England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BRENTFORD COUNTY COURT
(HHJ MARCUS EDWARDS)

		Royal Courts of Justice Strand London WC2
		1st November 1995

1. THE PRESIDENT: This is an appeal from the judgment of HHJ Marcus Edwards of 5th March 1993 at Brentford County Court. He then gave judgment for the plaintiff (a builder) in the sum of £11,354.33, to include interest, and dismissed the defendant's counterclaim.
2. The appeal first came before this Court in July 1995. On that occasion the appellant, who was the defendant in the action below, sought an adjournment in order that he might apply for legal aid. He had been the headmaster of a school at the time of the events which are the subject of the action, but by the time the matter came to this Court he was in difficulty financially, and he had the further difficulty that he was not capable, in his own view --and indeed quite appropriately so -- of dealing with certain complex legal points which appeared to arise in this appeal. The Court adjourned the matter and sought assistance from an amicus curiae, with regard to the particular issue which is now before this Court.
3. We have been fortunate, in that Mr Brennan (counsel) appears today as amicus. The Court has had the advantage of a skeleton argument from him and a further comprehensive revised skeleton argument from counsel for the respondent, who was the plaintiff in the case below.
4. The short facts of the matter are these. The plaintiff (the respondent to the appeal) is a building contractor, and the defendant (the appellant in this Court) was in 1989-90 the headmaster of a school at Hounslow. The school had suffered damage as a result of gales, and there were also other building works to be undertaken at the school. The plaintiff was engaged to carry out the building work. There were in fact three separate contracts which were alleged to have been concluded and which were the subject of the action. The plaintiff was seeking to recover the costs of certain work done and also damages for having been prevented from carrying out certain other work. The three contracts included one particular contract -- which the learned judge described as "contract one" -- for the repair of chimneys and walls, including part of a long wall in the school playground, which had suffered damage as a result of gales and which was likely to be the subject of an insurance claim. The learned judge found for the plaintiff in respect of contract 'one' and subject to allowing certain deductions also in respect of "contract two". In relation to the third alleged contract he decided that there had not been a legally binding agreement.
5. In relation to contracts 'two' and 'three' the court indicated on 5th July 1995 that it was unable to see any way in which the judge's findings in respect of those two claims could be assailed in this Court in the light of his findings of fact. Those matters are not now the subject of a live issue at this stage of the appeal.
6. This appeal raises an issue of importance. It arises in relation to contract 'one'. The notice of appeal stated the first ground of appeal:

"The learned judge having found as a fact that the contracts allegedly made between the plaintiff and the defendant were tainted by fraud, was wrong to hold that the contract was nevertheless fully enforceable, having regard to the quality of the illegality."

7. The appeal therefore raises the issue as to whether the respondent (the building contractor) may recover damages on a contract which involved a fraud in which he was a willing participant.
8. The facts relating to the formation of the contract appear from the evidence in chief of the plaintiff. This is to be found at page 2 of volume 2 of the appeal bundles. The story emerged quite openly in his examination in-chief. The relevant evidence was as follows. The plaintiff's counsel asked him the following question:

"Q. When did you first meet the defendant in this case, Mr Bhail?

A. Where did I meet him?

Q. I would like to know where and I would like to know when?

A. I believe it was December 1989 on the grounds of Hounslow College. An associate of mine introduced me to him.

Q. What was the name of that associate?

A. Mick Schofield.

Q. How did it come about that Mr Schofield introduced you to Mr Bhail?

A. He said to me, 'You're in the building trade.' He said, 'There's a big job over at Hounslow, would you be interested?' He said, 'It's too big for me.' I said, 'Yeah'. He made an appointment to go over to Hounslow College and meet Mr Bhail; which we did. He said to me, would I be able to do the work. I said, yes, I would."

Counsel asked the witness at that point to slow down.

He then asked the question again, repeating the answer in effect:

"Q. He said would you be able to do the work?

A. I said, 'Yes'. He said, 'It's an insurance job because it's storm damage. The high winds we had.' He said, 'Would you give us an estimate and I will pass it on to the insurers?' He said, 'You put an extra £1,000 on the price for me and I'll make sure that you get the job.' I said, 'No problem'.

Q. Was that all the conversation that you had with Mr Bhail on that occasion?

A. Yes.

Q. What happened after that?

A. I took him back an estimate and he said that he would pass it on to the insurers.

Q. When was that?

A. A couple or three days after the original meeting.

Q. When you took him back the estimate, how did you take it? You said 'took' it; did you take it yourself?

A. Yes, I took it back personally.

Q. What happened then?

A. Then I got a 'phone call from him [that is, the defendant] saying that could I possibly make it out to the site because a Mrs Ann Herbert loss adjuster was going to be there to talk to me.

