³⁰⁵ (1778) 2 Comp. 790, 792, 93 E.R. 1364. See also Lord Mansfield's statement in Smith v. Bromley: “If the act is in itself immoral, or a violation of the general laws of public policy, there the party paying shall not have this action; for where both parties are equally criminal against such laws … the rule is, potior est conditio defendentis. But there are other laws, which are calculated for the protection of the subject against oppression, extortion, deceit, etc. If such laws are violated, and the defendant takes advantage of the plaintiff's condition or situation, there the plaintiff shall recover”. (1781) 2 Doug. 696N., 697. This case was decided in 1760, but reported only in 1781. The holding in Browning v. Morris was endorsed by Silberg J. in an obiter in the milestone case of Geikobs v. Kartuz (1955) 9 P.D. 1401. Landau J. will allow the innocent party to rely on the contract even in order to uphold the transaction. Id. at 1418–19. But note that the contract was pleaded in defence and not as a constituent element of a cause of action. Witkon J. reserved judgment on the rights of the innocent party. Lately the court refused to entertain an action by an allegedly innocent party to enforce the illegal contract; Sivan v. Reisman (1968) (II) 22 P.D. 683, 687; and also refused a restitutionary action by such party to recover advance money on a frustrated contract; Rider v. Morgenstern (1969) (II) 23 P.D. 95. See also R. Gottschalk, “Illegality in Contract” (1967) 2 Is.L.R. 589. The proposition of Browning v. Morris was endorsed in dicta in Bar-on v. Topol (1954) 8 P.D. 1065, 1072, and in Sivan v. Reisman before attaining something akin to the status of a holding in State of Israel v. Lior Ltd. (1969) (I) 23 P.D. 436, 442. Cf. Shimoni v. Ulamei Chain Ltd. (1971) (I) 25 P.D. 824, 835–40. The Contract Law (Remedies for Breach of a Contract), (1970) Sefer Ha-Hukim, no. 610, in sec. 24 blocks the importation of English law in matters of breach of contracts regulated by that law. It does not, however deal with the question of the rescission of an illegal contract by the oppressed party. That is, the English rules, in this matter still apply in Israel. The Draft Contract Law (General Part) (1970) Hatza'ot Hok, no. 880 at 129, proposes original Israeli rules in the matter of rescission of contracts for defects in their creation. Instead of rendering illegal contracts unenforceable, sec. 31 of the draft Law declares them invalid. Under this section the defrauded outsider would be able to rescind the contract. Sec. 19(a) of the Bill provides that “a party who was induced to make a contract by the other party taking advantage of his distress, mental feebleness or inexperience may rescind the contract when the terms of the contract are unreasonably worse for him than is customary”. Query, however whether the outsider can ever show the required “distress” and bad terms to be able to raise sec. 19(a).

³⁰⁶ Of note is the discussion of when is a party not in pari delicto in Grodecki, , “In pari delieto, potior iest conditio defendentis” (1955) 71 L.Q.R. 254.Google Scholar It has been recently held in Israel that a party is not in pari delicto only when his conduct is not tainted at all. Sivan v. Reisman followed in Rider v. Morgenstern.

³⁰⁷ [1953] 2 Q.B. 190, C.A.

³⁰⁸ [1960] A.C. 192, P.C.

³⁰⁹ Cutler v. Wandsworth Stadium Ltd. [1949] A.C. 398, H.L.

³¹⁰ 24 & 25 Geo 5, c. 48.

³¹¹ [1953] 1 W.L.R. 487.

³¹² [1953] 2 Q.B. 190 at 196, C.A.

³¹³ Id. at 197.

³¹⁴ Gower at 338, n. 40. Gower expressed this opinion, without discussion, in regard to filling the gaps in the protective wall of civil remedies to buyers in distributions.He does not elaborate on the problem of invoking a restitutionary remedy when an implication of a tort is ruled out. In the context of insider trading, Gower describes the law to be that which follows from Percival v. Wright subject to the exception of Allen v. Hyatt (Gower at 544). In another place he envies the American law for its development under Rule 10b–5: “But as yet we lag far behind the American law, which, as a result largely of a judicial gloss on rule 10b–5 made under the Securities Exchange Act 1934, has virtually placed directors in a fiduciary relationship to all those with whom they have dealings in their company's securities”. Id. at 517. It is the thesis of the present writer that a thorough examination of the law justifies Gower's observations as regards an action for enforcement by the violator and a restitutionary action by his victim, and both should be extended to market transactions. Percival's action against Wright was a restitutionary action, and an English court today should entertain it on the basis of sec. 13.

