WONG, CHI HUNG v. LO, WING PUN AND ANOTHER

DCCJ 1960/2019

[2023] HKDC 1284

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1960 OF 2019

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JUDGMENT

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I.  INTRODUCTION

1.  It has often been argued, on the ground of foreign illegality, that the defence of bona fide change of position and/or bona fide purchaser for value without notice is not available to a claim of unjust enrichment when the change of position and/or the purchaser is exchange of RMB in the PRC into HKD in Hong Kong via a money exchanger who is not an authorised exchanger under the PRC law. This case raises a slightly different issue – where the payer of the RMB claims back the RMB on unjust enrichment against the unauthorised exchanger, whether the unauthorised exchanger may raise a defence of foreign illegality, when, as shall be seen below, article 157 of the PRC Civil Code (中華人民共和國民法典) requires restitution at least in certain circumstances. Incidental to this issue is the question of whether the no-subversion principle would bar a restitutionary claim in the first place, when the money is paid under a contract found unenforceable (but not necessarily invalid) on the ground of foreign illegality or public policy.

2.  At the material times, the 2^nd defendant, as its trading name suggests, carried on a business of remittance and currency. It had a branch in Mongkok and another in Sham Shui Po (the “Shum Shui Po Branch”). The 1^st defendant is the husband of the 2^nd defendant. It is the plaintiff’s case, and there is no dispute, that the 1^st defendant, being the 2^nd defendant’s husband, represented the 2^nd defendant in the business, whether as an employee or agent. In fact, the 1^st defendant made a witness statement under the 2^nd defendant’s authorisation, and the 2^nd defendant herself did not make any witness statement.

II.  UNDISPUTED FACTS

3.  The undisputed facts are stated below:-

(1)  The plaintiff’s brother, Wong Chi Wo, had been a customer of the 2^nd defendant and had 7 currency RMB-to-HKD exchange transactions with the 2^nd defendant prior to the subject exchange transaction between the plaintiff and the 2^nd defendant in the present case.

(2)  The 7 currency exchange transactions the plaintiff’s brother had with the 2^nd defendant took place between February and May 2016. They all went through without any hiccup. They all took the same mode of operation, typical of an underground money exchanger or underground banking (commonly known as 地下錢莊), namely, (a) the plaintiff’s brother would enquire with the 2^nd defendant’s staff Ms Lee in Sham Shui Po Branch or with the 1^st defendant about the exchange rate, (b) the plaintiff’s brother would then inform Ms Lee or the 1^st defendant of the amount of RMB he would like to exchange into HKD, (c) Ms Lee or the 1^st defendant would then tell the plaintiff’s brother into which account in the PRC he should deposit the RMB, and (d) the 2^nd defendant would then deposit an equivalent of HKD into the plaintiff’s brother’s account in Hong Kong. The total amount of these 7 transactions exceeded RMB5,000,000.

(3)  The operation of such an underground money exchanger does not involve any real exchange of the money, that is, the RMB deposited in the PRC would not really be taken for an exchange into HKD, but instead, a HKD equivalent would be deposited into the payer’s account in Hong Kong. This exchange is known in the PRC as “match-and-knock” (“對敲”).

(4)  In 6 out of the 7 transactions, the account into which the 2^nd defendant told the plaintiff’s brother to deposit RMB was an account in the name of one Ms Kwok Lulu (“Ms Kwok”) maintained with Industrial and Commerce Bank of China in the PRC (“ICBC”) (“Ms Kwok’s ICBC Account”). In the remaining one of the 7 transactions, which was the fifth transaction taking place in April 2016, the account was an account also in the name of Ms Kwok but maintained with Bank of China Limited (“BOC”) in the PRC (“Ms Kwok’s BOC Account”).

(5)  The subject transaction took place in June 2016, and was not successful. The plaintiff, via his wife Lo Guilan, deposited RMB1,000,000 into Ms Kwok’s BOC Account, but the 2^nd defendant has not returned or exchanged a penny to the plaintiff, whether in RMB or HKD, allegedly for the reason that Ms Kwok’s BOC Account had been frozen.

(6)  A bank statement of Ms Kwok’s BOC Account printed by BOC on 23 August 2023 shows that on 8 August 2018, all the money in the account was withdrawn, with a note “2017 苏 0381 刑初 164 号扣款人郭安璐 [ie Ms Kwok] 法官時春梅”. According to the 刑事判決書 (the “PRC Criminal Judgment”) in 2017 苏 0381 刑初 164 号 dated 28 February 2018, handed down by a panel of judges presided by 審判長時春梅, a group of 8 defendants (none of whom was Ms Kwok, Ms Lee, any of the defendants, the plaintiff’s brother, the plaintiff or his wife) were convicted of the offence of illegal pyramid selling (非法傳銷), an offence unrelated to unauthorised/​illegal exchange of foreign currency or the 2^nd defendant’s business. At the end of the PRC Criminal Judgment, the court ordered “追繳八被告人違法所得，上交國庫” (tracing what the 8 defendants obtained by breaching the law, and confiscating the same by the treasure of the government). It is clear from the said bank statement printout that the RMB1,000,000 deposited by the plaintiff via his wife was among the confiscated money, and there is no evidence, and it is none of the parties’ case, that this sum is in any manner related to the illegal pyramid selling.

III.  THE PLAINTIFF’S CASE

4.  The plaintiff’s case is this:-

(1)  In early June 2016, the plaintiff would like to exchange his RMB deposited in his wife’s account maintained with BOC in the PRC (the “plaintiff’s Wife’s BOC Account”). The plaintiff’s brother, having had 7 successful exchange transactions with the 2^nd defendant, recommended the 2^nd defendant to the plaintiff.

(2)  On or around 5 or 6 June 2016, the plaintiff’s brother visited the Sham Shui Po Branch and asked Ms Lee whether she could provide him with a BOC account of the 2^nd defendant for his brother to transfer RMB for exchange into HKD. Ms Lee then handwrote on a note Ms Kwok’s BOC Account details.

(3)  On 7 June 2016, the plaintiff’s brother enquired with the 1^st defendant via WhatsApp about the exchange rate. The 1^st defendant replied with a rate of RMB854.50 to HK$1,000. On behalf of the plaintiff, the plaintiff’s brother then replied that RMB1,000,000 would be deposited into “中行”, to which the 1^st defendant replied with “OK”. On behalf of the plaintiff, the plaintiff’s brother further said that the plaintiff would deposit RMB1,000,000 into “中行”, to which the 1^st defendant replied with “好的”.

(4)  The plaintiff asked his wife to visit a BOC’s branch in Shenzhen to cause RMB1,000,000 to be deposited into Ms Kwok’s BOC Account in the PRC. However, the 2^nd defendant has not exchanged or repaid a penny to the plaintiff. Thus, the plaintiff commenced the present action to claim the 1^st and/or 2^nd defendants the RMB1,000,000 and interest thereon.

