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Ireland: Illegal contracts

John Breslin

It is a basic rule of common law that a court will not uphold a claim founded on an illegal act. This rule is important for internal and external counsel acting for financial service providers to keep in mind. Financial service providers operate in a highly regulated environment. Even exercising all due diligence, and with highly resourced compliance systems, mistakes and errors of judgement occur. Applying the strict common law approach can result in unjust and disproportionate results, particularly in cases of technical breach.

Fortunately, the highest courts in the UK and Ireland have now signalled a policy-based approach which recognises the impact of regulation in today's trading environment.

On July 20 2016, the UK Supreme Court handed down a judgment in Patel v. Mirza. Patel claimed restitution of £620, 000 paid by him to Mirza to carry out a trade to be based on insider information – which never materialised. Mirza defended the claim for restitution on the basis that the money was paid over for an illegal purpose. The UK Supreme Court held that Patel was entitled to restitution. The policy of the insider dealing legislation would not have been harmed by ordering Mirza to pay back the money. Mirza should not be allowed a windfall gain.

In 2015, the Irish Supreme Court took a similar approach in Quinn v. Irish Bank Resolution Corporation (IBRC). There, IBRC sought enforcement of security allegedly provided by the Quinns. The Quinns defended the claim (among other things) on the basis that the security was given to enable IBRC illegally to support its share price on the stock exchange. This would have breached Irish company and market abuse law. The Quinns argued that permitting IBRC to enforce its security would promote illegality. This was rejected. The Irish Supreme Court held that the policy of the legislation would not be infringed by allowing IBRC to enforce its security. The legislation already provided penalties and it would be disproportionate for the court to impose additional sanctions that could impact innocent third parties.

The old common law approach had arbitrary and disproportionate effects, and was blind to the legislative context. The new approach is more rational and proportionate. It also leads to more predictable results and takes into account the highly regulated environment in which financial service providers operate.

John Breslin

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