Wong, Chi Hung v. Lo, Wing Pun and Another

CACV 399/2023

[2025] HKCA 370

On Appeal From [2023] HKDC 1284

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 399 OF 2023

(ON APPEAL FROM DCCJ NO 1960 OF 2019)

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J U D G M E N T

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Hon Kwan Ag CJHC:

1.I agree with the judgment of G Lam JA. The costs order to be made at the conclusion of his judgment is a final order, as we have heard the parties on costs and there is no dispute that costs should follow the event.

Hon Au JA:

2.I agree with the judgment of G Lam JA.

Hon G Lam JA:

A.  Introduction

3.A money exchange shop has received from a customer funds in RMB in Mainland China, but fails to pay the customer an equivalent amount in HKD in Hong Kong as agreed.  Their agreement is illegal under Mainland laws.  The customer sues the shop in Hong Kong.  Does he have any legal redress?

4.In his judgment in the action (“Judgment”),[1] Deputy District Judge Gary CC Lam rejected the customer’s claim in contract on the ground that it was unenforceable as a matter of Hong Kong public policy because of its illegality under Mainland laws, but upheld the customer’s claim in unjust enrichment.  The question in this appeal brought by the shop is whether the latter holding is right.

B.  Background facts

5.The relevant facts may be stated as follows. The 2^nd defendant, assisted by her husband the 1^st defendant, ran a money exchange business in the name of “Fai Tat RMB Exchange” in Hong Kong.  As the 1^st defendant has been found to be an employee or agent of the 2^nd defendant[2] and no longer features in this appeal, for simplicity I shall refer to the 2^nd defendant as the “defendant”.  In June 2016, the plaintiff wished to exchange RMB 1 million he had in Mainland China into HKD.  His brother had done seven such exchanges through the defendant before (with a total amount exceeding RMB 5 million) and recommended the defendant to the plaintiff.  The mode of operation was that the customer would cause RMB to be deposited into a bank account in the Mainland specified by the defendant; the defendant would then deposit the equivalent amount in HKD, at the agreed exchange rate, into the customer’s bank account in Hong Kong.  This mode of exchange is known as “match-and-knock” (對敲), typically used by money exchangers who are not licensed for money exchange business in the Mainland and who are thus commonly known as “underground banks” (地下錢莊).

6.On 5 June 2016, on behalf of the plaintiff, his brother went to the defendant’s shop.  The shop assistant gave him a note with the name of a person surnamed Kwok (“Kwok”) and an account number at Bank of China in the Mainland (“Kwok Account”) for the plaintiff to deposit RMB.  The plaintiff’s brother was told that Kwok was an employee of the defendant.  Kwok’s bank accounts had also been used in his own previous transactions with the defendant, six of which were conducted via another account of Kwok at Industrial and Commercial Bank of China and one via the Kwok Account.  The plaintiff’s brother agreed with the defendant the rate of exchange (RMB 854.5 to HKD 1,000) and that the plaintiff would deposit RMB 1 million for exchange into HKD.

7.On 7 June 2016, the plaintiff duly caused RMB 1 million to be transferred from his wife’s bank account in the Mainland to the Kwok Account.  However, he was soon told that the Kwok Account had been “frozen”.  The evidence reveals that the account was frozen as a result of criminal investigation into a pyramid selling scheme relating to a cryptocurrency.

8.Immediately after receiving the plaintiff’s RMB 1 million, the Kwok Account had a credit balance of RMB 1,283,062.31.  There was no further movement in the account except the periodic credit of interest, until 8 March 2018 when the entire balance was withdrawn.  The withdrawal was made pursuant to a judgment of a Mainland court issued on 28 February 2018.[3] By that judgment, eight persons (who did not include the plaintiff, the defendants or Kwok) were convicted of offences relating to pyramid selling, and orders were made for confiscation of the money they illegally obtained.[4]  In this way the entire balance in the Kwok Account, including the RMB 1 million from the plaintiff, was confiscated in March 2018, even though none of the parties had suggested that the plaintiff’s money was in any way connected with illegal pyramid selling.

9.The plaintiff tried to recover the money from the defendants but to no avail, and commenced proceedings against them in the District Court in April 2019.

C.  The proceedings and judgment below

10.The plaintiff put his claim in contract and unjust enrichment.  There was no dispute there was a contract between the plaintiff and the defendant (“Contract”) that upon the plaintiff’s deposit of RMB 1 million in the Mainland, the defendant would pay the equivalent sum in HKD (HK$1,170,275.01 at the agreed exchange rate) to the plaintiff in Hong Kong.  There was a dispute whether they had agreed for the RMB to be deposited into the Kwok Account as the plaintiff contended, or into Kwok’s account in ICBC as the defendant contended.  The judge found the former.[5]

11.There was no plea that the Contract was governed by Mainland law, and it appeared to be common ground that Hong Kong law was its governing law.[6] Both counsel also submit to us that Hong Kong law is the system of law with which the transaction has its closest and most real connection.

12.Whilst the plaintiff argued that the Contract did not prevent the defendant from engaging authorised institutions to carry out the exchange and therefore did not necessarily breach any rules, the judge noted that on the plaintiff’s own case it was intended that the defendant herself was to be the exchanger.  On this basis the judge found that the Contract breached the following Mainland laws and regulations:[7]

(1)  Article 30 of the PRC Foreign Exchange Measures for Individuals (中華人民共和國個人外匯管理辦法):

“ 境內個人從事外匯交易等交易，必須通過具體業務的境內金融機構辦理。”

(Translation: “Domestic individuals that engage in foreign exchange trading or other transactions related to foreign exchange, shall conduct such business at a domestic financial institution qualified therefor.”)

