In jurisdictions such as Bermuda, the British Virgin Islands, and the Cayman Islands, the alleged ‘illegality’ of one party or another is often relied upon, in practice, as a defence to a claim, whether the claim is asserted in contract, tort, equity, or restitution.
It is quite often asserted, for example, that a claim should be dismissed because the claimants (or, in the case of a company in insolvent liquidation, the company’s former directors and officers) have allegedly been guilty of some fraud, dishonesty, breach of statute (such as an immigration or tax law), or regulatory non-compliance (such as a breach of Anti-Money Laundering, Beneficial Ownership, or Sanctions regulations).
The application of the ‘illegality’ doctrine is not straightforward, however, and it requires careful consideration in every case, not least in cross-jurisdictional cases where different governing laws might potentially apply to the issue.
In Patel v Mirza  UKSC 42, Lord Toulson and a majority of the United Kingdom Supreme Court noted that the application of the doctrine of ‘illegality’ had caused a good deal of uncertainty, complexity, and inconsistency, in earlier English case law.
In attempting to offer clarity and some degree of consistency to the doctrine of ‘illegality’ under English law, Lord Toulson concluded in Patel v Mirza  UKSC 42, that “the essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system”.
In doing so, the majority of the United Kingdom Supreme Court rejected the ‘reliance’ approach reflected in the earlier House of Lords’ decision in Tinsley v Milligan  1 AC 340, whereby the courts would, somewhat inflexibly, refuse relief to a party that was obliged to rely on its own illegality to plead or to establish its case: but not in other cases.
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Illegality as a defence under Cayman Islands, British Virgin Islands, and Bermuda law: a comparison with English law and Hong Kong law