(5)  The plaintiff avers that as a result of the WhatsApp conversation between the plaintiff (via his brother) and the 2^nd defendant (via the 1^st defendant), an agreement was reached between the plaintiff and the 1^st and 2^nd defendants that upon the plaintiff’s deposit of RMB1,000,000 into “中行” (mutually understood to be Ms Kwok’s BOC Account) (the “Exchange Agreement”), the 2^nd defendant should then deposit a HKD equivalent to the plaintiff’s designated account. In breach of the agreement, the 2^nd defendant has failed to do so.

(6)  Further or alternatively, the plaintiff avers that the 1^st and/or 2^nd defendant has been unjustly enriched by the plaintiff’s deposit of RMB1,000,000 into Ms Kwok’s BOC Account by mistake as to the proper account into which he should deposit the sum, if the account should be Ms Kwok’s ICBC Account.

IV.  THE DEFENDANTS’ CASE

5.  The defendants’ case is, in gist:-

(1)  Ms Kwok’s BOC Account had been frozen by June 2016.

(2)  The term of the Exchange Agreement between the plaintiff and the 1^st and 2^nd defendants was that the RMB1,000,000 should be deposited into Ms Kwok’s ICBC Account, which “中行” should mean by the parties’ understanding. Given that the plaintiff deposited the RMB1,000,000 into the Ms Kwok’s BOC Account not in accordance with the Exchange Agreement, the 2^nd defendant is not liable to exchange any RMB to the plaintiff under the agreement.

(3)  Further and in any event, the Exchange Agreement is unenforceable on the ground of public policy, namely, the agreement breached the PRC regulations in relation to foreign exchange. For convenience, I shall refer to this defence as the defence of foreign illegality[1].

(4)  In respect of the plaintiff’s claim on unjust enrichment, the 2^nd defendant claims that it was Ms Kwok but not the 2^nd defendant who was enriched.

(5)  Further, the defence of foreign illegality is a complete defence to the unjust enrichment, if any.

V.  THE PLAINTIFF’S REPLY IN RELATION TO FOREIGN ILLEGALITY

6.  The plaintiff’s reply in relation to the defence of foreign illegality is twofold:-

(1)  The plaintiff does not have to rely on the illegality to make good his claim under the Agreement.

(2)  In any event, under article 157 of the PRC Civil Code:-

“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。”

“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.”

(3)  Such civil juristic acts include those that become null and void because of breach of the mandatory provisions of the law or administrative regulation: see article 153 of the PRC Civil Code:-

“違反法律、行政法規的强制性規定的民事法律行為無效。但是，該强制性規定不導致該民事法律行為無效的除外。

違背公序良俗的民事法律行為無效。”

“Any civil juristic act that violates the mandatory provisions of laws and administrative regulations shall be null and void. Exception applies where the mandatory provision does not render the civil juristic act null and void. Any civil juristic act that violates public order and good morals is null and void.”

7.  Pausing here, I should first deal with the submissions of Mr Joseph Wong, counsel for the defendants, that the plea of article 157 is irrelevant because the plaintiff has not pleaded that the agreement or the transaction is governed by the PRC law. While I agree that there is no plea and thus it is not open for me to find that the agreement or the transaction is governed by the PRC law, I take the view that article 157 is still relevant to whether it would be contrary to public policy to award the plaintiff’s claim on unjust enrichment, because the Court may allow a civil claim on the ground that the civil claim would also be allowed under the foreign law even though the underlying contract constitutes an offence under the foreign law: see Emeraldian Ltd Partnership v Wellmix Shipping Ltd [2010] 1 CLC 993 at §179 per Teare J. If article 157, as the plaintiff contends, could be invoked by the plaintiff in the PRC for the return of the RMB1,000,000, then one may well argue that the unjust enrichment claim would not be contrary to public policy. This will be dealt with in detail below.

VI.  ISSUES

8.  The issues before me are:-

(1)  Whether the parties understood the Exchange Agreement to mean that the account into which the plaintiff should deposit the RMB1,000,000 was Ms Kwok’s BOC Account or Ms Kwok’s ICBC Account;

(2)  Whether the Exchange Agreement breached the PRC regulations in relation to foreign exchange and if so, whether it is therefore unenforceable on the ground of public policy;

(3)  Whether the plaintiff’s deposit of the RMB1,000,000 into Ms Kwok’s BOC Account constituted receipt by the 1^st and/or 2^nd defendant for the purpose of unjust enrichment; and

(4)  If so, whether the defence of foreign illegality is available.

9.  At the opening submissions, Mr Wong very sensibly confirmed that he would not run the defence of bona fide change of position upon the confiscation pleaded in the defence, given that the confiscation was ordered upon criminal convictions and thus any change of position upon the confiscation cannot be bona fide.

VII.  FACTUAL EVIDENCE

10.  At the opening submissions, Mr Wong made it clear in writing and orally confirmed again to me that he would not call any factual witness, despite that the defendants had filed and served a witness statement of the 1^st defendant. Mr Wong also made it clear in writing and orally confirmed again to me that he would not cross-examine the witnesses of the plaintiff. While he made it clear that he did not admit any factual allegations, the consequence of not producing witnesses for the defendant and not cross-examining the plaintiff’s witnesses is clear – there is no factual witness giving evidence as to facts in support of the defendants' case and to traverse the plaintiff’s case.

11.  Mr Tommy Cheung, counsel for the plaintiff, called the witnesses for the plaintiff, namely, the plaintiff himself and the plaintiff’s brother. They came to the court to orally confirm their respective witness statements and tender the same as their evidence-in-chief. Mr Wong held himself to his confirmation made at the opening submissions and confirmed to me “no cross-examination” of the witnesses in the witness box.

12.  Since the defendants, while calling no factual witness and not cross-examining the plaintiff’s witnesses, do not admit any factual allegations against them, I still have to assess the evidence and make findings of facts in relation to the above issues. Before I do so, I should mention how the expert evidence was presented before me.

VIII.  EXPERT EVIDENCE

13.  The parties called their respective experts on PRC law in relation to the regulations over foreign exchange to give evidence. The plaintiff’s expert is Huang Hailiang, a PRC lawyer, and the defendant’s expert is Ms Yang Qi, also a PRC lawyer.

14.  The way the expert evidence had been prepared was far from satisfactory.

15.  First, there had been no without prejudice meeting and no joint expert report. Each expert produced his/her own expert report to me. The expert directions were granted upon consent summons, in which, unfortunately, the parties did not provide for a without prejudice expert meeting and a joint expert report setting out agreements and disagreements pursuant to Order 38 rule 38. Equally unfortunately, the parties failed to draw the absence of such an expert meeting and such a joint expert report to the court’s attention throughout the proceedings. It has been the normal practice since the CJR in 2009 that expert directions would provide for an expert meeting and an expert joint report (see Hong Kong Civil Procedure 2023 Vol 1 §38/4/3), for a very good reason – the experts can at the meeting iron out their differences and narrow down the expert issues for trial. Unless there is any good reason, all expert directions should provide for an expert meeting and a joint expert report, and it is the parties’ duties proactively to ensure that such directions would be provided for, or proactively to explain why such directions are not needed. The parties cannot simply draft some defective directions in the consent summons, sit there and wait for the court to enhance the directions. When I was seized of the papers of this case and noticed the absence of a joint expert report, I urgently directed that the parties should provide one, which, due to the shortage of time, was prepared without any without prejudice meeting but was prepared by one side sending a draft for the other side to comment and amend. This is not satisfactory, but it is better than none.

