1. See Illegal Transactions: The Effect of Illegaliry on Contracts and Trusts, Law Commission Consultation Paper No 154 (1999) (hereinafter Law Corn CP No 154). I acted as consultant on the project, but the present paper has not been seen by the Commission and must not be taken to be in any way representative of its views.

2. The scope of the Consultation Paper in England is unusually wide in that it deals with the law of trusts as well as with that of contract. The present paper is, however, confined to illegality in contract as, in practice, are the reports of the other law reform bodies and the New Zealand legislation. But the main thrust of the provisional proposals in relation to trusts is, in very broad terms, similar to that of the proposals for contracts: ie a structured discretion and the abandonment of the ‘reliance’ principle. Some important cases are also relevant in both contexts, notably Tinsley v Milligan (1994) AC 340.

3. See the Thirty-Seventh Report Relating to the Doctrines of Frustration and Illegality in the Law of Contract (hereinafter the SA Report).

4. See the Report on Illegal Transactions (hereinafter the BC Report).

5. See Amendment to the Law of Contract, ch 11 (hereinafter the Ontario Report).

6. See M P Furmston ‘The Illegal Contracts Act 1970 - An English View’ (1972) 5 NZULR 151 at 155 et seq.

7. See N E Enonchong Illegal Transactions (London: LLP Ltd, 1998) ch 1, pp 3–8. See also R A Buckley ‘Implied Statutory Prohibition of Contracts’ (1975) 38 MLR 535 at 540–542.

8. ‘We cannot agree with those of our correspondents who were of the view that it was unnecessary to define “illegal contract” beyond affirming that the meaning of that term at common law is to govern’: BC Report, p 67.

9. BC Report, p 67.

10. See ibid, p 73.

11. ‘An Illegal Transaction Act should provide that a transaction not be regarded as an illegal transaction by reason that its formation or performance is in breach of an enactment, or contrary to the object of an enactment, unless the object of the enactment clearly so requires’: BC Report, p 70 (emphasis supplied). See also ibid at p 69: ‘… strictly speaking, the benevolent rule… should apply equally to the formation of a transaction.’

12. BC Report, p 70. See, generally, Enonchong, above n 7, ch 15.

13. See below.

14. See Law Com CP No 154, para 1.4 (p 2).

15. See ibid, para 1.5 (p 2).

16. See p 72 of the BC Report.

17. See the Illegal Contracts Act 1970, s 8.

18. See Law Com CP No 154 para 1.11 (p 7): ‘Any reform of this area of the law would require a careful, specialist, examination of… complex rules and the policy issues that lie behind them. Such a task is beyond the scope of this Paper with its very broad focus on illegal transactions generally.’

19. See ibid, paras 7.5-7.16 (pp 93–96).

20. Emphasis supplied

21. See the BC Report pp 74–75. See also the Ontario Report p 232. See below for discussion of the working of the New Zealand Act.

22. See the SA Report pp 26–21.

23. See the BC Report p 58: ‘Retaining the common law is fundamentally inconsistent with a discretionary power to grant relief.’

24. See ibid, pp 79 and 115.

25. See s 5(1) of the Draft British Columbia Illegal Transaction Act (Appendix E to the BC Report).

26. ‘If a transaction is illegal in the sense that it violates a statute, there is no justification for permitting courts to override completely the policy of the statute. Although we are more hesitant concerning transactions which are contrary to public policy, the reason such transactions fall within an Illegal Transaction Act in the first place is because, in the perception of the judge, enforcing that contract would have pernicious results. Preventing unjust enrichments or unfair results does not require going to the opposite extreme and ordering the very result which is said to be contrary to statute or harmful to society’: BC Report pp 74–75.

27. See p 76.

28. Ibid, p 76.

29. See above n 19.

30.. ‘In deciding whether or not a contract is contrary to public policy, the court is already effectively asking the question - would it be against the public interest to enforce the contract? Put another way, there is simply no scope for a discretion as regards enforceability which operates once the court has decided that a contract is contrary to public policy’: Law Com CP No 154 p 96, para 7.13.