(2)  Article 45 of the PRC Administrative Regulations on Foreign Exchange (中華人民共和國外匯管理條例):

“ 私自買賣外匯、變相買賣外匯、倒買倒賣外匯或者非法介紹買賣外匯數額較大的，由外匯管理機關給予警告，沒收違法所得，處違法金額30% 以下的罰款；情節嚴重的，處違法金額30% 以上等值以下的罰款；構成犯罪的，依法追究刑事責任。”

(Translation: “If anyone trades foreign exchange in private or in a disguised way, for profiteering or illegally recommends the purchase and sale of foreign exchange, and the amount is relatively large, the relevant foreign exchange control organ shall issue a warning, confiscate the illegal gains, and impose a fine of not more than 30% of the amount involved in the illegal activities; in a serious case, the relevant foreign exchange control organ shall impose a fine of more than 30% and not more than the equivalent amount of the foreign exchange involved in the illegal activities; if the act constitutes a criminal offence, it shall be subject to criminal liability.”)

13.The consequence of breaching the above regulations is set out in Article 39 of the PRC Foreign Exchange Measures for Individuals:

“ 對違反本辦法規定的，由外匯局依據《中華人民共和國外匯管理條例》及其他相關規定予以處罰；構成犯罪的，依法移送司法機關追究刑事責任。”

(Translation: Where the provisions of these Measures are infringed, the State Administration of Foreign Exchange shall impose punishment upon the parties involved according to the PRC Administrative Regulations on Foreign Exchange and other relevant provisions; where the infringements constitute a criminal offence, the parties shall be referred to the judicial authorities for pursuing their criminal liability.”)

14.In addition the judge made the following findings on Mainland law and practice:[8]

(1)  Article 225(4) of the PRC Criminal Law (中華人民共和國刑法) provides:

“ 違反國家規定，有下列非法經營行為之一，擾亂市場秩序，情節嚴重的，處五年以下有期徒刑或者拘役，並處或者單處違法所得一倍以上五倍以下罰金；情節特別嚴重的，處五年以上有期徒刑，並處違法所得一倍以上五倍以下罰金或者沒收財產：……（四）其他嚴重擾亂市場秩序的非法經營行為。”

(Translation: “Whoever, in violation of State regulations, commits any of the following illegal acts in business operation, thus disrupting market order, if the circumstances are serious, shall be sentenced to fixed-term imprisonment of not more than 5 years or short-term custody, and concurrently or alternatively, a fine of not less than the amount of illegal gains but not more than five times the amount.  If the circumstances are especially serious, the offender shall be sentenced to fixed-term imprisonment of not less than 5 years, with a fine of not less than the amount of illegal gains but not more than five times the amount, or confiscation of property: … (4) any other illegal act in business operation that seriously disrupts market order.”)

(2)  According to an Interpretation by the Supreme People’s Court,[9] foreign currency trading outside authorised centres exceeding USD 200,000 in amount (increased to RMB 5 million in 2019) should be penalised under Article 225(4) of the PRC Criminal Law.  The defendant’s carrying on of the money exchange business by way of “knock-and-match” constituted the offence of carrying on illegal business contrary to Article 225(4).

(3)  The plaintiff did not commit a criminal offence as such by entering into the Contract.  His breach of Article 30 of the PRC Foreign Exchange Measures for Individuals and Article 45 of the PRC Administrative Regulations on Foreign Exchange was a breach of administrative rules only.

(4)  Property acquired by the defendant in her illegal business carried on contrary to Article 225(4) of the PRC Criminal Law may be confiscated under Article 64 of the PRC Criminal Law[10] and Article 7 of the Supreme People’s Court’s Interpretation in relation to Certain Questions of the Laws Applicable to Trials of Criminal Cases of Fraudulent Purchase of Foreign Currencies and Illegal Sale and Purchase of Foreign Currencies (最高人民法院關於審理騙購外匯、非法買賣外匯刑事案件具體應用法律若干問題的解釋 ) issued in 1998.[11]

(5)  Whether property is actually confiscated may depend on how strongly the PRC authorities pursue the enforcement policy.  There may be times when the policy is strongly enforced leading to confiscation, but the converse is also true.

(6)  If there is confiscation in relation to a bank account, the PRC authority will usually confiscate all the funds in the account even though not all of them is related to the illegal activity in question.

(7)  Article 157 of the PRC Civil Code (中華人民共和國民法典) provides:

“ 民事法律行為無效、被撤銷或者確定不發生效力後，行為人因該行為取得的財產，應當予以返還；不能返還或者沒有必要返還的，應當折價補償。有過錯的一方應當賠償對方由此所受到的損失；各方都有過錯的，應當各自承擔相應的責任。法律另有規定的，依照其規定。”

(Translation: “When a civil juristic act becomes null and void, or has been revoked or has been determined as having no binding force, the person who acquired property as a result of such act shall return the same; if it is impossible or unnecessary to return such property, compensation shall be paid at monetarily. The party at fault shall compensate the other party for the loss it suffers as a result of the act; if both parties are at fault, they shall bear the corresponding liability respectively. Where the laws provide otherwise, such provisions shall prevail.”)

Under this provision, the plaintiff may claim the “return” of RMB 1 million from the defendant under the first limb of Article 157.  The word “return” here is not to be understood literally – the RMB 1 million claimed is not necessarily the same RMB 1 million deposited by the plaintiff.

(8)  The judge noted that whilst the defendants’ expert said that once confiscated, the money became “identified” and could not be returned, she accepted that a claimant may claim the return or payment of money under Article 157 if he is “lucky” and “quick enough” to make the claim before any confiscation takes place.

15.The judge referred[12] to the principles regarding the effect of illegality on contracts in the conflict of laws summarised in Johnston, Conflict of laws in Hong Kong (2^nd ed, 2012) at §5-012 and quoted with approval in Lord Collins of Mapesbury NPJ’s judgment (with which the other members of the court agreed) in Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544 at §39 (the “Ryder principles”). That passage reads as follows (footnotes omitted):

“ The following principles appear to represent Hong Kong law. The underlying rationale is international comity coupled with Hong Kong public policy.

First, if the contract is unenforceable under its proper law (whether chosen by the parties or otherwise), then it will not be enforced by the Hong Kong court. The importance of this principle is that it applies to limit the enforceability of the contract regardless of the place of required, intended or actual performance. Moreover, it is irrelevant whether the bar on enforcement is a foreign penal law of the sort which will not be directly enforced by a Hong Kong court.

