MAI, JIEPING TRADING AS FAI TAT RMB EXCHANGE v. WONG, CHI HUNG

Press Summary (English)

Press Summary (Chinese)

FACV No 5 of 2025

[2026] HKCFA 14

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO 5 OF 2025 (CIVIL)

(ON APPEAL FROM CACV NO 399 OF 2023)

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J U D G M E N T

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Chief Justice Cheung:

This appeal on foreign illegality

1.  This appeal raises the question of the proper approach in Hong Kong to the defence of foreign illegality^[1] in the context of an unjust enrichment claim arising from an unenforceable currency exchange agreement tainted by illegality in the Mainland.  I have had the advantage of reading the judgment of Mr Justice Ribeiro PJ in draft.  I agree that this appeal should be dismissed for the reasons given in his judgment.  On one particular argument, however, I would like to add a few words of my own.

2.  The “range of factors” approach propounded by the majority in Patel v Mirza,^[2] despite initial scepticism and criticism that it would lead to unacceptable uncertainty, has since demonstrated itself to be workable in practice without producing such uncertainty in the law.^[3]  It is a flexible approach that enables the court to strike an appropriate balance between the underlying – sometimes conflicting and competing – policy considerations and other relevant factors when a claim met by a defence of illegality comes before it.

3.  In cases of domestic illegality, the public policy against aiding or condoning a breach of the law is engaged.  In cases of foreign illegality, the public policy of comity is engaged.  What is common to both under the “range of factors” approach is that, although these public policies may be accorded significant weight when engaged, they are not in themselves conclusive.  Other policy considerations, as well as relevant case-specific factors (including the nature of the illegality and its centrality to the claim), also require consideration.  The balance struck may therefore differ from case to case, depending on the particular facts.

4.  In relation to an unjust enrichment claim based on a total failure of consideration, where the subject matter of the underlying contract is, for example, the sale of a chattel, and the contract is tainted by illegality such that it is illegal or otherwise unenforceable in contract, an unjust enrichment claim for the return of (say) a deposit or purchase price would not ordinarily attract a stultification objection.  Where, however, the claim concerns an illegal or unenforceable foreign exchange agreement or loan agreement, the argument that the claim amounts to “backdoor enforcement” may be raised, as it has been in the present case.  In the latter situation, it may of course be said in reply that a contractual claim seeks to enforce the contract, or to recover damages for its non-performance; an unjust enrichment claim, by contrast, proceeds on the premise that the contract is illegal or otherwise unenforceable.  Enforcement of an unjust enrichment claim is therefore distinct from enforcing the illegal contract, and it does not engage the public policy against illegality, or, where foreign illegality is involved, the policy of comity.  Stultification is not in issue, and no inconsistency is entailed.  One can easily see the force of this line of reasoning.

5.  However, whether stultification arises must depend upon the content of the law that gives rise to the issue of illegality.  A law may be infringed in more than one way, such that the unwinding of a contract may give rise to concerns of illegality just as much as its enforcement.  Moreover, in the context of the policy against aiding or condoning illegality, or the policy of comity, a central feature of the “range of factors” approach is its emphasis on substance rather than form, in contrast to the reliance approach in Tinsley v Milligan.^[4]Accordingly, the practical effect of a court’s decision cannot be wholly disregarded.  Viewed in this light, rather than from a purely legalistic or technical standpoint, giving effect to an unjust enrichment claim in the context of an illegal or unenforceable foreign exchange or loan agreement may, in practical terms, be regarded as enforcing an unenforceable contract by indirect means.  Thus, a lender recovers the money he has advanced, albeit without the agreed interest; or a customer obtains a money judgment for the sum he sought to exchange into another currency, either in the desired currency or in a currency readily convertible into it, and (depending on the facts) at the place of his choosing.  That is precisely the practical effect of the judgment below in the present case: a money judgment in Hong Kong for RMB 1 million, which may be satisfied either in Hong Kong dollars (albeit based on a different exchange rate from that agreed under the contract) or, if satisfied in RMB, in a sum that can readily be converted into Hong Kong dollars (at a different exchange rate).

6.  In that sense, it may be said that the Mainland law prohibiting the relevant currency exchange is engaged in substance, although not in form, and that the policy of comity is therefore likewise engaged by the judgment below.  The argument that restitution might also be available under Mainland law does not provide a complete answer.  Any restitution ordered by a Mainland court would be for a sum of RMB payable in the Mainland, the satisfaction of which would remain subject to the exchange controls that the illegal foreign exchange contract between the parties sought to circumvent in the first place. Likewise, the fact that, under the unjust enrichment claim, the plaintiff will not recover 100 per cent of what he would have received under the foreign exchange contract does not provide a full answer to the argument.

7.  In my view, under the “range of factors” approach, the most satisfactory response to this stultification objection is not simply to insist, as a matter of pure juridical reasoning, that enforcement of the unjust enrichment claim does not engage illegality or considerations of comity at all.  Rather, given its emphasis on substance over form, the approach treats both the objection and the difference in juridical basis as relevant factors, the weight of each depending on the facts of the particular case.  They must therefore be weighed alongside all other relevant policy considerations (including anti-windfall concerns) and the specific circumstances of the case, including the nature of the illegality and its centrality to the claim in unjust enforcement.

8.  Accordingly, there is no hard-and-fast rule applicable to unjust enrichment claims arising from loan agreements or foreign exchange agreements tainted by illegality, nor need there be: everything depends on the facts of the particular case and the illegality concerned.  In that sense, this flexibility is both the strength of and a potentially challenging feature inherent in the “range of factors” approach that must be accepted.

9.  In the present case, the balance comes down decisively in favour of upholding the unjust enrichment claim, for the reasons and considerations identified in Mr Justice Ribeiro PJ’s judgment.^[5]

Monat on stare decisis

10.  In Monat Investment Ltd v All Person(s) in Occupation of Part of No 16 Ma Po Tsuen,^[6] the Court of Appeal followed and adopted Patel, thereby departing from the earlier Hong Kong approach to the defence of domestic illegality derived from Tinsley.  In the course of doing so, the court expressed views on the operation of the doctrine of stare decisis in Hong Kong^[7] which, with respect, are unsatisfactory and ought not to be followed.  This appeal affords an opportunity to restate the correct position.

11.  As the Court of Appeal in Monat rightly observed, following the decision of the House of Lords in Tinsley in 1993, the courts in Hong Kong had treated it as the governing common law authority on the defence of domestic illegality.^[8] The question that the court in Monat asked itself was whether it remained bound to follow Tinsley, or whether it was free to adopt the “range of factors” approach endorsed by the majority of the UK Supreme Court in Patel, decided in 2016.^[9]

12.  Having summarised the respective majority and minority views in Patel, and having concluded that the former represented the current common law position on illegality,^[10] the Court of Appeal went on to articulate its understanding of the doctrine of stare decisis as it applied in Hong Kong:^[11]

“ The stare decisis rule in Hong Kong stated by the CFA [that is, this Court] in the landmark case of Solicitor (24/07) v Law Society of Hong Kong^[12] includes the following:

- before 1 July 1997, the authority of House of Lords decisions was ‘very great unless the decision was in a field where local circumstances made it appropriate for Hong Kong to develop along different lines’ ([15]);

- after 1 July 1997, decisions of the House of Lords (and its successor, the UKSC [– the UK Supreme Court]) ‘should of course be treated with great respect.  Their persuasive effect would depend on all relevant circumstances, including in particular, the nature of the issue and the similarity of any relevant statutory or constitutional provision’ ([17]).”