31. Cf Cheshire, Fifoot and Furmston's, Law of Contract (London: Butterworths, 13th edn, 1996) p 377: ‘It has been plausibly argued that sexual mores have changed radically and that public policy should reflect this, but it is not easy to state how far the changes have gone.’

32. Law Com CP No 154 para 7.16 (p 98).

33. In his dissenting judgment in Tinsley v Milligan (1994) AC 340 at 362, Lord Goff of Chieveley said: ‘I find it difficult to see how, in this context at least, it is possible to distinguish between degrees of iniquity.’ Sed quaere.

34. Cf per Megarry J in Curragh Investments v Cook (19741) WLR 1559 at 1563. See also Enonchong, above n 7, ch 1, pp 3–8.

35. See R A Buckley ‘Participation and Performance in Illegal Contracts’ (1974) 25 NILQ 421.

36. See Cheshire, Fifoot and Furmston's Law of Contract, above n 31, p 366.

37. See eg Shaw v Groom (1970) 2 QB 504, CA, especially per Sachs LJ at 523. See also per Lord Wright in the Court of Appeal in Beresford v Roval Insurance Co (1937) 2 KB 197 at 220: ‘… in these days there are many statutory offences which are the subject of the criminal law, and in that sense are crimes, but which would, it seems afford no moral justification for a Court to apply the maxim [ex turpi causa non oritur actio].’ This passage was cited with approval by Denning LJ in Marles v Philip Trant [19541 1 QB 29 at 37.

38. See Buckley, above n 7.

39. See eg Phoenix General Insurance Co Qf Greece v Helavanon Insurance (1988) QB 216, CA (discussed below); Re Mahrnoud and lspahani (1921) 2 KB 716, CA.

40. See eg St John Shipping Corporation v Joseph Rank (1957)1 QB 267.

41. See Law Com CP No 154, para 7.9 (p 95) citing the New Zealand Law Commission, Contract Statutes Review (1993) pp 17–21.

42. See Enonchong, above n 7, ch 16. See also J K Grodecki ‘In Pari Delicto Potior est Conditio Defendentis’ (1955) 74 LQR 254.

43. See eg Davies v London and Provincial Marine Insurance Co (1878) 8 Ch 469; Smith v Cufs (1817) 6 M & S 160.

44. See eg Kiriri Cotton Co v Dewani (1960) AC 192; Kasumu v Baba-Egbe (1956) AC 539; Gray v Southouse (1949) 2 All ER 1019; Browning v Norris (1778) 2 Cowp 790.

45. See the New Zealand Illegal Contracts Act 1970, s 7(1).

46. ‘… we recommend that legislation should be enacted to provide that where a contract, or any term thereof, is unenforceable by reason of public policy (including the effect of any statutory provision), the court may grant such relief by way of restitution, compensation or otherwise, as it thinks just and is not inconsistent with the policy underlying the unenforceability of the contract.’ Ontario Report, p 232.

47. But see below n 93, and associated text.

48. Law Com CP No 154 para 7.22 (p 100).

49. See Kleinwort Benson Ltd v Lincoln City Council (1999) 2 AC 349.

50. Cf Harse v Pearl Life Assurance Co (1904) 1 KB 558, CA, which would presumably now be decided differently.

51. See M J Higgins ‘The Transfer of property under Illegal Transactions’ (1962) 25 MLR 149.

52. See Singh v Ali (1960) AC 167, PC. See also Feret v Hill (1854) 15 CB 207; Ayersr v Jenkins (1873) LR 16 Eq 275.

53. Cf Belvoir Finance Co Ltd v Stapleton (1971) 1 QB 2 10, CA.

54. See Bowmakers v Barnet Instruments (1945) KB 65, CA.

55. See Tinsley v Milligan (1994) 1 AC 340.

56. ‘… every illegal contract shall be of no effect and no person shall become entitled to any property under a disposition made by or pursuant to any such contract.’