16.  Second, while the issues in the expert directions did not call for, both experts somehow comment on whether the plaintiff did or did not have the knowledge that the Exchange Agreement would breach the PRC regulations. This seems to suggest that the plaintiff’s knowledge would be relevant for the experts to form their opinion. If the expert’s opinion would show that the plaintiff’s knowledge would be relevant (for example, whether the PRC courts would assist the plaintiff with such knowledge), the parties should then properly amend the pleadings (especially because knowledge is a factual matter that must be pleaded) and accordingly adduce proper factual evidence rather than having the experts to comment (or more precisely, guess) whether the plaintiff had any such knowledge. In this regard, both experts referred to the frequency of the transactions between the plaintiff and the defendants and the common knowledge that there is foreign exchange in the PRC. In cross-examination, Mr Cheung even referred the defendant’s expert to some photos taken of the Sham Shui Po Branch apparently attempting to solicit from the defendant’s expert her opinion about whether one would perceive such a branch to be carrying out illegal business in the PRC. All these are not matters for the experts on PRC law, who are to assist me by telling me what the PRC law and legal practice are, not by arguing for their clients on factual issues or by suggesting to me what inferences as to facts could be drawn: see Taiping Trustees Ltd v Bosc International Co Ltd [2023] HKCFI 1189 at §27(4) per B Chu J.

17.  Third, the experts have not properly thought through the questions before they prepared their expert reports. This may be due partly to the absence of any without prejudice meeting and the haste in which the joint expert report was prepared upon my urgent directions, and partly to lack of focus on the most relevant and controversial issue, namely, “If the [Exchange Agreement] is illegal, void, invalid and/or unenforceable under the PRC, what are the consequential remedies for the plaintiff (if any) and/or whether the defendants shall repay the money to the Plaintiff”. In cross-examining the plaintiff’s expert Hua Hailiang, Mr Wong put a PRC legal point to the expert which simply could not be found in the defendants’ expert Ms Yang Qi’s expert report, namely, the Exchange Agreement was not merely breach of administrative rule but was so serious as to constitute a criminal offence such that judicial remedies would not be available to the plaintiff, including under article 157. Raising this new point was totally unfair to the plaintiff’s expert, who simply had no opportunity to do the necessary and proper legal research to address such new matters put to him only in the witness box. Upon that, I made it clear to Mr Wong that he would not be allowed to lead any new evidence from Ms Yang Qi unless there would be good reason. When it came to Ms Yang Qi’s turn to give evidence, while she was not led to give any new evidence, unsurprisingly, she was well prepared to burst out this new PRC legal point with some incidental points (for example, the threshold of USD200,000 over which the exchange would be regarded as criminal and below which the exchange would be regarded as mere breach of administrative rule, and that the PRC courts would not entertain the plaintiff’s request under article 157 given that the plaintiff was a participant in the defendants’ illegal business of foreign exchange, which would lead to confiscation by article 64 of the PRC Criminal Act, which was not even exhibited for my perusal) in cross-examination without any primary materials, explaining that when preparing her own written report and the joint expert report, it did not come to her mind that she should mention all these. I would say that had the parties properly thought through the matter and had the experts undergone some proper without-prejudice meetings and prepared the joint expert report with sufficient time, such situation may well have been avoided or at least alleviated.

18.  As a result, on the first day of the trial, having heard both experts’ live evidence, I adjourned the matter for the experts to have a without prejudice meeting and to prepare a supplemental expert report within 4 days in relation to the new matters arising from the expert evidence relevant to “what are the consequential remedies for the plaintiff (if any) and/or whether the defendants shall repay the money to the Plaintiff”, and directed the parties to tender the experts again to give oral evidence on matters in the supplemental expert report. This course was a very unusual course to take, and thus here I give my reasons for taking this very unusual course:-

(1)  The issues involved are related to foreign law. On the first day of the trial, Yang Qi referred to various new PRC legal matters. I do not feel comfortable simply rejecting such new matters for the sake of not having been raised earlier or not having the primary materials exhibited and then making findings of what the foreign law is or is not in the apparent absence of the whole picture of the foreign law.

(2)  7 days were reserved for the trial. Given that the defendants produced no factual witness and did not cross-examine the plaintiff’s factual witnesses, there was sufficient time so that with proper time limit, the experts should be able to conduct a without-prejudice meeting and prepare a supplement joint expert report, and to come back to court for oral evidence within the 7 days reserved for the trial. So, there would not be delay and derail of the trial at least with respect to evidence, although oral closing submissions would have to take place outside the 7 days reserved. In fact, the evidence resumed and finished on the sixth day of the 7-day timeframe.

19.  I emphasise that these two factors played equal importance in my decision to take this very unusual course. I would probably have simply proceeded with the trial on the unsatisfactory materials presented before me had any of the two factors been lacking. It is (unfortunately) not unusual for courts to decide on unsatisfactory materials in any event.

20.  Now, I turn to the issues.

IX.  WHETHER THE PARTIES UNDERSTOOD THE ACCOUNT IN THE AGREEMENT TO MEAN MS KWOK’S BOC ACCOUNT OR MS KWOK’S ICBC ACCOUNT

21.  The test I should apply in ascertaining the terms of a contract is an objective one in that if one actually and reasonably believes that the other has the requisite intention, the objective test is satisfied so that the former can hold the latter even though the latter subjectively does not have the requisite intention: see Chitty on Contracts (34^th ed) Vol 1 §4-003.

22.  In the present case, first, as mentioned above, it is not in dispute that the plaintiff’s brother had used Ms Kwok’s BOC Account in the past.

23.  Second, the plaintiff’s brother’s evidence is consistent with the plaintiff’s case that on or around 5 or 6 June 2016, Ms Lee of the 2^nd defendant did handwrite the account number of Ms Kwok’s BOC Account on a note and gave it to the plaintiff’s brother upon the latter’s request for a BOC account for exchange of RMB into HKD. The plaintiff’s brother was not cross-examined, and there is no evidence before me to traverse his evidence. I do not have reason to reject his evidence. Therefore, I find that Ms Lee of the 2^nd defendant did handwrite the account number of Ms Kwok’s BOC Account on a note and gave it to the plaintiff’s brother upon the latter’s request for a BOC account for exchange of RMB into HKD.

24.  Third, “中行” does usually refer to BOC rather than ICBC, which is usually abbreviated as “工行”.

25.  Considering the above, I find that objectively, the parties did intend the bank account in the Exchange Agreement to be Ms Kwok’s BOC Account, and thus I find that the terms of the Exchange Agreement are that the plaintiff was to deposit the RMB into Ms Kwok’s BOC Account.

