“No Court will lend its aid to a man who founds his cause of action upon an immoral or illegal act” said Lord Mansfield CJ in Holman v Johnson (1775) 1 Cowp 341, and marked the Cyprus legal framework around illegality in contracts up to the present date. The principle was redefined in the case of Tinsley v Millingan [1994] 1 AC 340 where the so called “reliance test” was established, essentially providing that if a Claimant needs to rely upon an illegal act in order to advance his claim, then that claim should be rejected. Also known as the common law principle of “ex turpi causa non oritur actio” (meaning “no action can arise from an illegal act”), this maxim usually presents itself as the “defence of illegality”, which is invoked by Defendants so as to argue that the claim against them should not succeed as it is based upon an illegal act.
The case of Christodoulou and others v Antonius H.F.M. Vraets, Civ.Appeal No. 329/2006, is a good example of how Cyprus Courts react to the invocation of this defence. In that case, the Claimant, claimed that he was entitled to the recovery of the amount of $856.000 which he paid as part of an agreement between himself and Defendants 1 and 2. The agreement considered the purchase of rough diamonds from Africa, which would subsequently be sold to the black market and would be exported from Angola to Belgium for processing. All three parties would divide the proceeds from the sale of the processed diamonds. The Claimant brought an action against both Defendants, as after the payment of the amount above he received no percentage from the sale of the processed diamonds. Defendant 1 attempted to rely on the “illegality defence” and subsequently alleged that since the agreement between the parties was carried out for an illegal purpose, the Court could not “lend its aid” to a man whose cause of action was based on an illegal contract and therefore the Claimant was not entitled to recover his money. The Cyprus Court of Appeal, based their reasoning on the cases of Holman v Johnson and Tinsley v Millingan above and upheld the Defendant’s argument. It was essentially held that since the Claimant was aware of and participated in the illegality of the transaction, he was not entitled to the recovery of his money.
The case of Andronikou v Mavropoulou and another, Civ. Appeal No. 14/2014 is also relevant. In this case, the Claimant brought an action against the Defendant and his daughter for fraud, false representation, deceit and unjust enrichment. The Claimant contended that she had made an agreement with the Defendant, that she would pay him an amount of money, which the Defendant subsequently would pay to certain “key officials” of a developing company so as to persuade them to buy the Claimant’s land. The Claimant’s land was indeed acquired by the developing company but the Defendant took the money and placed them to his daughter’s account instead. The first instance court held that the Claimant was entitled to the return of her money. The Defendant appealed. The Court of Appeal’s decision was not unanimous. It was held by majority that it was evident that the agreement between the parties was signed for an illegal purpose, namely bribery. The Court could not therefore “lend its aid” to the Claimant and hence the latter was not entitled to the recovery of her money.
Remarkably enough, the Court of Appeal accepted in both cases cited above that the Claimant and the Defendants were “in pari delicto”, meaning “in equal fault” regarding the signing of the illegal contract. Yet despite the above finding, the Court held that the Claimants were not entitled to the recovery of their property, the inevitable result of their decision being that the property remained to the Defendants’ possession.
The following questions subsequently arise: If it is accepted that both parties have contributed equally to the illegality of the contract, why is it acceptable for one party to retain the property and not for the other? Why do we consider it unacceptable for the Claimant to recover his property because of his misconduct, while, the Defendant who is culpable of the same misconduct, is often allowed to keep the property?
Although it is evident that this strict approach aims at encouraging morality and ethos in every-day transactions, it is doubtful whether it represents the common sense of justice given the “paradox” results that is sometimes creates.
The UK Courts did not fail to notice the “anomalies” created by the strict application of the “illegality defence” and completely changed their approach as to its application in 2016 with the adjudication of the case of Patel v Mirza [2016] UKSC 42. The Claimant in this case transferred an amount of money to the Defendant intending the latter to trade in shares in the Royal Bank of Scotland using insider information that he anticipated receiving. Neither the insider information, nor the purchase of shares ever materialized. When the Claimant brought an action against the Defendant, the Defendant attempted to rely on the “illegality defence” and argued that the Claimant could not recover his money as trading by using insider information is illegal. The Supreme Court held that the Claimant was entitled to the recovery of his money and that in fact, there is no reason for a party who manages to prove that he is capable of recovering his property on the basis of unjust enrichment, not to do so, just because the monies were paid to the Defendant for an illegal purpose. Additionally, the Supreme Court, held that in applying the “illegality defence” the following three considerations need to be taken into account: a)what is the purpose of the law that has been infringed and whether rejecting the claim would enhance that purpose b) any other relevant public policy on which the denial of the claim may have an impact c) whether the denial of the claim would be a proportionate response to the illegality.
The approach adopted in of Patel v Mirza demonstrates a shift from a rigid approach to a more flexible one which takes into consideration the peripheral circumstances of the case and is capable of producing more reasonable and pragmatic results.
Although the case of Patel v Mirza has been invoked in several first instance court decisions in Cyprus, to some of which, the invocation was indeed successful, it is apparent that the dominant approach regarding the application of the illegality defence remains the one established by Holman v Johnson and Tinsley v Millingan. Of course, the fact that the Cyprus Court of Appeal has not yet been given the chance to apply or make holistic reference to the case of Patel v Mirza plays an important role to the reproduction of the strict approach established by the “reliance test”.
What is certainly inarguable is that the case of Patel v Mirza which has shown the “way forward” to a more liberal approach has not been overlooked by the Cyprus Courts. What remains to be seen is how this approach will affect and re-shape the application of the “illegality defence” in Cyprus law.
Follow Ioannides Demetriou LLC on LinkedIn for more articles by our lawyers, news and updates.
