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England and Wales Court of Appeal (Civil Division) Decisions


You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Al-Kishtaini v Shanshal [2001] EWCA Civ 264 (23 February, 2001)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/264.html
Cite as: [2001] 2 All ER (Comm) 601, [2001] Lloyd's Rep Bank 174, [2001] EWCA Civ 264

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Neutral Citation Number: [2001] EWCA Civ 264
Case No: A2/2001/6020, A2/2001/6017, A2 1999/1071

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR JUSTICE RICHARDS
QUEEN'S BENCH DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL
Friday 23rd February, 2001

B e f o r e :

LORD JUSTICE MUMMERY
LORD JUSTICE RIX
and
MR JUSTICE HOLMAN

____________________

MAHMUD AL-KISHTAINI
Appellant
- and -

FAKHRY IBRAHIM SHANSHAL
Respondent

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

Philip Marshall (instructed by Messrs Gordon Dadds for the Appellant)
Martin Young (instructed by Browne Jacobson for the Respondent)

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    LORD JUSTICE MUMMERY :

  1. This is an appeal from the order of Richards J dated 9 June 1999. He held that Mr Shanshal (the claimant) was entitled to the sum of DM 113,569 and interest at the rate of 8% per annum from the date of the issue of the writ. This is, however, subject to a set off of all sums payable or found due to Mr Al-Kishtaini (the defendant) following an inquiry ordered on his counterclaim. The judge reserved the costs of the action and counterclaim pending the outcome of the inquiry. The inquiry was adjourned to the Master and has not yet taken place. The costs of the proceedings are very substantial. The trial lasted from 19 January to 16 February 1999. Although this appeal by the defendant is about a relatively small sum, the outcome of the appeal could have a significant impact on his liability for those costs.
  2. The Outline Facts

  3. The parties were once close friends. From time to time they did business with one another and discussed business opportunities and investments. They both come from Iraq. The claimant came to the United Kingdom from Iraq in 1982. The defendant left Iraq for Amman, Jordan in 1991. By May 1992 he had acquired a substantial number of shares in Haussmann Holdings NV.
  4. During 1992 the claimant attempted to develop a business in the export of oil products from Russia. He offered the defendant a chance to participate. On 10 September 1992 the defendant transferred DM 700,000 from his account with United Overseas Bank in Geneva to the claimant's account with Ifabanque in Paris. That was equivalent to US $500,000 at the then rate of exchange. The money was transferred in connection with the claimant's Russian oil business, but the claimant used it for his own purposes and converted it into other currencies-Canadian and US $ and £ Sterling. By the end of 1992 the Russian project had come to nothing and the claimant had informed the defendant of that fact.
  5. 0n 24 January 1993 the defendant sent a fax to the claimant which, according to the translation from the Arabic, stated-
  6. "Moreover,Von Claer [the claimant's banker at Ifabanque SA in Paris] informed me that he has reserved for me shares in Haussmann holding for just over half a million dollars, for allotment by the end of the month.

    I shall be thankful and grateful if you would please let me know the amounts of money (net) belonging to me with you, and when it is possible to transfer them?"

  7. A fax was sent to the defendant by the claimant's secretary (Lisa Jacobs) on 25 January-
  8. "Received with thanks your fax. However, Mr Shanshal is currently out of the country for a week, but I did manage to pass on your message to him and in reply he asked me to convey to you that the $350,000 US dollars will be remitted to James von Claer by the end of the month/first few days in February. The remaining just under $150,000 will follow 10 days later."

  9. The defendant contends that this fax contained a clear representation that the sum of nearly US $500,000 was due from the claimant to him and that he relied on it in committing himself to the purchase of further shares in Haussmann and its funding. This is the basis of an estoppel argument, which was rejected by the judge and is one of the grounds of appeal.
  10. On 29 January the claimant sent a fax to Mr von Claer at Ifabanque -
  11. "You are hereby authorised to debit my personal account for the sum of $500,000.00 (Five Hundred Thousand) for the purpose of Dr Mahmud Al Kishtaini."

  12. The actual sum debited on 5 February was $ 499,122.30 representing the exact cost of the defendant's new Haussmann shares.
  13. The DM had fallen against the US $. This has given rise to a dispute whether any money is still owed by the defendant to the claimant.
  14. The Judgment in Outline

  15. The main conclusions of the judge in a very detailed 92 page judgment were as follows:-
  16. i) The parties contemplated a joint venture for the export of Russian oil involving the direct financial participation of the defendant. The transfer of DM 700,000 by him to the claimant was in connection with the joint venture and was for use only in that business. It was not, as the claimant contended, a loan repayable on request, coupled with an apportionment, in a manner subsequently to be agreed, of any profits made on the Russian oil venture.

    ii) There was a relationship of trust and confidence between them which put the claimant under a duty to apply the sum transferred only for the specific purpose of the joint venture. The joint venture was intended to take effect from the time of the performance of the initial contracts that the claimant had put in place. But the contracts were never performed; the business came to nothing; the joint venture never took effect; and the time from which the defendant was to participate did not arrive.

    iii) The defendant was entitled to an inquiry on his counterclaim as to the use of his money by the claimant. There was a continuing breach of trust by the claimant from the time when the money was applied to his own purposes "until it was effectively repaid by inclusion in the amount of just under $500,000 transferred by the plaintiff on 5 February 1993 for the purchase of the defendant's shares in Haussmann Holdings." The judge accordingly made a declaration that the sum of DM 700,000 was held by the claimant from 10 September 1992 to 5 February 1993 upon trust and subject to a fiduciary duty on the part of the claimant to apply the same exclusively for the Russian oil venture.

    iv) The transfer of just under $500,000 to the defendant on 5 February 1993 did not constitute complete repayment of the DM 700,000. It exceeded the value at the prevailing rate of exchange of the DM 700,000 due for repayment to the defendant. The claimant was entitled to claim the difference, either on the basis of the implication of a loan of the difference, or on the basis of ordinary restitutionary principles entitling him to reimbursement of the US $ transferred. The difference was DM 113,569 (or US $ 68,617.61), that being the amount by which the US $ transferred by the claimant exceeded the sum of DM 700,000. As already indicated, this difference resulted from the fall of the DM as against the US $ in the period between the payment of DM 700,000 to the claimant in September 1992 and the transfer of US $ by the claimant in February 1993.

    v) The claim for the difference was, however, subject to a set off in respect of the sum found due on an inquiry ordered on the counterclaim for breach of trust regarding the use by the claimant of the joint venture payment of DM 700,000.

    vi) There had not been any clear representation relied on by the defendant so as to estop the claimant from recovering any part of the difference.

    vii) The claim for the difference was not based on any illegal act precluding the claimant from recovering any part of it.