X.  WHETHER THE AGREEMENT BREACHED THE PRC REGULATIONS IN RELATION TO FOREIGN EXCHANGE

26.  The plaintiff’s expert (Huang Hailiang) gives his opinion that the Exchange Agreement did not prohibit the defendants from engaging authorised institutions to carry out the exchange, and thus the Exchange Agreement itself cannot be said to have breached any rules. However, in my view, he could not get around the following regulations:-

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

27.  The consequence of breaching the above regulations is set out by article 39 of the PRC Foreign Exchange Measures for Individuals:-

“對違反本辦法規定的，由外匯局通知《中華人民共和國外匯管理條例》及相關規定；構成犯罪的，依法移送司法救助其他責任。”

(Translation: Where there is any violation of the provisions of these Measures, the foreign exchange authorities shall impose punishment upon the parties involved according to the Regulations of the People’s Republic of China on Foreign Exchange Management or other relevant provisions; Where said actions constitute a crime, such parties shall be investigated by judicial authorities for criminal liability.”)

28.  While in appropriate circumstances, one might argue that an agreement for exchange was simply for the payer to engage the payee as the former’s agent who would then find some proper authorised financial institutions for exchanging RMB into HKD and thus such an agreement would breach no regulations on foreign exchange, the present case is not such a circumstance. This is because the plaintiff’s case (whether in the Amended Statement of Claim, the Amended Reply in response to the defence that the agreement breached the PRC regulations, or in evidence) is not that he engaged the defendants to be his agents to find some proper authorised financial institutions for the exchange. The plaintiff’s case is clear that under the Exchange Agreement, it dealt with the defendants themselves as the exchanger, and such dealing was sufficient to constitute breach of article 30 of the PRC Foreign Exchange Measures for Individuals.

29.  In the circumstances, I find that the agreement did breach the above regulations.

XI.  WHETHER IT IS UNENFORCEABLE ON THE GROUND OF PUBLIC POLICY

30.  The underpinning rationale for a defence of foreign illegality is international comity. In Ryder Industries Ltd v Chan Shui Woo [2015] 18 HKCFAR 544 at §39, Lord Collins NPJ (delivering the unanimous judgment of the Court of Final Appeal) expressly approved Johnston, Conflict of laws in Hong Kong (2^nd ed, 2012) at §5-012:-

“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.”

31.  The above principles have recently been applied by DHCJ Winnie Tsui in She Ching Yan v Cai Yuxiang and others [2023] HKCFI 592 at §84. In that case, the plaintiff was a victim of an online romance scam. The 18^th defendant there was a second-tier recipient. The 18^th defendant’s explanation of the receipt of the subject sum was that the sum was deposited into her bank account under a currency exchange arrangement she had made with a Mr Ma, whereby she transferred RMB from her bank account in the PRC to a bank account designated by that Mr Ma. On such facts, the 18^th defendant raised the defence of bona fide change of position and/or bona fide purchaser for value without notice.

32.  The plaintiff there applied for summary judgment. He relied upon article 30 of the PRC Foreign Exchange Measures for Individuals to argue that the 18^th defendant could not be bona fide.

33.  Her ladyship assumed all the facts in favour of the 18^th defendant, among which was the fact that the 18^th defendant did not know that the currency exchange arrangement would breach any PRC regulations. However, given that the arrangement would involve exchanging RMB with unauthorised individuals in the PRC in breach of article 30, this would be the second scenario mentioned in Johnston, Conflict of laws in Hong Kong (2^nd ed, 2012) at §5-012 (approved by the Court of Final Appeal in Ryder, supra), and thus the Hong Kong Court would not enforce the arrangement. I agree with the learned judge’s analysis. (For the avoidance of doubt, it is not necessary for me here to express any view on her ladyship’s conclusion that the second scenario would mean that the 18^th defendant there could not mount the defence of bona fide change of position and/or bona fide purchaser for value without notice.)

34.  Following the same analysis, I come to the same conclusion that the Exchange Agreement in the present case is unenforceable. It is unenforceable, but not void, because the Exchange Agreement is per se valid under the Hong Kong law, but the Hong Kong Court does not give effect to it due to public policy: see Mackender & ors v Feldia AG & ors [1967] 2 QB 590 at 601D-G.

35.  For the sake of completeness, Mr Cheung refers me to DHCJ Dawes SC’s decision in Lesnina H DOO v Wave Shipping Trade Co Ltd [2022] 2 HKLRD 727 and the Court of Appeal’s judgment in Monat Investment Ltd v All Person(s) in Occupation of No 16 Ma Po Tsuen [2023] 2 HKLRD 1311 in an attempt to urge me that for the defence of foreign illegality, a flexible, holistic approach as in Patel v Mirza [2016] UKSC 42 should also be adopted for coherence sake. Indeed, in Magdeev, supra, at §332, Cockerill J agreed that Patel v Mirza may provide some guidance for the defence of foreign illegality. However, in Hong Kong, Ryder is the highest authority on the defence of foreign illegality, and there, Lord Collins NPJ held effectively that cases on the defence of domestic illegality (based on ex turpi causa and consistency: see She Ching Yan v Cai Yuxiang and others, supra at §12) are not relevant to the defence of foreign illegality (based on international comity): see Ryder, supra at §55. While there is attraction in Mr Cheung’s submissions, in reliance on Lesnina H DOO v Wave Shipping Trade Co Ltd, supra and Monat Investment Ltd v All Person(s) in Occupation of No 16 Ma Po Tsuen, supra, that a unified, flexible, holistic approach should be adopted for both domestic and foreign illegality given that the fundamental basis for both defences is public policy, Lesnina H DOO v Wave Shipping Trade Co Ltd, supra is a first instance decision to refuse an Order 14 application on the ground that the foreign illegality involves triable legal issues, and Monat is a Court of Appeal authority on domestic illegality. I do not think that this first instance court is an appropriate forum for any departure from Ryder.

XII.  WHETHER THE PLAINTIFF’S DEPOSIT OF THE RMB1,000,000 INTO MS KWOK’S BOC ACCOUNT CONSTITUTED RECEIPT BY THE 2^ND DEFENDANT

36.  The defendants contend that it was Ms Kwok who was enriched, while the plaintiff contends that Ms Kwok’s BOC Account was held for and on behalf of the 2^nd defendant. There is no dispute that the 2^nd defendant had been using Ms Kwok’s BOC Account and Ms Kwok’s ICBC Account for its money exchange business. There is no evidence to the contrary. In the circumstances, I find that Ms Kwok’s BOC Account was held for and on behalf of the 2^nd defendant. I should add that while the plaintiff ran a case that it was both “the 1^st and/or 2^nd defendants” who received the money, on the plaintiff’s own case (which I accept) that the 1^st defendant is an agent or employee of the 2^nd defendant, the account should be held for and on behalf of the 2^nd defendant only.

37.  It follows that the deposit of RMB1,000,000 into Ms Kwok’s BOC Account constituted a receipt by the 2^nd defendant at the expense of the plaintiff. The question is whether the enrichment was unjust in that there is no basis for the deposit.

38.  Mr Wong submits that the cause of action of unjust enrichment is pleaded in the context of mistake but not in the context where the Exchange Agreement was found to be unenforceable. In paragraph 9A of the Amended Statement of Claim, it is pleaded that:-

“Further and/or alternatively, the Plaintiff has made a mistake as to the proper account nominated by the 1^st and/or 2^nd Defendant(s).”

