SHE CHING YAN v. CAI YUNXIANG AND OTHERS

HCA 1062/2020

[2023] HKCFI 592

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2020

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D E C I S I O N

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INTRODUCTION

1.  This is the plaintiff’s application by summons dated 28 December 2021 against the 18^th defendant for summary judgment, interim payment and the striking out of the counterclaim.

2.  The plaintiff’s case is that she is a victim of an online romance scam.  She was defrauded by a person who proclaimed a romantic interest in her and eventually deceived her into transferring sums totalling HK$11,938,000 and RMB 215,770 between May and June 2020 to bank accounts held in the name of a number of individuals, including the 1^st to 4^th defendants in this action (together “the 1^st tier recipients”).  The bulk of the defrauded sums was then transferred to other bank accounts held in the name of various entities who are now named as the other defendants in this action (together “the 2^nd tier recipients”).  The 18^th defendant is one of the 2^nd tier recipients.  She received a sum of HK$150,500 from the 2^nd defendant on 5 June 2020.

3.  The plaintiff now claims a sum of HK$140,000 from the 18^th defendant, based on two causes of action.  First, she asserts a proprietary claim over the sum, which she says represents the traceable proceeds of part of the originally defrauded sums.  Second, she makes a personal claim for the same sum based on unjust enrichment.

4.  The 18^th defendant says that she does not know the 2^nd defendant. Her case is that the sum of HK$150,500 was deposited in her bank account in Hong Kong under a currency exchange arrangement she had made with one Mr Ma.  In exchange for that sum, she transferred RMB 139,212 from her bank account in mainland China to a bank account also in mainland China designated by Mr Ma.

5.  In this action, the 18^th defendant acts in person.  She did not advance any legal argument at the hearing.  Mr Lai Chun Ho, appearing with Ms Tinny Chan for the plaintiff, helpfully identifies in his submissions two possible lines of defence which the 18^th defendant’s evidence reveals.  They are, first, the defence of change of position and, second, the defence of bona fide purchaser for value without notice.

6.  Nevertheless, Mr Lai submits that they do not amount to arguable defence to the plaintiff’s claim.  This is so because the currency exchange transaction allegedly executed by the 18^th defendant is illegal as a matter of PRC law.  Hence it cannot be relied upon by her to make good the defence of change of position or the defence of bona fide purchaser.

7.  As evidence of the illegality in the PRC, the plaintiff relies on the determination by Deputy High Court Judge Blair in DBS Bank (Hong Kong) Ltd v Pan Jing [2020] 4 HKC 395, [2020] HKCFI 268 on the relevant PRC exchange control provisions.   In this regard, the plaintiff invokes section 59 of the Evidence Ordinance, Cap 8 and Order 38, rule 7 of the Rules of the High Court.  The 18^th defendant has not adduced any evidence to dispute that determination.

8.  In light of the present state of the evidence, the plaintiff contends that on the 18^th defendant’s own case, the performance of the currency exchange transaction by her necessarily involved conduct which is illegal under PRC law.  The result is that as a matter of Hong Kong law, she cannot now rely on that transaction to raise either the defence of change of position or the defence of bona fide purchaser for value without notice.  That being the case, summary judgment ought to be granted against her.

9.  This case is therefore primarily about the effect of the alleged PRC illegality on the potential defences of change of position and bona fide purchaser.  More specifically, I need to address the following issues.

10.  First, has the plaintiff properly adduced evidence on the PRC law in relation to the alleged illegality?  If so, what finding should I make on the PRC law?  This requires a determination of the proper construction of Order 38, rule 7 and whether the rule, as construed, has been complied with. 

11.  Second, it is well-known that illegality is a difficult area of law.  I need to consider whether the present case is suitable for summary disposal.   Can I legitimately rule at this stage that both defences are bound to fail because of the alleged PRC illegality?  Or can the issue be only properly determined at trial after all the facts, including the PRC law evidence, are explored in full?

12.  Third, for conflicts of law purposes, the HKSAR and the PRC are separate law districts: Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544 at para 37.  We are therefore concerned with foreign illegality, as opposed to domestic illegality, in the present case.  The legal analysis is conceptually different.  It has been said that the public policy underpinning domestic illegality is ex turpi causa and consistency whereas that underpinning foreign illegality is international comity: Chitty on Contracts (34^th ed) at para 18-076A (citing Magdeev v Tsvetkov [2020] EWHC 887 (Comm) at para 331).