    The Appeal

  17. The defendant appeals on two main points: the illegality point and the estoppel point. A new point is raised by the defendant that the claimant made a gift of the difference to him. Exception is also taken to the award of interest to the claimant at the judgment rate from the date of the issue of the writ.
  18. At the opening of the appeal the court suggested (and counsel agreed) that the illegality point should be dealt with first.
  19. Illegality Issue

  20. The defendant introduced at a relatively late stage in the case the defence that the claim against him was based on illegality.
  21. The defendant submitted that there was a contravention of Article 2 of the Control of Gold, Securities, Payments and Credits (Republic of Iraq) Directions 1990 SI No 1616. The Directions were made on 4 August 1990 in implementation of the United Nations sanctions against Iraq, as contained in resolutions adopted by the Security Council in August 1990 following the invasion and occupation of Kuwait by Iraq. The Directions were made pursuant to ss 2 and 7 of the Emergency Laws (Re-enactments and Repeals) Act 1964 (the 1964 Act).
  22. Section 2(1) of the 1964 Act provides:-
  23. "Where the Treasury are satisfied that action to the detriment of the economic position of the United Kingdom is being, or is likely to be, taken by the government of, or persons resident in, any country or territory outside the United Kingdom, the Treasury may give general or special directions prohibiting , either absolutely or to such extent as may be specified in the directions, the carrying out, except with permission granted by or on behalf of the Treasury, of any order given by or on behalf of the government of that country or territory or any person resident therein at the time when the directions were given or at any later time while the directions are in force, in so far as the order-

    requires the person to whom the order is given to make any payment or to part with any gold or securities".....

  24. It was pointed out that that provision is in the same terms as paragraph 2A of the Defence (Finance) Regulations 1939 made under the Emergency Powers (Defence) Act 1939 and continued in force by section 2 of the Emergency Laws (Repeal) Act 1959.
  25. Section 13 of the 1964 Act provides that contravention of any direction given under that Part of the Act is an offence punishable by a maximum of 3 months imprisonment on a summary conviction or by a term not exceeding 2 years imprisonment on conviction on indictment. By virtue of section 14 no proceedings for an offence against a direction under section 2 shall be instituted except by or with the consent of the Director of Public Prosecutions or a specified Department or Minister.
  26. The Directions recite that the Treasury are satisfied that action to the detriment of the economic position of the United Kingdom is being or is likely to be taken by the government of or persons resident in the Republic of Iraq.
  27. Article 2 of the Directions provides that
  28. "Except with permission granted by or on behalf of the Treasury, no order given by or on behalf of......any person resident in the Republic of Iraq at the time of the coming into force of these directions or at any later time whilst these directions are in force shall be carried out, in so far as the order:

    requires the person to whom the order is given to make any payment or to part with any gold or securities..."

  29. Guidance set out in the Press Notice of the Bank of England issued on 4 August 1990 was superseded by a Notice issued on 7 August 1990. That Notice gave certain permissions and also contained guidance. The following is stated under the heading "Residents of Iraq" -
  30. " 5 For the purposes of the directions, a resident of Iraq is any person, including any body corporate, normally resident in that country on 4 August 1990 or at any later time. A branch in Iraq of any business is treated as if the branch were a body corporate resident in Iraq. Orders given by branches outside Iraq of any body corporate resident in Iraq or by branches of any business whose head office is in Iraq are given on behalf of persons resident in Iraq, irrespective of the location of such branches. Persons resident or becoming resident in Iraq should not subsequently be treated as resident elsewhere without prior reference to the Bank of England.

    Residential status should be determined by reference to the facts. Cases of doubt should be referred to the Bank of England."

  31. It is stated in paragraph 32 that application should be made to the Bank of England in respect of any transaction which is not covered by the permissions given in the Notice. The Bank had an Iraq and Kuwait Emergency Unit to which the applications were to be addressed.
  32. It is common ground that
  33. i) The claimant was resident in the United Kingdom at the time of the relevant transaction;

    ii) the defendant was resident in Iraq at the time of the coming into force of the Directions on 4 August 1990;

    iii) the defendant was not resident in Iraq at the date of the relevant transaction (by then he had become de facto resident in Jordan);

    iv) the general permissions granted in the Notice do not apply to the relevant transaction; and

    v) no Treasury permission was applied for or obtained for the relevant transaction.

  34. It was accepted by the claimant in the court below that, if he had to rely on a transfer of funds rendered illegal by the Directions, then he was precluded from making any recovery of the shortfall. There was no dispute that, if the Directions applied to the defendant as a resident of Iraq at the time of the Directions coming into force, the act of the claimant in authorising a debit from his account for the purposes of the defendant's acquisition of the Haussmann shares was an illegal act. The crucial area of dispute was and is whether the prohibition in the Directions applied to that transaction, even though the defendant had ceased to be resident in Iraq by the time that it took place.
  35. The defendant contended the Directions applied notwithstanding his change of de facto residence. As a matter of construction, Article 2 applied to, and continued to apply to, any person who was resident in Iraq at the time of the coming into force of the Directions on 4 August 1990.
  36. The judge rejected this contention in these terms
  37. " I do not read section 2(1) of the 1964 Act or article 2 of the Directions as imposing an indefinite prohibition in relation to a person who was resident in Iraq at the time when the Directions came into force. If such a person ceases to be resident in Iraq, then the prohibition ceases to apply to him; just as, in the case of a person who was not resident in Iraq at the time when the Directions came into force, the prohibition begins to apply in relation to him if, and from the time when, he becomes resident in Iraq."