Secondly, if the performance of the contract requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed, then it will not be given effect regardless of its proper law.

Thirdly, the contract will not be given effect regardless of its proper law ‘if the real object and intention of the parties [at the time of concluding the contract] necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of such country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally’ [citing Foster v Driscoll [1929] 1 KB 470, 521, per Sankey LJ].

Fourthly, violation of foreign laws in the actual performance of a contract may, even though not required or initially intended, lead to the unenforceability of the contract before a Hong Kong court, regardless of its proper law. It has recently been stated in England at first instance that a contract will not be enforced if it has been ‘performed in such a way that one party (or both parties) commits a legal wrong’. It is, however, respectfully suggested that this is to state the principle too rigidly, and that a more flexible approach having regard to the seriousness of the foreign illegality is required to determine whether public policy and comity really require enforcement of the contract to be denied in such a case.

Fifthly, the above four principles apply irrespective of whether the illegality under foreign law existed at the time of contracting or arose subsequently.”

16.The judge went on to find that the present case fell within the second Ryder principle and concluded that the Contract was unenforceable, though not void.[13]

17.Turning to the claim in unjust enrichment, the judge found that the RMB 1 million paid into the Kwok Account constituted a receipt by the defendant since that account was held for and on behalf of the defendant, rejecting her contention that it was Kwok who was enriched.  The judge also found that the enrichment was at the expense of the plaintiff.[14]

18.The judge considered the enrichment was prima facie unjust, either because the Contract was “for all purposes non-existent” between the parties as it was unenforceable on the ground of foreign illegality,[15] or because there was a total failure of consideration.[16]  He rejected the proposition that there could be no restitutionary claim[17] for money paid under a contract which was valid but merely unenforceable.[18]

19.The judge next considered the effect of foreign illegality on a restitutionary claim.  He adapted the Ryder principles to the context of unjust enrichment as follows (which I shall refer to as the “modified Ryder principles”):[19]

“ (1) First, if the unjust enrichment claim arising from such unenforceability is not permissible under the foreign law, then the claim will not be allowed by the Hong Kong Court.

(2) Second, if the unjust enrichment claim arising from such unenforceability requires or necessarily involves any breach of the foreign law, then the claim will not be allowed regardless of the proper law governing the contract.

(3) Third, the unjust enrichment claim arising from such unenforceability will not be allowed if the real object and intention of the parties at the time of the property transfer is to make use of such claim to commit an act which is illegal by the foreign law. I can think of an example in the context of RMB-HKD exchange that hypothetically, the parties intended at the beginning of the Exchange Agreement that an unjust enrichment claim would be made in Hong Kong so that eventually, the RMB would effectively be exchanged into HKD hoping that the court would as usual award the damages in HKD.

(4)  Fourth, violation of foreign laws in the actual execution of an award on the unjust enrichment claim arising from such unenforceability may, even though not required or not initially intended, lead to disallowance of the claim.  In this scenario, the court in Hong Kong may have to examine whether public policy and comity requires denial of such claim.  I cannot see in reality how this situation would arise because unlike a contractual claim, before the Court’s award is made, proper arguments must have been considered as to whether the actual execution would lead to violation of foreign laws.  If it would, then it would be scenario (2) above.  If it would not, then it is difficult to envisage how the execution would suddenly lead to any violation of foreign law, whether intended or not, unless the foreign laws are changed in the course of the execution of the award.  The present case is, however, not such a situation, and thus it is inappropriate for me to say more on this.”

20.Proceeding to apply the modified Ryder principles thus formulated, the judge observed that there was no suggestion that the parties had any real object and intent to commit an act that was illegal under Mainland law.  Nor would a Hong Kong court order that the defendant pay the plaintiff RMB 1 million or its HKD equivalent be in effect a money exchange in breach of the relevant Mainland regulations, because any such HKD paid would not be an exchange but damages.[20]  The judge concluded that the plaintiff’s unjust enrichment claim did not fall within any of the four scenarios under the modified Ryder principles, and was therefore permissible.[21]

21.Finally, the judge said that even if a general, flexible approach as applied in Patel v Mirza [2016] UKSC 42, [2017] AC 467 were to be adopted, the plaintiff’s claim would still not be contrary to public policy and comity.  In this connection the judge took into account that a restitutionary claim against the defendant would be permissible under Mainland law, particularly Article 157 of the Civil Code.[22]

22.By way of relief, the judge made an order that the defendant pay the plaintiff RMB 1 million or its HKD equivalent at the time of payment, together with interest thereon from the date of the Writ to the date of judgment, at the usual rate at which RMB could be borrowed in the Mainland.[23]

D.  The parties’ contentions on this appeal

23.The defendant sought leave to appeal on a number of grounds.  The judge granted leave to appeal on four of them and rejected the rest.[24] The four grounds, and Mr Joseph Wong’s submissions in support of them, are broadly as follows:

(1)  The judge was wrong in his modifications of the Ryder principles.  The focus should be on whether and to what extent the transaction is tainted by foreign illegality.  The Ryder principles should be applied with respect to the underlying transaction.  There should be no difference in how a Hong Kong court treats a transaction where it is relied upon as the basis for a contractual claim and where it is relied upon as the basis for an unjust enrichment claim.  A contract which is tainted with foreign illegality remains valid though it is unenforceable.  A restitutionary remedy cannot be awarded where the effect would be to subvert the parties’ contract.  The reason for holding a contract unenforceable because it offends the principle of international comity should similarly apply to bar claims in unjust enrichment.

(2)  The judge was wrong to rely on the case of Emeraldian Limited Partnership v Wellmix Shipping Ltd & Anor [2010] 1 CLC 993 and to find that where the other jurisdiction would provide civil remedies to a claimant notwithstanding the illegality under the laws of that jurisdiction, it would not offend principles of international comity for the Hong Kong court to grant such remedies.  Emeraldian is a “type-4 case” under the Ryder principles, different from the present case.