39.  Though this plea could have been put better, I think it is reasonably clear that irrespective of what the parties agreed objectively the account to be, the money was deposited into an account which the defendants subjectively say was a mistaken account. The fact is that the 2^nd defendant’s “mistaken” account, namely, Ms Kwok’s BOC Account here, did receive the RMB1,000,000 because the plaintiff did something which the defendants say was a mistake. On the defendants’ case, the 2^nd defendant received this sum into Ms Kwok’s BOC Account for no good reason but for a “mistake”. On the plaintiff’s case, agreeing to the defendants that it was a mistake as an alternative case to the existence of the Exchange Agreement that the account should be Ms Kwok’s BOC Account, he deposited the RMB1,000,000 into Ms Kwok’s BOC Account by mistake. As I have found that the Exchange Agreement is unenforceable, subject to the no-subversion principle I shall discuss below, the Exchange Agreement is for all purposes non-existent between the plaintiff and the defendants. Although it is non-existent for the ground of foreign illegality rather than non-existent as an agreement about which account for the deposit, it is still, in this plaintiff’s alternative case, that the Exchange Agreement as pleaded by the plaintiff does not exist. This case of non-existence of the basis for the RMB payment into Ms Kwok’s BOC Account, coupled with the given that the 2^nd defendant received the sum for no good reason, prima facie constituted an unjust factor to the enrichment to the 2^nd defendant at the plaintiff’s expense.

40.  Further, this “mistake” arose out of, and/or was made under, the Exchange Agreement. Whether the Exchange Agreement was the one as I found or whether it was the one as subjectively intended by the defendants, for the reasons explained above, the Exchange Agreement would still be unenforceable due to foreign illegality. The “mistake” made thereunder is thus tainted by foreign illegality.

41.  Further and in any event, while the phrase “a total failure of consideration” is not expressly pleaded in the plaintiff’s amended statement of claim, in my view, the facts already pleaded (namely, (a) the plaintiff deposited RMB1,000,000 to the 2^nd defendant for exchange, (b) the 2^nd defendant did not perform the exchange at all (or the basis being the Exchange Agreement did not exist), and (c) the plaintiff now seeks a return of the RMB1,000,000) are clear enough to show this as the or another unjust factor. I do not agree with Mr Wong’s submissions that the phrase “a total failure of consideration” must be expressly pleaded in order to make good the case of a total failure of consideration, as it is not a must that the legal effect and the law should be pleaded: see Hong Kong Civil Procedure 2023 Vol 1 §18/7/4. As all the requisite facts are pleaded, I cannot see any prejudice to the defendants if the plaintiff is allowed to rely on total failure of consideration. It is another matter that Mr Wong made his judgment call to run or not to run certain defences thinking (rightly or wrongly) that certain words must be expressly pleaded in the pleadings before a certain cause of action or defence can be taken. This cannot constitute any relevant prejudice.

42.  Mr Wong also relies on the well-established no subversion principle that restitutionary remedies cannot be awarded where their effect would be to subvert what the parties have agreed in a valid contract: see Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §92 per Ribeiro PJ, and contends that because the Exchange Agreement is, as mentioned in paragraph 34 above, still valid (though unenforceable), no unjust enrichment claim is available to the plaintiff. Mr Wong refers me to Chitty on Contracts (34^th ed) Vol 1 §32-094, where the learned authors state:-

“Money paid under illegal contracts The mere fact that one party has paid money to another under a contract which he cannot enforce against the latter, either because of non-compliance with a statute requiring written evidence or on grounds of public policy, will not entitle the payer to recover the money automatically, for such a contract is not void, but merely unenforceable.(footnote 576) A total failure of basis must be proved before restitution can be claimed in these circumstances and restitution will not, in any event, be given if it would run counter to the policy of the statute in question.

(Footnote 576) On requirement of writing… On public policy, see Aratra Potato Co Ltd v Taylor Joynson Garrett (A Firm) [1995] 4 All ER 695…”

43.  With respect, I disagree with the learned authors’ view that no restitutionary claim would be available when the contract is merely unenforceable but still valid, for the following reasons:-

(1)  The rationale for the no-subversion principle is, as explained by the Court of Final Appeal in Shanghai Tongji Science & Technology Industrial Co Ltd (2004) 7 HKCFAR 79 at §91 per Ribeiro PJ, citing Professor Burrow with approval, that:-

“… the ambit of failure of consideration is rightly kept in check by the principle that, before a party can claim restitution for failure of consideration, he must establish that he has no contractual obligation to confer the relevant benefit on the defendant; any relevant contract must be ineffective. This may be, for example, because an initially valid contract has been discharged for breach or frustration; or because the contract was void, unenforceable or incomplete. It is by this principle that an undermining of contract by restitution is avoided and restitution is made subservient to contract. It is only when the parties’ own allocation of risk is ineffective that the imposed standards set by the law of restitution can step in…” (emphases added)

(2)  First, it appears from this passage that restitutionary claim may be available on an “unenforceable” contract. Second, consistently, the rationale for such a restitutionary claim is that “the parties’ own allocation of risk is ineffective”, rather than “invalid”.

(3)  If the parties’ own allocation of risk has become ineffective, the restitionary claim would not subvert the parties’ bargain at all, because the Court would not enforce or give effect to the bargain. So for all practical purposes, the bargain would be ineffective and non-existent as between the parties.

(4)  Aratra Potato Co Ltd v Taylor Joynson Garrett (A Firm), supra referred to in the footnote to the passage of Chitty on Contracts quoted above does not really stand for the proposition in the passage. In that case, the solicitors and the client entered into a contingency fee arrangement for conducting litigation, and the arrangement was found to be champertous and thus unenforceable as being contrary to public policy. However, in that case, the Court found that the client was not entitled to claim back the fees paid to the solicitors for services already rendered. I do not think that that case stands for such a bald proposition that no restitutionary claim would be available when the underlying contract is unenforceable though remaining valid. In any event, Aratra has not been followed subsequently. For example, in Diag Human SE & anor v Volterra Fietta (a Firm) [2022] Costs LR 1209, the Court, effectively concluding that Aratra was wrongly decided in the light of the subsequent authorities, did not follow Aratra and held that the client was entitled to the refund of the fees paid even though services had been rendered, noting that it was the result of a proper statutory construction of the relevant statutory provisions in question. Thus, in my view, Aratra should be seen as a case of anomaly and a case concerning statutory construction, and in any event, cannot be regarded as an authority in support of the bald proposition in the passage in Chitty on Contracts.

44.  In any event, if necessary, as mentioned in paragraph 41 above, total failure of consideration is a ground for the unjust enrichment claim here, and thus even assuming that the passage in Chitty on Contracts is correct, the plaintiff may still run his unjust enrichment claim.

XIII.  WHETHER THE DEFENCE OF ILLEGALITY IS AVAILABLE TO UNJUST ENRICHMENT

A.  Legal principles

45.  The defence of foreign illegality is based on the public policy of international comity. Just as the defence of domestic illegality is available to unjust enrichment based on public policy: see, for example, very recently, Kwan Hung Shing v Fong Kwok Shan Christine [2023] HKCA 1020, in my view, international comity should be observed not just in contractual claims but in all civil claims including unjust enrichment, and thus the defence of foreign illegality should be available in general to all civil claims including unjust enrichment. By way of footnote, I note that in Singapore, the Singapore Court of Appeal has recently recognised this defence of foreign illegality in unjust enrichment in Esben Finance Limited v Incredible Power Limited & ors [2022] SGCA(I) 1 at §§171-172.