  38. The judge considered that this view was supported by paragraphs 5 and 6 of the Bank of England Notice of 7 August 1990 and by statements of the Bank of England (Sanctions Emergency Unit) in correspondence with the defendant's solicitors in 1999 and 2000, which he regarded as being in line with the guidance in the Notice.
  39. He concluded
  40. "Accordingly I hold that the prohibition in article 2 of the Directions did not apply to an order by or on behalf of the defendant at the material time, that the plaintiff does not therefore have to rely on an illegal act in order to recover, and that the defendant's submissions founded on the Directions cannot succeed."

  41. The judge then made two observations on which the parties have made submissions referred to below -
  42. i) He left open the further question whether the plaintiff's transfer of funds involved the carrying out of an "order" given by or on behalf of the defendant which "required" the making of a payment or a change in the persons to whose credit a sum was to stand.

    ii) The judge did not accept that, if there was a breach of the sanctions regime, it was a deliberate breach on the part of the claimant. He did not consider that any illegality was of "a character that ought to preclude recovery as a matter of public policy if it became necessary to look beyond the question of reliance by the [claimant]on an illegal act".

    Construction of Directions

  43. After some initial hesitation on the point I am unable to agree with the judge's conclusion on the construction of section 2 (1) of the 1964 Act and Article 2 of the Directions.
  44. I turn first to the statutory language. It refers to the carrying out of an order given by "any person resident" in the Republic of Iraq. In order to clarify the classes of residents in the specified country affected by the Directions the draftsman then had to identify the relevant time of residence. He could easily have described the persons affected as those resident in the specified country at the time the order was given or at the time the order was carried out.
  45. But he did not do so. Instead, he described two classes of residents affected by the provisions-first, those resident "at the time of the coming into force of these directions" and, secondly, those resident "at any later time." Neither the Act nor the Directions make any express provision for the case of residents falling within these descriptions who cease to be resident in the specified country before the order is given or carried out.
  46. The natural and ordinary effect of the language of the legislation is that (a) persons who are resident in the specified country at the time the Directions came into force or at any later time are and remain affected by the Directions and (b) those persons cannot escape from the consequences of residence at the specified times by later changing their residence to another country, unless and until the requisite Treasury permission is obtained for the carrying out of an order. The Bank of England Notice and the correspondence concerning Treasury practice do not provide assistance on the question of construction.
  47. In the exercise of the Treasury's discretion to grant permission the residence of the person at the time of giving and carrying out of the order will no doubt be a factor to be taken into account, along with all the other relevant factors. There is ample guidance in the cases on this kind of emergency legislation as to the correct approach to the determination of a person's residence in a country or territory: Vandyke v. Adams [1942] 1 Ch 155 (a prisoner of war de facto in enemy territory-Germany or German-occupied territory); Re Hatch [1948] 1 Ch 592 at 599-601 (a de facto resident in British territory- Jersey- during enemy occupation); Vamvakas v. Custodian of Enemy Property [1952] 2 QB 183 ( involuntary de facto residence in German occupied Rumania).
  48. The purpose of conferring the discretion to refuse or grant permission is to enable the Treasury to exercise control over transactions which may be affected by sanctions. If the claimant's construction were correct it would be all too easy for that control to be avoided. The object of the Directions could be easily defeated by Iraqi residents simply moving their de facto residence to a different country after the Directions came into force.
  49. I accept that this construction has potentially far reaching effects. It may produce surprising consequences in some cases. I also bear in mind the penal sanctions for contravening the Directions. But I also bear in mind that this kind of measure is intended to have far reaching effects. The Directions were made to introduce a comprehensive system of general official control in national and international emergency conditions. On this point the observation of Lord Radcliffe in Boissevain v. Weil [1950] AC 327 at 343 ( a case on the 1939 Defence (Finance) Regulations) is also relevant:
  50. "And here I would add that when a regulation contains a general dispensing power such as the power that is given to the Treasury by reg.2 [ i.e the power to grant permission] it is very difficult to press to a result any argument for a limited interpretation which is based on the absurdity of its literal construction."

  51. In the words of Lord Radcliffe later on the same page of that report, if the court adopted the construction contended for by the claimant it would be
  52. "...making a new regulation, not interpreting an existing one."

  53. It is not contended that the consequences of any past contravention of the Directions can be cancelled by now applying for and obtaining retrospective permission. The offending transaction has already been carried out. The wording of the legislation clearly contemplates permission to be obtained prospectively for the carrying out of an order.
  54. I conclude that, on the true construction of the legislation, the claim for the shortfall is based on an illegal act (i.e the contravention of the Direction). It is accordingly caught by the principle recently re-affirmed by this court in Royal Boskalis Westminster NV v. Mountain [1999] QB 674,691-692 and Soleimany v. Soleimany [1999] QB 785,794-795 that illegality prevents a claimant from recovering under a contract
  55. "....if in order to prove his rights under it he has to rely on his own illegal act..."

