we found this to be a difficult question to answer.^23 We were of the opinion that it would be too limited a view to restrict the meaning of “illegal transaction” to those transactions where the formation, purpose or performance involved the commission of a legal wrong, and took as the broad remit both this situation and conduct which was “otherwise contrary to public policy”.^24 This public policy side of illegality is more likely to be of importance in claims involving contracts or trusts than tort, although those tort claims which can be seen as parasitic on a contract may fall within this head.

1.14 It can be seen from the comments made by judges that the operation of the illegality doctrine in tort cases is not confined to criminal illegality, but in

(^20) See below, para 2.1. (^21) See, eg, the comments made in Pitts v Hunt [1991] 1 QB 24:

I find the ritual incantation of the maxim ex turpi causa non oritur actio more likely to confuse than to illuminate. ( per Balcombe LJ ibid , at p 49). That a defence of illegality can be pleaded to a case founded in tort is...clear, whether or not the defence is correctly called ex turpi causa. ( per Dillon LJ ibid , at p 57). See also N Enonchong, Illegal Transactions (1998) pp 94-95. (^22) Eg, Lord Mansfield uses the phrase ex dolo malo non oritur actio in Holman v Johnson (1775) 1 Cowp 341, 343; 98 ER 1120, 1121. (^23) See Consultation Paper No 154, para 1.4. (^24) See ibid , paras 1.4-1.11 for a full discussion of the concept of “illegal transaction”.

where there is medical evidence that the suicide was not in full possession of his or her mind.^31 A similar defence was asserted in the later case of Reeves v Commissioner of Police of the Metropolis , it being argued that the Court of Appeal in Kirkham had left open the question of whether the suicide of a sane person would be sufficient for the illegality defence to apply. The Court of Appeal held that such action would not result in the successful application of the doctrine to bar the claim.^32

1.16 We have found it difficult, although not impossible, to envisage a realistic modern day situation in which the conduct of the claimant is so immoral or reprehensible that the claim should be disallowed, without such conduct also being (potentially) criminal.^33 Nonetheless, we accept that such a case might occur, and references in this paper to illegality should be understood in the third, broadest sense noted above.

1.17 In the course of this paper we seek to avoid unnecessary use of Latin phrases such as ex turpi causa non oritur actio. Although honoured by tradition, we do not think that such phrases provide significant enlightenment to litigants in the twenty-first century, particularly given the attempts in recent years to make the process of civil litigation cheaper, clearer and fairer than before. Instead, although

(^31) See further below, para 2.37 n 89. Lloyd LJ said at [1990] 2 QB 283, 291:

[Suicide] is no longer regarded with the same abhorrence as it once was. It is, of course, impossible for us to say how far the change in public attitude has gone. But that there has been a change is beyond doubt. We discuss the now-disapproved approach of assessing the “public conscience” below, paras 2.31-2.42. (^32) See further below, para 2.39. Buxton LJ said at [1999] QB 169, 186:

I am quite unpersuaded that shock or affront (both of which are very strong reactions indeed) would be the reaction of a citizen armed with that information [the circumstances of the case, and the respective responsibilities and duties] to an award of damages in respect of the suicide of a man known to be a suicide risk while he was involuntarily in police custody. (^33) Clerk and Lindsell on Torts (18th ed 2000) para 3-15 n 62 raises the question whether sado- masochistic practices not falling foul of the criminal law would fall into this category, and refers to the cases of R v Brown [1994] 1 AC 212 and R v Wilson [1997] QB 47. It seems that the House of Lords in the case of R v Brown thought there would be some such conduct that would be both morally repugnant yet legal. See, eg, the (dissenting) speech of Lord Mustill ibid , at p 257: The two remaining categories of conduct comprised private acts. Some were prosecuted and are now before the House. Others, which I have mentioned, were not. If repugnance to general public sentiments of morality and propriety were the test, one would have expected proceedings in respect of the most disgusting conduct to be prosecuted with the greater vigour. Yet the opposite is the case. Why is this so? Obviously because the prosecuting authorities could find no statutory prohibition apt to cover this conduct. However, whilst such conduct might come within a definition of “illegal”, we are not at all sure that in most cases involving “grossly immoral” but consensual, non-criminal acts in private, denial of an allied civil claim for personal injury would be necessary to reflect the policies underlying the illegality doctrine. See below, Part IV.

this may not be the ideal replacement, we refer in this paper to the “illegality doctrine” or the “defence of illegality”.

4. AN OVERVIEW OF OUR PROVISIONAL PROPOSALS

1.18 Our provisional proposals for the reform of tort law are similar to those originally set out in Consultation Paper No 154 for contract and trusts, although we have since developed our thinking. We suggest that the current rules applied by the courts when considering the effect of illegality on a tortious claim should be replaced by a structured discretion, under which the court would be directed to consider whether, in the light of the underlying rationales and taking into account a number of guiding factors, the claim should be allowed or disallowed.

1.19 We propose that the discretion should be structured around a number of factors, to help provide certainty and guidance in the exercise of the discretion, and, importantly, to reflect the policies that lie behind the existence of the doctrine of illegality. In Consultation Paper No 154, and in the context of contract and trusts,^34 we proposed that those factors should be (i) the seriousness of the illegality; (ii) the knowledge and intention of the plaintiff^35 or illegal trust beneficiary; (iii) whether refusing to allow the claim or whether invalidity of the trust would act as a deterrent; (iv) whether refusing the claim would further the purpose of the rule which renders the contract or trust illegal, and (v) whether denying relief would be proportionate to the illegality involved. We discuss in Part VI the factors that we think are relevant to a discretion in the context of tort; they are along similar lines to those mentioned above. However, we will also raise other factors including one that reflects an argument that we discuss later in this paper, the need for “consistency”.

