Investigation of further case law reveals cases allowing what were normally common law rights to be extended to the law of equity. See the case of Financings Ltd v Baldock “Whatever may have been the position before the fusion of law and equity, the effect today of the court's granting relief against a penalty agreed to be paid pursuant to a penalty clause in a contract is that the penalty clause is treated as void and the plaintiff is forced to rely upon his right to such measure of damages as he would be entitled to at common law for the breach of contract which the defendant has committed.”
To discuss what impact the case has had on the maxim of ‘clean hands’ it is necessary once again to establish the position prior to the decision.
Quote from ‘The Future of Equity’ by Lord Evershed in 1977 “equity acts in personam, that is, upon the conscience of the defendant. Equity does not provide remedies for the plaintiffs own mistakes but prevents a defendant from taking unfair advantage.”
The clean hands maxim was summarised in the following case, Holman v. Johnson “No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act.” The principle has been applied for over 200 years.
This was the position in equity, however the common law provided a much more discretionary system. The mere fact that a transaction is illegal does not have the effect of preventing property, from passing under it. In Scarfe v. Morgan, Parke B said that “if the [illegal] contract is executed, and a property either special or general has passed thereby, the property must remain.”
I find Lord Denning’s reasoning in Singh v. Ali the best explanation: “The reason is because the transferor, having fully achieved his unworthy end, cannot be allowed to turn round and repudiate the means by which he did it … and the transferee, having obtained the property, can assert his title to it against all the world, not because he has any merit of his own, but because there is no one who can assert a better title to it.”
The court does not confiscate the property because of the illegality - it has no power to do so, in the words of Lord Eldon: 'Let the estate lie where it falls.' Muckleston v. Brown
The position after the case appears to extend the ‘clean hands’ maxim. Lord Browne-Wilkinson said that illegality neither prevents an equitable interest coming into existence nor destroys it, but renders the interest unenforceable in certain circumstances. He based this view on the doctrine of locus poenitentiae, which applies in equity as well as at law, where a plaintiff can recover his property if he had repented before the illegal purpose was carried out. Lord Browne-Wilkinson said that the locus poenitentiae doctrine is irreconcilable with any rule that no equitable interest arises in the transferor where property is transferred for an illegal purpose. He continued that, if under the locus poenitentiae doctrine the courts recognised that an equitable interest did arise out of the transaction, the same must be true where the illegal purpose has been carried out. “The carrying out of the illegal purpose cannot, by itself, destroy the pre-existing equitable interest.”
Were the courts right to extend the principle? It is easy to see the temptation of doing so especially when considering the facts in Tinsley.
New Zealand have legislated on this area of law by the Illegal Contracts Act 1970 whereby they created a system of discretionary relief. On a review by the New Zealand Law Commission ‘Contract Statutes Review’ Report No’25 it has been noted as working reasonably well. Israel has also introduced a similar system. However, bringing such a discretionary system to the UK would be a big conventional decision.
Was the decision extending the principle wrong? The extension of the Bowmakers rule could provide random results with it being a rule of evidence. There are also possible detrimental consequences. Take Lord Goff's example, a group of terrorists who secure a base for their activities by buying a house in the name of a third party not directly implicated in those activities… will, as a result of Tinsley v. Milligan, be entitled to the assistance of a court of equity in recovering their equitable interest.
However, in contradiction of this are the cases of Marles v Phillip Trant & Sons and Beresford v Royal Insurance Company. The former placing consideration of the ‘gravity of the illegality’ and the latter evaluating whether recovery would allow the plaintiff to benefit from the illegality.
A further argument against the extension of the law was made by Lord Goff who felt that after almost 200years of the original principle, it was not in the hands of the judiciary to change existing legislation.
Also a point developed in the article “Title Claims and Illegal Transactions” argues that if the plaintiff derives his title from an illegal contract, how can he establish it otherwise than by relying on the (illegal) contract. When used in the context of Tinsley v Milligan the article states that although Milligan did not have to rely on the illegality she had to rely on the agreement therefore she was allowed to rely on the illegal agreement because her reliance was for the purpose of providing the basis of her property. This may be argued the other way by using the exception permitting reliance for the purpose of establishing a title but it was made clear by the court that Milligan succeeded because she had ‘no need to rely on an illegality’. The complications of this widening is that if Milligan has succeeded without relying on illegality then Tinsley v Milligan has introduced a new meaning of reliance which could have very strange results!
This outcome could have been avoided if the House of Lords had reconsidered the Bowmakers rule as it has been applied at common law. It is thought that on the authorities it would have been open to the law lords to hold that the rule applies only to a right of possession or occupation, and not to title. However, all the law lords, including Lord Goff, agreed that the rule, as it has been applied at common law, permits property to pass.
It is clear from the recent case of Martin J. Halley v. The Law Society that Tinsley v Milligan really did extend the law in this area. The above case used the reasoning from Tinsley to reinforce the use of the ‘no reliance theory’ in equity.
In my opinion, the explanation for this departure from Lord Eldon's absolute rule is that the fusion of law and equity has led the courts to adopt a single rule applicable both at law and in equity. Although there is no case overruling the principle stated by Lord Eldon, as the law has developed the equitable principle has become fused with the common law rule. I believe that due to this fusion the remedy should be available at both common law and equity.