46.  In the present context, the relevant matter is not a contract, but an unjust enrichment claim arising from the unenforceability of a contract due to foreign illegality. While technically, Ryder is an authority on contractual claims and thus is not binding on me in unjust enrichment claims, logically as well as for coherence, the same legal principles as approved by Lord Collins NPJ in Ryder (see paragraph 30 above) should be applicable to unjust enrichment as well, with proper modification in the context of unjust enrichment. Thus, the legal principles should be:-

(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.

47.  The burden of proof, of course, lies upon the one who raises the defence.

B.  Expert evidence

48.  Having heard the evidence, it is fair to conclude that both experts agree that:-

(1)  the 2^nd defendant’s carrying out of the exchange business by way of “knock-and-match” exchange constitutes the criminal offence of carrying out illegal business (非法經營罪) contrary to article 225(4) of the PRC Criminal Act (中華人民共和國刑法) in force in 2016[2] as the amount the 2^nd defendant had exchanged exceeded RMB5,000,000 by the time of the subject transaction[3];

(2)  the plaintiff did not commit any criminal offence and his breach of article 30 and article 45 mentioned above is breach of administrative rules only;

(3)  article 157 of the PRC Civil Code is applicable in the present circumstances, under which where a transaction has (the Exchange Agreement here) become null and void as contravening certain laws or regulations, the property acquired (the RMB1,000,000) should be returned.

49.  It is convenient here to quote article 157 again, with appropriate breaks:-

“民事法律行為無效、被撤銷或者確定不發生效力後，

[1] 行為人因該行為取得的財產，應當予以返還；

[2] 不能返還或者沒有必要返還的，應當折價補償。

[3] 有過錯的一方應當賠償對方由此所受到的損失；

[4] 各方都有過錯的，應當各自承擔相應的責任。

[5] 法律另有規定的，依照其規定。”

“When a civil juristic act becomes null and void, or has been revoked or has been determined as having no binding force,

[1] the person who acquired property as a result of such act shall return the same;

[2] if it is impossible or unnecessary to return such property, compensation shall be paid at monetarily.

[3] The party at fault shall compensate the other party for the loss it suffers as a result of the act;

[4] if both parties are at fault, they shall bear the corresponding liability respectively.

[5] Where the laws provide otherwise, such provisions shall prevail.”

50.  What the experts disagree on is whether the plaintiff would be able to claim the RMB1,000,000 given that this sum, together with the other money, in Ms Kwok’s BOC Account has been confiscated.

51.  The plaintiff’s expert (Huang Hailiang)’s view is that since the property here is money, it is not that a specific sum of money would be marked, not that the return required under article 157 would be the return of that specific money, and thus not that the return of the RMB1,000,000 is impossible; instead, the “return” required under article 157 would be payment of RMB1,000,000, which is of course possible. Further, this payment would be the “return” under limb [1] of article 157 but not “compensation” in limb [2]. His opinion appears to me to be more in line with the texts of article 157.

52.  The defendant’s expert (Yang Qi)’s view is that since the sum had been frozen, there can be no return or payment of RMB1,000,000. Her reasoning is as follows:-

(1)  Money is “general property of equivalent value” (“一般等價物”) under the PRC law. It cannot be marked as a specific property. I note here that this is in effect in line with what the plaintiff’s expert says – the money would not be marked.

(2)  Although the RMB1,000,000 was not (and cannot be) marked as a specific property, this amount (not the money) became an “identified” amount upon confiscation.

(3)  Once “identified”, this amount cannot be returned or paid, not even out of the 2^nd defendant’s other accounts which are not frozen or any other money which is not confiscated, unless the plaintiff could prove (whether to the PRC police or the PRC courts) that this amount has nothing to do with any illegal activity or that the plaintiff is a victim of the illegal activity[4].

(4)  The illegal activity here is not necessarily the illegal activity that triggers the confiscation. It is because the PRC authority may usually confiscate all funds in an account as it may be impossible for the relevant authority to verify the linkage between each and every transaction and the illegal activity in question. Thus, it is possible that of the confiscated money, part is not related to the offence in question. However, if that part of the money is related to some other offence which would still trigger confiscation, then the money would remain confiscated (and thus the amount would remain identified). In this regard, as noted above, the bank statement of Ms Kwok’s BOC Account does show the deposit of RMB1,000,000 by the plaintiff’s wife, and that the same RMB1,000,000 was confiscated among all the money confiscated. This indeed is consistent with the defendants’ expert’s evidence that the relevant PRC authority, in confiscation, would not verify whether each and every transaction is related to the illegal activity in question.

(5)  Practically, to prove that this amount has nothing to do with any illegal activity or that the plaintiff is a victim of the illegal activity, the plaintiff would have to tell the PRC police or the PRC Court that the deposit of the RMB1,000,000 into Ms Kwok’s BOC Account was made pursuant to the Exchange Agreement, which contravenes the foreign exchange control regulations. This would then in turn reveals the 2^nd defendant’s criminal offence of carrying out illegal business contrary to article 225(4) of the PRC Criminal Act, which would lead to confiscation pursuant to article 64 of the PRC Criminal Act[5] and article 7 of the People’s Supreme Court’s Interpretation in relation to Certain Questions of the Application of the Law of Fraudulent Sale and Purchase of Foreign currencies and Illegal Sale and Purchase of Foreign Currencies in Trials[6] (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 (the “1998 Interpretation”).

(6)  The PRC police or the PRC court would simply not entertain such claim for the RMB1,000,000 which would be confiscated in any event though for another illegal offence.

(7)  In this sense, the plaintiff could not make the claim under article 157.

(8)  Like the plaintiff’s expert, she is firm that limb [2] of article 157 is not applicable here.

53.  Thus, central to the defendants’ expert’s opinion that the RMB1,000,000 would not be ordered to be returned under article 157 are the following three points:-

(1)  The subject amount has already been confiscated, and thus it is the claimant’s burden to prove that it is not related to any illegal activity or that he is a victim. For convenience, I refer to this as the “Existing Confiscation Point”.

(2)  The discovery of the illegal business would lead to confiscation. For convenience, I refer to this as the “Future Confiscation Point”.

(3)  Upon confiscation, the amount becomes “identified” and thus the amount (not only the money) cannot be returned or paid. For convenience, I refer to this as the “Identification of Amount Point”.

54.  In relation to the Existing Confiscation Point, the defendants’ expert is frank and honest – she told this court that if there is no existing confiscation, article 157 may be applicable to assist the plaintiff’s claim subject to the Future Confiscation Point. She also accepts that this Existing Confiscation Point means that whether the claimant may invoke article 157 may depend on his luck – if he is lucky, he may be quick enough to make the claim before there is any confiscation, and the converse is also true. This is not challenged by Mr Cheung during cross-examination.