13.  The court then reviewed a number of earlier decisions of this Court (including a determination by the Appeal Committee) and of the Court of Appeal.^[13] It observed that in HKSAR v Lau Kam Ying^[14] (a pre‑Patel case), the Appeal Committee had, without any detailed examination of the underlying principles, accepted Tinsley as representing the local law on illegality,^[15] whereas in Ryder Industries Ltd v Chan Shui Woo^[16] (another pre‑Patel appeal) this Court had not found it the appropriate case or occasion to revisit Tinsley in the domestic illegality context, as the appeal concerned foreign illegality, and expressly left the question open.^[17]  The Court of Appeal further noted that in Kan Wai Chung v Hau Wun Fai^[18], a decision of that court handed down two days after Patel (which had not been cited to the court), the court had treated itself as bound by Lau Kam Ying to follow Tinsley, notwithstanding that it had been referred to an Australian approach broadly comparable to that later adopted in Patel.^[19]

14.  Proceeding on the footing that it was both entitled, and apparently obliged, to follow Patel, the Court of Appeal stated:

“52.1. As far as the CFA [i.e. this Court] is concerned, it is clear from the judgment in Lau Kam Ying that it did not decide to adopt the reliance approach [under Tinsley] after undertaking its own examination of, and making its own conclusion on, the common law defence of illegality. What it did was to follow the House of Lords in Tinsley pursuant to the stare decisis rule in Solicitor (24/07). Ryder discussed a different test, the one suggested in ParkingEye,^[20] not Patel, and in any event, Ma CJ’s observations and Lord Collins’ agreement were expressly obiter.

52.2. Since the common law on the defence of illegality is now expounded by the UKSC [i.e. UK Supreme Court] in Patel, applying the same stare decisis rule, it would only be logical that Patel is followed in the absence of any local circumstances that render it inappropriate.

52.3. This conclusion accords with the declaratory theory of the common law, but also makes practical sense generally. When a UKSC decision on a point concerning the common law is given, there might or might not happen to be a case involving that point being processed through the Hong Kong courts. Even if there happens to be a case involving that point, and even if one of the parties decides to appeal to the CFA, there may be a time lag before the case can reach the final court.

52.4. In my view, it would be surprising if the common law as expounded by the highest authority in the UK (which the CFA has said should be accorded the greatest respect) is not to be regarded as the common law in Hong Kong simply because randomly, there may or may not happen to be a case involving the point being processed through the Hong Kong courts, which may or may not happen to reach the CFA.

52.5.    Of course, when such a case does reach the CFA, it would be free to follow the UKSC decision or not, in accordance with the stare decisis rule in Solicitor (24/07), but until the CFA pronounces on it, the courts in Hong Kong should not regard themselves as being ‘hide-bound’ to adhere to an old common law rule.   The common law is an integral part of the law governing global commercial activities. Adherence to an old rule (while hoping or waiting for a case to reach the CFA) would only lead to a disconnect with other common law jurisdictions, and misunderstanding or confusion of parties engaged in commercial transactions.”

Matters requiring correction

15.  The Court of Appeal’s evident desire to keep the common law of Hong Kong – a major international financial and commercial centre and a significant common law jurisdiction – abreast of, and aligned with, developments in other jurisdictions, particularly one as respected as the United Kingdom,^[21] is entirely understandable and indeed commendable.  Its recognition of the seriousness of its role as an intermediate appellate court, in which the great majority of civil appeals are finally determined, and of the corresponding responsibility it bears for the clarification and development of the common law in Hong Kong, likewise merits affirmation.  The concern of the court that appeals raising important questions of law, especially those requiring reconsideration or development of existing doctrine, may take considerable time to reach this Court, if they do so at all, is again real.  As was pointed out in Solicitor (24/07):^[22]

“An appeal may not be pursued for a number of reasons. The party concerned may not wish to spend the necessary time and effort and may not be able or willing to undertake the risks and afford the costs involved. Further, the exigencies of the situation may practically preclude an appeal. And the parties may compromise their dispute.”

16.  Furthermore, the Court of Appeal’s preference for the Patel approach over the Tinsley approach was, as Mr Justice Ribeiro PJ now explains in his judgment, entirely correct.

17.  Nevertheless, the quoted passages in Monat are problematic in several material respects and call for correction and clarification.

18.  First, the passages erroneously treat, or may be read as treating, a decision of the UK Supreme Court as an authority which must be followed in Hong Kong,^[23] as an application of the stare decisis rule, “in the absence of local circumstances that render it inappropriate.”^[24]

19.  Secondly, the passages overlook the fact that, notwithstanding their common historical origins, different common law jurisdictions possess their own bodies of common law, which may and do diverge from one another in significant respects, including in areas bearing upon international commercial activity.

20.  Thirdly, it follows that the declaratory theory of the common law, even taken at its highest, is confined to the common law of the particular jurisdiction concerned.  Accordingly, when the Court of Appeal stated at [41] that “by the majority of 6‑3 [in Patel], the common law on the defence of illegality was declared to be decided on the range of factors approach based on the trio of necessary considerations”, that statement can legitimately mean no more than that the common law of England and Wales was so declared.

21.  Fourthly, it also follows that there is nothing surprising in the proposition that a change in the law of England and Wales effected by a decision of the UK Supreme Court does not, without more, represent a corresponding change in the common law of Hong Kong.  Indeed, the contrary position would be surprising, given that Hong Kong and England and Wales are separate and distinct jurisdictions.  That conclusion is not altered by the fact that the same legal issue may, or may not, come before the courts of Hong Kong, including this Court, in the near future.

The correct position

22.  It is therefore necessary to restate and reaffirm the correct position concerning the doctrine of precedent in civil cases in Hong Kong.

23.  As this Court made clear in Solicitor (24/07), first, only decisions of the Privy Council given before 1 July 1997 on appeal from Hong Kong are binding on Hong Kong courts, subject to any subsequent departure by this Court after that date.^[25]

24.  Secondly, all pre‑1997 non‑Hong Kong Privy Council decisions and decisions of the House of Lords are not binding on Hong Kong courts.^[26] Before 1997, for the practical reasons explained in Solicitor (24/07), such decisions were very often treated as binding, or as almost invariably to be followed, in practice.^[27]  After 1997, however, that is no longer the position.  Their persuasive weight depends upon their substance and merits, rather than upon their origin or source.  That said, the considered views of eminent jurists sitting in the apex court of the United Kingdom will almost always repay careful attention and consideration. Nonetheless, such decisions are not binding in Hong Kong.^[28]

25.  The same is true of decisions, including those of the highest courts, in other common law jurisdictions.  Whilst authorities from Australia, New Zealand, Canada and Singapore are frequently cited in our courts, they are not binding.^[29]

26.  Indeed, Article 84 of the Basic Law places all overseas common law authorities on the same footing and expressly provides that they may be referred to.^[30]  No particular jurisdiction is accorded any special status by reason of the provenance of its authorities.

27.  That, after 1997, no overseas authorities are binding on the courts of Hong Kong is also clear from Articles 8 and 18(1) of the Basic Law, which govern the sources of the laws of the Hong Kong Special Administrative Region and do not include overseas authorities among them.^[31]

28.  This position is to be contrasted with that which obtained before 1997 under the Application of English Law Ordinance,^[32] which provided in section 3(1) that “[t]he common law and the rules of equity [of England and Wales] shall be in force in Hong Kong so far as they are applicable to the circumstances of Hong Kong or its inhabitants [and] subject to such modifications as such circumstances may require”.  That Ordinance was not adopted as part of the laws of Hong Kong after 1997.

29.  After 1997, whether to follow or adopt an overseas authority depends solely upon the judgment of the local court concerned.^[33]  No hierarchical consideration arises.  A judge or judicial officer at any level of court may decline to follow a recent decision of the UK Supreme Court on a point not governed by any binding local authority if, having considered the relevant merits and circumstances, he or she concludes that it should not be followed.  By “merits and relevant circumstances” is meant, among other things, the nature of the legal issue concerned, the soundness and persuasiveness of the reasoning, and the similarities and differences between Hong Kong and the overseas jurisdiction in question in terms of the relevant contexts, such as the constitutional, statutory, legal, social, economic, cultural, political or historical.