Q. What did you do then?

A. I went there on a date we all agreed to have a talk about the job; explained to the loss adjuster what had to be done and what work had to be undertaken which was already in the estimate. She said, you know, 'When could you start? You have got the job'."

He went on to explain that the estimate given included the additional £1,000 over and above the price of £12,480 which was the actual cost of the work.

9. The learned judge in his judgment, having indicated the nature of the relevant contracts, said at page 3 of the transcript:

"The plaintiff and defendant agree that the plaintiff should dismantle and rebuild three chimneys and demolish and rebuild part of a long wall and do other work at Hounslow College for £13,480.00 plus VAT. The defendant's insurers were to pay the bill. The plaintiff said, and I accept, contrary to the evidence of the defendant, that he obtained the contract by agreeing to pay back to the defendant £1,000 which of course came out of the insurers' pocket -- and he, the plaintiff, would pay, and no doubt claim in due course, the VAT for that sum. On any view, therefore, his claim against the defendant is for £1,000 less than the £12,480.00 plus VAT. The arrangement was a fraud on the insurers and therefore tainted with illegality."

However, the judge continued:

"In my judgment the quality of the illegality in all the circumstances was not such that the plaintiff should be not permitted to succeed on his claim against the defendant to be paid for the work which in fact he did. If it were otherwise the defendant would have all these works done free and, what is more, keep the money from the insurers. That seems to me to be the right and just attitude to take after doing the balancing act referred to in cases such as Saunders and Edwards [1987] 1 WLR 1987 and Tinsley and Milligan [1992] 2 All ER 391.

The work under contract 'one' was done and no complaint was made about it, save as to the long wall and there is an issue as to the payment or nonpayment; to which I will return later."

10. It is that part of the judgment which is challenged by the defendant's notice of appeal. The learned judge held:

"In my judgment the quality of the illegality in all the circumstances was not such that the plaintiff should be not permitted to succeed on his claim against the defendant to be paid for the work which in fact he did."

11. The Court, as I have indicated, has had the assistance of Mr Brennan, counsel, as amicus curiae. He has submitted clearly and with emphasis, that in these circumstances the Court will not enforce an illegal contract. He referred to what is regarded as the original authority in this matter, that is to say to the judgment of Lord Mansfield CJ in Holman v Johnson (1775) 1 Cowp 341 at 343. Lord Mansfield said:

"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 of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditio defendentis."