    Additional Points

  56. There are three additional points.
  57. The Order Point

  58. As indicated earlier, the question whether the plaintiff's transfer of funds involved the carrying out of an "order" given by or on behalf of the defendant was described as a "further question " which was expressly left open by the judge. In fact the point was neither pleaded nor argued at the trial.
  59. On the adjourned hearing of this appeal a supplementary skeleton argument was lodged by Mr Young on behalf of the claimant stating that it was intended to apply for permission to re-re-re-amend the Reply and Defence to Counterclaim and to re-amend the Respondent's Notice to raise the point whether an "order" within the meaning of paragraph 2 of the Directions was made in this case.
  60. The proposed amendments, which were attached to a formal Application Notice, were opposed by Mr Marshall on behalf of the defendant. He pointed out that the existing pleadings, in particular the Statement of Claim, are inconsistent with the case that no "order" was made in this case. No amendment is proposed to the Statement of Claim to cure the inconsistency. He also submitted that the application should be refused on two grounds.
  61. First, it raised new issues of fact which were not explored at the trial, so that this court does not have all the necessary facts before it. If the point had been raised those acting for the defendant would have wished to explore with him in evidence whether he intended the fax sent on 24 February 1993 to the claimant to communicate a requirement that the funds be paid and to cross examine the claimant as to whether he understood the communication to be a requirement that money be paid. The court should reject Mr Young's suggestion that the matter should be remitted to the trial judge. There had been ample opportunity to raise the point before or at the trial. This was not done. On the contrary, the claimant had run an inconsistent case
  62. Secondly, the application was made far too late and would, if granted, involve prejudice to the defendant which could not be compensated financially. In the exercise of its discretion the court should have regard to the legitimate expectations of the defendant, the efficient conduct of the litigation and the potential inconvenience caused to other litigants.
  63. Mr Marshall added that in any event the available evidence established that an order was made within the meaning of the Directions. It was clear that the defendant was requiring a payment to be made for the Haussmann shares.
  64. In my judgment it is now far too late to raise this question of fact for the first time in the middle of the appeal. It was not pleaded or argued at trial. Although it was expressly left open by the judge in his judgment, no attempt was made to raise the point in the Respondent's notice or to apply to the court for leave to adduce fresh evidence on the appeal. I would refuse permission to amend the pleadings and the Respondent's Notice.
  65. The Deliberate Breach Point

  66. In the Respondent's Notice the claimant contends that, even if there was illegality, he is entitled to succeed on the ground that any breach of the Directions by him was not a deliberate breach. He relies on the passage in the judgment in which the judge said that he
  67. "...did not accept that, if there was a breach of the sanctions regime, it was a deliberate breach...[the claimant] sought to comply with the requirements of the regime rather than avoid them..."

  68. In his Notice of Appeal the defendant takes the point that, if it is necessary to contend that the claimant was aware of the provisions giving rise to illegality, then, contrary to the judge's view, the claimant was so aware and that he had detailed knowledge of the sanctions legislation in the United Kingdom, including the financial sanctions supervised by the Bank of England.
  69. In my judgment it is not necessary as a matter of law to investigate the question whether the claimant was aware or unaware of the provisions the breach of which made the act on which he bases his claim illegal. The law is clearly laid down in the authorities cited earlier in this judgment. The claimant cannot recover if he founds his claim on an illegal act. It is irrelevant whether or not he intended to break the law or was unaware that he was doing so: see also Archbolds (Freightage) v. Spanglett Ltd [1961] 1 QB 374 at 388 where Devlin LJ said
  70. " Another effect of illegality is to prevent the plaintiff from recovering under a contract if in order to prove his rights he has to rely on his own illegal act; he may not do that even though he can show that at the time of making the contract he had no intent to break the law and that at the time of performance he did not know that what he was doing was illegal."

    Human Rights Point

  71. This point was not argued at the trial, which took place before the Human Rights Act 1998 came into force on 2 October 2000. The point is raised for the first time by way of amendment to the Respondent's Notice. The contention is that (a) a bar to recovery on the grounds of illegality would amount to a deprivation of the claimant's right to possession of or claim to DM 113,569 and interest; (b) the deprivation would be incompatible with Article 1 of Part II of Schedule 1 to the 1998 Act (The First Protocol-Protection of Property) ; (c) the Directions ought to be construed so as not to prevent persons, such as the claimant, from recovering possessions from persons, such as the defendant, to which the latter are not entitled; (d) it would not be proportionate to deprive the claimant of his claim, even if the public interest is a reasonable foundation to deprive individuals of possessions acquired in a manner collateral to a breach of sanctions; and (e) it would be unlawful for the court, as "a public authority" within the meaning of section 6, to act in a way which is incompatible with the Convention right.
  72. The defendant's response is that this point is misconceived, as (a) the Directions themselves impose only criminal sanctions for contraventions and do not deprive the claimant of any right to possessions; and (b) the availability of the common law defence of illegality to a contractual or restitutionary claim based on the commission of a prohibited act by the claimant falls within the express exception to the right as being "in the public interest and subject to the conditions provided for by law" and has the effect that the claimant is simply not entitled to what he claims to be "his possessions."
  73. Article 1 is in these terms:
  74. " Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

    The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

  75. The arguments of counsel on Article 1 concentrated on "the public interest" exception, although Mr Marshall, on behalf of the defendant, made it clear that he did not concede that the unenforceability of a claim on the grounds of illegality was a deprivation of possessions within the meaning of the Article.
  76. I agree with him that, even assuming that the claimant is entitled to invoke that Convention right at all, this case falls clearly within the public interest exception to the right and that the illegality defence is not incompatible with the Convention right.
  77. In Holman v. Johnson (1775) 1 Cowp. 341 Lord Mansfield said at p.343
  78. " The objection that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice as between him and the plaintiff, by accident, if I may say so. The principle of public policy is this; ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause if action appears to arise ex turpi causa, or the transgression of the positive law of this country, there the court says he has no right to be assisted."

  79. In Tinsley v. Milligan [1994] 1 AC 340 at p. 355B-C Lord Goff commented that
  80. "It is important to observe that, as Lord Mansfield made clear, the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other."

  81. In Boissevain v. Weil (supra) at p.341 Lord Radcliffe said that, if the regulation forbidding the borrowing of foreign currency extended to the transaction in question and forbade the very act, then that act could not "be a source of civil rights in the courts of this country." In such a case it was beside the point to say that the defendant ought not in conscience to retain the money: "...the matter passes beyond the field in which the requirements of the individual conscience are the determining factor."
  82. The public interest element in this case exhibits two striking features.
  83. i) The Directions embody a very high public interest originating in the resolutions of the Security Council of the United Nations in an international emergency. If public interest of this degree does not fall within the exception in Article 1, it is difficult to conceive of any other matters which would fall within it.

    ii) The prohibition in the Directions, the breach of which resulted in the illegality on which the claim is based, is not an absolute one. The prohibition operates in cases in which the requisite permission has not been sought and obtained. The method adopted for the protection of the public interest is the exercise of official control over relevant transactions by means of the grant and refusal of permissions. It was open to the claimant, and to any one else in a similar situation, to obtain advance clearance from the Treasury, so that he could find out precisely where he stood before entering into and carrying out a potentially illegal transaction. It was for the Treasury, acting through the Bank of England, and not for the claimant himself to judge whether it was an appropriate case for the grant of permission. The public interest in effective official control of the specified transactions, as embodied in the Directions, would not be properly served by allowing a person and his advisers to decide for themselves whether Treasury permission was required. The proper course was to apply to the Bank of England to exercise its discretion to grant permission for the proposed transaction. That precaution was available. It was not taken.