(3)  The judge was wrong to take into account the evidence of the defendants’ expert that if a claimant is lucky and quick enough to make a claim for the return of the money before the Mainland authorities have confiscated it, then he may succeed under Article 157 of the Civil Code; and that even if upon the claimant making a claim, the Mainland court refers the matter for criminal investigation, it may or may not result in any confiscation depending on how strongly the Mainland authorities pursue the enforcement of the regulations.

(4)  In granting restitution by an order for payment of RMB 1 million or its HKD equivalent, the judge erred in effectively allowing the enforcement of the Contract.  The order violated the principle of comity and involved illegality within the second category of Ryder, and should not have been granted.

24.Opposing the appeal on behalf of the plaintiff, on the first two grounds Mr Tommy Cheung submits that the Ryder principles do not lay down a rigid test but take into account the seriousness of the foreign illegality as a factor.  It is not correct to say that whenever a transaction breaches a foreign law and the claim falls within the second category of Ryder, an unjust enrichment claim must automatically be barred.  Such a claim does not seek to complete the transaction but to unwind it, putting the parties back to the position they were in before the transaction.  There are good reasons for treating contractual claims and unjust enrichment claims differently in this context.  There is nothing wrong for the judge to look into how a restitutionary claim would be treated in the other jurisdiction in order to ascertain what comity requires.  Mr Cheung submits, as a fall-back position, that it was open to the judge to modify the principles in Ryder and adapt them for unjust enrichment claims.

25.Mr Cheung further submits that in so far as necessary, this court is entitled to adopt a more flexible “range of factors” approach based on Patel v Mirza as applied in Hong Kong by this court in Monat Investment Ltd v All Person(s) in Occupation of No 16 Ma Po Tsuen [2023] 2 HKLRD 1311.  Applying this approach, foreign illegality provides no defence to the defendant having regard to the circumstances of this case.  They include that there is no suggestion that the parties had any real object and intent to commit an act illegal under Mainland law; the defendant committed a criminal offence contrary to Article 225(4) of the Criminal Law whereas the plaintiff only breached administrative rules; and the sum of RMB 1 million would be returnable by the defendant under Mainland law, particularly Article 157 of the Civil Code.

26.As to the third ground of appeal, Mr Cheung submits that the evidence of the defendants’ expert on what might happen in the Mainland is relevant to the question of comity.  On the fourth ground, Mr Cheung submits that the argument was not raised by the defendants below and is not open on appeal, and it would be unjust to bar relief on this ground where there was merely a minor contravention of administrative regulations in the Mainland. 

E.  The claim in contract

27.As mentioned above, the judge rejected the plaintiff’s claim in contract on the ground that the Contract was unenforceable. Relying on She Ching Yan v Cai Yunxiang & others [2023] HKCFI 592, the judge considered that the contractual claim fell within the second category in the Ryder principles (see §15 above). 

28.She Ching Yan concerned a completed money exchange transaction carried out in breach of Mainland laws and regulations, whereby the defendant in question, pursuant to an agreement with another person, received a sum of HKD in Hong Kong and deposited an equivalent amount in RMB into a Mainland bank account specified by that person.  Allowing the plaintiff’s claim for the HKD received by the defendant as a second-tier recipient in a cyber scam, Deputy High Court Judge Winnie Tsui considered that illegality under Mainland law precluded the defendant (who acted in person) from relying on the potential defences of change of position and bona fide purchaser for value without notice.[25]

29.The second of the Ryder principles is based on the line of authorities associated with Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287.  Lord Collins NPJ explained in Ryder at §43 that the prevailing view is that the rule established by Ralli Bros is a principle of the law of contract relating to impossibility of performance.  The cases cited in the footnote in Johnston[26] show that the principle is one about enforcing the contract, hence the phrase “will not be given effect” in the second Ryder principle.  Ralli Bros itself was a case about whether shipowners could claim against charterers for the balance of freight payable in Spain but in excess of the freight limited by Spanish law.  Regazzoni v K C Sethia (1944) Ltd [1958] AC 301 was about an action brought by the appellant against the respondents for damages for breach of a contract which both parties knew could not be performed without the respondents procuring a breach of the law of India within its territory.  Mackender v Feldia AG [1967] 2 QB 590 was a case about service out of jurisdiction, but in an oft-cited passage Diplock LJ explained the effect of illegality on a contract and said (at 601F), inter alia: “a contract which is not illegal by its proper law, but requires for its performance an act to be done which would be illegal under the law of the country where the act is required to be done, is not void.  It is a contract which is, in a particular respect only, unenforceable in the English courts.”  In Ryder itself, Lord Collins NPJ said (at §42) that while Ralli Bros had had been cited in many cases, “it has been applied in very few commercial decisions to hold that performance of a contract or a particular obligation was discharged”, and cited four cases as examples.

30.In the present case, the Contract was not illegal by its proper law, i.e. Hong Kong law.  What remained to be performed under the Contract was simply the payment of HKD by the defendant to the plaintiff in Hong Kong.  There was no illegality, and hence no impossibility, in the performance of this obligation in the place where it was required to be performed, i.e. Hong Kong.  At common law, a prohibition under the law of another jurisdiction is generally not an excuse for not performing in Hong Kong a payment obligation governed by Hong Kong law: see Kleinwort, Sons & Co v Ungarische Baumwolle Industrie Aktiengesellschaft [1939] 2 KB 678; see also Kahler v Midland Bank Ltd [1950] AC 24, 48; Sharif v Azad [1967] 1 QB 605. 

31.Before July 1997, the (UK) Bretton Woods Agreements Order in Council 1946 extended to Hong Kong, giving effect to Article VIII(2)(b) of the Articles of Agreement of the International Monetary Fund (IMF), and thereby rendered unenforceable in Hong Kong any exchange contract which involved the currency of any Member of the IMF and which was contrary to the exchange control regulations of that Member maintained or imposed consistently with the Articles of Agreement of the IMF: see Tae Kim Chang v Official Receiver [1993] 1 HKLR 78.  Counsel have not been able to find any equivalent post-1997 legislation now in force that would similarly give legal effect to that provision in the IMF agreement.  Under our legal system, in the absence of such legislation, an international agreement or treaty does not impose rights or obligations on individual citizens: GA v Director of Immigration (2014) 17 HKCFAR 60 at §58.