30.  Unlike the position formerly mandated by the Application of English Law Ordinance, the fact that the subject matter concerns a shared common law or equitable doctrine (such as the defence of illegality), and that there is no material difference between local circumstances and those of the overseas jurisdiction, is but one consideration.  Of far greater importance are the quality and persuasiveness of the reasoning.  As the High Court of Australia recently observed in Hunt Leather Pty Ltd v Transport for NSW:^[34]

“‘The common law in Australia is the common law of Australia.’^[35] The significance of Fearn [a UK Supreme Court decision^[36]] for the potential development of the common law of Australia can rise no higher than the persuasive value of its reasoning.”

Other relevant considerations may include the state of the existing local case law, the comparative positions in other common law jurisdictions, the need for legal certainty, the risk of unsettling established arrangements where a change in the law is contemplated, and so forth.

31.  The constitutional provisions of the Basic Law concerning the sources of the laws of the Hong Kong Special Administrative Region, namely Articles 8, 18(1) and 84, also establish conclusively that the common law applied in Hong Kong is the common law of Hong Kong, and not that of England and Wales, nor that of any other common law jurisdiction.  By definition, the common law of different jurisdictions differs in content.  It is therefore entirely unsurprising that the law on a particular common law doctrine, as stated by the apex court of the United Kingdom, may diverge from that applied by the courts of Hong Kong or pronounced by this Court, or followed elsewhere.

32.  Where there has been a change in the law in the United Kingdom brought about by a decision of the UK Supreme Court (or, for that matter, of the Privy Council^[37]), the position in Hong Kong, assuming it had previously been the same, may well call for reconsideration, updating or development.  Where it does, and a case raising the point comes before the court, the answer, however, does not lie in the automatic adoption of the latest overseas authority merely because no material difference in local circumstances can be identified.  First, such an approach is impermissible where there exists a binding local authority on the point, in which event the matter can only be addressed if and when the case comes before the Court of Appeal (if it is not so bound or may properly depart from it), or, on further appeal, before this Court.  Secondly, even in the absence of any binding authority, the overseas decision should not be followed without a prior and careful assessment of its merits and of all other relevant circumstances, of the kind described above.

An assumed legal position

33.  The Court of Appeal, and all courts in Hong Kong, are bound by the decisions of this Court.  The Court of Appeal is also bound by its own previous decisions, subject to the “plainly wrong” exception as fully explained in Solicitor (24/07).^[38] What binds a subsequent court is, of course, only the ratio decidendi of the earlier decision.^[39]  It has been said that “[a] case is not binding authority for a proposition that has been assumed sub silentio, rather than actually considered and decided.”^[40]  However, the position in practice is considerably more nuanced than that formulation might suggest.

34.  In R (Kadhim) v Brent London Borough Council Housing Benefit Review Board, Buxton LJ explained:^[41]

“Like all exceptions to, and modifications of, the strict rule of precedent, this rule [that a subsequent court is not bound by a proposition of law assumed by an earlier court that was not the subject of argument before or consideration by that court] must only be applied in the most obvious of cases, and limited with great care. The basis of it is that the proposition in question must have been assumed, and not have been the subject of decision. That condition will almost always only be fulfilled when the pointhas not been expressly raised before the court and there has been no argument upon it…. And there may of course be cases, perhaps many cases, where a pointhas not been the subject of argument, but scrutiny of the judgment indicates that the court's acceptance of the point went beyond mere assumption. Very little is likely to be required to draw that latter conclusion: because a later court will start from the position, encouraged by judicial comity, that its predecessor did indeed address all the matters essential for its decision.”

The subject was re-visited in some detail by Lewison LJ in the recent English Court of Appeal decision in Zedra Trust Co (Jersey) Ltd v THG Plc.^[42]

35.  Echoing the observations of Buxton LJ in Kadhim, where a particular legal position has been treated by the courts – including the Court of Appeal, or even this Court – as representing the law of Hong Kong over a substantial period, and cases have been decided on that footing, it would take “very little” to conclude that the earlier cases’ acceptance of that position went beyond mere assumption.  This also accords with sound legal policy.  Apart from the basic requirement of justice that like cases be treated alike, the principal rationale for the doctrine of precedent, and its central importance to the common law, lies in the certainty, predictability, and consistency it brings to the law, thereby enabling individuals and businesses to order their affairs accordingly.^[43] Where the higher courts have long treated a particular legal position as the law, and decided cases accordingly, it would tend to undermine rather than promote that rationale to hold that the position may be readily departed from merely on the basis that it was apparently assumed rather than fully reasoned.  In case of doubt (or save “in the most obvious of cases”), so far as the Court of Appeal is concerned, departure should ordinarily be permitted only where the earlier position is shown to be “plainly wrong”.

36.  At the other end of the spectrum, where a legal position has been assumed without any, or any real, argument or discussion, is of relatively recent origin, and remains controversial either in local or overseas jurisprudence or in academic commentary, a subsequent court may find it easier to draw the conclusion that the legal position was merely assumed by the previous court.  The relatively more relaxed approach in this latter situation likewise advances legal policy.  For an equally important policy consideration underlying the doctrine of precedent is that an unduly overreaching, rigid or inflexible application of the doctrine risks stifling the proper development of the common law of Hong Kong, particularly in the Court of Appeal, where the great majority of civil appeals are finally determined.^[44]

37.  Ultimately, the facts and circumstances will vary from case to case, and the question whether an apparently assumed legal position has actually gone beyond mere assumption and should be regarded as binding must be approached with care and sensitivity to context.

38.  Given our decision to adopt the “range of factors” approach, for the purposes of both domestic and foreign illegality defences, it is unnecessary to explore further whether, in Monat, binding authority prevented the Court of Appeal from departing from Tinsley and following Patel, either altogether or absent recourse to the “plainly wrong” exception.

The position of the Court of Final Appeal

39.  This brings me, finally, to the pivotal role played by this Court, as the apex court in this jurisdiction, in the clarification and development of the common law of Hong Kong.  This is particularly so given that the Basic Law entrusts the power of final adjudication to the Hong Kong Special Administrative Region,^[45] and that that power is vested in this Court pursuant to Article 82 of the Basic Law.^[46]  Everything said thus far about the rule of precedent proceeds on the premise that this Court is fully and effectively functioning as the final appellate court in this jurisdiction.

40.  In relation to civil appeals, the Hong Kong Court of Final Appeal Ordinance^[47] provides, in section 22(1)(b), that leave to appeal may be granted where the question involved in the proposed appeal is “one which, by reason of its great general or public importance, or otherwise, ought to be submitted to the Court for decision”.  The role of this Court is to deal with general questions of principle and to ensure that the law is correctly articulated.  The focus is on whether the case raises an issue that is important for the law more generally.  The issue is therefore not simply whether the court below is considered to have reached the correct conclusion, or even set out the law accurately.  That is a relevant consideration.  What matters more is whether the point of law raised is one that should be determined by this Court so that the answer – whether it accords with that given by the lower court or not – carries the authority of a final appellate decision.  Conversely, leave to appeal may sometimes be refused even where the court below is thought to have erred, because the point does not bear upon the wider development of the law, unless the case can properly be brought within the “or otherwise” limb.

41.  I have already mentioned the important role of the Court of Appeal in clarifying and developing the law, so far as it is able to do so.  As noted, for a variety of practical reasons, cases raising important points of law may not always reach this Court.  That reality, however, only serves to highlight the importance of ensuring that, when an application for leave to appeal to this Court satisfies the requisite threshold, leave is granted where it should be.

Mr Justice Ribeiro PJ:

42.  I respectfully agree with the Chief Justice’s judgment regarding the proper approach to stare decisis.

43.  Leave to appeal was granted by the Court of Appeal[48] in respect of the following question, namely:

“Where a contract between the plaintiff and the defendant governed by Hong Kong law is held by the Hong Kong court to be unenforceable because of the contract’s illegality under foreign law, but the defendant has received a benefit under the contract at the plaintiff’s expense, under what principles and in what circumstances will the plaintiff’s claim brought in Hong Kong for restitution in respect of that enrichment be defeated by the defence of foreign illegality?”

