Authors Gregory Mitchell QC and Christopher Bond

The effect of foreign Illegality on

English law contracts
The recent decision of the House
of Lords (now the Supreme Court)
in Stone & Rolls Ltd (in liquidation) v
Moore Stephens (a rm) [2009] UKHL
39 has turned the spotlight on the eect
of illegality under English law. As the
amount of litigation arising from the credit
crunch and recession grows, it is likely that
defendants will increasingly seek to resist
performance of contractual obligations on
the basis that the entire contract is illegal,
or that the performance of the obligation is
impossible without committing an illegal
act, or that the claimant himself is guilty of
some illegality or immorality, and so is shut
out by the principle of ex turpi causa non
oritur actio.
The topic can be sub-divided into
a number of categories, each of which
is discussed below. For some of these
categories, the approach that an English
court will take is relatively clear and wellestablished. For others, it is rather less
so, and a number of recent cases suggest a
trend towards a greater willingness to have
regard to foreign illegality as a basis for an
ex turpi defence. A balance must be struck
between taking notice of foreign illegality
on the basis of principles of judicial comity
between jurisdictions, and a reluctance on
the part of English judges to make decisions
which eectively give extra-territorial eect
to foreign law. Principles of comity are being
given increasing weight in the striking of
this balance.

CONTRACTS VOID AB INITIO

It is a long-standing rule that an English
contract will not be enforced where the
true purpose of the agreement is to break
the law of a foreign and friendly state. This
rule is based on a principle of comity: it
would be wrong for an English court to

This article considers the circumstances in which an English court, in proceedings on

a contract governed by English law, will take notice of an act or omission, occurring
in a foreign jurisdiction, which is illegal according to the laws of that jurisdiction or
immoral according to that jurisdictions prevailing ethical standards.

uphold a contract to be performed abroad

which, had it been an agreement to break
the laws of England, would have been void
ab initio for illegality. So in Regazzoni v
KC Sethia (1944) Ltd [1958] AC 301, an
English contract to ship jute from India
to Genoa was held to be unenforceable,
since the parties both contemplated that
the jute should then be sold on to South
Africa, in the common knowledge that the
export of jute from India to South Africa
was prohibited by Indian law. It is clear
from this case that the obligation which
the claimant seeks to enforce (to ship jute
to Italy) may in itself be unobjectionable

Compaia Naviera Sota y Aznar [1920] 2

KB 287, the obligation under an English
charterparty to pay freight on jute in
excess of the rate permitted by the law of
the place of delivery (Spain) was held to
be unenforceable against the charterers.
It is clear from this case that rules (1)
and (2) are dierent: in Regazzoni, the
parties intention from the outset was to
commit illegal acts, whereas in Ralli Bros,
the parties formed the contract in the
expectation that it could be performed
lawfully. The subsequent enactment of
a Spanish decree capping the freight on
jute meant that it could not, and so the

THE EFFECT OF FOREIGN ILLEGALITY ON ENGLISH LAW CONTRACTS

Feature

KEY POINTS
A balance must be struck between taking notice of foreign illegality on the basis of
principles of judicial comity between jurisdictions, and a reluctance on the part of English
judges to make decisions which eectively give extra-territorial eect to foreign law.
It is questionable whether the approach taken by some courts to ex turpi causa in a purely
domestic context, regarding it as an inexible rule of law which allows for very little
judicial discretion, applies in the same way in relation to foreign illegality.
Courts are likely to adopt a policy-orientated approach to the ex turpi causa defence, rather
than the mechanistic approach adopted in Barros Mattos.

"An English contract will not be enforced where the

true purpose of the agreement is to break the law
of a foreign and friendly state."
either to foreign or to English law. But it
will nevertheless be held to be illegal if the
ultimate object of the contract (to ship jute
to South Africa) oends this rule.

SUPERVENING ILLEGALITY:
INEVITABLE
A related but distinct rule is that an
obligation under an English contract will
be held to be unenforceable if it becomes
illegal under the law of the place in which
it must be performed. This rule is generally
thought to be a principle of English
contract law rather than a rule of private
international law. So in Ralli Brothers v

Butterworths Journal of International Banking and Financial Law

defendant was excused from performance.

This rule of supervening illegality is a
species of frustration.