  84. In those circumstances I fail to see how compatibility with the Convention right in Article 1 of the First Protocol requires the national court to apply a principle of proportionality, so as first to divine, and then to exercise, a discretion to relieve the claimant from the consequences of his own illegal act. In such a case it does not offend the principle of proportionality invoked by the claimant to apply to its full extent the high public policy applicable to this case, so as to prevent the enforcement of his claim. No decision of the European Court of Human Rights was cited to demonstrate that this result was inconsistent with the Convention.
  85. The arguments of counsel were confined to points on the scope of the Convention right in Article 1 of the First Protocol. I must make it clear that this judgment must not be understood as endorsing the proposition that the claimant had a right under section 6(1) of the 1998 Act to invoke the Convention right retrospectively in respect of private law issues arising between one citizen and another. No such proposition was developed in argument. The research which the court has conducted does not disclose any decision on the 1998 Act which holds that section 6 (1) can be retrospectively applied by an appellate court to remove a common law defence of illegality raised by one private individual against another in private law proceedings based on a contractual or restitutionary claim, which were tried before the 1998 Act was brought into effect.
  86. Finally I note that in the Consultation Paper (No 154) on "Illegal Transactions: The Effect of Illegality on Contracts and Trusts" (1999) the Law Commission's provisional proposals for legislative reform are prefaced with the comment in paragraph 1.23 that it was not believed that they would infringe Article 1 of the First Protocol, since it was considered that the public interest provision would apply and that
  87. "...if anything, there is a greater risk of successful challenge under the present common law illegality rules, which provide no opportunity to assess the proportionality of allowing an illegality defence to defeat the plaintiff's claim to his or her usual rights and remedies and do not apply any test based on the public interest."

  88. It is not explained how such a challenge could be made under the 1998 Act. In any case, as explained earlier, I would apply to this case a test based on the public interest and a very high one at that.
  89. Conclusion

  90. I would allow the appeal. It is unnecessary to hear submissions on the other points raised in the Notice of Appeal and the Respondent's Notice on the issues of estoppel, settled account, gift and the award of interest on the judgment sum. Argument on those points would add to the costs of the appeal, which must already exceed the net sum in dispute, without any possibility of affecting its outcome, whichever way the points were decided by this court.
  91. MR JUSTICE HOLMAN:

  92. I, too, agree that this appeal must be allowed for the reasons given by Lord Justice Mummery and Lord Justice Rix with which I agree. On the facts of this case the defence of illegality does indeed "sound ... very ill in the mouth of the defendant", to use the words of Lord Mansfield in Holman v Johnson, now well over two hundred years ago. But, for the reasons of public policy which he described, the defence has endured and been repeatedly restated, and the defendant is entitled to rely upon it. I wish to add a few words of my own only on the construction of the Act and the Directions, upon which we are differing from the judge, and on the human rights point.
  93. Mr Justice Richards considered this case with very great care, but I am satisfied that he did err in his construction of section 2(1) of the Emergency Laws (Re-enactments and Repeals) Act 1964 and of article 2 of the 1990 Directions which, so far as material, employs substantially the same language. The judge did not identify any reason for his view that "I do not read section 2(1) of the 1964 Act or article 2 of the Directions as imposing an indefinite prohibition in relation to a person who was resident in Iraq at the time when the Directions came into force. If such a person ceases to be a resident of Iraq, then the prohibition ceases to apply in relation to him ....". It is clear, however, that the judge was considerably influenced by the Bank of England's notice of 7th August 1990 and by some of the later correspondence with the Bank which Lord Justice Rix has fully set out and reviewed. However, material of that kind cannot be employed as an aid to the construction of a statute or a statutory instrument such as the 1990 Directions; at any rate if they are not ambiguous.
  94. In my view the phrase "any person resident therein at the time when the directions were given" in section 2(1) of the 1964 Act, and the phrase "any person resident in the Republic of Iraq at the time of the coming into force of these directions" in article 2 of the 1990 Directions, are not ambiguous and are in fact quite clear. It is simply impermissible to construe them as if the words "at the time when the directions were given" or "at the time of the coming into force of these directions" mean something entirely different, namely at the time of giving the relevant order. To construe them in that way would be, in the words of Lord Radcliffe in Boissevain v Weil, to make a new regulation, not to interpret an existing one.
  95. I now turn to the argument advanced by Mr Young in reliance upon Article 1 of the First Protocol. I am far from persuaded that the circumstances of this case engage Article 1 of the First Protocol at all. The claimant's claim is for the return to him of part of the sum paid by him in the course of an illegal and prohibited act. As, ex hypothesi, the law does not afford to the claimant a remedy, it is arguable (as Mr Marshall did argue) that his claim does not amount to a "possession" at all; still less that the court or the State "deprives" him of it.
  96. I am conscious, however, that that argument may be circular and that a proper respect for human rights, and purposive construction of the Convention and Protocol may require the court first to assume the existence of the possession and then to test the impact of the doctrine of illegality against the exceptions in both paragraphs of Article 1. Accordingly I, like my Lords, will assume that Article 1 of the First Protocol is engaged in this case and that the effect of the application of the doctrine of illegality is to deprive the claimant of his possession, namely a right to enforce his claim. Even so, that is, in the present case, in the public interest and subject to the conditions provided for by law; and is a proportionate response which strikes a "fair balance .... between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights." (Sporrong v Sweden, at paragraph 69).
  97. The "conditions provided for by law" in this case are the relevant provisions of the 1964 Act and the 1990 Directions, and the application of the common law doctrine of illegality which is an ancient, firmly established, well-defined and accessible principle of our law. The public interest in point is, as Lord Justice Mummery has said, a very high one indeed, being founded upon a resolution of the Security Council of the United Nations.
  98. The necessary proportionality and fair balance between the public interest and private right was clearly afforded in this case by the machinery for the claimant to apply to the Bank of England, on behalf of the Treasury, for permission in advance to carry out the order in question. This may be contrasted with the Sporrong case in which the Swedish legislation fatally excluded the possibility of re-assessing the respective interests of the individual and the community (see paragraphs 70, second paragraph, and 73). In the present case that possibility existed at the outset, by application to the Bank; and paragraph 5 of the Bank's notice of 7th August 1990 clearly warned that: "Persons resident ..... in Iraq should not subsequently be treated as resident elsewhere without prior reference to the Bank of England." The claimant knew of the existence of the machinery (and applied to the Bank for permission in relation to other transactions), but failed to invoke it in relation to this transaction. He cannot now complain that the law has operated disproportionately or unfairly to him. Further, I agree with Lord Justice Rix that for us now to exercise a discretion would be in effect to assume to ourselves, after the event, the discretion which the statute and the Directions firmly, and appropriately, vest in the Bank.
  99. In my view the claimant's claim must fail because it depends upon his own illegal act, there is no unjustified interference with his human rights, and the appeal must be allowed.
  100. LORD JUSTICE RIX