32.In these circumstances I would for my part reserve my opinion on the validity of the plaintiff’s contractual claim.  As there is no cross-appeal by the plaintiff against the judge’s rejection of his claim in contract, it is unnecessary to discuss this any further.

F.  The claim in unjust enrichment

(1)   The basis of the claim

33.As a claim in unjust enrichment, the plaintiff also claimed the sum of RMB 1 million as money had and received by the defendant.  The judge identified total failure of consideration as the basis for this claim which sounds in unjust enrichment.[27]  Such an obligation to make restitution is one imposed by law and is to be characterised as an obligation independent of the Contract in the context of the conflict of laws: Dicey, Morris and Collins on The Conflict of Laws (16^th ed), §36-005.

34.The first step in the analysis is to ascertain which law governs that obligation.  Whilst the payment of the RMB 1 million and thus the enrichment took place in the Mainland, it is common ground that the governing law of the plaintiff’s unjust enrichment claim is Hong Kong law.  Both counsel have referred us to Rule 250(1) in Dicey, Morris and Collins on The Conflict of Laws (16^th ed) as containing the applicable principle, which reads:

“ A non-contractual obligation arising out of unjust enrichment, including payment of amounts wrongly received, which concerns a relationship existing between the parties, such as one arising out of a contract for a tort/delict which is closely connected with that unjust enrichment, is governed by the law which governs that relationship.”

35.In First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569 at §66, Lord Collins NPJ also said:

“ The prevailing view is the obligation to restore the benefit of an enrichment obtained at another person’s expense is governed by the proper law of the obligation; and that where the obligation arises in connection with a contract the proper law is the law applicable to the contract …”

36.We accept the parties’ common ground, and since the Contract is governed by Hong Kong law, the plaintiff’s claim in unjust enrichment is also governed by Hong Kong law.

37.As a matter of Hong Kong law, as laid down by the Court of Final Appeal in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §67, a claim for restitution should generally be approached by asking 4 questions: (a) Was the defendant enriched? (b) Was the enrichment at the plaintiff’s expense? (c) Was the enrichment unjust? (d) Are any of the defences applicable?

38.The judge found that the remittance of RMB 1 million to the Kwok Account constituted receipt by the defendant and resulted in her enrichment to that extent, that the enrichment was at the plaintiff’s expense, and that the enrichment was unjust, in the sense that it ought to be redressed since there was a total failure of consideration for the payment.  There is no challenge against these findings.  Subject to any defence established, the defendant should be held liable to make restitution to the plaintiff.

(2)   The defendant’s argument

39.The only defence relied upon by the defendant is the effect of illegality under Mainland law.  The gist of Mr Wong’s argument is that the “transaction” as a whole, i.e. payment of HKD in Hong Kong in exchange for RMB to be paid in the Mainland, was tainted by illegality under Mainland law.  It involved an act that was illegal under the law of the place where it was required to be performed, i.e. Mainland law.  Substituting the relevant transaction for “contract” in the second Ryder principle, he submits that what should guide the court is this: if the performance of the underlying transaction upon which the unjust enrichment claim is based requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed, then it will not be given effect regardless of its proper law.  A claim in contract and a claim in unjust enrichment are often too inter-related for there to be any difference in their proper treatment.  Where the court finds the contract unenforceable because it offends the principle of international comity, it ought to hold that the same principle precludes a claim in unjust enrichment.

(3)   The applicable analysis

40.As mentioned above, the first step is to ascertain the law that governs the claim in restitution, applying Hong Kong rules of conflict of laws.  Where the contract is governed by foreign law, and is illegal under that foreign law, the contract would not be enforced by a Hong Kong court: see the first Ryder principle (§15 above).  In fact, the contract may be said to be void.  As Diplock LJ said in Mackender v Feldia AG at p 601G:

“ … a contract which is not illegal by its proper law, but requires for its performance an act to be done which would be illegal under the law of the country where the act is required to be done, is not void. It is a contract which is, in a particular respect only, unenforceable in the English courts. This is to be contrasted with an agreement which under its foreign proper law is illegal and incapable of giving rise to legally enforceable rights and liabilities under that law. Since the foreign proper law must be looked to for the legal affects of the agreement, such an agreement may properly be said to be void, i.e., not to be a contract at all.”

In such a case, a restitutionary claim arising out of the failure of the contract may well also be governed by the same foreign law (applying Rule 250(1) of Dicey, Morris and Collins).  On this basis, such a claim, if brought in a Hong Kong court, ought to be determined by reference to the rules of foreign law as established by expert evidence in the usual way.

41.In contrast, where the claim in restitution before the court is governed by Hong Kong law, we have to apply the principles of Hong Kong law to determine whether foreign illegality gives rise to a defence. Counsel have informed us that there is no previous case in Hong Kong directly on the point.

42.In the search for principle, it needs to be borne in mind that the rationale for the doctrine of illegality under domestic law is not the same as the rationale for recognising the effect of foreign illegality on civil claims.  The former has been described as “(1) furthering the purpose of the rule which the claimant’s illegal behaviour has infringed; (2) consistency; (3) the need to prevent the claimant profiting from his or her own wrong; (4) deterrence; (5) maintaining the integrity of the legal system; and (6) punishment”[28] – objects that are not readily applicable in relation to foreign laws.  