³¹⁵ Webber, , “Restitution of Illegal Payment” (1960) 23 Mod. L. R. 322, 326CrossRefGoogle Scholar observes: “Kiriri is a decision of the Privy Council and the law still awaits re-examination and restatement by the House of Lords”.

³¹⁶ [1960] A.C. 192 at 205, P.C.

³¹⁷ Id. at 206.

³¹⁸ Lumley v. Broadway Coffee Co. Ltd. [1935] O.R. 104, aff'd [1935] O.R. 278.

³¹⁹ [1935] O.R. 104, 108.

³²⁰ [1935] O.R. 278, 283–284. On its facts this case is, perhaps, the closest argument in favour of a rescission action in insider trading cases. The court's conclusion that the registration scheme was regulatory in nature was directed at a system requiring the registration of brokers (where even the issuer had to register as a broker). It could not be applicable to the Israel Law (which registers only securities, not brokers or dealers) or to the English Act.

³²¹ Anson, , Law of Contract (23rd ed. 1969) 359 Google Scholar sums up the law as follows: “Where the parties are not in pari delicto, the less guilty party may be able to recover money paid, or property transferred, under the contract.”

³²² For quasi-contractual recovery in cases involving unliquidated claims, see Winfield, P., The Law of Quasi-Contracts (1952) 131–2.Google Scholar

³²³ 17 & 18 Geo V. C. 21.

³²⁴ Lodge v. National Union Investment Co. Ltd. [1907] 1 Ch. 300.

³²⁵ [1908] 2 Ch. 612; aff'd [1909] 1 Ch. 238.

³²⁶ [1939] 1 K.B. 504.

³²⁷ [1956] A.C. 539, P.C.

³²⁸ Id. at 547.

³²⁹ Id. at 552.

³³⁰ id. at 551.

³³¹ But see the analysis of the moneylender cases in Goff, & Jones, , The Law of Restitution (1966) 292–293 Google Scholar, where the writers arrive at the quite gloomy conclusion that in most cases of rescissionary actions the recovery would be unconditional.

³³² [1930] 64 O.L.R. 545.

³³³ Id. at 558.

³³⁴ [1916] 26 D.L.R. 200.

³³⁵ R.S.S. 1909, Ch. 22, Sec. 19.

³³⁶ [1933] 1 D.L.R. 161.

³³⁷ Lumley v. Broadway Coffee Co. Ltd. [1935] O.R. 278.

³³⁸ [1967] 61 D.L.R. 2d 355 rev'g [1966] 54 D.L.R. 2d 194. For an excellent note on this case see Lister (1967) 25 U. of Tor. L.R. 177.

³³⁹ »R.S.Q. 1960, c. 222.

³⁴⁰ [1956] A.C. 539.

³⁴¹ [1967] 61 D.L.R. 2d 358 at 361 (per Kelly, J.A.).

³⁴² (1969) (I) 23 P.D. 436. The later English cases coming out the other way were not cited. The Draft Contract Law (General Part) (see Part I of this article in (1972) 7 Is.L.R. 215 (hereinafter Part I) at n. 304) states in sec. 32 that upon the rescission of a contract for its illegality each party must make restitution to the other party unless the court excuses him from so doing in order to serve justice.

³⁴³ Mason v. Gardiner (1793) E.R. 973, and In Re Cork and Youghal Ry (1869) 4 Ch. App. 748 at 762.

³⁴⁴ [1960] A.C. 192, P.C.

³⁴⁵ [1935] O.R. 278.

³⁴⁶ [1967] 61 D.L.R. 2d 358.

³⁴⁷ An opposite conclusion will allow the criminal to reap the fruits of his own crime. American courts do not hesitate to untie resulting transactions if they consider it an adequate remedy. J.I. Case Co. v. Borak 377 U.S. 426 (1964); Mills. Electric Auto-Lite Co. 90 S. Ct. 616 (1970).

³⁴⁸ See infra p. 385.

³⁴⁹ In Chapman [1908] 2 Ch. 612; aff'd [1909] 1 Ch. 238 the borrower was a “protected person”. Thus this case is not an authority for a declaration in favour of a person who cannot establish himself as not in pari delicto or for a “legal” fiduciary (such as a trustee in bankruptcy) of his. See Sidmay [1967] 61 D.L.R. 2d 358 at at 381. Cf. Helmut v. Peretz (1971) (II) 25 P.D. 35, 41 (minority opinion).

³⁵⁰ In the first instance the party renders his performance and receives nothing in exchange, in the second the considerations are merely re-exchanged.

³⁵¹ [1693] 90 E.R. 750.

³⁵² (1836) 2 M & W 149 at 157. See also the milestone case of Mahmoud v. Ispahani (1921) 2 K.B. 716, criticized in Williams, , “The Legal Effect of Illegal Contracts” (1944) 8 Camb. L.J. 51.CrossRefGoogle Scholar

³⁵³ (1845) M & W 452 at 463.