  101. I gratefully adopt the statement of the background of this appeal set out in Lord Justice Mummery's judgment, with which I agree on every point. I add some observations of my own on the construction of the Directions and on the Human Rights Act because of the interest and importance of those points.
  102. The Directions

  103. The question for decision is whether the words "any person resident in the Republic of Iraq at the time of the coming into force of these directions or at any later time whilst these directions are in force", as found in article 2 of the Directions, allow of the construction that such residents of Iraq fall outside the scope of that article after they have ceased to be resident in Iraq. The statutory language derives from section 2(1) of the 1964 Act and ultimately from paragraph 2A of the Defence (Finance) Regulations 1939.
  104. It was submitted on behalf of the claimant that article 2 should be construed as though it had read "resident…at the time of giving of such an order". However, that is not what article 2 says. On the contrary, a different time qualification is attached to the concept of residence, namely "at the time of the coming into force of these directions or at any later time whilst these directions are in force". Similarly, it was submitted that article 2 should be construed as though it had included the phrase "and as long as such person remained resident in the Republic of Iraq". But that seems to me to be an equally impossible construction. It is adding to the existing language an additional qualification which is simply not present in the text.
  105. It was contended that the Directions should be construed in accordance with their purpose to prevent any economic benefit passing to Iraq, and that such a purpose could not extend to the case of orders of persons who were no longer resident in Iraq. However, I would prefer to restate both parts of that submission. The purpose of the Directions is above all to control the making of payments required by the orders of Iraqi residents, and that control would be impossible if it could be avoided simply by changing residence. For these purposes the authorities on similar provisions have emphasised that what is in question at any rate includes de facto residence, which can be easily altered. This is to ensure that persons who find themselves in (for instance) enemy territory even temporally and by misfortune are caught by the measure: see, for instance Vandyke v. Adams [1942] 1 Ch 155, Re Hatch [1948] 1 Ch 592 and Vamvakas v. Custodian of Enemy Property [1952] 2 QB 183. If such a test were applied in the converse case of a person normally resident in the territory affected by such regulations who leaves that territory for another country, then the required control could be easily lost by the mere crossing of boundaries. If, on the other hand, the test in such a case is that of normal or habitual residence, then although the statutory control may survive the mere change of (say) an Iraqi resident's location, it becomes necessary for other reasons for that person's orders to remain subject both to the regulations and to the power to dispense with their operation ("Except with permission granted by or on behalf of the Treasury…").
  106. The breadth of such control of course sets up innumerable questions as to whether in any particular case or category of cases it is in the national interest to maintain the statutory prohibition, or whether it is appropriate to make an exception. All such questions are delegated to the Treasury, and in practice to the Bank of England. Thus the control is both deliberately broad in principle, but also flexible in practice. In Boussevain v. Weil [1950] AC 327, where the 1939 Regulations were in issue, the House of Lords was pressed, in the most deserving of cases, by a similar argument, but Lord Radcliffe, with whose speech their Lordships all agreed, rejected it. He said (at 342/3):
  107. "The range of what they prohibit, so understood, is indeed exceedingly wide, and it is this very width that lends plausibility to the suggestion that there must be implied some qualification either of the class of persons affected or of the kind of transaction that is brought under control…

    "But I think that it must be so interpreted…And here I would add that when a regulation contains a general dispensing power such as the power that is given to the Treasury by reg. 2 it is very difficult to press to a result any argument for a limited interpretation which is based on the absurdity of its literal construction."

  108. In the present case, it is not suggested that the construction on which the defendant relies is absurd, only that it goes wider than is necessary or appropriate.
  109. The claimant also relied on the terms of the Bank of England's notices and of certain correspondence carried on with it for the purpose of these proceedings. It is not suggested, however, that there was either a specific exception or consent granted for the claimant's payment in question, or that there was a general exception in respect of the orders of Iraqi residents who had ceased to be so resident at the time of order or payment.
  110. Thus we were taken to the Bank of England's press notice issued on 7 August 1990. The critical sentences are those contained in paragraphs 5 and 6 under the heading "Residents of Iraq":
  111. "5. For the purposes of the directions, a resident of Iraq is any person, including any body corporate, normally resident in that country on 4 August 1990 or at any later time…Persons resident or becoming resident in Iraq should not subsequently be treated as resident elsewhere without prior reference to the Bank of England.

    "6. Residential status should be determined by reference to the facts. Cases of doubt should be referred to the Bank of England."