44.  The illegality concerned arises under Mainland law.  As the Hong Kong Special Administrative Region is obviously part of the People’s Republic of China, in the present case the reference to “foreign” law must plainly be understood as a reference to the law of the Mainland treated as a separate law district for the purposes of the conflict of laws.[49] 

A.     The factual background

45.  The plaintiff wished to convert RMB 1 million which he had in the Mainland into HKD to be made available to him in Hong Kong.  On 5 June 2016, acting on his behalf, the plaintiff’s brother approached the defendant[50] who ran a currency exchange business in Hong Kong to effect the exchange.  They entered into an agreement (the “Exchange Agreement”) whereby the plaintiff would cause RMB 1 million to be deposited into a bank account designated by the defendant in the Mainland (referred to as “the Kwok account”); and the defendant would deposit the equivalent HKD amount into the plaintiff’s bank account in Hong Kong, converted at the agreed rate of RMB 854.5 to HKD 1,000.

46.  Such contracts, involving unlicensed currency exchange transactions, were unlawful under Mainland law, infringing regulatory measures[51] which provided for various sanctions including confiscation of the relevant funds and, in serious cases, criminal punishment.

47.  On 7 June 2016, the plaintiff duly caused the RMB 1 million deposit to be made into the Kwok account.  However, the defendant never made a corresponding deposit into the plaintiff’s Hong Kong account. This was because the funds in the Kwok account were frozen by Mainland authorities in connection with a criminal investigation concerning a pyramid selling scheme unrelated to the parties’ Exchange Agreement.

48.  Subsequently, pursuant to a Mainland court’s judgment issued on 28 February 2018, eight persons (who did not include the plaintiff, the defendants or the account holder Kwok) were convicted of offences relating to pyramid selling and confiscation orders were made covering the entire balance in the Kwok Account, including the RMB 1 million deposited by the plaintiff.  There is no suggestion that those court orders had anything to do with the unlawful currency exchange transaction referred to above.

B.     The proceedings below

49.  The plaintiff brought proceedings in the District Court against the defendant for breach of the Exchange Agreement, or alternatively for unjust enrichment in respect of the RMB 1 million deposited in the Kwok account.[52] 

50.  Regarding the contract claim, Deputy District Judge Gary C C Lam referred to the principles (“the Ryder principles”) regarding the effect of illegality on contracts in the conflict of laws set out by Lord Collins of Mapesbury NPJ in Ryder Industries Ltd v Chan Shui Woo,[53] quoting with approval Johnston, Conflict of Laws in Hong Kong,[54] as follows:

“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.”

51.  The Judge held that the Exchange Agreement fell within the second category of the Ryder principles.  He considered it to be a contract performance of which “requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed ... regardless of its proper law”.  This was so, his Honour held, “given that the arrangement would involve exchanging RMB with unauthorised individuals in the PRC in breach of article 30 [of the PRC Foreign Exchange Measures for Individuals]”.[55] 

52.  Writing for the Court of Appeal,[56] G Lam JA expressed reservations as to the correctness of the Judge’s conclusion.  His view was that the second category concerns cases where performance of a contract is rendered impossible by reason of illegality[57] and observed that:

“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.”[58] 

53.  G Lam JA reserved his position regarding the validity of the plaintiff’s contractual claim since that issue did not arise in the absence of a cross-appeal by the plaintiff.[59] I share his Lordship’s reservations as to the correctness of the Judge’s conclusion.  However, as the above-mentioned Question states, this appeal proceeds on the premise that the Exchange Agreement was unenforceable because of illegality under Mainland law, the central issue now being whether and on what basis, such illegality may provide a defence to the plaintiff’s unjust enrichment claim.

54.  The Judge upheld the plaintiff’s restitution claim, applying a modified version of the above-mentioned Ryder principles re-formulated by him so that they referred to unjust enrichment rather than contract claims.[60] While agreeing that the plaintiff’s claim for unjust enrichment should be sustained, the Court of Appeal rejected the Judge’s “modified Ryder principle”[61] as the basis for that outcome.   I agree that the Ryder categories addressing the effect of illegality on contracts, do not lend themselves to such modification.

55.  In an admirable judgment, G Lam JA distinguishes between contract and restitution claims and identifies policies which inform the principles for determining whether and when illegality may provide a defence against a claim for unjust enrichment under conflict of laws rules.[62] He holds that allowing the plaintiff to pursue his unjust enrichment claim is consistent with public policy and comity:

“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.”[63] 

56.  The respondent’s case is essentially an affirmation of the Court of Appeal’s judgment.

C.     The applicable principles

57.  The debate centres on illegality as a defence to a civil claim.  Where the defence is applicable, a plaintiff who has an otherwise good cause of action or equitable claim, is denied its enforcement because the claim is in some way tainted by illegality.  In what circumstances and pursuant to what principles does this defence avail a defendant?

58.  The relationship between claims for breach of contract and for unjust enrichment, both in domestic law and under conflict of laws rules, is presently important for determining the applicable principles, given the focus on total failure of consideration.

C.1   Illegality and contractual claims in domestic law

59.  Over the last decade or so, illegality as a defence to contractual claims has attracted much controversy as a matter of domestic law.  Major differences have arisen as to the nature and limits of the defence.  However, it is generally accepted, as is perhaps obvious, that the defence rests on public policy. 

60.  The doctrine is usually traced back to Lord Mansfield CJ in Holman v Johnson[64]  who made it plain, in the context of the law of contract, that the illegality defence embodies the policy of the law:

“The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this; ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiffs own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditio defendentis.”

61.  Echoing Lord Mansfield, in Tinsley v Milligan,[65] Lord Goff of Chieveley stressed that the defence was developed in furtherance of public policy and was not concerned with achieving fairness as between the parties to the transaction.  He also stressed that it did not involve conferring any discretion on the court:

“It is important to observe that, as Lord Mansfield made clear, the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other.”[66] 

62.  The principles laid down by Lord Browne-Wilkinson writing for the majority in Tinsley v Milligan centre upon what is usually referred to as the reliance principle, namely, that legal or equitable rights in goods or land can pass under a contract despite that contract’s illegality, but that the rights so transmitted can only be enforced if their owner can establish title without having to rely on the illegality.

63.  The reliance principle has been criticised for inflexibly and for giving excessive prominence to procedural and technical rules which do not advance any coherent policy regarding the illegality in question.  This is illustrated by cases where the party making the claim fails if he has to rely on matters involving illegality because he needs to rebut the presumption of advancement, but succeeds if he is able simply to rely on the presumption of resulting trust. Lord Browne-Wilkinson explained this as follows:

“The presumption of a resulting trust is, in my view, crucial in considering the authorities. On that presumption (and on the contrary presumption of advancement) hinges the answer to the crucial question ‘does a plaintiff claiming under a resulting trust have to rely on the underlying illegality?’. Where the presumption of resulting trust applies, the plaintiff does not have to rely on the illegality. If he proves that the property is vested in the defendant alone but that the plaintiff provided part of the purchase money, or voluntarily transferred the property' to the defendant, the plaintiff establishes his claim under a resulting trust unless either the contrary presumption of advancement displaces the presumption of resulting trust or the defendant leads evidence to rebut the presumption of resulting trust. Therefore, in cases where the presumption of advancement does not apply, a plaintiff can establish his equitable interest in the property without relying in any way on the underlying illegal transaction.”[67] 

64.  In more recent cases, the courts have tended to approach the policies underlying the illegality defence in less formalistic and more nuanced terms.  Thus, in Gray v Thames Trains Ltd,[68] Lord Hoffmann observed not merely that the maxim ex turpi causa “expresses not so much a principle as a policy” but also that “that policy is not based upon a single justification but on a group of reasons which vary in different situations”.  He noted for example that in cases where the court faces the dilemma that by denying relief on the ground of illegality to one party, it appears to confer an unjustified benefit illegally obtained on the other, “the courts have evolved varying rules to deal with the dilemma”.[69] Inviting comparison of the approach of the House of Lords in Tinsley v Milligan with that of the High Court of Australia in Nelson v Nelson,[70] his Lordship pointed out that “the questions of fairness and policy are different and the content of the rule is different.  One cannot simply extrapolate rules applicable to a different kind of situation.”[71] 