³⁵⁴ [1958] 13 D.L.R. 2d 69.

³⁵⁵ Cf. St. John Shipping Corp. v. Joseph Rank Ltd. [1956] 3 W.L.R. 870 at 879.

³⁵⁶ The statement of Kelly, J.A. in Sidmay is instructive: “…the unfavourable consequences which will result from the universal application of the principle [of illegality] under which the impugned mortgage was declared null and void demand that, in the public interest, this Court, unless compelled to do so by authorities which are so clear and unambiguous that they defy distinction, should not arrive at a conclusion the effect of which will interfere with the rights and remedies accorded to parties by the ordinary law of contract, particularly when such interference will have such an impact upon a substantial area of the financial life of the community”. [1967] 61 D.L.R. 2d 358 at 362.

³⁵⁷ [1956] 3 W.L.R. 870.

³⁵⁸ 22 & 23 Geo. 5, C. 9.

³⁵⁹ when the carriage contract between plaintiff and defendant was entered into, the loadline of the ship was not submerged. It became so only because of subsequent loadings.

³⁶⁰ A personal representative of an assured person, claiming insurance benefits matured by the assured's suicide, in circumstances amounting to a crime will not be heard in court—Bresford v. Royal Ins. Co., Ltd. [1938] A.C. 586—not to speak of the denial of a claim of, or through, a murderer to a legacy from the murdered—In the Estate of Cunigunda (otherwise Cora) Crippen, Deed. [1911] P. 108—or through manslaughter, in re Hall [1914] P. 1. The same holds true to preclusion from taking benefits on the victim's intestancy, in re Singworth [1934] 1 Ch. 89. See Goff, R. & Jones, G., The Law of Restitution (1966) 439–42.Google Scholar Legal writers think that the rationale of the principle limits its application to crimes having an element of mens rea. It might also be restricted only to crimes of moral turpitude. See Goff & Jones, id., at 439, and Cheshire, G. & Fifoot, C., Law of Contract (6th ed. 1964) 301.Google Scholar Even in the crimes in which the principle prevails, it would apply only if but for the crime the plaintiff would have no right or title. St. John Shipping [1956] 3 W.L.R. 870, at 886.

³⁶¹ Devlin J. observed that this principle is indeed only another presentation of the rule for implying a prohibition of a contract. [1956] 3 W.L.R. 870, at 884.

³⁶² Id. at 881–882. St. John Shipping was followed in Archbolds (Freightage) Ltd. v. Spanglett Ltd. [1961] I Q.B. 374, the Court of Appeal deciding that the Road and Rail Traffic Act, 1933, 23 & 24, Geo 5, c. 23, 1933, requiring a licence from any person using a vehicle for the carriage of goods, was designed to provide an orderly and comprehensive service and not “to interfere with the owner of goods or his facilities of transport” (Id. at 386 per Pearce L.J.) and does not implicitly forbid a carriage contract. Also in Shaw v. Groom [1970] 1 All E.R. where the Court of Appeal decided that the crime of not providing a proper rent book (under sec. 4 of the Landlord and Tenant Act 1962) did not bar a landlord's action for rent.

³⁶³ Two aspects of the problem which were thoroughly articulated are (a) the illegality of a cohabitation contract of married persons (Peretz v. Helmut (1966) (IV) 20 P.D. 337, and earlier cases cited therein, cf. Helmut v. Peretz (1971) (II) 25 P.D. 35, 38–40 (minority opinion)) and (b) the availability of an independent action when the contractual action is barred, whether a quasi-contractual action (Man v. Aion (1957) 11 P.D. 1612; Teichner v. Eckhaus (1967) (I) 21 P.D. 7; Reider v. Morgenstern (1969) (II) 23 P.D. 95), money had and received (Aharonest v. Neiman (1956) 10 P.D. 1121; Halperin v. Teiger (1966) (IV) 20 P.D. 372), or a proprietary action (Libman v. Lifshitz (1952) 6 P.D. 57; Ben Yechezkel v. Engelberg (1969) (II) 23 P.D. 370).

³⁶⁴ See per Justice Witkon in Reider v. Morgenstern (1969) (II) 23 P.D. 95, 100; per Silberg J. in Jekovs v. Kartoz (1955) 9 P.D. 1401, 1404–5.

³⁶⁵ See per Landau J. in Weiss v. Meirson (1963) 17 P.D. 22, 27.

³⁶⁶ Zackay v. Pollack (1955) 9 P.D. 864; Verkony Moscowitz v. Pepo (1956) 10 P.D. 480; Teichner v. Eckaus (1967) (I) 21 P.D. 7 and cases cited therein. Note, however, that this area is one in which an independent action for money had and received has been recognized. See supra, n. 363.