  112. Mr Justice Richards relied on this passage as containing an implication that a person who had been resident in Iraq at the time of the Directions and had ceased to be so resident may thereby cease also to be within the scope of article 2. However, in my judgment that implication is not present and there is nothing in that passage of any assistance to the claimant. All that the Bank of England is saying is that once a person is within the Directions as a resident of Iraq he should not be treated as resident elsewhere without prior reference to the Bank of England. No doubt, upon such a reference, the Bank of England would be able to grant permission in an appropriate case, for instance where a person had ceased to be resident in Iraq. In any event, the press notice could not of course affect the true construction of the Directions.
  113. The claimant also relied on correspondence undertaken between the parties' solicitors and the Bank of England regarding the lawfulness of a payment to the defendant by his solicitors or to the claimant by the defendant. Thus on 4 February 1999, during the trial below, the Bank of England wrote to the defendant's solicitors to say that it was satisfied that he should no longer be regarded as a resident of Iraq for the purposes of the Directions. The letter added –
  114. "Your firm may therefore use the funds deposited with yourselves for any legitimate purpose, and any funds due to him under Court Judgement may be paid to him however he wishes."

  115. The Judge regarded this letter as supporting his construction, but it is at best neutral: the letter may equally be read as meaning that because the defendant is no longer to be regarded as a resident of Iraq, therefore there is permission for him to pay and receive any funds.
  116. This letter, however, did not satisfy the defendant's solicitors, perhaps because it was regarded as ambiguous, and following a telephone conversation, the Bank of England wrote a further letter dated 23 February 1999, which concluded:
  117. "I further confirm that permission is not required by your firm to pay any funds to him."

  118. That letter certainly would support the Judge's construction of article 2, and perhaps justifies his reading of the earlier letter, but by then the trial had concluded and the later letter is not referred to in his judgment. That second letter gave rise to a further letter from the defendant's solicitors in which they pointed out that on their construction of article 2 permission was necessary, and they asked for it. The reply dated 26 March 1999 simply said that "It has been necessary to refer this matter to our legal advisers." On 12 April 1999, the Bank of England wrote again. This time it said:
  119. "I confirm that, on the evidence provided, I am satisfied that Mr Al-Kishtaini should no longer be regarded as a resident of Iraq. Accordingly, permission is hereby granted on behalf of H M Treasury, pursuant to article 2…"

  120. A year later, on 23 February 2000 the Bank of England replied to a letter (which is not in the bundle) from the claimant's solicitors. It had obviously sought guidance as to what the Bank's attitude would have been if he had sought authority to make the payment in question to the defendant back in 1993. The Bank could only speak in terms of their current practice, which is to establish "current residential status". The letter is ambiguous as to whether non-residency in Iraq would take a previous resident outside the Directions or would have led the Bank to look favourably upon the case and thus to authorise payment. The correspondence was renewed in the autumn and led to a further letter from the Bank to the claimant's solicitors dated 6 November 2000. That concluded with a paragraph which was phrased similarly to that dated 23 February 1999, viz –
  121. "Mr Al-Kishtaini is currently regarded as non-Iraqi for the purposes of the [1964 Act]. He does not therefore need to obtain permission from the Bank of England in order to release funds to your client, from any accounts he holds with UK banks."

  122. There is evidence in this correspondence, albeit of a most equivocal kind, that the Bank of England is prepared to regard persons currently regarded as resident outside Iraq as outside the scope of article 2 of the Directions. Nevertheless, when the question is most directly addressed, as it was in the Bank's letter of 12 April 1999, the issue was dealt with by the grant of permission. I have set out the correspondence in some detail, both because the beginnings of it were relied on by the Judge below, and also because it was relied on by the claimant on appeal. However, in my judgment, not only is the correspondence as a whole equivocal, but it cannot affect, let alone control, the true construction of the Directions.
  123. It follows that the claimant's payment was expressly prohibited by the Directions, and therefore that any claim founded directly on it fails by reason of the doctrine of illegality expressed by the maxim ex turpi causa non oritur actio. For these purposes it does not matter that the breach of the prohibition was not made deliberately, in the sense that it may have been made in ignorance of the law, or that if permission had been requested in advance it may or would have been granted. The case falls within the third of Lord Justice Devlin's classic threefold categorisation of the effects of illegality upon a contract: Archbolds (Freightage) Ltd v. S. Spanglett Ltd [1961] 1 QB 374 at 388. To the extent therefore that the claimant relies upon a contract of loan in respect of the DM 113,569 overpayment, he cannot enforce the contract. If, however, his claim is put in restitution, he is no better off. Boissevain v. Weil illustrates both points. There Lord Radcliffe said (at 341):
  124. "If reg. 2 did extend to this transaction it forbade the very act of borrowing, not merely the contractual promise to repay. The act itself being forbidden, I do not think that it can be a source of civil rights in the courts of this country. It is very well to say that the respondent ought not in conscience to retain this money and that that consideration is enough to found an action for money had and received. But there are two answers to this. Firstly, when the transaction by which the money has reached the respondent is actually an offence by our laws, the matter passes beyond the field in which the requirements of the individual conscience are the determining consideration…"

  125. In such circumstances, the claimant's reliance on such cases as Thackwell v. Barclays Bank Plc [1986] 1 All ER 676, to whatever extent that authority survives Tinsley v. Milligan [1994] 1 AC 340, see at 358/362 and 369B, is beside the point. Thackwell v. Barclays Bank Plc did not concern a prohibited act.
  126. That said, if the facts had to be investigated, I do not think that the claimant could show that he had acted in ignorance of the law - despite the Judge's saying that, if there had been a breach (which he had held there was not) he did not accept that it was deliberate. I will return to such considerations below, in the context of the Human Rights Act point.
  127. The Human Rights Act point