43.The latter, at least so far as the effect on contract is concerned, has been said to be “international comity coupled with Hong Kong public policy”: see Ryder at §39, quoting Johnston.  It is clear that international comity is the reason for the common law to recognise the effect of foreign illegality on a contract even though it is not governed by that foreign law: see Ralli Bros, p 300; Foster v Driscoll [1929] 1 KB 470, 510, 519.  In particular, in Regazzoni v K C Sethia (1944) Ltd, Viscount Simonds said at pp 318-319:

“ It is … nothing else than comity which has influenced our courts to refuse as a matter of public policy to enforce, or to award damages for the breach of, a contract which involves the violation of foreign law on foreign soil, and it is the limits of this principle that we have to examine.

…

Just as public policy avoids contracts which offend against our own law, so it will avoid at least some contracts which violate the laws of a foreign State, and it will do so because public policy demands that deference to international comity.”

44.Should foreign illegality also be a potential defence to a claim in restitution by reason of international comity and Hong Kong public policy?  I see no reason in principle why it should not.  Our public policy that requires respect for comity does not cease to be relevant when one moves from the realm of a claim to enforce a contract to a claim for restitution upon the contract becoming ineffective.  Public policy is a protean concept that must evolve as the law itself develops.  As Robert Goff J said in Toprak Mahsulleri v Finagrain [1979] 2 Lloyd’s Rep 98 at 107[29] the principles in this area “spring from the principle of comity, a root which (as Foster v Driscoll itself shows) is capable of new growth from time to time.”  In my view, and in agreement with the judge,[30] we should proceed on the basis that foreign illegality can potentially afford a defence to a claim in restitution.[31]

45.The real question is the limits of this defence. I do not accept the defendant’s submission that there is no distinction to be drawn between a contractual claim and a restitutionary claim in this context. As mentioned above, the obligation to restore the unjust enrichment is an independent obligation imposed by law, separate from the contract between the parties.  A claim to enforce the contract generally has as its object putting the parties in the position they would have been in had the contract been performed.  This may be done by a decree for specific performance or an award of damages in the “expectation measure” which is the primary measure for damages for breach of contract.[32] In contrast, in a case such as the present, where restitution is sought of the money paid pursuant to a contract that has failed for illegality, by giving that remedy the court will not be giving effect to an illegal agreement or a right derived from it, but will simply be recognising the ineffectiveness of the transaction and giving effect to the legal obligation imposed by Hong Kong law consequent upon the transaction’s failure.  The court will not be helping the parties achieve their agreement, but will be restoring them to the position in which they would have been in had the transaction not occurred: see Patel v Mirza, §§250 & 268.  I therefore reject Mr Wong’s submission that the same results should obtain in restitution as in contract treating them as inseparable aspects of the same transaction.

46.It follows that in a given case, the fact that the Hong Kong court would refuse to enforce the contract between the parties because of illegality under foreign law does not imply that the court would necessarily and for the same reason also reject a claim in restitution made on the ground that the contract has failed.

47.As far as domestic illegality is concerned, it has long been recognised that where the illegal purpose has not been carried out, a plaintiff may be able to recover his money paid under the illegal contract: Smith v Bromley (1760) 2 Doug KB 696n; Neville v Wilkinson (1782) 1 Bro Ch 543.  Although subsequent cases have analysed this in terms of the doctrine of locus poenitentiae (see e.g. Prosperous Nursing Centre Ltd v Cheung Yuk Ying [2008] 2 HKLRD 360, §§112-122), it would appear that that analysis is no longer necessary under the approach laid down in Patel v Mirza, which this court has adopted in Monat: see Patel v Mirza, §116.  In Patel v Mirza, the claimant had paid a sum of money to the defendant to trade in shares based on inside information, contrary to the criminal prohibition on insider dealing, but the agreement could not be carried out because the expected inside information was not forthcoming.  Whilst there was a division of opinion on the general approach to the effect of illegality, the UK Supreme Court unanimously held that the claimant was entitled to recover the money in unjust enrichment.  Lord Toulson said:

“ A claimant … who satisfies the ordinary requirements of a claim for unjust enrichment should not be debarred from enforcing his claim by reason only of the fact that the money which he seeks to recover was paid for an unlawful purpose. There may be rare cases where for some particular reason the enforcement of such a claim might be regarded as undermining the integrity of the justice system, but there are no such circumstances in this case.” [33]

48.Similarly, Lord Neuberger said that where money was paid by the claimant to the defendant pursuant to a contract to carry out an illegal activity, and the illegal activity is not in the event proceeded with owing to matters beyond the control of either party, the general rule should be that the claimant is entitled to the return of the money which he has paid.[34]  Lord Sumption favoured a similar rule making restitution available “for so long as mutual restitution of benefits remains possible”.[35]

49.It would to my mind be surprising if a claimant would be in a worse position where the illegality arose under foreign law than under domestic law.  Rejecting an otherwise valid claim based on considerations of public policy and comity is a strong thing.  In the context of domestic illegality it has been described as a “draconian power”: see Hall v Herbert [1993] 2 SCR 159, 169, per McLachlin J.  In a case like the present where money was paid by A to B for a transaction that is illegal under foreign law, but the transaction was aborted, it is not easy to see why and how it would be a breach of comity for the Hong Kong court to allow A to recover the money from B.  Comity, in the form of respect for the laws of another jurisdiction and restraint from facilitating their contravention, is in general not offended by permitting such a claim.  On the contrary the claim is premised on the contract being held invalid or unenforceable on the strength of those laws, and is based on an independent obligation imposed by Hong Kong law as a consequence. 

50.To the general rule there may possibly be exceptions, justified again by public policy considerations, where the court may refuse to give assistance to the plaintiff, such as where the agreement was for the commission of a heinous crime in the foreign jurisdiction, like payment made to hire a person to murder another there: Tappenden v Randall (1801) 2 Bos & P 467, 471,[36] or an agreement and payment made to support insurrections and hostilities against a foreign government: De Wütz v Hendricks (1824) 2 Bing 314, 315-316.  It may be debated whether the Hong Kong court should in those circumstances allow a plaintiff to recover the money paid when the agreement did not proceed.  With such cases as these, we are not concerned here.