³⁶⁷ E.g., Weiss v. Meirson (1963) 17 P.D. 22, regarding a regulation prohibiting the transfer of ownership of diamonds without a written permit given by the Controller. Even the fact that the Controller testified he used to waive the duty to obtain a permit, did not help the plaintiff.

³⁶⁸ Shmuel v. Israel (1960) 14 P.D. 1642, and cases cited therein.

³⁶⁹ The distinction between contracts prohibited per se and contracts to commit a crime is not always adhered to. For example, in the case of Gerscht v. Gerscht (1956) 11 P.M. 219, approved in (1958) 22 Psakim 164, Judge Lamm employed the instructive versus imperative dichotomy to analyze the legality of a partnership contract to commit a crime, i.e., run a certain business without a required licence.

³⁷⁰ (1952) 6 P.D. 57.

³⁷¹ (1955) 9 P.D. 1401.

³⁷² In a later case, Kouch v. Duchan (1963) 17 P.D. 1953, the court decided that a landlord can evacuate a tenant whose “rights” to the premises flow from an un registered lease. The registration law declared unregistered leases to be null and void. The Supreme Court ruled that plaintiff can win the case by relying merely on his ownership. Since the contract is a nullity the defendant will have no defence and the plaintiff will not have to resort to the contract (or its illegality) even as a replication. See also Orenstein v. Heiman (1965) (IV) 19 P.D. 190, Heiman v. Orenstein (1966) (II) 20 P.D. 52 (additional hearing) and Perelmut v. Zamir Cinema Company Ltd. (1969) (II) 23 P.D. 190.

³⁷³ Siani v. Izhari (1965) (I) 19 P.D. 40; Rider v. Morgenstern (1969) (II) 23 P.D. 95; Havardi v. Klinsky (1970) (II) 24 P.D. 565.

³⁷⁴ Meoded v. Don (1970) (I) 24 P.D. 2283 (dictum).

³⁷⁵ Id. at 287.

³⁷⁶ [1956] 3 W.L.R. 870 at 883.

³⁷⁷ See supra, n. 360.

³⁷⁸ Hely-Hutchinson v. Brayhead, Ltd. [1968] 1 Q.B. 549.

³⁷⁹ Gower, at 527.

³⁸⁰ See the excellent description of this development in Marsh, , “Are Directors Trustees? Conflict of Interest and Corporate Morality” (1966) 22 Bus. Law 35–50.Google Scholar

³⁸¹ Sec. 205 of the 1948 Companies Act, 11 & 12 Geo VI, c. 38, first introduced in the 1929 Companies Act 19 & 20 Geo V, c. 23. The equivalent Israeli provision is sec. 77 of the Companies Ordinance.

⁸⁸² Sec. 199 of the 1948 Companies Act. First introduced in the 1929 Companies Act. The equivalent provision in Israel is contained in sec. 75 of the Companies Ordinance. The Government has recently proposed an amendment to sec. 75 (4) stating that the company is entitled to damages suffered as a result of the crime. Amendment of the Companies Ordinance (No. 13) (1971) Hatza'ot Hok no. 976. For a criticism of the proposed provision see our article in (1972) 4 Mishpatim referred to in Part I at n. 8.

³⁸³ Gower at 529, n. 85, 532.

³⁸⁴ [1968] 1 Q.B. 549; [1967] 3 W.L.R. 1408.

³⁸⁵ There was no doubt that the contracts were intra vires the company.

³⁸⁶ It is submitted that Gower's conclusion at p. 529 and in note 87, that Hely-Hutchinson is an authority that non-compliance with sec. 199 per se renders the contract voidable, is indefensible. Pennington, , Company Law (2nd ed., 1967) 498 Google Scholar cites Hely-Hutchinson for its obiter, that “nor does a company have a right to avoid it [the contract] merely because of the director's failure to make disclosure”.

³⁸⁷ [1967] 3 W.L.R. 1408 at 1421.

³⁸⁸ Id. at 1425.

³⁸⁹ Id. at 1417.

³⁹⁰ This point would make no difference in Hely-Hutchinson itself. The company had the remedy of rescission anyhow, and an additional basis for the remedy would add nothing. An implication of a cause of action would not render the contract void, but in other circumstances the availability of an implied action would be the crucial point. E.g., the director sold an asset to the company which he bought for himself without breach of duty in the purchase. The company can rescind, but it cannot stick to the contract and make the director account for his profits. See Gower at 556, n. 87. An implied action would, presumably, enable such accountability.

³⁹¹ The Companies Act of 1936, No. 33 (N.S.W.).