SUPERVENING ILLEGALITY:
POTENTIAL
In Ralli Bros the contract was frustrated
because it expressly stipulated that the
jute was to be shipped to Barcelona at a
certain freight per ton. The defendant had
only two options: to perform and break
the law of Spain, or to refuse to perform
and plead supervening illegality. There is
another category of case, however, in which
the defendant could and, as originally

October 2010

531

THE EFFECT OF FOREIGN ILLEGALITY ON ENGLISH LAW CONTRACTS

Feature

contemplated by the parties, would

perform his obligations in a manner
which contravened the law of a foreign
state, but need not. Such a case was Libyan
Arab Foreign Bank v Bankers Trust Co
[1989] QB 728. In that case, Staughton J
emphasised the importance of ascertaining
when the performance of the contract
necessarily involves doing an illegal act in
another country and concluded that it is
immaterial whether one party has to equip
himself for performance by an illegal act in
another country. What matters is whether
performance itself necessarily involves such
an act (at 743-744). So a defendant will not
be able to excuse a failure to perform on
the basis of supervening illegality when the
obligation could but need not be performed
in such a way as to cause him to act illegally
in the place of performance. Underlying

dealers had engaged the claimant to

procure the renewal of a supply contract
between the defendant and the national
oil corporation of Qatar. The defendant
promised to pay commission to the
claimant if successful. The supply contract
was renewed, but the defendant denied
that it was liable to pay the commission
on the basis that its agreement with the
claimant, albeit governed by English law,
was contrary to the public policy of Qatar
and so void, because the ocial policy of
the government of Qatar was to prohibit
agreements for commission in respect
of oil supply contracts. Phillips J (as he
then was) dismissed the action on the
more fundamental ground that although
the agreement was to be performed in
Qatar, the transaction was contrary to
public policy in England. This ground was

"It cannot be said with certainty under what

circumstances an English court will take notice of
foreign illegality in ... an ex turpi causa defence."
this rule is the principle that if a claimant
does not stipulate a particular mode of
performance, it is no concern of his that it
is merely more dicult for the defendant to
perform than had originally been intended
as a result of some change in foreign law.
For the contract to be frustrated, the
obligation must be impossible to perform
without the defendant breaking a foreign
law.

CONTRACT CONTRARY TO PUBLIC

POLICY OF FOREIGN STATE
One area in which the question of foreign
illegality and English contracts has
undergone recent development is when
an English law contract is said not to
involve the breaking of the positive laws
of a foreign state, but rather to infringe
the public policy of that state. The leading
case in this area is Lemenda Trading Co Ltd
v African Middle East Petroleum Co Ltd
[1988] QB 448. The defendant petroleum

532

October 2010

stronger, since, as Phillips J said at 456,

the public policy of Qatar cannot, of itself,
constitute any bar to the enforcement of the
agreement in this case. It may, however, be
a relevant factor when considering whether
the court ought to refuse to enforce the
agreement in this case under principles of
English public policy.
In considering this question, Phillips J
articulated a series of principles which have
a signicant eect on the law relating to
foreign transactions and English contracts.
He found that it was generally undesirable
for a person in a position to use personal
inuence to obtain a benet for another to
charge for doing so, especially when that
persons pecuniary interest was not apparent
and when the benet to be obtained was
from someone in a public position. Had
such an agreement been made to procure a
contract from a British government body,
the judge held, it would be unenforceable
under English public policy (at 458). In the

view of Phillips J, certain agreements were

oensive to a head of public policy based
on universal principles of morality; where
these universal principles were in play, the
English court will not enforce [the contract],
whatever the proper law of the contract
and wherever the place of performance. By
contrast, the foreign public policy may be
based on considerations which are purely
domestic. In such a case there would seem no
good reason why there should be a bar to the
enforcement of a contract to be performed
abroad (at 459). The instant case fell
somewhere between the two: although the
underlying principles relating to the sale of
personal inuence were essentially principles
of morality of general application it is
questionable whether the moral principles
involved are so weighty as to lead an English
court to refuse to enforce an agreement
regardless of the country of performance and
regardless of the attitude of that country to
such a practice. But the agreement would
nevertheless be unenforceable because it was
oensive both to the public policy of the place
of performance (Qatar) and of England (at
461).
The Lemenda-principles thus divide
agreements into three categories: (1) those
oensive to universal principles of morality
which will not be enforced by an English
court regardless of the public policy of the
place of performance; (2) those oensive to
general principles of morality, in which case
the English court will refuse to enforce the
agreement only if it oends both English
and the relevant foreign public policy; and
(3) those oensive only to a public policy
peculiar to the place of performance, in
which case the English court will take
no notice, since the question is a purely
domestic one for the foreign jurisdiction,
and so can have nothing to do with English
public policy.

EX TURPI CAUSA
Distinct from categories (1) to (3) above,
but shading into (4), is the case in which
the defendant does not ask to be excused
from performance because the contract
is void or because performance would be
illegal, but says instead that the claimant

