The Weekly Roundup: The Badly Behaved Edition

• Published date: 23 August 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Charges, Mortgages, Indemnities, Financial Services, Corporate and Company Law, Trials & Appeals & Compensation
• Law Firm: 1 Chancery Lane
• Author: Ms Sarah Prager and Anirudh Mandagere

Travel practitioners tend to be sunny optimists, dealing as they do with the jollier aspects of human existence; package holidays, package tours, and (more latterly) linked travel arrangements. But (readers of a nervous disposition should look away now) not everyone involved in the industry always behaves impeccably, and this week's Roundup deals with poor behaviour and its consequences in a travel and cross border context. We hope to return to happier topics next week.

Sun, sand, and suspicious dealings: Jones v McCarthy [2022] EWHC 2186 (Ch)

Introduction

This judgment of the High Court illustrates the challenges of pleading illegality as a defence, particularly when the impugned law is foreign. It also highlights the details that an expert report on illegality should contain if a court is to find that this defence is met.

Background

Mr. Jones and Mr. McCarthy orally agreed to exchange assets in 2008. Mr. McCarthy would obtain beneficial ownership of a yacht, in exchange for Mr. Jones acquiring a villa near Palma, Mallorca and a mooring situated in mainland Spain. There was a substantial mortgage on the yacht and the villa. It was envisaged by the parties that after the swap, the yacht and the villa would be sold to third parties.

Mr. McCarthy sold the yacht for around '1M in 2008 and retained the proceeds of sale. The villa was sold for '1.1 million in 2016. The proceeds of sale were also retained for Mr. McCarthy, which was something not envisaged at the time. Mr. Jones issued a claim in breach of contract on the basis that Mr. McCarthy did not comply with his obligations by selling the property at his direction. He claimed the '1.1 million for which it was sold. Alternatively, he brought a claim for an account of profits/constructive trust over the proceeds of sale of the villa.

In his judgment, HHJ Jarman QC held that Mr. McCarthy's dealings with the villa amounted to a breach of his obligations under the 2008 agreement, by which it was intended that Mr. Jones, and not Mr. McCarthy, would sell the villa onto a third party.

There were two legal issues in this claim which are of relevance to travel practitioners. Namely:

1. Whether Spanish or English law governed equitable remedies?
2. The approach to illegality under foreign law.

Judgment

Equitable Remedies and Foreign Law. The Defendant's case was that the contractual remedies were governed by English law and that the equitable remedies were governed by Spanish law. Accordingly, HHJ Jarman QC had to determine the correct applicable law for an account of profits/constructive trust with respect to Article 4 of the Rome Convention. Namely, that a contract will be governed by the law of the country in which it is most closely connected.

HHJ Jarman QC found that equitable remedies were governed by Spanish law. The villa and the mooring were situated in Spain and the parties instructed a Spanish lawyer to draft documentation which referred to Spanish law as applicable and/or referred to Spanish law. Therefore, the country with which the 2008 agreement was most closely connected to was Spain.

Foreign Law and Illegality. The intention of the parties in making the agreement was to maximise Spanish tax efficiency. However, the Defendant took the position that a decision not to pay tax under Spanish law engages the principles of illegality, and a breach of it may be sufficiently serious such that it would be contrary to public policy to allow a person to profit from their wrongdoing. The test for whether illegality as a defence can be succeed was affirmed in Patel v Mirza [2016] UKSC 42. Namely, that a court should:

• Consider the underlying purpose of the prohibition.
• Consider conversely any other relevant public policies which might be rendered ineffective by denial of the claim.
• Keep in mind the possibility of overkill unless the law is applied with a due sense of proportionality.

The Defendant instructed a Spanish law expert who identified that any putative purchaser of property was required to pay ITP tax (equivalent to stamp duty) and ADJ tax. If the total amount of ITP and ADJ exceeds '120,000, then under Spanish law failure to pay amounts to a criminal offence.

Nevertheless, HHJ Jarman QC held that the defence of illegality did not apply. The report of the Spanish law expert did not give a clear understanding of questions of weight and gravity of Spanish priorities. Further, it was of relevance that Mr. McCarthy...