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Patel and Ochroid: Comparison and Attempts at Reconciliation

Nicholas Chiang

I. INTRODUCTION

With its origins in contract law, Illegality has since been extended by the courts to other areas of law. Attempts to universalise the doctrine have led to considerable difficulty and inconsistency. The House of Lords decision of Patel v Mirza¹ [Patel] was a valiant attempt to homogenise the approach to Illegality across all areas of law with a “range of factors” approach – but not without significant resistance, especially from jurists who prefer the deeply entrenched “rule-based” approach.²

Much closer to home, the Court of Appeal in the decision of Ochroid Trading Ltd v Chua Siok Lui³ [Ochroid] lays bare the difficulties in attempting to homogenise the doctrine, hinting that the ideal may indeed be a pipe dream. This article will examine the hurdles faced by the courts in formulating a universal approach in the law by comparing the English and local approach to illegality and discuss their compatibility.

II. ILLEGALITY IN CONTRACT

The majority in Patel laid out a “range of factors” approach which applies to common law illegality. Rejecting a mechanistic approach based on the reliance rule, Lord Toulson held that the courts should consider a) the underlying purpose of the prohibition which has been transgressed, b) any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and c) the “possibility of overkill unless the law is applied with a sense of proportionality.”⁴

A more measured ”middle ground” was also adopted by Lord Neuberger, as the Singapore Court of Appeal observed in Ochroid. His Lordship held that there is a “rule” which generally entitles the plaintiff to restitutionary relief,⁵ and approved of the “range of factors” in determining when exceptions should be made to this “rule”. This departed from the majority’s approach to ascertain the validity of the contract on a discretionary “range of factors”. The distinction between 1) if the contract was void due to illegality and 2) if restitutionary relief should be granted was also made by the court in Ochroid.⁶ It is thus unclear what Lord Neuberger’s approach is to the former question.

The minority, however, preferred a rule-based approach. Lord Sumption, with whom Lord Clarke agreed, endorsed the reliance test. Under this approach, the validity of a claim turned solely on “whether the person making the claim is obliged to rely in support of it on an illegal act on his part”.⁷ His Lordship clarified that the reliance rule does not relate to procedural matters. Similarly, the court in Ochroid recognised two conceptions of the reliance rule: the first refers to reliance in the procedural sense, whereas the other refers to the principle in a normative or substantive sense when a claimant seeks enforcement of the illegal contract through the claim.⁸ The latter conception is good law in Singapore.⁹ It is noteworthy that the principle is only engaged when a claimant seeks to enforce an illegal contract, but is inapplicable when restitution is being sought.¹⁰

The minority dissent was premised on the fact that a “range of factors” approach grants the courts too much discretion, and removes the need for the application of legal rules.¹¹ Furthermore, the majority approach engenders uncertainty due to the incommensurability of various factors and its applicability depends on the nature or degree of the illegality. Lastly, his Lordship pointed out the “range of factors” approach was unnecessary because the reliance rule is able to achieve substantial justice in the majority of cases. Arbitrariness in applying the reliance rule can be mitigated by the availability of restitutionary remedies.

The local approach since Ting Siew May v Boon Lay Choo¹² [Ting Siew May] is a discretionary assessment of the proportionality of vitiating a claim in response to a pleaded illegality. It is an approach that balances a range of factors similar to the majority in Patel, albeit with slightly different factors.¹³ However, while the Patel “range of factors” approach extends to all forms of common law illegality, the discretionary approach in Ting Siew May is to be applied only in the “residuary common law category… of contracts entered into with the object of committing an illegal act”.¹⁴

The Patel “range of factors” approach was rejected in Ochroid for three reasons.