65.  In Nelson v Nelson, Tinsley v Milligan was subjected to much criticism.  In their joint judgment, Deane and Gummow JJ pointed out that: “The outcome in Tinsley v Milligan indicates that adoption of one approach rather than the other may lead to opposite results.”[72] Since under Tinsley v Milligan,the outcome may turn on whether the presumption of advancement or the presumption of resulting trust is applicable, Toohey J observed that:

“This approach is open to the criticism that it represents a triumph of procedure over substance. It pays no regard to the nature or seriousness of the illegality.”[73] 

66.  In the same case, Dawson J, commented that:

... [It is] unacceptable that a party, tainted by a similar illegality, cannot establish a resulting trust merely because evidence advanced to rebut the presumption of advancement reveals the illegality. The different result is entirely fortuitous being dependent upon the relationship between the parties and is wholly unjustifiable upon any policy ground.”[74] 

67.  After much confusion due to a profusion of inconsistent judgments on illegality,[75] a panel of nine Justices was convened in the UK Supreme Court to decide Patel v Mirza[76] which concerned not only illegality and contracts but also illegality as a defence to an unjust enrichment claim.

68.  Lord Toulson JSC, with whom the majority agreed,[77] set out his conception of the policies underlying the illegality defence.  He began with broad policy reasons and proceeded to refine them into more specific categories.  Thus, he began stating:

“Looking behind the maxims, there are two broad discernible policy reasons for the common law doctrine of illegality as a defence to a civil claim. One is that a person should not be allowed to profit from his own wrongdoing. The other, linked, consideration is that the law should be coherent and not self-defeating, condoning illegality by giving with the left hand what it takes with the right hand.”[78] 

69.  Citing McLachlin J in Hall v Hebert,[79] Lord Toulson JSC noted that underlying those broad reasons was the essential question “whether allowing recovery for something which was illegal would produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system.”[80] 

70.  His Lordship went on to observe:

“... that one cannot judge whether allowing a claim which is in some way tainted by illegality would be contrary to the public interest, because it would be harmful to the integrity of the legal system, without (a) considering the underlying purpose of the prohibition which has been transgressed, (b) considering conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and (c) keeping in mind the possibility of overkill unless the law is applied with a due sense of proportionality.”[81] 

71.  Lord Toulson JSC provided examples from the case-law of “that trio of necessary considerations” bearing on whether the illegality defence to a contractual claim should be allowed.[82] He elaborated upon the third consideration, namely, the need for the law to be “applied with a due sense of proportionality”, as follows:

“In considering whether it would be disproportionate to refuse relief to which the claimant would otherwise be entitled, as a matter of public policy, various factors may be relevant. ... I would not attempt to lay down a prescriptive or definitive list because of the infinite possible variety of cases. Potentially relevant factors include the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties' respective culpability.”[83] 

72.  “Proportionality” in this context should not be confused with the test of proportionality familiarly employed in connection with enforcement of constitutional rights.[84]  The point here is that the court assesses the seriousness or centrality of the illegality against possibly refusing the plaintiff relief in respect of an otherwise sound cause of action.

73.  ParkingEye Ltd v Somerfield Stores Ltd,[85] provides an illustration. 

(a)     ParkingEye contracted to supply a system of automated monitoring of car parking at Somerfield's supermarkets for an agreed remuneration based on the charges levied.  Overstayers parking beyond a permitted period were charged fees and if they failed to pay, were to be sent letters of demand in an agreed standard form.  The third pro forma letter to be sent was deceptive because it falsely represented that ParkingEye had the authority and intention to issue proceedings against the customer if payment was not made within a stipulated period.

(b)     Six months into the contract Somerfield repudiated the contract for reasons unconnected with the letters of demand and was sued by ParkingEye.  Somerfield raised a defence of illegality based on the intended use of deception in the performance of the contract.  This was rejected and the trial judge awarded ParkingEye damages of £350,000 for loss of profits resulting from Somerfield's repudiatory breach.  The Court of Appeal upheld his decision.

(c)     The legally objectionable letter was only a small part of the intended performance of the contract and was not essential to it.  ParkingEye did not appreciate that the letter would be legally objectionable when the parties agreed on its form, and if someone had pointed the matter out, it would have been changed.  The court held that denial of ParkingEye's claim was not justified by the policies underlying the doctrine of illegality and would have led to a disproportionate result.

74.  ParkingEye and other decisions cited in Patel v Mirza mark the willingness of the English courts to undertake an assessment of the seriousness of the illegality relied on as a defence and to weigh it against depriving the plaintiff of an otherwise valid cause of action.

75.  As Bingham LJ had noted in Saunders v Edwards:[86] 

“... it is unacceptable that the court should, on the first indication of unlawfulness affecting any aspect of a transaction, draw up its skirts and refuse all assistance to the plaintiff, no matter how serious his loss nor how disproportionate his loss to the unlawfulness of his conduct.”

76.  Such disproportion is often the effect of the reliance principle laid down in Tinsley v Milligan which the Patel v Mirza majority held should no longer be followed.[87]  Lord Toulson JSC stated his conclusion as follows:

“The courts must obviously abide by the terms of any statute, but I conclude that it is right for a court which is considering the application of the common law doctrine of illegality to have regard to the policy factors involved and to the nature and circumstances of the illegal conduct in determining whether the public interest in preserving the integrity of the justice system should result in denial of the relief claimed. I put it in that way rather than whether the contract should be regarded as tainted by illegality, because the question is whether the relief claimed should be granted.”[88] 

77.  Patel v Mirza has since been treated as having resolved the uncertainties.  In Grondona v Stoffel & Co,[89] Lord Lloyd-Jones JSC[90] summarized the effect of that decision as follows:

“The decision of the Supreme Court in Patel v Mirza[91] is a significant development in the law relating to illegality at common law. It has resolved a period of considerable uncertainty during which conflicting views have been expressed in the Supreme Court as to the appropriate approach and the direction the law on the subject should take.[92] In Patel v Mirza a majority of the Supreme Court rejected the reliance principle as applied in Tinsley v Milligan,[93] whereby relief was refused to parties who had to rely on their own illegality to establish their case. In its place, the majority adopted a more flexible approach which openly addresses the underlying policy considerations involved and reaches a balanced judgment in each case, and which also permits account to be taken of the proportionality of the outcome.”

78.  In my opinion, this approach has much to recommend it.  Except where a different conclusion may be dictated by a particular Ordinance, it should now be acknowledged that the approach to the defence of illegality against contractual claims at common law in this jurisdiction corresponds with the approach set out by the majority in Patel v Mirza.  As noted in Section C.4 below, it is an approach that was actually adopted some six months prior to the decision in Patel in the conflict of laws context by this Court in Ryder Industries Ltd v Chan Shui Woo.[94] 

C.2   Illegality and unjust enrichment claims in domestic law

79.  In Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd,[95] it was acknowledged by this Court that “[the] common law cause of action asserted by the plaintiff for money had and received where consideration has totally failed is now generally regarded as a species of claim for restitution based upon principles of unjust enrichment”.  As further discussed below, it is a claim that is separate and distinct from claims in contract or tort.

80.  A useful framework for approaching such claims which has received substantial judicial support was seen to involve four 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?”[96] 

81.  In the present case, the Judge’s conclusion that questions (a) to (c) were to be answered positively was not subject to appeal. The focus has been and is on question (d) concerning the defence of illegality.

82.  It may be noted that the Patel v Mirza approach to illegality, turning away from rigid rules and exceptions in favour of flexibility and openly weighing policy considerations, also informs the majority’s decision regarding illegality as a defence to unjust enrichment claims.