57. See s 7(5).

58. See s 7(1)(c), discussed above.

59. BC Report p 81.

60. Ontario Report p 232.

61. See the SA Report pp 25–26.

62. See, generally, Enonchong, above n 7, chs 5 and 6.

63. See Law Corn CP No 154 para 7.32 (p 100). See also para 5.6 (p 82).

64. See ibid, at para 7.26 (p 101). The illegality would not ‘invalidate a disposition of property to a third party purchaser for value without notice of the illegality’ . Cf New Zealand Illegal Contracts Act 1970, s 6(1).

65. See eg Tribe v Tribe (1996) Ch 107; Bigos v Bousted (1951) 1 All ER 92; Kearley v Thompson (1890) 24 QBD 742; Taylor v Bowers (1876) 1 QBD 291.

66. For discussion of withdrawal as the basis of restitution see, generally, Enonchong, above n 7, ch 19. F D Rose ‘Restitutionary and Proprietary Consequences of Illegality’ in F D Rose (ed) Consensus ad Idem: Essays on the Law of Contract in Honour of Guenter Treitel (London: Sweet & Maxwell Ltd, 1996) pp 26–34; R Merkin ‘Restitution by Withdrawal from Executory Illegal Contracts’ (1981) 97 LQR 420; Grodecki, above n 42.

67. (1996) Ch 107, CA. See F D Rose ‘Gratuitous Transfers and Illegal Purposes’ (1996) 112 LQR 386.

68. See, especially, Bigos v Bousted (1951) 1 All ER 12.

69. See (1996) Ch 107 at 124 per Millett LJ.

70. See the BC Report p 23.

71. See ibid, at p 80. See also the draft ‘British Columbia Illegal Transaction Act’ (Appendix E to the BC Report), s 6(1)(d).

72. See Law Com CP No 154 para 7.69 (p 114).

73. Ibid. A further requirement is that ‘to succeed in a withdrawal claim the plaintiff must first satisfy the court that the contract could not be enforced against him or her’ . This is to prevent possible conflict between the discretion with respect to a withdrawal claim and the proposed discretion to enforce (which the defendant might seek to invoke): see paras 7.65–7.66 (p 113).

74. Cf G F Virgo ‘The Effect of Illegality on Claims for Restitution in English Law’ in W J Swadling (ed) The Limits of Restitutionary Claims: A Comparative Analysis (London: UKNCCL, 1997).

75. One possible alternative approach, to abolish illegality altogether and leave the field entirely to the criminal law, does not seem to have found any supporters elsewhere. It is also rejected by the Law Commission in England, which identifies several policy reasons for the retention of illegality: the need to uphold the dignity of the courts and to prevent claimants from profiting from their own wrongs, as well as the need for deterrence and punishment (see Law Com CP No 154, paras 6.1–6.12 (pp 86–90).

76. See s 7(1)(c), emphasis supplied.

77. See s 7(3), emphasis supplied.

78. See above n 57 and associated text.

79. Ie the New Zealand Act provides that ‘Subject to the express provisions of any other enactment, no Court shall, in respect of any illegal contract, grant relief to any person otherwise in accordance with the provisions of this Act’: s 7(7), emphasis supplied.

80. SA Report p 26.

81. Ontario Repori p 232. Unlike the New Zealand Act and the South Australia proposals, the Ontario Commission did not consider that the court should have power to ‘validate’ illegal contracts: ibid. See the BC Report p 76.

82. Cf the BC Report p 74.

83. See ibid p 79, and the Draft British Columbia Illegal Transaction Act (Appendix E to the BC Report) s 5(1)(c).

84. See the BC Report p 79.

85. See the Draft British Columbia Illegal Transaction Act (Appendix E to the BC Report) s 6(1). See also the Report itself, p 80.

86. ‘Retaining the common law is fundamentally inconsistent with a discretionary power to grant relief’: BC Report p 58.

87. See below n 148 and associated text.

88. (1994) AC 340.