55.  In relation to the Future Confiscation Point, the defendant’s expert’s opinion is that even if there is no existing confiscation, when the plaintiff makes his claim under article 157, the PRC court may refer the matter for criminal investigation first, which would then lead to the discovery of the 2^nd defendant’s illegal business, which would in turn lead to confiscation. The defendants’ expert is also frank and honest – she told this court that whether there would be confiscation may sometimes depend on how strongly the enforcement the PRC government would like to pursue. There may be times when the policy would be strongly enforced and thus there would be confiscation, and the converse is also true. This is not challenged by Mr Cheung during cross-examination.

56.  In this regard, the plaintiff’s expert’s opinion is that the discovery of the illegal business of the 2^nd defendant may not necessarily lead to confiscation under article 64 if the 2^nd defendant is remorseful, gives assistance to the authorities’ investigation and the offence is not serious. However, there is no factual evidence before me to suggest any of these. As such, his opinion in this regard has no weight in my consideration.

57.  In relation to the Identification of Amount Point, this point is an important point, and thus I would expect that during the 4-day adjournment for preparing evidence in relation to “what are the consequential remedies for the plaintiff (if any) and/or whether the defendants shall repay the money to the Plaintiff”, authorities such as legislation, interpretations, textbooks or decided cases would have been produced in support. However, there are no such authorities produced before me. On the contrary, the plaintiff’s expert’s understanding of article 157 that the amount should be returned thereunder accords with the text of article 157 and more importantly, accords with the defendants’ expert’s evidence that money is “general property of equivalent value” (“一般等價物”) under the PRC law and cannot be marked as a specific property. In short, I am unable to accept the defendants’ expert’s Identification of Amount Point in the light such unsatisfactory supporting evidence and of the plaintiff’s expert’s understanding of article 157, which, as I concluded above, is more in line with the texts of article 157.

58.  Based on the above, I make the following findings in relation to the PRC law:-

(1)  The 2^nd defendant’s carrying out of the exchange business constitutes the criminal offence of carrying out of the illegal business contrary to article 225(4) of the PRC Criminal Act (中華人民共和國刑法) in force in 2016 as the amount the 2^nd defendant had exchanged exceeded RMB5,000,000 by the time of the subject transaction.

(2)  The plaintiff did not commit any criminal offence and his breach of article 30 of the PRC Foreign Exchange Measures for Individuals and article 45 of the PRC Administrative Regulations on Foreign Exchange mentioned above did not constitute any criminal offence.

(3)  The property acquired by the 2^nd defendant in its illegal business carried contrary to article 225(4) of the PRC Criminal Act may be confiscated under article 64 of the PRC Criminal Act and article 7 of the 1998 Interpretation.

(4)  Whether there would be confiscation may sometimes depend on how strongly the enforcement policy the PRC government would like to pursue. There may be times when the policy would be strongly enforced and thus there would be confiscation, and the converse is also true.

(5)  If there would be confiscation, the PRC authority may usually confiscate all the funds in an account even though not all of them is related to the illegal activity in question. In other words, it is possible that of the confiscated money, part is not related to the offence in question.

(6)  Under article 157, the plaintiff may claim the “return” of RMB1,000,000 from the 2^nd defendant under limb [1] of article 157. The word “return” here should not be understood literally – this RMB1,000,000 claimed thereunder is not necessarily the same, specific RMB1,000,000 deposited by the plaintiff (via his wife).

(7)  Even according to the defendants’ expert’s evidence, 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 and the PRC government is at the time not pursuing the enforcement strongly.

59.  I should mention that the experts referred me to various decided cases by various PRC courts. Suffice to say that they are of little referential value given that none of them involves illegal business as the 2^nd defendant and in none of them the subject money had been confiscated.

C.  Pleading point

60.  Before proceeding to the analysis, I should deal with the pleading point raised by Mr Cheung. In gist, his submissions are that articles 64 and 225(4) of the PRC Criminal Act and article 7 of the 1998 Interpretation have never been pleaded by the defendants. Indeed, these points were made clear only after the 4-day adjournment.

61.  To assess the merits of this pleading point, it is important to appreciate how the relevant pleas were set out:-

(1)  In the Re-Amended Defence, in response to the plaintiff’s unjust enrichment claim, at paragraph 10A, the defendants denied that they received the RMB1,000,000, but it was Ms Kwok who did. Further, the defendants raised the defence of change of position upon the confiscation, a defence the defendants rightly abandoned at the opening submissions (as mentioned above) given the confiscation, ordered by the PRC Court upon criminal convictions, cannot be bona fide.

(2)  Then, at paragraph 10B of the Re-Amended Defence, it was pleaded that:-

“Further or alternatively, the Plaintiff’s conduct and/or the alleged Agreement is illegal, void, invalid and/or unenforceable under the laws of the PRC and is therefore unenforceable in Hong Kong whether as a matter of public policy or otherwise by reason of its contravention of Articles 30 and 39 of the PRC Foreign Exchange Measures for Individuals… and Article 45 of the PRC Administrative Regulations on Foreign Exchange…”

(3)  While paragraph 10B of Re-Amended Defence seems to address the plaintiff’s contractual claim only, in his Amended Reply, the plaintiff pleaded that the articles cited in paragraph 10B “shall not be applicable to the plaintiff’s claim”, and referred, inter alia, to articles 153 and 157 of the PRC Civil Code, to say that:-

“the plaintiff’s claims are not tainted by the rule against illegality”. (emphasis added)

(4)  So, it is reasonably clear to me that the plaintiff takes the defence of foreign illegality raised by the defendants as a defence to both his contractual claim and unjust enrichment claim. It is also reasonably clear to me that the plaintiff’s case is that article 157 of the PRC Civil Code renders the plaintiff’s claims “legal” (in the public policy sense).

(5)  The defendants did not file any rejoinder subsequently, and are taken to join issue on the matters pleaded in the Amended Reply.

(6)  In other words, the defendants do not agree that article 157 of the PRC Civil Code renders the plaintiff’s claims “legal”.

62.  While articles 64 and 225(4) of the PRC Criminal Act and article 7 of the 1998 Interpretation have never been pleaded by the defendants, the issue of whether article 157 of the PRC Civil Code would render the plaintiff’s claims “legal” has always been a live issue clear to both parties, and clearly at least from the defendants’ perspective, articles 64 and 225(4) of the PRC Criminal Act and article 7 of the 1998 Interpretation have significant impact on the “legality” of article 157 to the present case. Save and except for these articles themselves being unpleaded, all the facts that are related to article 225(4) of the PRC Criminal Act have been pleaded, namely, the carrying out of the defendants’ unauthorised business of an amount exceeding RMB5,000,000, whereas the confiscation under article 64 of the PRC Criminal Act and article 7 of the 1998 Interpretation is merely consequential upon article 225(4) of the PRC Criminal Act. Therefore, I am satisfied that I have “all the relevant facts bearing on the allegation of illegality”: see Igal Dafni v CMA CGM SA [2013] 2 HKLRD 73 at §34 per Recorder H Wong SC, or “the whole of the circumstances”: see JMW Motors Co Ltd v The Beverly Hills Group Limited [2013] EWHC 4623 (QB) at §13 per Norris J, and thus I admitted and considered above the evidence in relation to these unpleaded articles adduced on de bene esse basis. I should add that Mr Cheung has not pointed out any prejudice the plaintiff would suffer as a result of permitting the defendants to rely on these unpleaded articles and the related evidence.

