Comity, performance, and illegality under foreign law

This blog by Achas Burin considers the recent case of Colt Technology v SG Global Group [2020] EWHC 1417 (Ch).

Colt Technology, a company incorporated in the UK, successfully applied to restrain a winding up petition sought by SG Global (‘SGG’), an Italian company.

The court based its judgment on the principle in Ralli Brothers v Compania Naviera Sota [1920] 2 KB 28 regarding contractual performance which may be illegal under foreign law. This blog considers the modern effect of that principle and its relationship with the principle of international comity and the modern English doctrine of illegality as defined in Patel v Mirza.

Background

SGG sought a winding up petition due to an unpaid debt. Colt contended the debt was unenforceable for illegality under the principle in Ralli Brothers. This principle holds that a contractual obligation will not be enforced where this would require the obligor to commit a criminal offence in the place where the obligation falls to be performed. Colt suspected SGG of defrauding the Italian tax authorities of VAT. If the suspicion were correct, then the payment of the debt could constitute crime(s) under Italian law. 

This blogpost will not repeat the High Court’s inquiry into the evidence except to note its finding that, on the evidence of fraud before the court, Colt had a properly arguable case with a rational prospect of success (para 69). As this application concerned an injunction to restrain a winding up petition, this was the appropriate standard (para 31).

Colt made two further submissions, which the court dealt with briefly given its finding on the first issue. Colt said a defence was available to it based on the principle of ex turpi causa. It framed this as the ‘general principle that a party cannot enforce an illegal contract’ relying on Patel v Mirza [2016] UKSC 42.

Additionally, Colt argued the winding-up petition had the collateral and improper purpose of pressurising it into paying the alleged debt rather than continuing to contest payment in the Italian courts. The Companies Court was therefore submitted to be an inappropriate forum.

The contract was governed by English law and had a clause giving exclusive jurisdiction to the Courts of England and Wales. SGG had issued proceedings in Milan to recover the debt, notwithstanding the exclusive jurisdiction clause. Those proceedings were defended on substantive illegality grounds rather than on procedural objections given the contractual clause. They were under appeal by Colt.

This blogpost will concentrate on the issues of illegality and jurisdiction. The case raised a number of other issues of, inter alia, insolvency and injunctions, but they will not be the focus here.

Decision

Joanne Wicks QC, sitting as a judge of the High Court, found for Colt on the basis of Ralli Brothers. Colt’s other two arguments received briefer treatment.

1. The argument from Ralli Brothers

The Ralli principle was summarised in a recent case thus:

‘the Court will not enforce a contract if the performance of that contract necessarily requires an act in a friendly foreign state which would be unlawful by the law of that state. The rule does not require the parties to intend the illegality or even to be aware of the fact that what they have bargained for will involve an act unlawful by the place of performance. It simply requires it to be established that their bargain necessarily involves such an act.’ (Magdeev v Tsvetkov [2020] EWHC 887, [297])

SGG argued that there was no necessary illegality given the latitude in the contract as to where payment should be tendered. It submitted there was no requirement for payment to be made in Italy because the contract made no express provision as to this. However, the proper approach for the court was to scrutinise precisely the obligation under the contract, giving it its appropriate construction. On that approach, the court found payment was to be made in Italy due to the fact that SGG’s registered office was in Rome (paras 47, 50).  

Because the Agreement impliedly specified a place for payment, it followed that the question was whether such payment could be illegal under Italian law. Although the expert evidence adduced by the parties was at odds on this point, the High Court found that there was a rational prospect of Colt making a successful illegality defence (para 73). This rendered a winding up order inappropriate.

2. Ex turpi causa

Colt’s second submission received inconclusive treatment. The High Court noted that Patel v Mirza dealt with domestic illegality, and that this historically was thought to be a separate principle to Ralli. However, the Supreme Court in Les Laboratoires Servier v Apotex [2014] UKSC 55 did not address this point. Instead, it founded its judgment on the basis of authorities dealing with domestic illegality. Because Colt had succeeded on the first ground, the High Court merely noted in passing its uncertainty as to the applicable line of precedent.

3. Jurisdiction/abuse of process

On the evidence before the court, Colt was not balance-sheet insolvent (para 82). Therefore, it was an abuse of the Companies Court’s jurisdiction to issue a winding up petition. SGG’s real purpose in invoking the insolvency jurisdiction was to pressurise Colt into settling the debt in the Italian proceedings, which were under appeal (para 84). The injunction was therefore granted.

Comment

The illegality doctrine, as it applies to contracts, torts and unjust enrichment, has recently and increasingly been the subject of litigation. With renewed focus comes greater clarity. It is clear that the domestic illegality doctrine propounded in Patel promotes internal consistency among the laws of a particular legal system. But what is its relevance, if any, when we are concerned with foreign laws? 

The High Court mentioned three cases and raised the question of whether they state three separate principles. The cases are Patel v MirzaRalli Brothers, and Foster v Driscoll [1929] 1 KB 470. Foster deals with conspiring to commit crime in a foreign jurisdiction. By contrast, Ralli Brothers is ‘concerned only with whether the contract between the parties necessarily involves performance of an act which is illegal by the law of the place of performance, irrespective of the object and intention of the parties.’ (Magdeev v Tsvetkov, [307]).

What relevance do PatelFoster, and Ralli Brothers have to one another? Goff J (as he then was) opined that Foster and Ralli were distinct, though related, in that they spring from the principle of international comity (Toprak Mahsulleri v Finigrain [1979] Lloyd’s Rep 98, 107). 

The relevance of Patel, in turn, was outlined by Cockerill J in Magdeev. She held that where a clear answer is not provided by either Ralli or Foster, the court should balance the factors discernible from the Patel line of case law in light of the public policy underpinning domestic illegality. That policy is coherence and ex turpi causa (i.e. civil actions should not be founded upon illegality). Cockerill J’s rationale was that it would be absurd to have an inflexible rule where foreign illegality was concerned, and not where domestic illegality was concerned. This seems plausible, up to a point. Insofar as flexibility avoids unjust results, it is desirable. However, beyond that point, it might be thought contrary to international comity for a domestic court to take a diametrically opposed view to the foreign legal system in question.

There is a related line of doctrine that establishes the principle that UK courts will not enforce a foreign contract which would be contrary to public policy in the UK (Rousillon v Rousillon (1880) 14 Ch D 351; Israel Discount Bank of New York v Hadjipateras [1984] 1 WLR 137). What is the relevance of Patel v Mirza to that situation? This issue arose in a recent Supreme Court case concerning the recoverability of damages for the cost of a surrogacy arrangement. Surrogacy agreements are legal in California but not in the UK. The majority in that case permitted recovery, though the dissent highlighted Patel v Mirza. Lord Carnwath (dissenting on this issue) said: ‘The fact that the laws of other jurisdictions and other systems may reflect different policy choices seems to me beside the point. It would in my view be contrary to that principle [coherence /consistency] for the civil courts to award damages on the basis of conduct which, if undertaken in this country, would offend its criminal law.’ (Whittington Hospital NHS Trust v XX [2020] 2 WLR 972, [66]) According to the minority, then, international comity is irrelevant to the Rousillon doctrine. Rather, Patel is the appropriate guide. The majority did not comment expressly on these points.

Taking these cases together (ColtWhittingtonApotex, and Magdeev), it would appear that UK courts consider Patel to be relevant to the performance or enforcement of contracts which are illegal abroad or at home. Patel’s relevance seems to be, however, subsidiary to the more specific doctrines governing the fact pattern at hand. The precise ambit of international comity as an underlying principle in cases of illegal foreign contracts remains to be determined. 

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