13.  My task is therefore to apply the law concerning foreign illegality to evaluate the effect of the alleged PRC illegality in the context of the unjust enrichment claim and the proprietary claim.  In this regard, I consider that the primary authority is Barros Mattos Junior v MacDaniels Ltd [2005] 1 WLR 247, which decision is to be read in conjunction with the Court of Final Appeal decision in Ryder. 

14.  Mr Lai invites me to follow a line of Hong Kong decisions on online fraud cases, which follow Barros, including (1) Arrow ECS Norway AS v M Yang Trading Ltd [2018] 5 HKC 317, [2018] HKCFI 975; (2) Pan Jing; and (3) Americhip Inc v Zhu Hongling [2021] 4 HKLRD 490, [2021] HKCFI 2753.  At the same time, Mr Lai asks me to distinguish and not follow a line of apparently conflicting decisions in (1) Solyda SRL v Wu Ge [2021] HKCFI 1825; (2) Lesnina H DOO v Wave Shipping Trade Co Ltd [2022] 2 HKLRD 727, [2022] HKCFI 1070; and (3) Tokić, DOO v Hong Kong Shui Fat Trading Ltd [2022] HKCFI 217.  All these Hong Kong decisions share similar facts as the present case.  They are all claims made by alleged fraud victims against 2^nd tier recipients of the defrauded sums.  In each case, the alleged victim’s claim is met with a change of position defence and/or a bona fide purchaser defence.

PROCEDURAL HISTORY

15.  It is necessary to recite the procedural history for the purpose of determining the issue arising from Order 38, rule 7.

16.  Shortly after the discovery of the fraud, the plaintiff applied for and obtained ex parte proprietary and mareva injunctions against the 1^st to 4^th defendants, namely the 1^st tier recipients, in late June 2020.   

17.  In July 2020, the plaintiff obtained a disclosure order against various banks holding the bank accounts of the 1^st to 4^th defendants.  Based on the disclosure, she was able to trace the whereabouts of the funds and identify the 2^nd tier recipients, including the 18^th defendant.

18.  In August 2020, the plaintiff was granted ex parte proprietary injunctions against the 2^nd tier recipients, including the 18^th defendant.  With leave of the court, the latter was added as a defendant to the action.   The injunction has since been continued on an inter partes basis until trial or further order of the court, by orders made on 28 August and 18 September 2020.

19.  The statement of claim was filed on 9 September 2020. 

20.  The 18^th defendant’s defence and counterclaim was filed on 28 October 2020.  In her counterclaim, she pleads that she suffered loss as a result of the above proprietary injunction order.  First, she suffered mental distress.  For that, she claims a sum of HK$60,000.  Second, as her bank account was frozen, she was unable to make profits or cut losses in her investment in shares.  For this, she claims a sum of HK$99,840.  Accordingly, she counterclaims a total sum of HK$159,840.

21.  In response, the plaintiff filed her reply and defence to counterclaim on 14 January 2021.

22.  The present summons was filed on 28 December 2021.  On the same day, the plaintiff filed a document entitled “Notice of intention to adduce evidence on foreign law (s.59(3) Cap. 8, O.38 r7 RHC)”.  I shall call it “the notice to rely on section 59” below.  In the notice, the plaintiff stated her intention to adduce the decision in Pan Jing on the law of the PRC “with respect to underground foreign exchange trading” as evidence in this action pursuant to section 59(2) of the Evidence Ordinance and Order 38, rule 7.  The notice was served on the 18^th defendant by ordinary post on the day after the summons was filed.

23.  The plaintiff’s supporting affirmation was filed shortly afterwards in January 2022.

24.  The first return date of the summons was on 10 February 2022.  Directions were given for the filing of further affirmations and for substantive argument of the summons.

25.  The 18^th defendant then filed her opposing affirmation on 22 February 2022.  The content is the same as her defence and counterclaim.  As noted at the outset, she has not filed any evidence on the PRC law on foreign exchange trading.