³⁹² Castlereagh Motels Ltd., v. Davies Roe 67 S.R. (N.S.W.) 279 (N.S.W. Sup. Ct. C.A.) (1966).

³⁹³ Full fusion of law and equity has not yet been achieved in New South Wales.

³⁹⁴ 67 S.R. (N.S.W.) 279, 284 (N.S.W. Sup. Ct. C.A.) (1966).

³⁹⁵ Id.

³⁹⁶ In sec. 123(1) of the Uniform Act. Constitutional difficulties made it impossible to have a federal, all-embracing Companies Act. Uniformity was achieved by producing a uniform model, which was enacted separately in each of the states and territories of Australia. Yoston, & Brown, , Company Law, vol. III (2nd ed., 1964).Google Scholar

³⁹⁷ Article 72(g) of Table A which contains a set of articles, that, to the extent not modified by each company, are deemed to be the company's articles of association. In England this article was deleted from Table A in 1948.

³⁹⁸ Sec. 22.

³⁹⁹ 67 S.R. (N.S.W.) 279, 284 (N.S.W. Sup. Ct. C.A.) (1966).

⁴⁰⁰ Id. at 287. Note the striking resemblance between this test and the test in St. John Shipping [1956] 3 W.L.R. 870 for disallowing an action to enforce a contract.

⁴⁰¹ 67 S.R. (N.S.W.) 279, 287 (N.S.W. Sup. Ct. C.A.) (1966).

⁴⁰² See Selangor United Rubber Estates Ltd. v. Cradock (No. 3) per Ungoed Thomas J.: “It is in accordance with this substantial public policy nature of the courts' refusal of aid to illegality that such illegality is not treated as a matter of pleading, or a matter merely as between the parties, but as a matter of which the court will, of its own initiative, take cognisance irrespective of pleadings or wishes of the parties”. [1968] 1 W.L.R. 1555 at 1653. That is also the law in Israel, Aharonesty v. Neiman (1956) 10 P.D. 1121, 1125–6; Menkes v. Beton (1961) 15 P.D. 902.

⁴⁰³ Sec. 30.

⁴⁰⁴ Sec. 30(1) (b).

⁴⁰⁵ Unlike the situation involving an implied action based on sec. 13 of the Prevention of Fraud (Investments) Act the outsider in an option case is in delicto when he knows that he deals with a director, or his spouse or child. However, it is submitted that he is not in pari delicto with him.

⁴⁰⁶ See supra p. 379 for the recovery of damages in a restitutionary action.

⁴⁰⁷ The Committee noted that “a director who speculates in this way with special inside information is clearly acting improperly, and we do not believe that any reputable director would deal in such options in any circumstances”, para. 90. If the outsider can prove abuse of inside information, he will be able to base his action both on sec. 13 of the Prevention of Fraud (Investments) Act and on sec. 25 of the Companies Act, 1967.

⁴⁰⁸ Palmer, Company Law (21st ed., 1968) 569.

⁴⁰⁹ See Part I at 238.

⁴¹⁰ Pennington, , Company Law (2nd ed., 1967) 497.Google Scholar

⁴¹¹ Which reads: “It shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security, or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company”. 11 & 12 Geo. 6, C. 38.

⁴¹² Victor-Battery Co. v. Curry's Ltd. [1946] Ch. 242.

⁴¹³ Dressy Frocks Pty. Ltd. v. Bock (1951) S.R. (N.S.W.) 390; Sheerer Transport Co. Pty Ltd. v. McGrath (1956) V.L.R. 361 and E.H. Dey Pty. Ltd. v. Dey (1966) V.R. 464.

⁴¹⁴ Gibor v. Goshen & Hachaklaith (1961) 15 P.D. 2101; Kimche v. Feuchtwanger Ltd. (1970) (I) 24 P.D. 527.

⁴¹⁵ Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 1 W.L.R. 1555 at 1659. The Selangor court (per Ungoed Thomas J.) decided that a loan given by an acquired company to the acquiring shareholder is rendered unenforceable by sec. 54, and that the same rationale will render a security given by the company unenforceable too. Yet, in the Selangor case itself the illegality was not a ban to an action by the company, because suit was brought against the directors for breach of trust and against the shareholder (borrower) as constructive trustee, rather than on the contract. In S. Western Mineral Water Co. Ltd. v. Ashmore [1967] 1 W.L.R. 1110, an action by the seller of shares against the buyer, Cross J. decreed restitutio in integrum because a debenture given by the company to the seller to secure the principal part of the price was an integral part of the agreement. The decision assumes that the debenture became unenforceable against the company as a result of a violation of sec. 54. All the same, Cross J. thought the seller entitled to his day in court to set the agreement aside. The reliance of Palmer's on Western Mineral Water for his proposition is unexplainable.

