Illegality And The Enforcement Of Contract

Regulation is a fact of life for every financial service provider ("FSP"). FSPs face an ever-increasing volume of regulation. Regulatory requirements range from those which go to the root of the FSP's business (solvency, fitness and probity, proper governance) to more technical requirements (such as financial reporting and record keeping). What is the effect of a breach of a regulatory provision on an FSP's rights to enforce a contract with its customer or counterparty? If the FSP breaches a regulatory provision associated with a transaction is the underlying contract unenforceable by it? If this is a loan does it mean that the FSP lender cannot compel repayment, or enforce security? If it is a trade in securities or derivatives does it mean that the FSP cannot compel its counterparty to complete? It is clear that the answer will often have significant commercial implications.

The question is simple but the answer is complicated. The key difficulty facing the FSP is that it has (in legal terms) put a foot wrong and yet it is looking to the law (and ultimately a court of law) to assist it to compel the customer or counterparty to perform obligations it has signed up to. Like many complex legal doctrines there is an elegant Latin phrase to summarise it – ex turpi causa non oritur actio. A related doctrine is that where each party is in breach of the law, the defendant is always in a better position – the pari delictu...