51.Whether or not the foreign law itself provides for restitution notwithstanding that the agreement is illegal is not determinative.  By definition we are concerned with a claim governed by Hong Kong law.  The fact that the foreign law makes no provision for restitution does not mean that the Hong Kong court should not order restitution in accordance with the principles of law and justice in Hong Kong.  The position is fortified if restitution is permissible and provided for under the foreign law.  In Emeraldian Limited Partnership v Wellmix Shipping Ltd [2010] 1 CLC 993, Teare J of the English High Court enforced a guarantee governed by English law, rejecting the argument that enforcement should be refused on the ground of English public policy because the guarantee had been entered into in contravention of Chinese law without the authorisation of the State Administration of Foreign Exchange of China.  In doing so Teare J noted that even under Chinese law there could still be civil liability on such a guarantor if he was at fault, and said: “If Chinese law does not regard the civil liability or otherwise arising from the guarantee to be unenforceable there is no reason why English law should so regard it.  It would not, it seems to me, be contrary to the principles of comity to enforce it.”[37]  This supports the view that comity does not require the denial of a restitutionary remedy if a similar remedy is afforded by the foreign law itself.

52.Where on the other hand the foreign law not only prohibits the activity that is the subject matter of the contract but also bars, expressly or impliedly, any attempt to unwind the transaction and restore money or property transferred, different considerations may arise.  In Haugesund Kommune v Depfa ACS Bank (Wikborg Rein & Co, Part 20 defendant) [2012] QB 549, two Norwegian local authorities had entered into interest rate swap contracts with an Irish bank under which the local authorities obtained capital sums from the bank and undertook to make periodic payments of interest and a final repayment comprising the outstanding interest and principal.  It was held that the swaps contracts, which were governed by English law, were void because the local authorities had no powers under Norwegian law and therefore lacked capacity to enter into the contracts.  On the bank’s claim for restitution of the sums advanced, it was argued on behalf of the local authorities that recovery would be contrary to the objective of the Norwegian statute in question and should therefore be refused by the English court on public policy ground.  On this defence Aikens LJ of the English Court of Appeal said (footnotes omitted):

“ 99. … In the absence of authority to guide us, I have attempted to examine the question from first principle. Two approaches seem possible. The first is that the English court should take account of the express or clearly implied intention of the foreign statute in deciding whether and to what extent a restitutionary remedy should be available, even though the restitutionary claim is governed by English law. It should do so as a matter of comity and should only refuse to consider the effect of the foreign statute if it would be contrary to English public policy notions to do so. In short, this would be an English domestic law public policy approach. The second approach is to draw an analogy with the rule that an English law contract will not be regarded as unenforceable if prohibited by a foreign law, unless the contract requires performance in the place of that law or it is proved that it is the common intention of the parties to the contract to violate the law of the place of performance of the contract. That also would be applying a rule of domestic English law, as the cases recognise.

100. In the circumstances of the present case, my inclination is towards the first approach.  Although the restitutionary claim is governed by English law and no English statute is involved, the reason a restitutionary claim has arisen is that the putative contract is void because of the lack of substantive power and so capacity of the foreign corporation to conclude the contract.  The key element in the lack of substantive power is the relevant foreign statute, viz. the 1992 Act.  Under the English conflict of laws rule the English court has to take account of that when deciding on the issue of the foreign corporation’s capacity to conclude a contract putatively governed by English law.  If the consequence is that the contract is void and so, in English law, a restitutionary claim may arise, it seems logical and consistent with comity to take account of the same foreign statute to see whether, as a matter of English public policy, the right to a restitutionary claim should be restricted in some way.  If this approach is correct, then it must be for the party claiming to rely on the foreign statute to do two things.  First, it must prove, by evidence of the foreign law if need be, that the statute expressly or by clear implication bars recovery of money advanced under a void contract.  Secondly, it must satisfy the English court that there is no countervailing English public policy reason not to give effect to the foreign statute.”

Pill LJ agreed with Aikens LJ whereas Etherton LJ would be inclined to treat the argument as part of the defence of change of position.  In the result, the defence failed because there were no findings of fact by the trial judge that recovery of money paid under a contract which was held invalid was either expressly or implicitly barred by the Norwegian statute or would be contrary to the statutory intent; nor was there evidence on which the judge could have made such a finding.[38]

53.Although it is a case of a contract being void for lack of capacity rather than illegality, Haugesund seems to me to support the view that in the context of a contract having failed because of foreign illegality, restitution may likewise be barred if to allow recovery would be contrary to the foreign law.  Consistency on the part of Hong Kong law would suggest that, having for reasons of comity and public policy denied legal effect or force to the parties’ contract due to foreign illegality, it should not countenance a claim in restitution that would stultify the object and policy of the same foreign law, subject to any countervailing Hong Kong public policy reason not to give this effect to the foreign law.  It is necessary to recall, however, the fundamental difference in nature between enforcing a contract and giving restitution, as explained above.  It does not follow from the fact that an activity is prohibited under foreign law that restitution in the event the activity cannot be carried out is also prohibited.  It would be for the party relying on the defence to demonstrate why the foreign law would be stultified by allowing a restitutionary claim or, which perhaps amounts to the same thing, that the restitutionary claim is expressly or by clear implication barred under the foreign law.

54.Drawing the threads together, I would endeavour to summarise what I regard as the applicable analysis as follows:

(1)  The first step is to ascertain the law that governs the claim in restitution by Hong Kong conflict of laws rules.  If the claim is governed by foreign law, the effect of foreign illegality on that claim is also governed by foreign law.

(2)  When a restitutionary claim is governed by Hong Kong law, the court assesses whether foreign illegality constitutes a defence by applying Hong Kong principles, focusing on public policy and international comity rather than the rationales underlying the domestic doctrine of illegality.

(3)  Restitutionary obligations are distinct from contractual claims.  Restitution aims to restore parties to their pre-transaction positions rather than enforce contractual performance.  Accordingly the reasons for refusing to enforce a contract due to foreign illegality do not automatically bar restitution.

(4)  Foreign illegality may serve as a defence to claims in restitution under Hong Kong law, grounded in international comity and public policy.