Firstly, the approach was unprincipled because it created an arbitrary distinction between common law and statutory illegality by granting unfettered discretion to the courts over illegality at common law.¹⁵ If a court is of the view that a contract should not be void pursuant to an established common law category of illegality, the court ought to “reconsider that particular category altogether”.¹⁶

Secondly, Phang JA also questioned the necessity of the approach in achieving justice as the availability of restitutionary remedies is sufficient to mitigate the harshness of the traditional rule. The Ting Siew May approach, with its proportionality principle, could also allow the court to reject the defence of illegality to avoid disproportionate and unjust results.¹⁷

Lastly, the uncertainty engendered by the “range of factors” approach was left unaddressed by the majority in Patel. These were, namely, that the balancing exercise involves uncertainty through the actual balancing exercise itself, and that the factors are incommensurate with no one factor being determinative. These problems according to Phang JA, were less severe under the approach in Ting Siew May because firstly, it was confined to “contracts entered with the object of committing an illegal act” and secondly, was limited by the “overarching principle of proportionality”.¹⁸ However, such uncertainty was unacceptable outside that restricted context.

While the court in Ochroid unequivocally rejected the “range of factors” approach, it is submitted that because of the overlapping similarity of approaches there is a semblance of universality – at least in the realm of “contracts entered into with the object of committing an illegal act”. However, this optimism is arguably short lived , given that parties to a void contract often seek restitutionary relief - wherein a different set of rules and principles apply.

III. ILLEGALITY IN RESTITUTION

With the majority’s “range of factors” approach Patel extending to civil claims of all sorts, the distinction between types of claims becomes irrelevant. The same approach would be applied to restitutionary claims.

While the minority in Patel was more circumspect with respect to contractual illegality, the opposite can be said with respect to restitution. For Lord Clarke, the harshness of the reliance rule in voiding illegal contracts could be ameliorated by the availability of restitutionary relief which, ought to be granted as long as restitutio in integrum can be achieved.¹⁹

On the doctrine of locus poenitentiae, Lord Mance construed it as a general principle of rescission that “puts parties back in the position that they should have been in…but for the entry into the contract which was or became affected and unenforceable by reason of the illegality”.²⁰ His lordship also did not restrict the principle by reference to whether the illegal purpose has been carried out. Similarly, Lord Sumption stated that there is a general right to the restitution of money paid under an illegal contract. This position is similar to Lord Neuberger’s endorsement of the “Rule” granting a general right to restitution.

Dicta in Ochroid diverges from both the majority and minority in Patel.²¹ Phang JA rejected the minority view – more specifically, Lord Sumption’s position that restitutionary relief ought to be extended even to monies paid under a contract to commit murder. The learned Justice of Appeal characterised Lord Sumption’s view as one that would produce offensive or objectionable outcomes that would “bring the court into disrepute and undermine the integrity of the law”. The majority approach was also dismissed with the same reasons vis-a-vis contractual illegality.

In contrast to Lord Clarke’s general principle of rescission which makes available restitutionary relief as long as restitutio in integrum can be achieved, a claim in unjust enrichment in the local context would however be subject to the defence of illegality and considerations of public policy – which is distinct from the defence of illegality in a contractual sense.²² The court in Ochroid further adopted the principle of stultification which prevents restitutionary recovery if doing so would “undermine the fundamental policy that rendered the underlying contract void and unenforceable in the first place [emphasis added]”.²³ This position is premised on the inadequacy of the approach which grants a general right to restitution. Even if a restitutionary claim does not provide the plaintiff with a remedy identical to contractual performance under the illegal contract, there are nevertheless remaining dangers of stultification; permitting recovery might provide future plaintiffs with a “lever” that the plaintiff might use to extract contractual performance from the defendant, or it might produce a “safety-net” for parties looking to engage in the same sort of illegality.