83.  As Lord Toulson JSC pointed out (at para 44):

“The [Law Commission] observed that one might have expected to find that illegality has little role to play as a defence to a claim for unjust enrichment, since the claimant is not seeking to execute the contract. However, after a more liberal start, the courts adopted a much tougher stance, applying the ex turpi causa maxim to such claims unless the claimant could bring himself within certain recognised exceptions. These were (a) duress, (b) possibly ignorance of a fact or law that rendered the contract illegal, (c) possibly membership of a vulnerable class protected by statute and (d) locus poenitentiae.”[97] 

84.  His Lordship held that the aforesaid approach should no longer be followed and that only in rare and exceptional cases, would illegality defeat the claim:

“In place of the basic rule and limited exceptions to which I referred at para 44 above, I would hold that a person who satisfies the ordinary requirements of a claim in unjust enrichment will not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration. I do not exclude the possibility that there may be particular reason for the court to refuse its assistance to the claimant, applying the kind of exercise which Gloster LJ applied in this case, just as there may be a particular reason for the court to refuse to assist an owner to enforce his title to property, but such cases are likely to be rare.”[98] 

85.  Suggested examples of such exceptional cases include refusal to order recovery of money paid to a drug trafficker or to a hitman who does not deliver.  But even in cases involving a heinous criminal conspiracy, cogent arguments may be made favouring an order for restitution.  Thus, in his dissenting judgment in Patel v Mirza Lord Sumption JSC argues that allowing an illegality defence even in such cases would be contrary to principle:

“If I pay £10,000 to a hitman to kill my enemy, he should not kill my enemy and should not have £10,000. The fact that when it comes to the point he is unwilling or unable to kill my enemy does not give him any legal or moral entitlement to keep the £10,000. If he does kill him, the rational response is the same. He should be convicted of murder, but he should never have received the money for such a purpose and by the same token should not be allowed to retain it. Of course, in practice, this is all rather artificial. In a case involving heinous crimes, both parties would be exposed to confiscation orders under the Proceeds of Crime Act 2002...”[99] 

86.  The point in my view is that the law in its present state generally favours the granting of restitutionary relief where consideration has totally failed despite some illegality tainting the contract in question.  It may be that in rare and exceptional cases, the court might consider it excessively repugnant to the public interest to order restitution.  But in most such cases, recourse to the criminal law’s resources, including criminal confiscation orders, is likely to be available and the obviously preferable solution.  It is most unlikely that a conspirator would bring an unjust enrichment claim against a co-conspirator, exposing his own criminality.

87.  The Patel v Mirza approach to illegality as a defence to unjust enrichment claims should be adopted in Hong Kong.

C.3   Contractual illegality as a defence in the present case

88.  The Ryder principles referred to by Lord Collins NPJ have been set out in paragraph 50 above.  As his Lordship there stated, the underlying rationale of those principles is comity coupled with Hong Kong public policy.  Thus while there is likely to be some overlap with the Patel v Mirza approach in assessing underlying policy considerations as discussed above, such policy assessments occur in the context of the requirements of comity involving due respect for other legal systems.

89.  Also as noted in Section B of this judgment, notwithstanding reservations concerning the Judge’s conclusion as to unenforceability, this appeal proceeds on the premise that the Exchange Agreement is unenforceable because of its illegality under Mainland law, there having been no cross-appeal by the plaintiff on this point.  Further discussion of such contractual unenforceability is therefore presently unnecessary.

90.  However, to deal with the principal issue of whether and on what basis, such illegality may provide a defence to the plaintiff’s unjust enrichment claim in the conflict of laws context, it is necessary to consider certain aspects of that Agreement.

C.4   Illegality and the unjust enrichment claim

91.  Since the present unjust enrichment claim is based on total failure of consideration, one begins by determining the proper law of the Exchange Agreement.  As Lord Collins of Mapesbury NPJ pointed out in First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd:[100] 

“The common law rule is that the law applicable to a contract is the system of law by which the parties intended the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.”

92.  In the present case, the plaintiff (through his agent) approached the defendant at her place of business in Hong Kong and the parties entered into the Exchange Agreement for delivery to the plaintiff in Hong Kong a sum of HKD representing the proceeds of converting RMB 1 million deposited in the Kwok account on the Mainland at the agreed rate of exchange of RMB 854.5 to HKD 1,000.  In my view, applying either of the above-mentioned tests, it was properly common ground between the parties that the Agreement was governed by Hong Kong law.

93.  In First Laser, while noting that “[there] is a paucity of authority on the applicable law in restitution cases with a foreign element”, Lord Collins NPJ held that:

“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…”[101] 

94.  Adopting that approach, it was again appropriately common ground between the parties that the law governing the plaintiff’s unjust enrichment claim is Hong Kong law.

95.  As noted in Section C.2 above, with possible rare exceptions, unjust enrichment claims based on total failure of consideration are to be permitted under Hong Kong law notwithstanding that the underlying contract is tainted by illegality.  The question is whether for the purposes of the conflict of laws, the Mainland law’s treatment of the contract as illegal should result in the Hong Kong court denying the plaintiff’s unjust enrichment claim.  The answer depends on whether such a course is required by considerations of comity, in particular, whether granting such a remedy would constitute an unacceptable violation or stultification of Mainland law.

96.  In my view, enforcement of the plaintiff’s unjust enrichment claim against the defendant involves no violation of comity. The plaintiff’s restitutionary claim fundamentally does not involve enforcement of the illegal contract but is based on a separate and distinct obligation.

97.  In Dicey, Morris and Collins on The Conflict of Laws,[102] the point is made as follows:

“It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is, to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he or she should keep. Such remedies in English law are generically different from remedies in contract or in tort, and are now recognised to fall within a third category of the common law which has been called quasi-contract or restitution.”[103] 

98.  The learned editors add:

“The obligation to restore the ‘unjust enrichment or unjust benefit’ is imposed by law. Accordingly it should be characterised as an independent obligation both in the context of domestic law and in the context of the conflict of law.”[104] 

99.       AG of Trinidad and Tobago v Trinsalvage Enterprises Ltd,[105] involved an unjust enrichment claim by way of a quantum meruit which was met with the defence that such claim would “stultify” a statute.  Rejecting that defence, Lord Burrows JSC[106] stated:

“It is trite law that, in general, the aim of contractual remedies is to put the claimant into as good a position as if the contract had been performed ... This has sometimes been referred to as the protection of the claimant’s expectation or performance interest ... In contrast, where there is an unjust enrichment, the aim of restitutionary remedies is to reverse the enrichment. This is the protection of the restitution interest. Where there are concurrent causes of action in contract and unjust enrichment, the different aims of the remedies mean that there may be different results.”[107] 

100.  This point was also made by Lord Sumption JSC in Patel v Mirza (while developing his minority view in favour of retaining the reliance principle) stating:

“... in order to demonstrate that the basis for the payment had failed, Mr Patel must say what that basis was, which would necessarily disclose its illegality. In my opinion, the reason why the law should nevertheless allow restitution in such a case is that it does not offend the principle applicable to illegal contracts. That principle, as I have suggested above, is that the courts will not give effect to an illegal transaction or to a right derived from it. But restitution does not do that. It merely recognises the ineffectiveness of the transaction and gives effect to the ordinary legal consequences of that state of affairs. The effect is to put the parties in the position in which they would have been if they had never entered into the illegal transaction, which in the eyes of the law is the position which they should always have been in.”[108] 

101.  The distinction is “between a claim to give effect to a right derived from an illegal act, and a claim to unpick the transaction by an award of restitution”.[109] 

102.  G Lam JA applied a similar analysis in the Court of Appeal below:

“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.”[110] 

103.  The Mainland law referred to is Article 157 of the PRC Civil Code which, on the evidence before the Court, provides (in translation) as follows:

“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 [sic]. 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.”[111] 

104.  As G Lam JA observed, the existence of such a remedy under Mainland law tends to reinforce the view that denying an illegality defence to an unjust enrichment claim in Hong Kong involves no breach of comity.[112] 

105.  The approach taken by this Court in Ryder Industries Ltd v Chan Shui Woo,[113] is instructive in this context.  Notably, it endorsed (some six months prior to the UK Supreme Court’s decision in Patel v Mirza), adoption of a flexible, nuanced approach in assessing the seriousness of the illegality concerned.  In stating the fourth principle, Lord Collins NPJ stressed that taking account of “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”.[114] 

106.  His Lordship elaborated as follows:[115] 

“There may ... be cases in which a sufficiently serious breach of foreign law which reflects important policies of the foreign state or separate law district may be such that it would be contrary to public policy to enforce a contract. But there is no basis in authority or principle for holding that every breach of foreign law would come into this category.