89. See below.

90. See Law Com CP No 154 paras 7.27–7.43 (pp 102–106).

91. But cf G H Treitel in Tapper (ed) Essays in Memory of Sir Rupert Cross (London: Butterworths, 1981) pp 96–99.

92. Cf Solle v Butcher (1950) 1 KB 671.

93. See Law Com No 154 paras 7.73–7.87 (pp 116–122).

94. See the Law Reform (Frustrated Contracts) Act 1943, s 1

95. See Law Com CP No 154 para 7.82 (p 120).

96. See Law Com CP No 154 para 7.49 (p 108).

97. See the New Zealand Illegal Contracts Act 1970, ss 6 and 7, quoted above.

98. Cf Furmston, above n 6.

99. (1997) 3 NZLR 669.

100. (1997) 3 NZLR at 685.

101. ‘The beneficiaries are entirely inncent of any involvement in the transaction. The McDonalds are not’ per Blanchard J in (1997) 3 NZLR 669 at 686.

102. See eg France v High (1987) 2 NZLR 38. See also Bevin v Smith (1994) 3 NZLR 648.

103. (1975) 2 NZLR 560.

104. See (1975) 2 NZLR 560 at 563-564 per McMullin J (quoting from the judgment of Woodhouse J in earlier proceedings).

105. See (1975) 2 NZLR at 565. See also per Woodhouse and Cooke JJ in Broadlands Rentals Ltd v R D Bull Ltd (1976) 2 NZLR 595 at 600.

106. See Broadlands Rentals Ltd v R D Bull Ltd (1976) 2 NZLR 595, in which the order of the trial judge was varied as having been unduly favourable to ‘a rather unsophisticated individual’ (per Chilwell J at first instance in (1975) 1 NZLR 304 at 309). The Court of Appeal observed that the Act ‘provides for a discretionary lifting of burdens, not for a distribution of windfalls’ (per Woodhouse and Cooke JJ in (1976) 2 NZLR at 600).

107. See Howick Building Co Ltd v Howick Parklands Ltd (1993) 1 NZLR at 759–760.

108. Now Lord Cooke of Thorndon.

109. See Harding v Coburn (1976) 2 NZLR 577 at 587. The point arises because s 7(1) of the Illegal Contracts Act makes the availability of relief ‘subject to the express provisions of any other enactment’: see eg Parker v Rock Finance Corporation Ltd (1981) 1 NZLR 488 at 493; Dreadon v Fletcher Development Co Ltd (1974) 2 NZLR 11 at 19.

110. The English Law Commission is uneasy with the way in which the judiciary in New Zealand has used the Act in this context, and considers that ‘it would constitute an unacceptable undermining of Parliamentary Sovereignty’ to facilitate such an approach in its proposed legislation. The new discretion would therefore not apply where an earlier statute ‘expressly lays down’ what the consequences of contravention should be (see Law Com CP No 154 paras 7.98-7.102 (pp 126–128). But according priority in this way to the (occasionally fortuitous?) choice of words by a draftsman, sometimes many years before, inevitably increases the danger of the kind of anomaly which the New Zealand judiciary was anxious to avoid.

111. See (1976) 2 NZLR 577 at 584–585.

112. See also Hurrell v Townend (1976) 2 NZLR 577 at 584–585.

113. Section 7(3)(b) of the Act provides that: ‘In considering whether to grant relief under subsection (1) of this section the Court shall have regard to-(a) The conduct of the parties; and (b) In the case of a breach of an enactment, the object of the enactment and the gravity of the penalty expressly provided for any breach thereof; and (c) Such other matters as it thinks proper - but shall not grant relief if it considers that to do so would not be in the public interest.’

114. See Euro-National Corporation v NZI Bank Ltd (1992) 2 NZLR 739; Edwards v O'Connor (1989) 3 NZLR 448; Lower Hutt City Council v Martin [19871 I NZLR 321; Leith v Could (1986) 1 NZLR 760.

