Neutral Citation [2016] IEHC 659
THE HIGH COURT
[2007 No. 4129P]
BARRY ENGLISH
PLAINTIFF
-AND-
NIALL O'DRISCOLL, GEAROID O'DRISCOLL AND DAN MURPHY, A FIRM PRACTISING UNDER THE STYLE AND TITLE OF NIALL AND GEAROID O'DRISCOLL & COMPANY ACCOUNTANTS AND REGISTERED AUDITORS, ODM ASSET MANAGEMENT LIMITED AND LIBERTY ASSET MANAGEMENT LIMITED
DEFENDANTS
EX TEMPORE JUDGMENT of Mr. Justice Twomey delivered on the 15th day of November 2016.
Costs where litigation relates to an illegal transaction
1. This is a decision in relation to the costs of a professional negligence action by the plaintiff, Mr. English, against his accountant, Mr. Murphy, in relation to an investment scheme whereby Mr. English was claiming capital allowances from the Revenue.
2. While that litigation was primarily concerned with professional negligence, this Court found (see the judgement of English v. O’Driscoll [2016] IEHC 584), that the scheme in which Mr. English invested was in fact an illegal investment scheme, since it was designed to claim capital allowances from the Revenue Commissioners based on a sham and a fraud. This Court also found that both Mr. Murphy and Mr. English knew or should have known of the illegal nature of the scheme. The issue for this Court now is the impact that this finding of illegality has on the costs of that unsuccessful professional negligence action.
3. On grounds of public policy, this Court refused to grant the plaintiff the orders he sought regarding the alleged negligence of Mr. Murphy, since to do so would amount to this Court approving of the unlawful scheme. In its judgment, this Court stated that it would refuse to grant assistance to either party since they were both involved in the illegal transaction.
4. However, at the costs hearing, Mr. Murphy relied on the findings of facts in the judgment to seek his costs on the basis that the plaintiff should have known that this was an unlawful transaction and so he should never have issued the proceedings in the first place and by doing so he put Mr. Murphy to the cost of defending them. Mr. Murphy argued that as Mr. English failed in his litigation (since the Court refused to make any orders), costs should be awarded against Mr. English, the unsuccessful party, in favour of Mr. Murphy.
5. While on the face of it, this argument might appear to have merit, this Court is not persuaded by it.
6. This is because this is a case where the Court has found that Mr. Murphy had an active role in a scheme that was designed to unlawfully claim capital allowances from the Revenue. For public policy reasons therefore, this Court does not believe that it should reward one knowing participant in an unlawful scheme over another knowing participant. To do so could be seen as this Court approving participation in an unlawful scheme to claim capital allowances from the Revenue. There can be doubt that awarding costs to Mr. Murphy would in real terms amount to rewarding Mr. Murphy over Mr. English, even though they were both active participants in the scheme to deprive the Revenue of tax. This is because an order for costs is likely to amount to a substantial amount of money, particularly in this case where the trial lasted 10 days in the High Court.
No order as to costs where the parties are knowing participants in the illegality
7. Accordingly, this Court concludes that where proceedings are based on an illegal transaction in which both parties to the litigation are knowing participants, the Court should, on public policy grounds, offer no assistance to either party, not only in relation to the substantive litigation but also in relation to the costs of the proceedings.
8. In rejecting Mr. Murphy’s application for costs, this Court is also influenced by the fact that Mr. Murphy did not plead, in his defence, that the scheme was illegal. Indeed, Mr. Murphy did not acknowledge that the scheme was illegal at any stage in the proceedings and it was only when the Court raised the issue of illegality that there was any such acknowledgement by Mr. Murphy, and even then, it was only an acknowledgement of the possibility that the Court might find the arrangement illegal. If Mr. Murphy had pleaded illegality it is quite possible that the proceedings would not have come to trial and he would not be faced with the legal costs which he is now seeking to have Mr. English pay. He cannot therefore complain that he has to pay his own legal costs in this case.
9. Similarly, if Mr Murphy had sent a Calderbank type letter (i.e. without prejudice, save as to costs,) outlining his view to Mr. English that the proceedings should be withdrawn or settled, since a court would find that the arrangement was illegal, it is also likely that the proceedings might not have come to trial. However, he also failed to do this and so cannot complain about having to pay his own legal costs. It should be observed that this Court is not saying that a knowing participant in an illegal transaction will be awarded costs in his favour if he has sent a Calderbank letter. Rather it is saying that Mr. Murphy might have prevented the litigation and thereby saved himself the costs of the litigation, if he had raised the illegality of the transaction with Mr. English on a without prejudice basis.
10. It seems to this Court that by failing to either plead illegality in his defence or raise illegality on a without prejudice basis, Mr. Murphy was seeking to have his cake and eat it. This is because he stayed quiet to the Court and the plaintiff about the illegality, it seems in the hope that the Court would not find the transaction was illegal. Yet now that the Court has found the scheme was illegal, he wishes to claim that Mr. English (who was not as central to the scheme as Mr. Murphy), should never have brought the proceedings, even though Mr. Murphy never pleaded the scheme was illegal or suggested, even on a without prejudice basis, to Mr. English that it was illegal.
11. For these reasons, no order will be made as to costs.