THE PLAINTIFF’S CASE

26.  It is unnecessary to recount the plaintiff’s case in detail save to state the following.

27.  In May 2020, the plaintiff came across a person who was since known to her as Mr Long on a dating app.  Soon after, Mr Long proclaimed his romantic interest in her. This led to various exchanges between the two of them over WhatsApp.  In those exchanges, Mr Long introduced the plaintiff to make investments through an app.  Having apparently made some initial gains and as a result of Mr Long’s encouragement, the plaintiff continued to make what she believed to be investments on the app and deposit increasingly large sums into the bank accounts of the 1^st tier recipients on various dates from May to June 2020.  They amounted in total to HK$11,938,000 and RMB 215,770.  Eventually in mid-June 2020, when the plaintiff ostensibly made a profit of about RMB 44 million in her investments and tried to withdraw it on the app but failed, it dawned on her that she had fallen victim to an online romance scam.

28.  According to the bank statements obtained from the banks, the 2^nd defendant received a sum of HK$180,000 from the plaintiff’s account on 3 June 2020.  Two days later, on 5 June, out of the 2^nd defendant’s account, a sum of HK$40,000 was transferred to the 15^th defendant and a sum of $150,500 was transferred to the 18^th defendant.  (Between the incoming transfer and the outgoing transfers, the balance of the 2^nd defendant’s account never fell below HK$180,000.) 

29.  The plaintiff contends that as a matter of tracing, she can claim the sum of HK$140,000 from the 18^th defendant’s bank account.  Hence the present claim.

THE 18^TH DEFENDANT’S CASE

30.  As revealed by her opposing affirmation, the 18^th defendant’s factual case is as follows.

31.  On 5 June 2020, the 18^th defendant entered into a currency exchange arrangement with Mr Ma with a view to exchanging some RMB for HK dollars. The 18^th defendant came to know Mr Ma via WeChat through the introduction of a friend in the mainland. She was not very familiar with Mr Ma (“不太相熟”). 

32.  Mr Ma claimed that he had a customer who had some HK dollars for exchange.  On 5 June 2020, he arranged for the sum of HK$150,500 to be transferred to the 18^th defendant’s bank account in Hong Kong.  Upon receipt, the 18^th defendant transferred RMB 139,212 from her bank account in the PRC to a bank account in the PRC designated by Mr Ma.  The latter account was in the name of 卡進海.

33.  The 18^th defendant says that she does not know either the 2^nd defendant or 卡進海.  She simply wanted to exchange money so that she could invest in shares in Hong Kong. Further, she had limited legal knowledge and did not know that it was inappropriate to exchange currencies in this way.  In her affirmation, she said:

“事實上，本人不認識過賬戶口持有人薛鏐屾 [ie the 2^nd defendant] 和卡進海，只是單純想找換錢。本人當時因法律知識尚淺，並不知道透過他人找換金錢是不妥當的。而且，本人以往亦曾和馬先生找換美元和人民幣，因此本人當時認為此做法沒有問題。”

34.  In fact, the 18^th defendant had on the previous day effected a similar HK$/RMB exchange transaction with Mr Ma. 

35.  The 18^th defendant says that the RMB which she had transferred under the currency exchange arrangement on 5 June 2020 came from a bank loan.  She had pledged her car in the PRC in order to obtain the loan.  She wanted to use the HK dollars which she obtained from the exchange to invest in shares through her bank account in Hong Kong.

36.  The 18^th defendant contends that the sum of HK$150,500 transferred to her account on 5 June 2020 is her personal asset.  She does not understand why the plaintiff is now claiming only HK$140,000 against her.  The claim is obviously illogical and is made up.

THE PRC LAW

37.  The plaintiff invites the court to find that the currency exchange transaction, as alleged by the 18^th defendant, is illegal under PRC law.  

38.  She says that the transaction is the same as what was described as “the underground foreign exchange system” (or “the underground money exchange system”) in Pan Jing.  She seeks to adduce as evidence the determination in that case that such transaction contravened PRC law. 

The determination in Pan Jing

39.  The judge’s determination and reasoning is to be found in paras 32 to 40 of the decision.

40.  Para 33 sets out the relevant PRC regulations, namely Articles 30 and 39 of the PRC Foreign Exchange Measures for Individuals and Article 45 of the PRC Administrative Regulations on Foreign Exchange.

“Article 30

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.

Article 39

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.

Article 45

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.”