(5)  In general, a plaintiff who has paid money to the defendant pursuant to a contract which the latter has not performed and which has been rendered ineffective due to foreign illegality should be entitled to restitution of the money.  There may be exceptions if the underlying agreement involves egregious foreign illegality, where comity and public policy demand refusal of assistance to the plaintiff.

(6)  The general rule is fortified if the foreign law itself provides for restitution in such a case.

(7)  Where the foreign law would be stultified by allowing a restitutionary claim or such a claim is expressly or by clear implication barred under the foreign law, and there is no countervailing Hong Kong public policy reason not to give effect to the foreign law, there may be a defence to the claim in restitution.

(4)   The judge’s modified Ryder principles

55.I turn to the modified Ryder principles put forward by the judge (quoted in §19 above).  To his credit, the judge sought to inject some structure to the law in an area with a dearth of authorities.  But the Ryder principles are a summary of the rules and principles that emerged from various authorities on the effect of foreign illegality on contracts.  Given the different nature and object of claims in contract and in restitution respectively, for my part I do not think those principles readily lend themselves to wholesale adaptation in the way attempted.

56.Thus, it is not clear whether the first modified Ryder principle is premised on the foreign law being the law governing the restitutionary obligation and whether “not permissible” means a restitutionary claim is barred under the foreign law or the foreign law simply makes no provision for such a claim.  These are material questions as explained above.

57.The second modified Ryder principle, mirroring the rule in Ralli Bros, postulates a situation where a restitutionary claim will “require or necessarily involve a breach of the foreign law”.  But the rule in Ralli Bros depends on an act being illegal under the law of the place where it is required by the contract to be done.  Where restitution is being sued for in Hong Kong, it is not clear how this second principle arises.  Perhaps the judge had in mind a claim for specific restitution where the property claimed is situated in the foreign jurisdiction and the foreign law prohibits its transfer to the plaintiff.  But even so it is not clear that the plaintiff should be denied remedy in any form. 

58.The third modified Ryder principle is supposed to apply to a restitutionary claim where the parties’ real object and intention at the outset was to make use of such claim to commit an act that is illegal under the foreign law.  But unless the contract is a sham, one would have thought that the parties’ real object and intention was to carry out the contract, not for the contract to be held unenforceable so that one or both of them would have a claim in restitution instead.  With respect, the basis of this principle is far-fetched.

59.The fourth modified Ryder principle requires no discussion for the judge himself could not see how the situation postulated would in reality arise.

60.Accordingly, with great respect to the judge I do not think that his modified Ryder principles provide useful general guidance.

(5)   Applying the principles to the present case

61.The cases and discussion above refer to international comity and foreign law, but the principles also apply when the case concerns, as here, separate law districts within one country: Ryder, §50.

62.In the present case, the plaintiff paid the defendant RMB 1 million pursuant to their Contract, and in return the defendant agreed to pay the plaintiff an equivalent amount in HKD in Hong Kong.  As such, the Contract (1) would result in a breach by the plaintiff of administrative rules which require an individual to conduct foreign exchange transactions through qualified financial institutions, and (2) was entered into by the defendant as part of her substantial money exchange business carried on in breach of the PRC Criminal Law.  There is no dispute that the Contract was in this sense illegal under Mainland law.

63.But the money exchange was not carried out.  The defendant did not pay any HKD to the plaintiff, no doubt because the Kwok Account was frozen and the funds in it were later confiscated.  But the freezing of the account and the confiscation of the money had nothing to do with the money exchange transaction.  They were adventitiously caused by a separate and different crime of pyramid selling wholly unconnected with the plaintiff and his money.  The defendant did not rely on any defence based on change of position by reason of the confiscation.

64.The claim in restitution is based on an independent obligation imposed by its proper law, here Hong Kong law, under which the plaintiff is prima facie entitled to restitution.  By allowing his claim the Hong Kong court will simply be upholding the plaintiff’s rights under Hong Kong law that flow from the total failure of consideration for the money he paid, in the context where the parties’ Contract had become ineffective.  I do not think this would in any way detract from the object and policy of the Mainland laws and regulations infringed by these parties.  I can see no reason in comity or public policy for denying restitution to the plaintiff, especially given that restitution would also be possible under Mainland law. 

65.For the above reasons, I would reject the first three grounds of appeal raised by the defendant.

(6)   The form of relief

66.This brings me to the fourth ground of appeal concerning the form of order made.  The judge ordered the defendant to pay the plaintiff RMB 1 million “or its HKD equivalent at the time of payment”.  Plainly the first part of the order would not in effect enforce the Contract.  The plaintiff contracted to pay RMB for buying HKD.  Giving him RMB does not perform the Contract.  It is the second part of the order against which Mr Wong complains.  I can see that to require the defendant to pay HKD to the plaintiff may come close to enforcing the Contract (albeit at a different exchange rate), and caution may be needed where the order for restitution sought would be “functionally indistinguishable from an order for enforcement”.[39]  But the judge’s order does not require the defendant to pay any HKD.  She will obtain a good discharge by paying RMB to the plaintiff.  The second part of the order is more important when it comes to execution, for it is necessary for those responsible for enforcing it to know the extent of the steps they are to take.  This form of order was sanctioned in Miliangos v Frank (Textiles) Ltd [1976] AC 443, 463A which decided that a court may give judgment for a sum of money expressed in a foreign currency, and was endorsed in Practice Direction 16.2 which indeed requires that where enforcement is sought for a judgment debt in foreign currency such as by writ of fieri facias or garnishee order, the exchange rate and the actual sum in HKD have to be certified. Accordingly I also reject the fourth ground of appeal raised by the defendant.

G.  Conclusion

67.For the above reasons, I would dismiss the appeal with costs.

Mr Tommy Cheung, instructed by Messrs. Li, Kwok & Law, for the Plaintiff (Respondent)

Mr Joseph Wong, instructed by Messrs. S.W. Wong & Associates for the 2^nd Defendant (Appellant)