Illegality

Current project status

• Initiation: Could include discussing scope and terms of reference with lead Government Department
• Pre-consultation: Could include approaching interest groups and specialists, producing scoping and issues papers, finalising terms of project
• Consultation: Likely to include consultation events and paper, making provisional proposals for comment
• Policy development: Will include analysis of consultation responses. Could include further issues papers and consultation on draft Bill
• Reported: Usually recommendations for law reform but can be advice to government, scoping report or other recommendations

This project is complete. The Government stated in March 2012 that they "are minded not to implement the Commission’s proposals"

Where a claimant in a civil action has been involved in illegal activities, how far should this prevent them from enforcing their normal legal rights? This project looks at the way that the law of trusts, contract, unjust enrichment and tort responds when a claimant has been involved in some form of illegal conduct connected to their claim.

The law in this area has been criticised for being complex, uncertain, arbitrary and occasionally unjust.

The project

On 17 March 2010 we published our report, “The Illegality Defence”, which included a draft Bill and brought this project to an end.

We concluded that in the areas of contract, unjust enrichment and tort, recent case law is already bringing about the improvements that are needed. In two House of Lords decisions (Gray v Thames Trains and Stone & Rolls v Moore Stephens), the judges showed a willingness to take into account the policy factors that lie behind the illegality defence, and to explain their reasoning accordingly. Therefore, we do not recommend legislative reform in these areas. We think that the law should be left to develop through the case law.

However, in one particular area – the law of trusts – we do recommend statutory reform. This is because a House of Lords case, Tinsley v Milligan, prescribes how the illegality defence should operate. The law of illegality in trusts has the potential to operate arbitrarily.~

We recommend that where a trust has been set up to conceal the beneficiary’s interest in order to commit a criminal offence, legislation should provide the judges with a discretion to deprive the beneficiary of their interest in limited circumstances. The report therefore includes a short, targeted, seven-clause draft Bill to be laid before Parliament.

The Government announced in their March 2012 Report on the implementation of Law Commission proposals that “reform of this area of the law cannot be considered a pressing priority for the Government at present”. They stated that they “are minded not to implement the Commission’s proposals”.

Consultation

Our final recommendations follow the provisional recommendations made in our consultation paper “The Illegality Defence: A Consultative Report” (Consultation Paper No 189), which we published in January 2009.

We have changed our views since our previous consultations. In 1999 we published “Illegal Transactions: the Effect of Illegality on Contracts and Trusts” (Consultation Paper No 154). It proposed that where a contract involves an element of illegality, the court should have a structured discretion whether to enforce it.

In 2001 we published “The Illegality Defence in Tort” (Consultation Paper No 160), which proposed a similar discretion in tort claims.

Presumption of advancement

The presumption of advancement is a 19th century rule that if a man gives money to his fiancee, wife or children, he intends to make a gift, unless it is proved otherwise. We were concerned that the interaction of the illegality rules with the presumption of advancement can result in arbitrary and discriminatory decisions. In December 2006 we issued a short paper explaining the issues in more detail and asking for comments. We were grateful for all the comments we received, which supported our proposals to abolish the rule.

The Government has already accepted that the presumption of advancement is discriminatory and should be abolished. In February 2010 the Government accepted amendments to the Equality Bill to this effect.

Unfortunately, however, we no longer think this is sufficient to remove the problems created by the illegality defence in trusts law. This is because in 2007 the House of Lords decision, Stack v Dowden, introduced further uncertainty into the law.

Other related papers

As part of this project, we presented several papers to seminars and conferences.

In 2002, we presented a paper to the SPTL Conference, considering ways that the law could be rationalised without statutory intervention.

In February 2005 we presented a short paper to the TUC Legal Officers Group, looking at the effect of illegality on employment rights – particularly where the parties are evading tax.