Supreme Court: the common law working out illegality defence
23 April 2015
Jetivia v. Bilta  UKSC 23, 22 April 2015 – read judgment
Nigel Farage is quoted yesterday as preferring immigrants to be Australians and Indians rather than EU citizens, because they probably speak English and “understand common law.”
Nice coincidence, then, that on the same day the Supreme Court came out with a perfect illustration of the potential difficulties of the common law process. This is the latest (but unlikely to be the last) instalment from the Court going to the question as to whether some crime by a claimant ought to stop his claim in its tracks.
The issue is well demonstrated by this claim, in effect a carousel fraud (see pic and see my post here), in which a company the victim of a fraud seeks to recoup losses from the fraudsters and is met with the argument – but your directors were in on the fraud too. How does the law deal with this?
A bit more on the facts, so we can see the problem. Bilta (through its liquidators) sued two former directors and a Swiss company, Jetivia SA, together with Jetivia’s chief executive. Bilta said that its two directors had caused Bilta to engage in fraudulent trading in carbon credits. The fraud was simple. Bilta bought carbon credits free of VAT from Jetivia (for some £294m). It resold them back-to-back to UK companies registered for VAT. The onsale price of the credits net of VAT was often fixed at a level below Bilta’s purchase price, thus enabling Bilta’s UK buyer to sell them on at a profit. The proceeds of Bilta’s sales, together with the VAT thereon, were paid either to Bilta and on to Jetivia. All Bilta had was the cash generated by its sales, and the result was to make it insolvent with a liability to pay the VAT to HMRC.
Upshot, Bilta owed HMRC £38m+, HMRC wound them up, and the liquidators (doubtless stoked by the Revenue) are seeking to recoup the losses from those said to be behind the fraud.
The Supreme Court unanimously dismissed Jetivia’s attempt to strike the claim out, on the basis of an ex turpi causa defence – in English, you cannot sue relying upon a crime to which you are a party. But there was a good deal of difference between the justices as to how the law should go in this area – a classic common law problem, not for these litigants, but for later ones.
As Lord Sumption pointed out, the illegality defence commonly raises three questions:
- what are the “illegal or immoral acts” which give rise to the defence?
- what relationship must those acts have to the claim?
- on what principles should the illegal or immoral acts of an agent be attributed to his principal, especially when the principal is a company?
As for the first, the illegality defence is potentially engaged by any act of the claimant which is criminal or dishonest or falls into a limited number of closely analogous categories, and there has been some recent learning on this – so, in Servier, breach of a foreign patent did not qualify.
As to the second, the precise relationship required between the illegal act and the claim is not yet clear. If the crime is purely incidental, the courts ignore it. If the crime is directly relied on, it obviously counts. Between those polar positions, the ground is not clear, but the courts are astute not to be blinded by cunning drafting. A perfect example is Everet v Williams, the 18th case of two highwaymen having a partnership dispute about their ill-gotten gains, in which unsurprisingly they did not plead out the nature of their business. (When the truth emerged, their solicitors were arrested and fined, and their hapless clients were hanged.)
The third question, attribution, has caused a vast of ink to be spilled in recent years. In the current case, was the dishonesty in the illegality defence to be attributed to Bilta for the specific purpose of defeating its claim against the directors and their alleged co-conspirators?
Lord Sumption put it in this way
The question is whether the defence is available to defeat an action by a company against the human agent who caused it to act dishonestly for damages representing the losses flowing from that dishonesty.
He, the rest of the Supreme Court, and the courts below said the defence was not available. The agent of the company (a director) was not entitled to attribute his own dishonesty to the company for the purpose of giving himself immunity from the ordinary legal consequences of his breach of duty.
Beyond that, there was a good deal of disagreement between members of the court, which Lord Neuberger sought to summarise. There was a general difference of approach between those (Lord Sumption) who say that the illegality defence is based on a rule of law on which the court is required to act, if necessary of its own motion, in every case to which it applies; it is not a discretionary power on which the court is merely entitled to act, nor is it dependent upon a judicial value judgment about the balance of the equities in each case. Others (Lord Hodge and Toulson) took a broader view, in which policy had a role to play; they relied on Hounga v Allen  UKSC 47, in which the claimant (the victim of human trafficking) was a victim of unlawful discrimination occurring within the context of a contract of employment. But the contract of employment was in breach of her immigration status.
This issue did not arise directly in the current case, but Lord Neuberger has rather waved on arguments in future cases where it does arise.
In my view, while the proper approach to the defence of illegality needs to be addressed by this court (certainly with a panel of seven and conceivably with a panel of nine Justices) as soon as appropriately possible, this is not the case in which it should be decided.
Herein lies another difficulty about the common law. The judges do not generally come up with an answer which the parties have not argued for, and they can be wary about saying any more than they have to. And there may well be tactical reasons why a party has not argued a point; with some irony, it has been pointed that one of the key cases under debate (Stone & Rolls Ltd v Moore Stephens  UKHL 39) proceeded on a concession made by one J. Sumption QC, which, according to some academics, sent the case off on the wrong footing. As Lord Mance pointed out, the concession was no doubt tactically well-judged; it may have helped win the case for Sumption’s auditor clients. But, in Lord Neuberger’s view this relatively recent decision of our top domestic court should be “put on one side and marked ‘not to be looked at again'”. Indeed, Lord Mance thought that criticism of Stone & Rolls for
being over long and diffuse have a fair point, and commentators and practitioners have found the case difficult.
Not just French or Romanian ones, doubtless.
Don’t get me wrong. I am not for a moment bashing the UK process in which the disparate views of judges (whether concurring or dissenting) are articulated at length in their judgments. Contrast the CJEU method in which the whole court signs up to a judgment often amounting to the lowest common denominator between the judges, suppressing completely or in part the dissent which actually lay between them in the privacy of their chambers. Nor should it be thought that the French Code Civil somehow contains all the answers within its enactment; it does not, and it requires its own set of case law interpreting it.
But the common law approach can come at a cost, in that areas of law can be for many years in a state of flux before they settle down. And the law of illegality, despite having gone to our top court on a number of times in recent years, still awaits answers on some key issues, as the Supreme Court recognises.
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