Lecture - ONES DAY PROFESSORSHIP OF COMMERCIAL LAW LECTURE 2019 – “THE STATE OF ILLEGALITY”

• Citation: (2019) 31 SAcLJ 747
• Published date: 01 December 2019
• Publication year: 2019
• Date: 01 December 2019

1 Can a nation's legal culture be defined by one legal doctrine – or even one case? The doctrine of illegality, and recent decisions in England and Singapore on its operation, may serve to define each state's legal culture, including judicial attitudes to the act of judging. Justice Finn1 once said, specifically of the legal culture in England and Australia (but Singapore could be included as well), that there are “differing casts of mind, distinctive methodologies and markedly different contexts”. But bearing in mind our shared sources of law, perhaps our legal cultures are not so different after all. Analysis of the approach to illegality will cast a useful spotlight on these differences and similarities.

2 In England, two judicial factions have emerged as regards the interpretation of illegality which, superficially at least, can be characterised as the anti- and pro-discretion camps. On one side are those judges who wish to adopt a rule-based approach; one which is founded on reason, logic and the rule of law. For these justices predictability of result is vital and the uncertainty of judicial discretion makes it unacceptable; they tend to come from the commercial practice tradition. The other faction appears more concerned with the desire to reach the just result on the facts by resorting to the exercise of judicial discretion. The identification of these factions is, however, an unsophisticated caricature. The reality is more complex and subtle, although it is clear that some justices are more comfortable with the notion of judicial discretion than others.

3 In Singapore there is, perhaps, less of a conflict, with a greater acceptance of the importance of rules and the need for certainty, but, of

course, the need for justice and fairness remains vital. This approach has been reflected particularly clearly by Andrew Phang who has said:2

[F]airness and justice, though, must be achieved in a principled manner – in accordance with the existing rules and principles (or by way of a principled application and/or extension of them).

The need to balance certainty and fairness, whilst respecting longstanding legal doctrine, runs throughout our legal systems. It is especially significant in private law and it is in the context of the doctrine of illegality that the different approaches are most apparent. But might there be a way to balance certainty, the rule of law, fairness and justice? That is what this lecture will examine.

I. What is discretion?

4 Before the law on illegality is considered, it is important to reflect on the function of judicial discretion, which has often been regarded as the solution to the illegality problem but also used as a weapon to attack sloppiness of legal thinking.

5 The language of judicial discretion appears to allow for the judge to secure what he or she considers to be the just result with reference to the particular facts of the case. That was certainly the view of Sir Thomas More writing 500 years ago in Utopia:3

The law and Judges should avoid arcane interpretations and debates about law but should instead judge the overall equity or justice of a situation and decide accordingly.

But the consequent lack of certainty and predictability has been a cause of concern. In Doe v Kersey in 1795 Lord Camden said:4

The discretion of a Judge is the law of tyrants; it is always unknown; it is different in different men; it is casual, and depends upon constitution, in temper and passion. In the best it is often times caprice; in the worst it is every vice, folly and passion to which human nature is liable.

But this simple equation of judicial discretion with arbitrary choice lacks sophistication. In an important and helpful analysis H L A Hart5 argued that discretion is fundamentally different from arbitrary choice: discretion by its nature is guided by rational principles, so that a decision which is not susceptible to principled justification is not an exercise of discretion at all but simply an arbitrary choice, and it is this which should be considered to be contrary to the rule of law. Hart rejected arbitrary choice as a basis for judicial decision-making. He was right to do so. Judges must, by virtue of their office, act judicially and not arbitrarily, but this does not prevent them from exercising discretion as long as that exercise can be justified by reference to recognised principles. The key question will then be what principles, or reasons of general application,6 might be identified. This will depend on the particular body of law which is being considered.

6 This analysis of discretion identifies a basis for the recognition of a middle way between the operation of strict rules on the one hand and arbitrary choice, which is dependent on careful assessment of the facts, on the other. That model requires the identification of a rule which can then be modified by the application of recognised principles as determined by the particular facts of the case. It is this model which can provide the solution to the disagreement about the operation of illegality.

II. Illegality in England

A. Background

7 Confusion about the operation of the illegality defence runs throughout the law of obligations in English law.7 The defence of illegality is traditionally formulated as a rule. It applies in the form of the maxim ex turpi causa non oritur actio (“No action can arise from a base cause”),8 meaning that the courts will not assist a claimant to obtain a remedy where the action is founded on illegal conduct. It is influenced

by external considerations of public policy rather than securing justice between the parties.9 As Lord Goff said in Tinsley v Milligan:10

[I]t is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other.

In Les Laboratoires Servier v Apotex Inc,11 Lord Sumption emphasised that the defence was not based “on the perceived balance of merits between the parties to any particular dispute”,12 thus squarely placing it within the external relationship between the court and the claimant,13 rather than the internal relationship between the claimant and the defendant.

8 Lord Mance has written, extra-judicially, that “the underlying problem [is] of how to react to illegal behaviour”.14 Inherent in this statement is the assumption that the defence of illegality should not necessarily be absolute in its application, and that in certain cases, such as where the illegality is minor or the defendant is more responsible than the claimant for participation in the illegal transaction, a claim tainted15 by illegality should nonetheless be recognised by the courts. For instance, where the effect of rendering the claim unenforceable is wholly out of proportion to the illegal behaviour, “most people's moral instincts”16 would be that the defence should not apply. It was for this reason that the Judiciary sought to temper the strict rule to secure justice. For a few years in the 1980s this was achieved through the reformulation of the illegality defence by reference to the public conscience test, whereby the defence would only be applied if the public conscience would be affronted if relief was granted. This test originated in Thackwell v Barclays Bank plc,17 where an action for conversion failed by virtue of the illegality defence, but only after the court had considered all the circumstances of the case, including the nature of the illegality, to determine whether the granting of a remedy to the claimant

would be seen to be indirectly assisting or encouraging his criminal act. A remedy was eventually denied because the claimant had been a knowing party to a fraudulent transaction. The public conscience test was, however, rejected by the House of Lords in Tinsley v Milligan, on the ground that it was inconsistent with previous authority and that it would replace a principled system of rules with a discretionary balancing operation.18

9 The rejection of the public conscience test was surely correct. The application of the test resulted in inconsistent decisions,19 often turning on judicial outrage arising from the facts of the case.20 Justice is dependent on a high degree of predictability, which is lacking under the public conscience test. But, even though subsequent cases have not resurrected the test, there remains a clear judicial desire to temper the rigidity of the ex turpi causa rule to avoid unjust results. But the ex turpi causa rule was never absolute; it has always been qualified by various doctrines to limit its operation.

(1) No reliance on illegality

10 Since the illegality defence is typically formulated in terms of the claimant being prevented from relying on the illegality to establish the claim,21 it follows that a claim may succeed where its elements can be established without needing to rely on the illegality.22 In Tinsley v Milligan23 a majority of the House of Lords recognised that Miss Milligan could vindicate her equitable proprietary right even though she had participated in an illegal transaction, since, having contributed to the purchase of a property which had been put into Miss Tinsley's sole name, the presumption of resulting trust was engaged without needing to plead the illegality. If, however, the claimant needed to refer to illegality to make good the claim, it would be defeated by the illegality defence.24 But whether the claimant can establish the claim without relying on illegality turns on chance. Tinsley v Milligan would have been different had the presumption of advancement applied, for then the claimant would have needed to plead the illegal agreement to

rebut the presumption. The validity of the no-reliance principle has anyway been doubted. In Stone and Rolls Ltd v Moore Stephens,25 Lord Phillips said:26...