Butterworths Journal of International Banking and Financial Law

should not succeed because he has based

his claim on actions, which were illegal
or immoral in the jurisdiction in which
they occurred. The principle on which the
court will shut out such a claimant is not
so much one of judicial comity (as (1)) or
of English contract law (as (2) or (3)), but
rather one of English public policy (as (4)),
based as it is on the celebrated dictum of
Lord Manseld in Holman v Johnson (1775)
1 Cowp 341 at 343 that no court will lend
its aid to a man who founds his cause of
action upon an immoral or an illegal act.
In this area the cases demonstrate a variety
of approaches, and so it cannot be said
with certainty under what circumstances
an English court will take notice of foreign
illegality in respect of an ex turpi causa
defence.
One approach is exemplied by the
controversial decision in Barros Mattos Jr
v MacDaniels Ltd [2005] 1 WLR 247, in
which the claimants sought restitution of
stolen money innocently received by the
defendants. The defendants said that they
had changed their position by converting
the money into Nigerian currency and
distributing it. Laddie J held that the
defendants could not rely upon this defence,
because the foreign exchange transactions
entered into by the defendants were illegal
under Nigerian law. In this case, the court
held, as a matter of English public policy,
that a party which had broken the law of a
foreign and friendly state in that state was
barred from recovery, despite the fact that
the law in question had no equivalent in
English law, and was not based on a generally
accepted moral principle so that it would
also be considered wrongdoing in England.
This decision appears to be based on the
same principle of judicial comity which
precludes an English court from enforcing an
agreement to break foreign law (Regazzoni)
however, it must be questioned whether
the principle applies in this way. See for
example Arnold J in Lilly Icos LLC v 8PM
Chemists Ltd [2009] EWHC 1905 (Ch) at
[265] and [297] in relation to the eect of a
possible breach of US customs law. In Barros
Mattos the court applied a hard-and-fast
principle that a court would not assist a party

who brought a claim based on a breach of

any law, be it English or foreign, on the basis
that there is no room for the exercise of any
discretion by the court subject to a possible
de minimis exception (at 257). This is, of
course, consistent with the approach taken
by some courts to ex turpi causa in a purely
domestic context, regarding it as an inexible
rule of law which allows for very little judicial
discretion, but it is questionable whether this
approach applies in the same way in relation
to foreign illegality.
In other cases, the courts have applied
what may be called the Lemenda-principles to
the parties dealings overseas, and considered
whether or not the actions which are said
to give rise to an ex turpi causa defence
would be oensive to the public policy of
England. If so, the English court tends to

So in Fox v Henderson Investment Fund Ltd

[1999] 2 Lloyds Rep 303, the defendant fund
managers argued that by instructing them to
perform certain transactions on his behalf,
the claimant would commit a legal wrong
by violating an order of a court in Virginia.
The argument was founded on r (1) above,
and rejected on the basis that the Regazzoni
principle had no application to a contract to
be performed in England. Timothy Walker
J (at 306) was plainly also concerned by
the fact that to shut out the claimant on
this ground would be to give the order of
the Virginian court extra-territorial eect.
The application of the Lemenda-principles
safeguards English judges from doing so:
there is essentially a cross-check that had the
wrongdoing taken place here, then the court
would have taken notice of it; thus by taking

THE EFFECT OF FOREIGN ILLEGALITY ON ENGLISH LAW CONTRACTS

Feature

Biog box
Gregory Mitchell QC and Christopher Bond practise in commercial law from 3 Verulam
Buildings, Grays Inn (3vb.com) and can be contacted on gm@3vb.com and cbond@3vb.com

"The courts are likely to adopt a policy-orientated

approach to the ex turpi causa defence."
deny relief to a claimant who bases his claim
on this oensive behaviour. So in Marlwood
Commercial Inc v Kozeny [2006] EWHC
872 (Comm), Jonathan Hirst QC (sitting as
deputy judge of the High Court) would have
struck out claims in conspiracy, deceit and
breach of duciary duty based on English
contracts, had he found that the claimant
was aware of the bribery of public ocials in
Azerbaijan, where the venture between the
parties was to be performed (at [178]). The
deputy judge would have done so on the basis
of ex turpi causa and the application of the
Lemenda-principles, according to which he
found that the corruption of public ocials
overseas was oensive to generally held
standards of morality, regardless of whether
it was a breach of English criminal law (at
[131] to [134]). A similar approach was taken
in Donegal International Ltd v Republic of
Zambia [2007] EWHC 197 (Comm).
Rather dierent might be a case in which
the behaviour complained of was an actual or
threatened breach of a foreign law or court
order which had nothing to do with generally
accepted standards of morality and which
was specic to that overseas jurisdiction.

Butterworths Journal of International Banking and Financial Law

notice of foreign wrongdoing, the English

court is not giving extra-territorial eect
to the laws of another jurisdiction, but is
rather applying a principle of English public
policy, that a court will not lend its aid to
a wrongdoer. This is consistent with the
traditional distinction between the attitude
of an English court to enforcing a foreign
law and recognising one as summarised by
the Court of Appeal in Ispahani v Bank Melli
Iran [1997] All ER (D) 124.

CONCLUSION
The speech of Lord Phillips in Stone &
Rolls (at [25]) shows that the courts are
likely to adopt a policy-orientated approach
to the ex turpi causa defence, rather than
the mechanistic approach adopted in
Barros Mattos. It is likely that the more
exible principles articulated in Lemenda
will become a more commonly used tool
to decide whether, as a matter of English
public policy, it is appropriate to shut out a
claimant who bases his claim on behaviour
which is oensive to the laws or accepted
moral standards of a foreign and friendly
state.

October 2010

533