⁴¹⁶ [1971] 1 W.L.R. 497 Fisher J. reasoned that even if the debenture was invalid, the company had given financial assistance to the purchaser of its shares, since the seller had sold the shares on the strength of the company's purported security.

⁴¹⁷ Roxburgh J. in Victor Battery could not conceive that “notwithstanding that in sec. 45 the only persons singled out by name for punishment are the company and its officers the primary class of persons for whose protection the illegality of the contract was created—assuming it to be illegal—is companies.” [1946] Ch. 242 at 249.

⁴¹⁸ See Street, , The Law of Torts (4th ed., 1968) 455–8.Google Scholar

⁴¹⁹ [1901] 1 Ch. 894.

⁴²⁰ [1967] 1 W.L.R. 1104, C.A.

⁴²¹ The injunction was brought to enjoin an alleged violation of sec. 6(1) of the Race Relations Act 1965, 13 & 14 Eliz. 11 Ch. 73, making incitement to racial hatred a crime. Sec. 6(3) (b) provides “no prosecution for such an offence shall be instituted in England and Wales except by or with the consent of the Attorney General.”

⁴²² J. I. Case Co. v. Borak 377 U.S. 426 (1964); Mills v. Electric Auto-Lite Co. 90 S.Ct. 616 (1970). For a private 10b–5 action, refusing damages yet allowing an injunction, see Mutual Shares Corp. v. Genesco 384 F 2d 540 (2nd Cir. 1967).

⁴²³ S.E.C. v. Texas Gulf Sulphur Co. 297 CCH Fed. Sec. L. Rep. Sec, 992, 572 at 98584 (S.D.N.Y. 1970). Note, however, that in this case the remedy ot injunction was express, only the ancillary relief can be said to be “implied”.

⁴²⁴ See e.g., the injunction issued in S.E.C. v. Great American Industries Inc., 393 U.S. 453 (1969).

⁴²⁵ We keep in mind Lord Devlin's illuminating description of the process of judge-made law: “It is not in accordance with traditional methods of judicial law-making to begin by saying how far you will go. Some cases are allowed and then others are disallowed as going too far, and the formulation of principle has to wait until that process is well advanced; and during the process the common lawyer will stop, logic or not logic, when something tells him that he has gone far enough.” Devlin, , Samples of Law Making (1962) 10.Google Scholar All the same it helps if there are “road indicators” for the journey which might be called “legal valves”, known a priori at the starting point.

⁴²⁶ Prof. Loss has on two occasions observed that “slavish importation” is futile. Loss, , “The Protection of Investors, The Role of the Courts” (1963) 30 South African L.J. 372, 383Google Scholar; Loss, , “The Fiduciary Concept as Applied to Trading by Corporate Insiders in the United States” (1970) 33 Mod. L.R. 34.CrossRefGoogle Scholar What we are doing here is, indeed, examining whether implication of civil liability is justified in terms of Israeli and English law. A recent New Zealand article examines which American developments should be introduced in New Zealand and England. But the article does not discuss the question of implied civil remedies. Wright, , “Insider Trading in Corporate Securities—Can We Learn from America? (1971) 4 N.Z.U.L.R. 209.Google Scholar

⁴²⁷ Manne, H., Insider Trading in the Stock Market (1966).Google Scholar The second quotation in the heading is from this work.

⁴²⁸ See Wu, , “An Economist Looks at Section 16 of the Securities and Exchange Act of 1934” (1968) 68 Colum. L.R. 260.CrossRefGoogle Scholar Prof. Wu thinks that “unfortunately Prof. Manne missed the real economic issues in his discussions”. Id. at 260n.3. But Wu reaches a similar conclusion, viz. that “speculative trading by insiders may be beneficial in an ‘economic’ sense”, and that “we must know all the costs and benefits of particular legislation, and the benefits from requiring equity between individual investors must justify any economic cost.” Id. at 269. His analysis starts with the classic theory that knowledgeable speculators contribute both to allocational efficiency—by stabilizing prices and aiding in “fair price determination” (i.e. prices which reflect the “intrinsic value” of the stock) and to promotional efficiency (or liquidity) by their readiness to trade when the current price is slightly different from the normal (i.e. reflecting “intrinsic value”) price. Prof. Wu quickly disposes of other economic theories which conclude that insider speculation is destabilizing: Keynes' theory that speculators predict mass psychology—average public opinion—and not intrinsic values; Kaldor's criticism that the inherent difficulty in appraising intrinsic values can lead to a destabilizing effect—changes in quotations will lead insiders to change their price expectation in the same direction; and Baumol's observation that speculators trade “with the market”—buy only after the trough has been passed and sell only after the peak has been reached and thus, while profiting themselves, increase price fluctuations. Even accepting all the empirical assumptions in favour of Prof. Wu's analysis the crucial question is the effect on the outsiders of the revelation that they have been “taken”. If it reduces their confidence in the market, and, therefore, the long-run demand curve in the capital market, Wu's building, which assumes that there is not such a change in the demand curve, collapses. Moreover, the conflict of interest between the insiders and the company may cause that the very market speculations will decrease the intrinsic values of the stock. See infra p. 403.

