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Sender:
Simon Macdonald
Date:
Fri, 15 Aug 2003 17:28:15 +0100
Re:
Illegality as a defence to restitutionary claims

 

Dear Colleagues

I believe the present state of the law (in spite of law comm. recommendations) to be that illegality stands as a defence to a restitutionary claim except where the parties are non in pari delicto.

This would seem to bite in relation to benefits conferred under the illegal contract. I wonder whether the benefit in the following scenario has been so conferred, or whether the unjust enrichment, though causally linked to the illegal contract, is remote enough to allow restitution?

1. A confers a benefit on B under an illegal contract of £x plus VAT. B accounts to customs for the VAT. A reclaims the VAT.

2. Following official discovery of the illegality, A is required by customs, for whatever reason, to repay to customs the VAT reclaimed by it.

3. customs then offsets that VAT against entirely separate VAT liabilities owed by B. B is, surely, unjustly enriched at the expense of A, since A has effectively paid part of B's VAT bill.

So, the VAT element of A's initial payment doesn't represent a benefit for B (as the payment simply goes round in a circle back to A). The benefit only arises when customs intervenes as if to reverse the cyclic transfer, but stops halfway.

So was the benefit which unjustly enriches B transferred under the illegal contract? Presumably if the answer is no, there is nothing to stop A seeking restitution against B. Alternatively and even if the answer is yes, what public policy objective is achieved by not allowing restitution. Say in the above scenario both A and B have paid heavy fines vis a vis the illegality. Public policy would be better served by a status quo re the VAT and both with their fingers burnt re the illegal purpose surely? As it stands, B is not only enriched to A's detriment, but the hardship intended by the fines he pays to the state is undermined.

I would be very interested in any thoughts.

 

A fine weekend to you all

Simon MacDonald

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