On the doctrine of locus poenitentiae, Phang JA gave two reasons for rejecting the Patel minority’s position. The minority had determined that the doctrine should be relaxed as a “general principle of rescission”, such that recovery was permitted as long as restitutio in integrum can be achieved. In response, Phang JA first observed that such a broad and relaxed doctrine could undermine the need for the need for the claimant to establish the requirements for a claim in unjust enrichment. It would, more importantly, allow the claimant to avoid the stultification principle.²⁴

Secondly, Phang JA objected that a broad doctrine is incompatible with the role of the doctrine itself – namely to encourage timely withdrawal from illegality.²⁵ Hence, Phang JA emphasised the need for genuine withdrawal, as opposed to mere voluntary withdrawal. In sum, the court characterised the doctrine as one which should only be invoked based on the policy of discouraging unlawful conduct.

IV. ILLEGALITY IN TORT

While the “range of factors” approach has been extended to cover tortious claims in UK, the law is less settled in Singapore. The courts have traditionally used the close connection test, which according to Ooi Han Sun v Bee Hua Meng²⁶ has a very limited application in tort – confining the test to situations where the injury is directly incurred in the course or commission of crime.²⁷ The High Court in the recent decision of Md Shohel Md Khobir Uddin v Chen Yongbiao and another²⁸ endorsed both the close connection test and the public policy approach of Hounga v Allen²⁹ [Hounga] which can be considered the precursor of the test set out in Patel.

There are four possible paths that local courts may adopt to develop the illegality doctrine in tort law:

(1) Adopting the Patel “range of factors” approach.

(2) Continuing to use the close connection test.

(3) Attempting to reconcile both approaches.

(4) Extending the Ting Siew May approach to tortious claims.

Extending Ting Siew May’s approach (item (4), above) seems unlikely because the Ting Siew May approach is tailored for application to contractual illegality. For instance, one of the factors to be considered is the centrality of the illegality to the contract, which cannot be readily applied to tortious claims. It is suggested that an attempted reconciliation of the “range of factors” and “close connection” tests (item (3), above) will be the most viable way forward because the local courts are unlikely to only apply the Patel approach for the reasons set out above. However, the Patel approach (item (1), above) is potentially incompatible with the close connection test as it gives the courts the discretion to ignore the rule completely.

One plausible solution can be found in a flexible application of the close connection test, where policy considerations can influence the courts to either broaden or narrow the application of the test. In the case of Hounga, the Respondent (who was the employer) attempted to rely on the illegal employment of the Appellant (who was a victim of human trafficking) as a defence. With a flexible application of the close connection test, the Court could have applied the close connection test narrowly and find that the plaintiff did not fall within its scope and was thus entitled to recovery. The impetus behind a narrow application would naturally be overriding policy considerations, such as of discouraging human trafficking and exploitation in Hounga.

[1] [2016] UKSC 42.

[2] See e.g. Lords Sumption’s criticisms of a pliable “range of factors” approach to illegality in Les Laboratoires Servier & Anor v Apotex Inc & Ors (Rev 1) [2014] UKSC 55 at [19]-[21].

[3] [2018] 1 SLR 363; [2018] SGCA 5.

[4] Supra note 1 at [101].

[5] Ibid at [145].

[6] Supra note 2 at [64] – [65].

[7] Supra note 1 at [234].

[8] Supra note 2 at [128].

[9] As accepted in Ting Siew May v Boon Lay Choo and another [2014] 3 SLR 609; [2014] SGCA 28, at [127].

[10] Supra note 2 at [137].

[11] Supra note 1 at [261] – [264].

[12] Supra note 8.

[13] Ibid at [68].

[14] Supra note 2 at [110].

[15] Supra note 2 at [114].

[16] Ibid at [118].

[17] Ibid at [119].

[18] Ibid at [123].

[19] Supra note 1 at [220].

[20] Ibid at [193].

[21] Supra note 2 at [145].

[22] Ibid at [139] and [143].

[23] Ibid at [145].

[24] Ibid at [172].

[25] Ibid at [173].

[26] [1991] 1 SLR(R) 922; [1991] SGHC 73.

[27] Ibid at [15]

[28] [2018] 3 SLR 160; [2017] SGHC 109.

[29] [2014] UKSC 47; see supra note 25 at [33]-[34].