12. Lord Goff although dissenting in the decision of the House of Lords in Tinsley v Milligan [1994] 1 AC 34 0, referred in his speech at page 354F to the general principle as stated by Lord Mansfield which was accepted by all members of the Judicial Committee. It is that principle which the 'amicus' invites us to apply in this case.
13. On behalf of the plaintiff respondent, Mr Paul Harris submits that it is possible in this case to sever what he would term, I think, in plain language, 'the bribe' of £1,000 from the agreement to undertake the actual building work. He resists the submission made by counsel as 'amicus' that this was one indivisible transaction and that the fraud in question was part and parcel of the initial contract. It is an illegal contract. With regard to the £1,000, the learned judge made his finding of fact upon the clearest evidence, which emerged quite starkly as part of the evidence in-chief of the plaintiff, who, it would appear, could see nothing wrong with it. Therefore this is a matter which is not capable of challenge on the facts.
14. The important feature of the case is that the contract was, in substance, an agreement between the appellant and the respondent to defraud a third party, the insurance company. This, in my judgment, is not capable of severance.
15. Mr Harris has invited our attention to a number of authorities, all of which are very different on their facts. In my judgment they do not assist in this particular instance. I say that because it is quite clear, in my judgment, that this was one indivisible contract. The plaintiff could not plead his case or present his claim in court without embracing the whole of what took place between himself and the appellant.
16. Indeed he did so in his evidence in-chief. The estimate which was delivered to the insurance company included, with the connivance of both parties, the additional £1,000, which constituted in effect an endeavour to defraud the insurance company for the enrichment of the defendant. From the plaintiff's standpoint, as shown by his own evidence, it provided the inducement to the defendant to give the contract for the work to him.
17. The numerous cases which have been brought to our attention, as I have said, do not affect that basic situation. It is further the position in this case that, in the light of the decision of the Court of Appeal in Orakapo v Barclays Insurance Services Company Limited and Another (unreported, 29th March 1994 CA) but reported in Commercial Law Cases that the insurance company would have a clear right to seek the recovery of the £1,000 if it had in fact been paid.
18. In this case it is apparent that some money has in fact been paid by the defendant to the plaintiff. At page 10 of the transcript of the learned judge's judgment he found that the defendant had established that he had paid to the plaintiff the total sum of £7,400. Part of that may be attributable to the second contract, but it is clear that some of the money for contract 'one' has in fact been paid by the defendant to the plaintiff. It follows that if this Court allows the appeal on this ground the defendant will not be able to recover that money, whilst the plaintiff for his part will be unable to recover the balance outstanding of the £12,480, being the actual price of the work.
19. I believe this to be a very clear case, and the message should be sent out loud and clear that if parties conspire to defraud an insurance company, as in this case. They cannot expect the courts to assist them in implementing their agreement. It is a remarkable feature of this case that the evidence was disclosed, not in the course of cross-examination, but as part of the case for the plaintiff himself. It would further appear that he could see nothing wrong in this.
20. I would allow this appeal for the reasons which I have given. This was a plain conspiracy to defraud the insurance company. The contract was indivisible and it was a necessary part of it that an extra £1,000 should be made part of the estimate.
21. For these reasons I would allow this part of the appeal. LORD JUSTICE RUSSELL: I agree. The reality of this case is that the plaintiff and the defendant agreed to defraud the insurance company. They agreed, each of them, to obtain monies from the insurers by deception. That was a criminal offence and a serious one. The deception was the false representation that £13,480 was the true value of the work done and materials supplied by the plaintiff. The fact that he undertook to do the work and that remuneration for that work formed a substantial part of the consideration for the agreement between the parties does not in any way cure the inherent criminality of the agreement. There was, in my judgment, one indivisible contract. In effect, as the transcript of evidence discloses, the defendant said: "I will give you the contract if you will ensure that I am enriched at the expense of the insurance company to the tune of £1,000. If I do not get the £1,000, you do not get the contract." The plaintiff agreed. For my part I cannot read into this dialogue two contracts: one relating solely to the work to be done and the proper remuneration for it, and another, the unlawful receipt of £1,000 by the defendant. The one was in no sense collateral to the other.
22. If there was but one contract, the question then arises whether the Court will sever that part of the agreement dealing with the £1,000 from that part, namely the building work, which was lawful. In my view the two parts of the one agreement are inextricably intertwined; so there is no room for severance. The whole contract is therefore tainted by fraud, not a severable part of it. In order to pursue his claim, as the transcript discloses, it became necessary for the plaintiff to refer to the illegality himself, which he did freely in examination in-chief.
23. Counsel for the plaintiff asserted as an alternative argument that he could rely upon the concept of quantum meruit. In my judgment that concept cannot be invoked to overcome the illegality of the contract upon which the claim for payment by the plaintiff is made.
24. For those reasons and those enunciated by my Lord, the President, I too would allow this appeal.
25. LORD JUSTICE MILLETT: The question in this appeal is whether the plaintiff, who is a builder, can enforce a contract which was intended to be used to practise a fraud on the defendant's insurers. The plaintiff was aware of the intended fraud and he was a willing participant in it. The question is whether the building contract can be identified and enforced separately from the fraudulent arrangements of which it formed an integral part. In my judgment it cannot.
26. This was a conspiracy to defraud. It is quite unrealistic to regard it as a building contract for the sum £12,480 with a separate and independent agreement to defraud the defendant's insurers superimposed upon it. The plaintiff was willing to do the work for £12,480. The defendant agreed to give the work to the plaintiff provided that the plaintiff would provide him with an inflated estimate for £13,480 and assist him in deceiving the insurers into believing that this was the true price for the work.
27. Mr Brennan, who appeared before us as amicus curiae, analysed the transaction as constituting a single contract which was vitiated by illegality. Mr Harris, who appeared for the plaintiff, submitted that the arrangements consisted of two contracts which were separate and distinct from each other: (1) a building contract -- by which the plaintiff agreed to do the work for £12,480; and (2) a fraudulent conspiracy --by which the plaintiff agreed to provide a false estimate for use by the defendant in the deception which he intended to practise on his insurers. Mr Harris submitted that the conspiracy was ancillary and subsidiary to the building contract, for which it provided at best only partial consideration; and that its illegality did not affect the plaintiff's right to enforce the building contract at the true and not the inflated price.
28. In many contexts it may be important to analyse a transaction in order to determine whether it consisted of a single contract or two contracts. But illegality is a question of substance, not form. Whether the arrangements between the plaintiff and the defendant comprised a single contract or two separate contracts is, in my judgment, immaterial; they constituted a single, indivisible arrangement tainted by fraud, neither component of which was ancillary or subsidiary to the other, and neither of which is severable so as to leave the other enforceable.
29. It is important to bear in mind that the law refuses to enforce not only contracts which are in themselves illegal, but also contracts which are ex facie legal but which, to the knowledge of the parties, have an illegal purpose or are intended to be performed in an illegal manner. In Pearce v Brooks (1866) LR Ex 213 the plaintiffs agreed to supply the defendant with a brougham on hire-purchase. The defendant was a prostitute. The jury found that the plaintiffs knew that she intended to use the brougham in the course of plying her trade. The plaintiffs were unable to recover the cost of the hire. This is a well-known example of a contract which was legal on the face of it but was unenforceable because it was intended for an illegal or immoral purpose.
30. In Miller v Karlinski (1945) 62 TLR 85 the plaintiff was employed on terms that he was to make inflated returns for expenses which in truth represented disguised remuneration. The purpose of these arrangements was to defraud the Inland Revenue. The plaintiff later brought an action against his employer for arrears of salary and travelling expenses. He was not allowed to recover. The case has frequently been followed. Employees who connive with their employers to defraud the Inland Revenue have been unable to recover compensation for unfair or wrongful dismissal or to enforce their contracts of employment in any way. In such cases the contract of employment is tainted by fraud by the illegal use for which it was intended to be put. These cases cannot be distinguished in principle from the present.
31. In all such cases there is an underlying, lawful contract -- to supply a brougham on hire, to engage a workman at a wage, or to build a wall -- and in all of them that underlying contract has been rendered unenforceable by the illegal manner in which it was intended to be performed or by the illegal use to which it was intended to be put.
32. The plaintiff has nevertheless claimed to recover on a quantum meruit. This is, of course, an alternative claim. If the building agreement could be severed from the conspiracy to defraud, the plaintiff would be able to recover the balance of the contract price. He would not need to plead quantum meruit. If, however, the building contract is void for illegality, then in my judgment the plaintiff cannot enforce it indirectly by claiming a quantum meruit rather than the contract price.
33. A claim in quantum meruit lies in restitution or, as it was formerly called, in quasi-contract. It arises whenever one party supplies goods or services to another in expectation of payment but no enforceable contract for payment has been entered into. In the absence of such a contract, the court enforces the implied promise of the recipient of the goods or services to pay a reasonable sum (quasi-contract) or orders restitution to prevent his unjust enrichment. But the existence of a valid contract for payment is a bar to the remedy. If there is no contract at all, or if there is a contract which is void for a reason other than illegality, a claim in quantum meruit will lie. But if there is a contract which is void for illegality, it will not. The reason for this can be variously stated:

(1) The illegality renders any implied promise to pay a reasonable sum unenforceable -- just as it renders the express promise to pay the contract price unenforceable.

(2) The defendant is enriched at the expense of the plaintiff -- but his enrichment is not unjust. It is the price which the plaintiff must pay for having entered into an illegal transaction in the first place.

(3) The existence of a contract bars the remedy. To succeed, the plaintiff must repudiate the contract. But he may do so only if no part of the illegal purpose has been carried out. Once it has been carried out, it is too late to withdraw from the transaction, repudiate the contract, and claim restitution.

34. In my judgment, therefore, the plaintiff should have been denied any relief in respect of this transaction.
35. I reach this conclusion with some satisfaction. The refusal of the court to enforce illegal contracts often leads to injustice and the unjust enrichment of a defendant. It is defensible only on the basis explained by Lord Mansfield CJ in Holman v Johnson (supra), where he said: "It is not a principle of justice but it is a principle of policy."
36. In the present case, the result will be -- perhaps fortuitously -- not altogether unfair. The plaintiff agreed to build a wall for the defendant at a price of £12,480 and to assist him in defrauding his insurers by pretending the cost was £13,480. On the facts found by the judge, the defendant has paid £7,400 to the plaintiff. The result of allowing this appeal is:

(1) the plaintiff will not recover the balance of the sum he expected to be paid for the work he did; and

(2) the defendant will be unable to claim on his insurers, and if he has already received payment from them, he will be liable to reimburse them.

37. Accordingly, the plaintiff will be some £5,000 out of pocket and the defendant will be £7,400 out of pocket.
38. I respectfully agree with the President that it is time that a clear message was sent to the commercial community. Let it be clearly understood if a builder or a garage or other supplier agrees to provide a false estimate for work in order to enable its customer to obtain payment from his insurers to which he is not entitled, then it will be unable to recover payment from its customer and the customer will be unable to claim on his insurers even if he has paid for the work.

I agree that this appeal should be allowed.

ORDER: Appeal allowed in relation to contract one. £2,892.05 substituted for County Court Judge's order for contract two. Appeal in relation to contract two dismissed. No order for costs. Legal aid taxation.