115. In several cases involving financial assistance by a company for the purchase of its own shares (contrary to s 62 of the New Zealand Companies Act 1955) relief amounting to enforceability has been held to be available: see Catley v Herbert (1988) 1 NZLR 606; Coleman v Myers (1977) 2 NZLR 225 at 378. But in other cases involving the same provision it has been denied: see Euro-National Corporation v NZI Bank Ltd (1992) 2 NZLR 739 and Hoverd Industries Ltd v Supercool Refrigeration etc Ltd (1994) 3 NZLR 300 (reversed on other grounds in [19951 3 NZLR 577). Similarly, relief is frequently granted in cases involving s 25 of the New Zealand Land Settlement Promotion and Acquisition Act 1952: see eg Bevin v Smith (1994) 3 NZLR 648; Williams v Gibbons (1994) 1 NZLR 273; Hurrell v Townend (1982) 1 NZLR 536. In another such case, however, Leith v Gould (1986) 1 NZLR 760, relief was refused on the ground that ‘to validate the transaction would be totally to avoid the operation of the legislation and necessarily to vitiate the object of the enactment’ (per Ongley J at 768).

116. See, especially, Euro-National Corporation v NZI Bank Ltd (1992) 2 NZLR 739 at 766–767.

117. Cf per Devlin J in St John Shipping Corporation v Joseph Rank (1957) 1 QB 267 at 283: ‘… the court will not enforce a contract which is expressly or impliedly prohibited by statute. If the contract is of this class it does not matter what the intent of the parties is; if the statute prohibits the contract, it is unenforceable whether the parties meant to break the law or not.’

118. See Bardsell v Kerr (1979) 2 NZLR 731 at 737-738 per Quilliam J (contract to stifle a prosecution). See also Peters v Collinge (1993) 2 NZLR 554 (contract to preclude a person from standing for Parliament).

119. See Phillips v Foster (1991) 3 NZLR 263 at 265-266 per Cooke P.

120. See Mall Finance & Investment Co Ltd v Slater (1976) 2 NZLR 685 at 689 per Cooke J. But cf the reversed decision of White J at first instance in (1976) 2 NZLR 1.

121. (1997) 154 DLR (4th) 229.

122. See (1997) 154 DLR (4th) 229 at 246–247 per Robertson JA delivering the judgment of the court.

123. See ibid at 253. See also the judgment of Krever J in the Ontario High Court in Royal Bank of Canada v Grobman (1977) 83 DLR (3d) 415 at 431-432, which was quoted in Re Still: ‘As I understand the evolution of the current law of contract, modem judicial thinking has developed in a way that has considerably refined the knee-jerk reflexive reaction to a plea of illegality … The serious consequences of invalidating the contract, the social utility of those consequences and a determination of the class of persons for whom the prohibition was enacted, are all factors which the Court will weigh.’

124. (1989) 57 DLR (4th) 606 at 611.

125. See (1989) 57 DLR (4th) 606 at 615–616 (the emphasis is in the original).

126. See Nelson v Nelson (1995) 184 CLR 538 at 611 per McHugh J.

127. (1995) 184 CLR 538. See F D Rose ‘Reconsidering Illegality’ (1996) 10 JCL 271 at 282 et seq.

128. See, especially, per Toohey J in (1995) 184 CLR 538 at 583–586.

129. Cf Tribe v Tribe (1996) Ch 107, CA.

130. The English Law Commission has invited consultees to comment on the desirability or otherwise of giving the courts a general ‘discretionary power to allow the plaintiffs claim only on condition that the plaintiff makes a payment or transfers property to a person (such as the state) who is not a party to the illegal contract’ (Law Corn CP No 154, para 7.93 (p 124)).

131. Cf Tinsley v Milligan (1994) 1 AC 340, HL. For analysis and criticism of Tinsley's case in Nelson see, especially, (1995) 184 CLR 538 at 579-580 per Dawson J, 592-593 per Toohey J, and 606-610 per McHugh J.

132. See (1995) 184 CLR 538 at 613.

133. (1988) QB 216.