D.  Plaintiff’s claim contrary to public policy and comity?

63.  On the above findings, there is no suggestion (whether by pleadings or by evidence) that the plaintiff and the 2^nd defendant had some real object and intent to commit an act which is illegal under the PRC law at the time of the Exchange Agreement.

64.  It may however be argued (though Mr Wong does not advance such argument) that the plaintiff’s claim falls within the second scenario set out in paragraph 46 above because the execution of the award on the plaintiff’s claim would effectively be an exchange of RMB in the PRC to HKD in Hong Kong via the 2^nd defendant in breach of the relevant regulations in the PRC, upon the Hong Kong Court’s order that the 2^nd defendant shall pay the plaintiff RMB or HKD equivalent at the time of payment. Such argument, upon closer scrutiny, cannot stand. The RMB1,000,000 had been confiscated, and an order that the 2^nd defendant may pay the plaintiff the HKD equivalent would not be an exchange in any sense but damages.

65.  Therefore, the plaintiff’s unjust enrichment claim dose not fall within any of the four scenarios set out in paragraph 46 above, and is therefore permissible.

66.  For the sake of completeness, even if a general flexible approach like Patel should be adopted in an unjust enrichment claim as advocated for by Mr Cheung, in my view, allowing such a claim would not be contrary to public policy and comity because:-

(1)  The plaintiff’s claim would be allowed under article 157 in the same situation in the PRC, that is, where the Exchange Agreement would not be enforced due to breach of article 30 and article 45.

(2)  It is the 2^nd defendant who committed a criminal offence under the PRC law and not the plaintiff. The 2^nd defendant would be subjected to punishments for the criminal offence, even though the plaintiff’s claim would be allowed. In fact, the plaintiff may also be subject to punishments for breach of the regulations (by virtue of Article 45 of the PRC Administrative Regulations on Foreign Exchange), even though the plaintiff’s claim would be allowed. So, it is not that upon return of the RMB1,000,000, the parties would be free from any other liability arising from their criminal offence and/or breach of regulations. In other words, the return would not necessarily encourage any of the parties to continue the illegal business and/or breach of the regulations.

(3)  Further, for the plaintiff’s civil claim, he has to incur legal costs and time to pursue the claim. More importantly, if the money is confiscated, his claim is personal only, and thus he faces the risk that the 2^nd defendant would be insolvent and cannot satisfy the Court’s award.

(4)  In my view, these risks in (2) and (3) above borne by the plaintiff are entirely resonant with the warning by the PRC police’s announcement issued on 20 April 2006 that participation in illegal underground money exchange would entail risks (“參與地下錢莊從事非法買賣外滙活動，對企業和公民來說也頗具風險”).

(5)  These risks are less serious compared to confiscation faced by the 2^nd defendant, and this is proportional to the stigma upon them respectively, the plaintiff breaching administrative regulations while the 2^nd defendant committing a criminal offence. It is a fortiori proportional when there is no plea and no evidence to suggest that the plaintiff had any knowledge that the 2^nd defendant’s business is illegal under the PRC law.

(6)  Even on the defendants’ expert’s own evidence, the plaintiff’s claim under article 157, if he is lucky enough, would also be allowed. While I agree that a determination or sanction by the relevant authorities cannot be a prerequisite for illegality to bar a claim or defence if otherwise available: see DBS Bank (Hong Kong) Ltd v Pam Jing [2020] 4 HKC 395 at §41, I think how the law is enforced in the foreign jurisdiction is still a consideration I need to take into account in terms of comity. For example, if the law is never enforced, it is legitimate to query whether it would really be contrary to comity to allow the claim. Here, if luck can be a touchstone here, I do not see that allowing the plaintiff’s claim in Hong Kong would necessarily be contrary to public policy and comity.

67.  Considering the matter in paragraphs 63 – 65 above under the Ryder approach, or for completeness sake, the matters in paragraph 66 above cumulatively under the Patel approach, I am not satisfied that the defence of foreign illegality has been established, and I am satisfied that allowing the plaintiff’s unjust enrichment claim would not be contrary to public policy and comity.

XIV.  SUMMARY

68.  In summary, I find that:-

(1)  The Exchange Agreement between the plaintiff and the 1^st and 2^nd defendants was intended to use Ms Kwok’s BOC Account.

(2)  The Exchange Agreement was unenforceable on the ground of foreign illegality.

(3)  The plaintiff has a claim on unjust enrichment against the 2^nd defendant, and the defence of foreign illegality is not established.

XV.  PRE-JUDGMENT INTEREST

69.  As regards pre-judgment interest, given that I am to award RMB1,000,000 or HKD equivalent at the time of payment, and given that the pre-judgment interest is to compensate the plaintiff for being kept out of use of this RMB1,000,000, and bearing in mind that this RMB1,000,000 would not be exchanged to HKD under the Exchange Agreement, I exercise my discretion to award pre-judgment interest at the usual rate at which RMB could be borrowed in the PRC: see Chow How Yeen Margaret v Wex Pharmaceuticals Inc [2018] 3 HKLRD 163 at §68 per Lam VP (giving the judgment of the Court of Appeal). There is no evidence before me in this regard, and I direct the parties to agree to such rate or rates from 1 March 2019 (being the second written demand made by the plaintiff against the defendants for the refund and thus being the latest date the cause of action of unjust enrichment started to accrue) until today.

XVI.  ORDER

70.  In the circumstances, I order that:-

(1)  The plaintiff’s claim against the 1^st defendant be dismissed.

(2)  The 2^nd defendant do pay the plaintiff RMB1,000,000 (or its HKD equivalent at the time of payment).

(3)  There shall be pre-judgment interest thereon accruing from the date of the Writ (1 March 2019) until today, at the usual rate at which RMB could be borrowed in the PRC.

(4)  The parties do agree to such rate or rates for the said period in (3) above within 14 days from today, failing such agreement each party to file and serve evidence in this regard by affirmation within 7 days thereafter and written submissions within 7 thereafter, and the court shall determine the rate by paper disposal. For this purpose, there be liberty to apply.

(5)  There shall be judgment interest on the sums in (2) and (3) above from today until payment.

(6)  There be a costs order nisi that:-

(a)  the plaintiff do pay the 1^st defendant costs of the action as between them (including all costs reserved) to be taxed if not agreed, with certificate for counsel; and

(b)  the 2^nd defendant do pay the plaintiff the costs of the action as between them (including all costs reserved) to be taxed if not agreed, with certificate for counsel.

(7)  For taxation purpose, having invited and heard submissions from the parties, and having the benefit of conducting the trial, it is fair to say that the issues in relation to the Exchange Agreement and the unjust enrichment are intertwined because the PRC law evidence is related to both issues. On a broad-brush approach, as part of the costs order nisi in paragraph (6) above, I apportion 50% of the costs of the whole action as the costs of the action between the plaintiff and the 1^st defendant, and 50% to be that between the plaintiff and the 2^nd defendant.