Hedging your bets and illegal contracts
Robert Woodhouse, Senior Associate in the Dispute Resolution team, takes a closer look at illegal contracts and a recent case involving insider information and betting on the share price.
There are certain types of contracts that courts will not enforce either as a matter of public policy or morality or arising from their duty to uphold the law. They will not enforce an illegal transaction or decide its legal consequences. Although there are more lurid examples, contracts entered into by unregistered estate agents have been determined as falling into this category. The net result can be to create a situation where one wrongdoer benefits at the expense of another.
So what happens when party A gives money to party B to bet on a bank’s share price, using inside information and when the expected insider information never actually materialises, so that party B does not place the bet? Can party A take legal action to get his or her money back?
The Supreme Court has ruled that on these particular facts, party A could still recover his money from party B.
On one view, party A and party B have, by virtue of their scheming, done something that amounts to conspiracy to commit an offence of insider dealing – the sort of illegality that one might think puts party A squarely in the sort of territory where the Court will send him or her away empty-handed.
However, the Court decided that he should not be prevented from doing so simply because the money that he was trying to get back had been paid for an unlawful purpose.
The Court appears to have accepted that the unlawful purpose was sufficiently remote that it could safely intervene to force the return of party A’s money, preventing party B from enjoying a windfall, without condoning the nefarious activity that caused the payment to be made.
Crucially, he was seeking to unwind the arrangement not to profit from or enforce it.
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