5. OUR UNDERLYING THINKING

1.20 Our consideration of the law has led us to the conclusion that there are two problems with the current law. First, there is a lack of clarity in the way the illegality defence is to be applied in tort cases. Secondly, the law could be applied in a way which would produce outcomes that we think are undesirable, by including within its scope situations in which we believe the use of the illegality defence would be difficult to justify.

1.21 Our provisional proposals for reform do not seek to draw up a finite list of situations when illegality would impact on a claim and when it would not - this would be unjustifiably rigid and practically impossible - but we do seek to provide a policy-based, structured discretion to assist the court in deciding that question. Under these proposals, we envisage that cases where the claimant is seeking damages as compensation for the direct consequences of his or her illegal

(^34) Consultation Paper No 154, paras 7.43 and 8.63. (^35) Now “claimant”. In this paper we generally use the term “claimant” when referring hypothetically or to a case decided under the regime of the Civil Procedure Rules, and “plaintiff” when referring to a case decided before those Rules came into force.

Despite this, however, the law does recognise that in certain situations illegal conduct will as a matter of policy operate so as to prevent a person suing to enforce his or her rights under the civil law. The question is where the boundary is to be drawn between illegal conduct that will have an effect on the offender’s rights, and where it will not. To be just, that boundary must not be drawn arbitrarily. It should reflect the underlying policy rationales. We believe that the outcomes of the existing cases can be justified in terms of the policy rationales or of other doctrines, but we are not convinced that this is true of the statements of law contained in some of the cases.

1.26 Finally, we make the point that the decision to bar a claimant from recovering damages in tort is a very serious one. It may mean that a claimant who has been barred from recovering damages for serious personal injury following a negligently caused accident will lose a substantial sum of money. He or she may have to fall back onto State benefits in respect of, for example, an inability to work as a result of the injury. In such a case this would involve both a substantial reduction in the sums available and a transfer of the financial responsibility from the defendant tortfeasor (or his or her insurers) to the public purse, the Criminal Injuries Compensation Authority, or possibly the Motor Insurers’ Bureau. We consider these aspects in more detail in Parts II and V. Given these points, we have serious doubts as to the appropriateness of the illegality doctrine operating in the context of personal injury cases. This is a theme we develop during the course of this consultation paper.

The medieval concept of outlawry is unacceptable in modern society. An outlaw forfeited the protection of the law. He could not invoke the assistance of the court to enforce non-existent rights. In the United Kingdom today there are no outlaws. However abhorrent the crime, whatever the subsequent conviction, the protection of the law extends to the criminal who enjoys rights not only in theory but enforceable in practice. (Smith Bernal transcript). See further below, para 2.5.

PART II THE EXISTING LAW IN ENGLAND AND WALES

1. INTRODUCTION

2.1 The Latin maxim ex turpi causa non oritur actio^1 has been held to mean that “no cause of action may be founded on an immoral or illegal act”.^2 The maxim seems first to have been applied in contract cases and some commentators have argued that the maxim should not apply to tort claims.^3 Some of the earlier cases are unclear on this point,^4 but it has now been confirmed unequivocally that the defence does apply in tort,^5 and indeed the defence is said to be the same in both contract and tort. In Standard Chartered Bank v Pakistan National Shipping Corporation and others (No 2)^6 Aldous LJ said:

There is in my view but one principle that is applicable to actions based upon contract, tort or recovery of property. It is, that public policy requires that the Courts will not lend their aid to a man who founds his action upon an immoral or illegal act.^7

2.2 However, it remains difficult to identify when a claim in tort will be barred on the basis of the defence of illegality:^8 part of the difficulty stems from the wide variety of factual situations in which the illegal conduct may arise.

(^1) Referred to below as “ex turpi causa”. (^2) Revill v Newbery [1996] QB 567, 576 per Neill LJ. See below, paras 2.49-2.52. (^3) See, eg, G Williams, “Contributory Negligence and Vicarious Liability” (1954) 17 MLR 365, 365 where he argued that “‘plaintiff a wrongdoer’ is not one of the general defences recognised in tort” although he acknowledged that Lord Asquith recognised a limited application of the defence in tort in National Coal Board v England [1954] AC 403. See below, para 2.48. (^4) In National Coal Board v England, ibid , at p 419 Lord Porter said:

the adage itself is generally applied to a question of contract and I am by no means prepared to concede where concession is not required that it applies also to the case of a tort. In the Australian case of Smith v Jenkins (1969) 119 CLR 397, 410 Windeyer J considered that ex turpi causa was not a valid defence in tort and that it should be understood as being confined to contract. See below, para 3.10. (^5) Clunis v Camden and Islington Health Authority [1998] QB 978, 987. See below, para 2.7. (^6) [2000] 1 Lloyd’s Rep 218. See below, para 2.14 n 40. (^7) Ibid , at p 232. See also Mance LJ in Hall v Woolston Hall Leisure Ltd [2001] 1 WLR 225, 247: Although the underlying principle is as applicable to tort as it is to contract, its impact differs. (^8) Illegality is normally treated as a defence to a tort claim (see, eg, Clerk and Lindsell on Torts (18th ed 2000) paras 3-02 ff, and see the comments of Buxton LJ in Reeves v Commissioner