I would therefore reject the submission made on behalf of Timely that comity requires the Hong Kong Court to treat the contract as unenforceable because of incidental breaches under PRC law in its performance.

... it would be extraordinary if it could be regarded as contrary to public policy in Hong Kong to enforce a contract because of breaches in the PRC which the Judge found (a) not to be a very serious contravention of the law; (b) not to be conduct which could be described as iniquitous; (c) not to have resulted in actual criminal or enforcement proceedings in the PRC; and (d) to have been mere administrative contraventions ... There is no principle of law or public policy which would lead to such a conclusion, which would be contrary to common sense and justice.”

107.  Given the low level of illegality affecting the plaintiff’s claim, a similar view is justified in the present case.  The Judge found that while the defendant had committed a criminal offence contrary to Article 225(4) of the PRC Criminal Act, the plaintiff was only guilty of breaching administrative rules and (as noted in Section C.4 above) he might have a claim under Article 157 of the Mainland Civil Code to recover the RMB 1 million paid.[116] There has been no enforcement action directed against the exchange transaction and confiscation of the amount deposited was for reasons unconnected therewith. Everything therefore points in favour of permitting the plaintiff to pursue his unjust enrichment claim.

C.5   The defendant’s main arguments

108.  The appellant advances two main arguments in favour of upholding an illegality defence.

(a)     The first involves the proposition that no distinction should be drawn between the Exchange Agreement and the plaintiff’s unjust enrichment claim: once it is determined that the Exchange Agreement is unenforceable, it must follow that the unjust enrichment claim is also unenforceable.

(b)     The second involves the argument that enforcement of the unjust enrichment claim should be refused because this would constitute enforcement of the Exchange Agreement “by the backdoor”.

109.  The appellant puts the first argument as follows:

(a)     “... where a contract tainted by foreign illegality is held to be unenforceable, similar considerations should apply such that the claim based on unjust enrichment ought to fail as well.”[117] 

(b)     “... as a matter of logic and coherence, in cases where there is underlying contract, there should be no difference in the treatment to the contractual claim and unjust enrichment claim based on the same set of transactions.”[118] 

110.  That argument is unsustainable.  As set out in Section C.4 above, the authorities clearly establish that the respective claims for breach of contract and unjust enrichment are distinct and have different rationales and aims.  As noted above, Lord Burrows JSC called it “trite law” that,

“... in general, the aim of contractual remedies is to put the claimant into as good a position as if the contract had been performed ... This has sometimes been referred to as the protection of the claimant’s expectation or performance interest ... In contrast, where there is an unjust enrichment, the aim of restitutionary remedies is to reverse the enrichment. This is the protection of the restitution interest. Where there are concurrent causes of action in contract and unjust enrichment, the different aims of the remedies mean that there may be different results.”[119] 

111.  For the reasons set out in Section C.2 above, unjust enrichment claims based on total failure of consideration are (with possibly rare exceptions) generally permitted under Hong Kong law notwithstanding that the underlying contract is tainted by illegality.  And for the reasons provided in Section C.4 above, enforcement of the plaintiff’s unjust enrichment claim against the defendant involves no violation of comity in respect of the Mainland.  These conclusions flow from the basic proposition that the restitutionary claim does not involve enforcement of the illegal contract but is founded on a separate and distinct obligation.

112.  Counsel for the defendant cited the decision of the Singapore Court of Appeal in Esben Finance Limited and others v Wong Hou-Liang Neil,[120] in support of his argument that unenforceabilty of an unjust enrichment claim is inseparable from unenforceabilty of the underlying contract.  He sought to rely on the following passage:

“Put simply, if permitting recovery under a contract would result in the contravention of the laws of a foreign country, then the principle of comity would prevent such recovery. Viewed in this light, there is, in our provisional view, no reason in principle why the Comity Unenforceability Principle should not apply equally to claims not only in contract but also (by analogy and general principle) in unjust enrichment as well. The underlying principle of comity would apply equally in the latter situation as it does in the former.”[121] 

113.  Counsel’s citation was seriously incomplete and the aforesaid passage was taken out of context.  Properly understood, the Singapore Court of Appeal’s reasoning is quite contrary to the appellant’s case.

114.  In the first place, a central plank of the Singapore Court of Appeal’s reasoning involved rejecting the characterisation of unjust enrichment claims as based on “implied contract” and emphasising the conceptual difference between claims for unjust enrichment on the one hand, and claims in contract and tort on the other.  This was in the context of the Court holding that unjust enrichment claims fell outside the Singapore Limitation Act, distinguishing such claims from other common law claims which fell within the Act.

115.  Thus, the Court held as follows:

“The law of unjust enrichment comprises a separate cause of action (with restitution as the remedial response) and is made out when there is no civil wrong but the defendant is unjustly enriched at the expense of the plaintiff. In contrast, restitution for wrongs relates only to the remedial response to a civil wrong (including breaches of contract, torts and breaches of fiduciary duty)...”[122] 

116.  The Singapore Court of Appeal cited (among other authorities) Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Limited,[123] and in particular, Lord Wright’s explanation of Lord Mansfield’s judgment in Moses v Macferlan[124]regarding money had and received, Lord Wright stating:

“Lord Mansfield does not say that the law implies a promise. The law implies a debt or obligation which is a different thing. In fact, he denies that there is a contract; the obligation is as efficacious as if it were upon a contract. The obligation is a creation of the law, just as much as an obligation in tort. The obligation belongs to a third class, distinct from either contract or tort, though it resembles contract rather than tort. … The gist of the action is a debt or obligation implied, or, more accurately, imposed, by law in much the same way as the law enforces as a debt the obligation to pay a statutory or customary impost...”[125] 

117.  The passage at §172 of Esben Finance cited by the defendant is taken out of context.  In the preceding paragraph, the Court posed the question whether unjust enrichment claims might be disallowed on comity grounds “if to permit it would otherwise result in the contravention of the laws of a foreign country (and thus offend against the principle of international comity)”.[126] 

118.  Given that premise, i.e., that permitting the unjust enrichment claim would result in contravention of the foreign law, the Court’s provisional view that there is no reason in principle “why the Comity Unenforceability Principle should not apply equally to claims not only in contract but also (by analogy and general principle) in unjust enrichment as well” is unsurprising.  However, that discussion does not address the prior proposition which is of present relevance, namely, that since the unjust enrichment claim does not involve enforcing a contract tainted by Mainland illegality, it does not contravene Mainland law or compromise comity.  The Esben Finance decision therefore affords no support for the defendant’s first argument. 

119.  The defendant’s second, “backdoor”, argument is that permitting enforcement of the plaintiff’s unjust enrichment claim would be tantamount to enforcing the Exchange Agreement which is unenforceable under Mainland law and thus a breach of comity.  The suggestion is that enforcement would result in the plaintiff achieving what was agreed with the defendant, namely, his obtaining HKD in Hong Kong in exchange for the RMB 1 million deposited in the Kwok account.

