Key takeaways
Foreign illegality defence
This requires that it should be pleaded and ultimately proved that the acts relied upon were prohibited under the law governing the claim or the law where the acts relied on have been or are to be carried out.
Territoriality requirements
These apply equally where foreign illegality is raised as a defence to a non-contractual claim as they do to a claim for breach of contract.
Public policy
Determining what is English public policy at any given time can be complicated and the Court prefers to apply black letter law where possible.
A recent case, Beneathco DMCC -v- RJ O’Brien Ltd [2025] EWHC 3079 (Comm), dealt with a party refusing to make a contractually required payment in USD on the grounds that doing so would have been unlawful under U.S. sanctions. For a detailed analysis of how the Court resolved this issue, please refer to our article (Court upholds broker’s decision not to make payment to sanctioned client).
This case also involved the illegality defence based on a breach of US sanctions, but in a different context. Namely, a defendant seeking to bar the claimant’s relief under a tort claim, on the grounds that the claim arose from business activities breaching U.S. sanctions. This engaged the principle of ex turpi causa non oritur actio (essentially, the illegality defence).
The background facts
The claimant, a Singapore based company, claimed that some of its directors (the defendants) diverted substantial funds from it through a dishonest breach of fiduciary duty.
The defendants sought to bar the claim. They denied that they had controlled the claimant company and contended instead that the company was at all material times controlled by an individual, Mr Jahanpour, who was responsible for the alleged misappropriation of funds.
Furthermore, Mr Jahanpour was a US citizen and the defendants alleged that he had breached US sanctions. The claimant’s business involved an Iranian based petrochemical company and, as a US citizen, Mr Jahanpour was prohibited from facilitating transactions in respect of petrochemicals originating from Iran.
Accordingly, the defendants contended that the tort claim arose from an illegal business breaching US sanctions and should be barred according to the principle of ex turpi causa (no action arises from a dishonourable cause).
The claimant sought to have this defence struck out on the basis that the foreign illegal act, to apply as a defence, must be performed in the territory where it is illegal, which was here not the case: the alleged breach of US sanctions did not take place within the territorial US.
The claimant further argued that it would be contrary to English public policy to refuse enforcement of the tort claim, on the basis that it arose from a breach of US sanctions, because:
denying enforcement would enable the defendants to avoid liability for the dishonest breach of their trust or fiduciary duty (which amounted to fraudulent conduct), thereby undermining the integrity of the legal system; and
refusing enforcement on the grounds of an extraterritorial breach of U.S. sanctions would conflict with the UK’s foreign policy, which expressly discourages the extraterritorial application of unilateral U.S. sanctions.
The Commercial Court decision
The Court struck out the illegality defences. It held that, under English law, foreign illegality (such as a breach of U.S. sanctions) can prohibit relief for a tort claim only if the illegal act from which the claim arose was performed in the jurisdiction where it is illegal. In the present case, there was no indication whatsoever that any of the claimant’s alleged US sanctions breach occurred within the U.S.
The Court noted that if the illegality defence had applied, a full trial would have been necessary to determine if applying the defence would offend UK public policy and international comity.
The Court referred to the decision in Byers -v- Samba Financial Group (2020) EWHC 853 Ch. In that case, the Court noted (at p. 183) that this was a fact sensitive exercise, taking into account the following criteria: “Proportionality being the touchstone relevant to that assessment must be the seriousness of the illegality in the given case, the extent of a claimant's knowledge of it or involvement in it, the importance of his role, the impact of denial of recovery as between the parties, and whether denial would prevent the making of a profit out of wrongdoing or alternatively prevent wrongdoing.”
In this case, the mere fact that the defence could enable the defendant to avoid civil liability for his fraudulent conduct, did not automatically render the illegality defence inapplicable for public policy reasons; a factual balancing exercise would still be required between the interest of denying relief and allowing a party to get away with fraudulent conduct – a full trial would have been required to make this assessment.
As to whether, even if illegality had been established, it should be discounted because it was against UK foreign policy to enforce unilateral US sanctions against Iran, deciding what public policy was in this area was likely to prove controversial and difficult. In the Court’s view, it would be preferable to adopt and apply the territoriality rule.
Finally, the Court rejected the claimant’s argument that, as a matter of English law, an illegality defence could never be available where a claim was based on dishonest breach of trust or fiduciary duty.
Comment
The decision confirms that in order for the illegality defence to be available under English law, the act complained of must be performed in the territory in which it is deemed illegal. This conclusion potentially renders any UK foreign policy assessment irrelevant.
This article was co-authored by Tom Burdass, Legal Director at Hill Dickinson.