⁴²⁹ Schotland, , “Unsafe At Any Price: A Reply to Manne, Insider Trading in the Stock Market” (1967) 53 Va. L. R. 1425.CrossRefGoogle Scholar The Appellate Division endorsed this view in Diamond v. Oreamuno 287 N.Y.S.2d. 300, 303. Other writers, too criticized Manne's thesis in book reviews. See e.g. Jennings, (1967) 55 Cal. L.R. 1229. Marsh, (1968) 65 Mich. L.R. 1317; Poser, (1967) 53 Va. L.R. 753. See also Loss, Part I, n. 60 at pp. 35–37.

⁴³⁰ The Kimber Report, Part I, n. 11 (para. 1.08–1.09).

⁴³¹ E.g., in most of the Commonwealth countries the company cannot repurchase its own shares.

⁴³² E.g., the laws of patents.

⁴³³ Which, in turn, contributes to the achievement of another perfection-investors' confidence that the market prices indeed reflect the value of their investments.

⁴³⁴ See Part I at 259.

⁴³⁵ Strong v. Repide, 213 U.S. 419 (1909). See Part I at 227.

⁴³⁶ Attempt to induce to buy or sell by concealment of material information is also a crime. However, if no contract is induced and no damages are inflicted there could not be a rescissionary action and, of course, no tort action.

⁴³⁷ See Part I at 259.

⁴³⁸ The American Rule 10b–5 reads as follows:

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

“(a) To employ any device, scheme, or artifice to defraud,

“(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

“(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security”.

See the articulation of the scienter element in Rule 10b–5 in Ruder, , “Texas Gulf Sulphur—The Second Round: Privity and State of Mind in Rule 10b–5 Purchase and Sale Cases” (1968) 63 N.W.U.L.R. 423, 427Google Scholar; Mann, B. A., “Rule 10b–5: Evolution of a Continuum of Conduct to Replace the Catch Phrases of Negligence and Scienter ” (1970) 45 N.Y.U.L.R. 1206.Google Scholar

⁴³⁹ It is another question whether a private action could be inferred from the duty to file a report on the occurrence of such an event. The July 1970 Regulations (see Part I at 245) require any company which made a public offering or has securities traded on the stock exchange, to disclose within 15 days “the details of any event which materially affected the company's profitability, assets or liabilities or may do so Reg. 36(a)).

⁴⁴⁰ “Material facts include not only information disclosing the earnings and distributions of a company but also those facts which affect the probable future of the company and those which may affect the desire of investors to buy, sell or hold the company's securities”. S.E.C. v. Texas Gulf Sulphur Co. 401 F. 2d 833, 849 (2d Cir. 1968).

⁴⁴¹ The quantum of damages in a Rule 10b–5 private action in the United States has not yet been settled. Professor Cary observes: “The courts have thus far developed rationales as to the proper measure of damages primarily in cases where privity of contract was present. The trend seems to be toward a rescission measure, by which a plaintiff seller would receive the difference between the price at which he sold his stock and its market value at some time later, most likely at the time of trial”. Cary, W., Corporations (4th ed. 1969) 790.Google Scholar But what would be the measuring stick when the stock appreciates from the time the insider buys and the seller loses his right of rescission by laches? Baumel v. Rosen 412 F 2d 571 (4th Cir. 1969) held that the seller could recover the appreciation in price up until the time he lost the rescission remedy. At any rate, the hapless outsider is not limited to the difference between the price he paid and actual value at the time of sale.

⁴⁴² Damages will not be a prerequisite to recovery in just those cases where it is clear from the context of the statute that the legislature intended to protect plaintiff even from a violation without damages. Street, , The Law of Torts (4th ed., 1968) 278.Google Scholar

⁴⁴³ But the plaintiff must move to rescind within a reasonable time after discovery of the concealment. Because “Rescission is a radical move, and the law exacts the election of that course to be asserted without wait”. Baumel v. Rosen 412 F. 2d 571, 574 (4th Cir. 1969). See also Friedman, , “Delay as a Bar to Rescission” (1941) 26 Cornell L.Q. 426.Google Scholar The fluctuating nature of securities requires prompt and immediate rescission. Baumel v. Rosen 412 F. 2d 571, 574–575 (4th Cir. 1969).