120.  In support, the defendant cites Boissevain v Weil[127] for the proposition that “the unjust enrichment claim cannot be treated as a completely independent obligation separate from the underlying contract” where such a claim would “stultify” the prohibiting law.[128] 

121.  However, Boissevain v Weil is clearly distinguishable.  The appellant Boissevain claimed to have lent to the respondent Weil (a British subject), during the Second World War, 320,000 French francs which she promised to repay in England in Sterling at the rate of 160 francs to the £ as soon as hostilities ceased.  She failed to make repayment and the appellant sued on the debt in England for the sum of £6,000, asserting the existence of an oral contract.  That claim failed because the transaction was caught by regulation 2 of the Defence Finance Regulations, 1939 which, as Lord Radcliffe pointed out: “... forbade the very act of borrowing, not merely the contractual promise to repay.  The act itself being forbidden, I do not think that it can be a source of civil rights in the courts of this country.”[129] 

122.  Thus it was an attempt by the appellant to enforce in an English court repayment of a loan which was illegal from its inception under English law, a wholly different case from the present where no illegality under Hong Kong law, the proper law of the claim, is alleged.

123.  Throughout the speeches in Boissevain v Weil, it was noted that no claim for unjust enrichment had been properly raised on the pleadings.  However, given the aforesaid unlawfulness of the entire transaction, Lord Radcliffe held that there was in any event no prospect of a claim for money had and received succeeding.  This was so because “the transaction by which the money has reached the respondent is actually an offence by our laws”.[130] Given the utter illegality of the entire transaction, the court would not grant relief contrary to the statutory purpose, so that no distinction could be drawn between the claims in debt and for unjust enrichment:

“... if this claim based on unjust enrichment were a valid one, the court would be enforcing on the respondent just the exchange and just the liability, without her promise, which the Defence Regulation has said that she is not to undertake by her promise. A court that extended a remedy in such circumstances would merit rather to be blamed for stultifying the law than to be applauded for extending it.”[131] 

124.  The Boissevain v Weil decision therefore rests on the premise of a thoroughgoing illegality under the applicable local law that has no parallel in the present case. 

125.  The defendant also seeks to rely on an article published by Professor Peter Birks in 2000[132] for the argument that unjust enrichment claims should not be allowed in circumstances which would involve stultification of the underlying prohibiting law, in particular where the claim would give to the claimant substantively the same benefit that they would have received under the contract, referred to as the “identical yield objection”.  The following passage from Professor Birks’ article is cited:

“The question is always whether allowing the claim in unjust enrichment would make nonsense of the law's condemnation of the illegal conduct in question and of its refusal to enforce the illegal contract. Since the danger is real, and not confined to cases in which the claim in unjust enrichment will produce a yield identical to the barred contractual action, the presumption in such cases is that the non-contractual action is barred. In other words, there is a widespread defense of stultification.”[133] 

126.  With respect, I do not consider this a tenable view.  Certainly, after Patel v Mirza, decided some 17 years after publication of that article, it can no longer be suggested that “the presumption in such cases is that the non-contractual action is barred”.  On the contrary, as explained in Section C.2 above, unjust enrichment claims based on total failure of consideration (subject to possible rare exceptions) are generally enforceable notwithstanding illegality affecting the underlying contract.  This is because it is generally accepted that unjust enrichment claims are distinct and proceed on a different logic from claims to enforce underlying unenforceable contracts.  Such claims do not “make nonsense of the law's condemnation of the illegal conduct in question”.

127.  The defendant also seeks to draw comfort from the remarks of Lord Sumption JSC in Patel v Mirza,[134] who reserved his position in the present context.  His Lordship stated:

“I say nothing about cases in which an order for restitution would be functionally indistinguishable from an order for enforcement, as in a case of an illegal loan or foreign exchange transaction. The traditional view is that if the law will not enforce an agreement it will not give the same financial relief under a different legal label: Boissevain v Weil [1950] AC 327. I am inclined to think that the principle is sound, but I should prefer not to express a concluded view on the point.”

128.  In the present case, the Exchange Agreement involved illegality under Mainland law.  But since the unjust enrichment claim advanced in the Hong Kong court seeks to unwind, rather than to enforce, that agreement, there is no reason to hold that its enforcement would involve contravention or “stultification” of Mainland law.  Any Mainland illegality engaged is of a wholly peripheral nature.  This is especially so in the light of Article 157 of the PRC Civil Code mentioned above.  No breach of comity arises.

129.  The idea that a judgment award by a Hong Kong court pursuant to an unjust enrichment claim results in an “identical yield” or a result which is “functionally indistinguishable” from an order for enforcement of the offending contract is, with respect, untenable.  An unjust enrichment award may resemble enforcement of the illegal contract but that is a superficial likeness which ignores the differences between the legal bases of the two types of claim and their respective consequences as a matter of substantive law.  At the risk of untoward repetition, one enforces, while the other unwinds, the illegal transaction.

130.  The need to recognize the respective legal bases was noted by Lord Neuberger of Abbotsbury in Patel v Mirza as follows:

“... it may be said that application of the Rule would result in the court sometimes getting precious close to enforcing an illegal contract—a course which the court most certainly cannot take, as already mentioned. I accept that application of the Rule would sometimes involve the court making an order whose effect in practice is similar to performance of the illegal contract. But there is nothing in that point. If a particular outcome is correct, then the mere fact that the same outcome could have been arrived at on a wrong basis does not make it the wrong outcome.”[135] 

131.  The judgment which the trial judge entered on the unjust enrichment claim required the defendant to pay the plaintiff “RMB1,000,000 (or its HKD equivalent at the time of payment)”.  That was the outcome of the plaintiff’s action brought on the unjust enrichment claim subject to Hong Kong law on proof of the elements of the cause of action noted in Shanghai Tongji.[136]  The substantive basis of the judgment is plainly quite different from any enforcement of the Exchange Agreement.

132.  The judgment is denominated in RMB but it directs that the defendant is to pay RMB 1 million or its HKD equivalent at the time of payment.  As G Lam JA points out:

“This form of order was sanctioned in Miliangos v Frank (Textiles) Ltd,[137] 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.”[138] 

133.  The amount awarded by the judgment is plainly not identical to what the plaintiff would have been entitled to under the Exchange Agreement which was the equivalent of RMB 1 million at the specified rate of RMB 854.5 to HKD 1,000, agreed by the parties almost ten years before on 5 June 2016.  Accordingly, I also reject the defendant’s second argument on this appeal.

D.     Conclusion

134.  My answer to the Question on which leave to appeal was granted is accordingly as follows.  Where a contract between the plaintiff and the defendant governed by Hong Kong law is held by the Hong Kong court to be unenforceable because of the contract’s illegality under foreign (or Mainland) law, but the defendant has received a benefit under the contract where there has been a total failure of consideration and the defendant was unjustly enriched at the plaintiff’s expense, then save in possibly rare and exceptional circumstances and save where enforcement of the unjust enrichment claim would offend comity by constituting or endorsing a violation of the relevant foreign or Mainland law, the plaintiff’s claim for unjust enrichment, being governed by Hong Kong law, will be upheld as involving a separate and distinct obligation, notwithstanding some illegality affecting the underlying contract.

135.  In the present case, the plaintiff’s unjust enrichment claim should be upheld.  Accordingly, I would dismiss this appeal and make an order nisi that the defendant pay the plaintiff’s costs with liberty to the parties to lodge written submissions as to costs within 14 days of the delivery of this judgment and written submissions in response within 14 days thereafter.  The Court will determine the question of costs on the papers, the aforesaid order as to costs to stand as an order absolute in default of such written submissions.

Mr Justice Fok PJ:

136.  I agree with the judgment of Mr Justice Ribeiro PJ and would likewise dismiss the appeal for the reasons he gives.  I also agree with the judgment of the Chief Justice in relation to the doctrine of stare decisis in Hong Kong and on his further observations in relation to the approach to foreign illegality in the context of a claim for unjust enrichment.

Mr Justice Lam PJ:

137.  I agree with the judgment of Mr Justice Ribeiro PJ and the concurring judgment of the Chief Justice.

Lord Hoffmann NPJ:

138.  I agree with the judgment of Mr Justice Ribeiro PJ and the concurring judgment of the Chief Justice.

Chief Justice Cheung:

139.  Accordingly, the Court unanimously dismisses the appeal and makes the order and directions indicated in [135] above.