  128. Article 1 of the First Protocol reads as follows:
  129. "Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

    "The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

  130. The first question is whether the provisions of article 2 of the Directions have to be read down on the ground that its application to the orders of persons who are no longer residents of Iraq is calculated to lead to disproportionate results. I agree with Lord Justice Mummery that the Directions prohibit such payments, but do not in themselves prevent their recovery. That is the consequence of the common law doctrine of illegality. Mr Martin Young, who has appeared on behalf of the claimant, himself accepts that that is so.
  131. The issue is, therefore, whether the application of the common law doctrine in this case falls within the public interest or general interest exceptions contained in both paragraphs of article 1 respectively.
  132. Mr Young has cited only one case of ECHR jurisprudence on the effect of such exceptions, and that is Sporrong and Lönnroth v. Sweden (1982) 5 EHRR 35. That was a case concerned with compulsory acquisition or "expropriation permits" as they were there called. The applicants were complaining of the uncompensated effect of such permits which had been in force for periods of up to 23 years, and which had caused planning blight and had prohibited the owners of the land affected from building on it. In the end the permits were cancelled, no expropriation took place, and the redevelopment planned by the local authority never went ahead. The European Court of Human Rights held by a narrow margin that there had been a breach of article 1. It held that there had been no deprivation of the applicants' possessions within the meaning of the second sentence of the first paragraph, but an interference with their peaceful enjoyment under the first sentence. It also held that the second paragraph was not invoked. The question for the Court, for the purposes of its decision as to whether the first sentence of the first paragraph had been breached, was whether "a fair balance" had been struck. Thus, even though the express public or general interest exceptions had not been invoked, the Court said (at para 69):
  133. "For the purposes of [the first sentence of the first paragraph], the Court must determine whether a fair balance was struck between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights. The search for this balance is inherent in the whole of the Convention and is also reflected in the structure of Article 1."

  134. In concluding that there had been a breach of the first sentence, the Court emphasised that "A feature of the law in force at the relevant time was its inflexibility" (para 70). It criticised the planning authorities for failing, over the lengthy periods of time over which the permits were in force, to reassess the respective interests of the local authority and of the owners.
  135. I am prepared to assume for the sake of argument that the claimant here is deprived by the common law doctrine of illegality of his right of action and thus of his possessions within the meaning of the first sentence of article 1. I put the matter only as an assumption, for in this case it may be noted that the claimant's cause of action is itself only acquired by reason of the claimant's illegal and prohibited act. I am also prepared to assume, without endorsing, the claimant's submission that he is entitled to invoke Convention rights in respect of private claims, at any rate where their failure depends on a rule of law itself premised upon public legislation. Even upon the assumptions stated, however, I agree with Lord Justice Mummery that the public interest exception within the first paragraph, as well perhaps as the general interest exception in the second paragraph, can be successfully invoked.
  136. This is not only because the common law doctrine of illegality is founded in the concept of the public interest, see Holman v. Johnson (1775) 1 Cowp 341 at 343. Even so, Lord Mansfield's famous dictum itself refers to the fact that general principles of policy may achieve a result "contrary to the real justice as between [the defendant] and the plaintiff"; and Lord Goff in Tinsley v. Milligan at 335B/C pointed out that "the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between parties to litigation". It may therefore be insufficient merely to say that the rule is founded in the public interest. It may be necessary to justify the rule's application in the instant case as representing that "fair balance", between the demands of the general interest and the requirements of the protection of an individual's fundamental rights, of which the European Court of Human Rights spoke in the citation from Sporrong and Lönnroth v. Sweden above.
  137. Nevertheless, the facts of this case are in my judgment compelling. On the one hand, the public interest here invoked is very strong. It reflects the resolutions of the Security Council of the United Nations in response to the invasion by Iraq of Kuwait. Those resolutions were binding on all members of the United Nations: see Kuwait Airways Corporation v. Iraq Airways Company (CA, 10.11.00 at paras 248/262). On the other hand, the claimant had it in his own hands to make representations to the Bank of England to the effect that, as the defendant had ceased at the relevant time to be a resident of Iraq, he should be permitted to make the payment requested. The evidence is that the Bank of England was quite ready to give permission where an Iraqi resident ceased to be resident in Iraq. Because the statutory control was linked to a system whereby permission could be sought in advance, not only was it possible for someone in the position of the claimant to know where he stood before he committed himself to any course of action, but the public interest entrusted to the Treasury, and through the Treasury to the Bank of England, could be interpreted in a flexible way which was able, to some degree at any rate, to meet the practicalities and justice of particular situations. In the present case, the evidence showed that the claimant was aware of and understood the Directions and their prohibitions, was familiar with the practice of consulting the Bank of England and did so in transacting his own affairs, but omitted to do so in the case of the relevant payment at the defendant's request in part at any rate because he considered it to be relatively too small to be of much concern.
  138. In such circumstances the public interest reflected by the doctrine of illegality in my judgment weighs particularly heavily in the scales. It speaks not only to the difficulty which a court has in enforcing prohibited transactions but is itself the instrument by which the prohibition is policed. If a private litigant, neglecting the dictates of the statute, were to feel free to transact and later, if the point were ever taken against him, were able to argue before the courts the merits of his case which, under the scheme of the legislation, could and should have been put, in advance, to the Bank of England, then the statutory purpose is undermined, and that control which is meant to be vested in the Bank of England is lost. Moreover, such a situation transfers the discretion from the Bank of England, which is the expert in such matters, and can decide the case in the light of the contemporaneous considerations, to the courts, which are not expert in such matters, and can only investigate the merits of the particular case pathologically.
  139. For these reasons, I do not consider that, even on the assumptions I have made, a breach of article 1 has been made out. That is not to say that the Law Commission's provisional proposals for a statutory discretion to be given to the courts in the case of a defence of illegality would not in general be an improvement on the inflexibilities of the present common law rules (see its Consultation Paper (No 154) on "Illegal Transactions: The Effect of Illegality on Contracts and Trusts" (1999), and Tinsley v. Milligan at 363G/364E per Lord Goff).
  140. In conclusion, in full agreement with Lord Justice Mummery, I would allow this appeal on the ground that the claimant's claim to recover the DM 113,569 fails because of illegality.
  141. ORDER: Appeal allowed. Application for permission to appeal to the House of Lords refused. We refuse Mr. Marshall's application for the payment out immediately of the sum which has been paid into court and direct that, that sum remain in court pending the outcome of all proceedings in the House of Lords, including any petition there may be for leave to appeal. We grant Mr. Marshall's application for permission to apply to the costs officer for payment of costs on account. As we have allowed this appeal, we order the respondent to pay the costs of the appellant. We dismiss the application for permission to amend the respondent's notice and the reply and defence to the counterclaim, and make no order on the application for disclosure on its being with withdrawn, there being agreement as between solicitors that the respondent shall pay the appellants costs of the application for disclosure.
    (Order does not form part of approved Judgment)


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