134. Insurance Companies Act 1974.

135. See (1988) QB 21 6 at 276.

136. (1985) QB 966 at 982.

137. (1985) QB 988 at 1008. See also Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 4 10.

138. ‘I can see no convincing escape from the conclusion that… the prohibition has the unfortunate effect that contracts made without authorisation are prohibited by necessary implication and therefore void … In that situation there is simply no room for the introduction of considerations of public policy’; (1988) QB 216 at 274. See also per Parker J in Bedford (1985) QB 966 at 986: ‘… once it is concluded that on its true construction the Act prohibited both contract and performance, that is the public policy.’ (Parker J, having been subsequently promoted to the Court of Appeal, was also a party to the decision in Phoenix.)

139. See (1988) QB 216 at 232.

140. See the Financial Services Act 1986, s 132. This does not affect the status of the decision on the general principles of statutory illegality: see the treatment of it in the later cases of Fuji Finance Inc v Aetna Life Insurance Co Ltd (1997) Ch 173 and Hughes v Asset Managersplc (1995) 3 All ER 669 (discussed below).

141. (1995) 3 All ER 669.

142. See (1995) 3 All ER 669 at 673–674.

143. See (1995) 3 All ER 669 at 675.

144. (1997) Ch 173; reversing (1995) Ch 122. On 13 March 1997 the House of Lords allowed a petition for leave to appeal from the Court of Appeal: see (1997) 1 WLR 482.

145. See (1997) Ch 173 at 192 per Momtt LJ. For another recent example of the adoption of the literal interpretation approach, so as to render the innocence of the plaintiff irrelevant, see the decision of Lightman J in Mohamed v Alaga & Co (1998) 2 All ER 720. Cf the approach of the Court of Appeal, which reversed the decision of Lightman J in part: (1999) 3 All ER 699.

146. See (1997) Ch 173 at 197 per Sir Ralph Gibson.

147. ‘The only wholly satisfactory answer … would be for those responsible for the legislation to make clear their intention by, for example, making applicable to s 16 the discretion which already exists in s 132 of the 1986 Act or by some other express intention’: (1997) Ch 173 at 199 per Hobhouse LJ.

148. See Thackwell v Barclays Bank plc (1986) 1 All ER 676; Saunders v Edwards (1987) 1 WLR 11 16; Euro-Diam v Bathurst (1990) 1 QB 1; Howard v Shirlstar Container Transport Ltd (1990) 1 WLR 1292.

149. See per Nicholls LJ in the Court of Appeal in Tinsley v Milligan (1992) Ch 310 at 319.

150. See eg per Bingharn LJ in Saunders v Edwards (1987) 1 WLR 1 116 at 1134: ‘… it is unacceptable that the court should, on the first indication of unlawfulness affecting any aspect of a transaction, draw up its skirts and refuse all assistance to the plaintiff, no matter how serious his loss or how disproportionate his loss to the unlawfulness of his conduct.’

151. See per Lord Goff in Tinsley v Milligan (1994) 1 AC 340 at 359–361.

152. See per Lord Browne-Wilkinson in Tinsley v Milligan (1994) 1 AC 340 at 369 et seq.

153. I have called this elsewhere the ‘technique of evasive technicality’: see R A Buckley ‘Law's Boundaries and the Challenge of Illegality’ in R A Buckley (ed) Legal Structures (Chichester: Wiley, 1996) pp 232–234.

154. (1994) AC 340.

155. For discussion of the case see Enonchong, above n 7, ch 6, p 181 et seq; H Stowe ‘The “Unruly Horse” has Bolted’ (1994) 57 MLR 441; R A Buckley ‘Social security fraud as illegality (1994) 110 LQR 3.

156. (1992) Ch 310.

157. See (1994) 1 AC at 363.

158. (1994) 1 AC at 369.

159. Ie by establishing that the familiar principle in Bowmakers v Barnet Znstruments (1945) KB 65 applied to equitable as well as legal rights.

160. See (1994) 1 AC 340 at 364 per Lord Goff.