⁴⁴⁴ The elements of a common law deceit action are: (1) representation (2) scienter (3) materiality (4) reliance (5) causation (6) damages. In Israel the damage must be pecuniary damage. Civil Wrongs Ordinance (New Version) sec. 56.

⁴⁴⁵ Sec. 13 (2) of the Prevention of Fraud (Investments) Act, 1958 punishing a conspiracy, can be used for imposing liability on “tippers” and cognizant “tippees”.

⁴⁴⁶ Loss, , “Recent Developments in Securities Regulations” (Symposium at Columbia Law School) (1963) 63 Colum. L.R. 856, 861.Google Scholar

⁴⁴⁷ The cases which developed the “deputization concept” are instructive. This concept will impose liability on legal entities, including partnerships, which are not insiders of a certain corporation but one of the legal entity's insiders is on the board of that Corporation. The legal entity would thus become a “director” for purposes of sec. 16 (b). Feder v. Martin Marietta Corp. 406 F. 2d 260 (2d Cir. 1969) implementing a dictum in Blau v. Lehman 368 U.S. 403 (1962). There begins to appear a trend away from the crude “rule-of-thumb” to “an opportunity of abuse” rule, or as Lowenfels puts it: “[the recent cases] shifted from a strict and comparatively harsh objective interpretation of the Section to a much more subjective approach, an analysis less concerned with the narrow letter of the law than with the particular facts at bar”. The starting point of this development is Ferraiolo v. Newman 259 F. 2d 342 (6th Cir. 1958).

⁴⁴⁸ For a criticism of the pending proposed Amendment of the Companies Ordinance and its insider trading provisions, described, in Part I at n. 8, see our article in (1972) 4 Mishpatim.

⁴⁴⁹ Report of the Company Law Committee, Cmnd. No. 1749 (1962). For revisions of the law as regards insider trading in other parts of the Commonwealth, see Report of the Attorney General's Committee on Securities Legislation in Ontario, Kimber Report (1965), which led to legislation in Ontario, Ontario Securities Act of 1966, Ont., 14 & 15 Eliz. 2, C. 142 Part XI (1967), and in other parts of Canada, Alta, 16 Eliz. 2, C. 76, Part II (1967); B.C. 15 & 16 Eliz. 2, C. 45, Part XI (1967); Man., 17 Eliz. 2, C. 57, Part XI; Sask., 16 Eliz. 2, C. 81, Part XII (1967).

See also, Final Report of the Commission of Enquiry into the Working and Administration of the Present Company Law of Ghana, secs. 205 (a), 210, 214, 215 (1961), the comments to these sections, and the same numbered sections in the New Companies Code of Ghana, New Act 179 (1963); secs. 124 & 126 of the Uniform Companies Act in the Australian States and territories.

⁴⁵⁰ Para. 99 (a) (iii), which provides that “a director who commits a breach of these provisions should be liable to the company for any profit made by him and for any damage suffered by the company as a result of the breach”, does not furnish the company with a cause of action because the director did not breach any provision by trading on inside information, which is not at the company's expense. In the Diamond case, Part I at 239 both the trial and the appellate courts observed that insider trading might cause damage to the company by decreasing its goodwill and reputation. A showing of such damages is practically impossible and, at any rate, there is no relation between the extent of this damage and the directors' profits from trading on inside information.

⁴⁵¹ “We realize that it might well be very difficult for the other party to establish that he was transacting with a director, this problem is particularly difficult in the case of transactions through the London Stock Exchange because of the method of settlement. It may also often be difficult for the other party to establish a case. Nevertheless we think a remedy should be provided and we recommend accordingly below”. Para. 89.

⁴⁵² Para. 254.

⁴⁵³ Protection of Depositors Act 1963 (c. 81), sec. 21 (1) (a).

⁴⁵⁴ 15 & 16 Eliz. 2, C. 7.

⁴⁵⁵ [1964] A.C. 465 H.L. This case was described as the most important tort decision since Donoghue v. Stevenson [1932] A.C. 562, Salmond, , Torts (14th ed., 1965) 284.Google Scholar

⁴⁵⁶ Gower, at 317 n. 32. See also Ministry of Housing v. Sharp [1970] 2 W.L.R. 807 and Mutual Life and Citizens' Assurance Co. Ltd. v. Evatt [1972] 2 W.L.R. 23. In Evatt, the Privy Council set a limitation to the Hedley rule, requiring that the defendant possess special skill and competence. Apparently this requirement is met in cases involving corporate circulars inviting one to trade in securities.

⁴⁵⁷ It is interesting to note that the Israel Supreme Court espoused a rule similar to the Hedley one, a decade earlier. Weinstein v. Kadima (1954) 8 P.D. 1317.