41.  The judge made his finding in paras 36 and 40:

“36. On the face of the pleadings and the evidence, the bank submits that it is effectively common ground that the defendant has contravened arts 30 and 45 and is liable to pay an administrative fine because he has purchased foreign currency from an unlicensed exchange agent. The defendant does not seriously dispute that he acted in breach of these provisions. Though there is no criminal liability, his breaches still amount to ‘administrative violations’ which would potentially attract fines. The fact that there have been no fines in this case is irrelevant.

…

40. In my view, the bank’s submissions accurately reflect the state of the evidence and pleadings.  It is clearly established that the defendant’s exchange transaction breached PRC law, and rendered him liable to an administrative penalty, albeit none has been imposed.”

42.  In summary, the judge found that an individual who entered into a currency exchange transaction with an unlicensed agent in the PRC contravened PRC law and the individual would be liable to an administrative penalty.

Section 59 of the Evidence Ordinance and Order 38, rule 7

43.  Section 59 is entitled “Evidence of foreign law” and provides:

“…

(2) Where any question as to the law of any country or territory outside Hong Kong with respect to any matter has been determined (whether before or after the commencement of this Part) in any such proceedings as are mentioned in subsection (4), then in any civil proceedings (not being proceedings before a court which can take judicial notice of the law of that country or territory with respect to that matter) –

(a) any finding made or decision given on that question in the first-mentioned proceedings shall, if reported or recorded in citable form, be admissible in evidence for the purpose of proving the law of that country or territory with respect to that matter; and

(b) if that finding or decision, as so reported or recorded, is adduced for that purpose, the law of that country or territory with respect to that matter shall be taken to be in accordance with that finding or decision unless the contrary is proved:

Provided that paragraph (b) shall not apply in the case of a finding or decision which conflicts with another finding or decision on the same question adduced by virtue of this subsection in the same proceedings.

(3) Except with the leave of the court, a party to any civil proceedings shall not be permitted to adduce any such finding or decision as is mentioned in subsection (2) by virtue of that subsection unless he has in accordance with rules given to every other party to the proceedings notice that he intends to do so.

(4) The proceedings referred to in subsection (2) are the following, whether civil or criminal, namely –

(a) proceedings at first instance in the High Court ...”

44.  Order 38, rule 7 makes provisions for the giving of notice as contemplated in section 59(3):

“(1) A party to any cause or matter who intends to adduce in evidence a finding or decision on a question of foreign law by virtue of section 59 of the Evidence Ordinance (Cap. 8) shall—

(a) in the case of an action to which Order 25, rule 1, applies within 28 days after the pleadings in the action are deemed to be closed, and

(b) in the case of any other cause or matter, within 21 days after the date on which an appointment for the first hearing of the cause or matter is obtained,

or in either case, within such other period as the Court may specify, serve notice of his intention on every other party to the proceedings.

(2) The notice shall specify the question on which the finding or decision was given or made and specify the document in which it is reported or recorded in citable form.

(3) In any cause or matter in which evidence may be given by affidavit, an affidavit specifying the matters contained in paragraph (2) shall constitute notice under paragraph (1) if served within the period mentioned in that paragraph.”

45.  An issue arises in the present case as to whether the requisite notice was served within the timeframe set out in Order 38, rule 7(1).  This turns on a proper construction of the rule.

46.  Rule 7(1) makes a distinction between two types of proceedings. It is plain from the wording that sub-rule (a) covers actions commenced by writ whereas sub-rule (b) includes matters commenced by originating summons.  But there is an exception to sub-rule (a).  Order 25, rule 1(2)(a) provides that rule 1 does not apply where the plaintiff has applied for summary judgment and directions have been given by the court.  

47.  Here, since the plaintiff took out the present summons in December 2021 and the court gave directions in February 2022, the present action does not come within Order 38, rule 7(1)(a) but falls within rule 7(1)(b) instead.  For construction purposes, the action is the “cause or matter” referred to in that sub-rule.  The next question is which date is “the date on which an appointment for the first hearing of the cause or matter is obtained”.

48.  It will be recalled that as between the plaintiff and the 18^th defendant, a proprietary injunction was granted back in August 2020, first on an ex parte basis, and subsequently continued on an inter partes basis in September 2020.  That was way before the present summons and the notice to rely on section 59 were served in December 2021.  If the injunction hearing is taken to be “the first hearing” referred to in rule 7(1)(b), the plaintiff is seriously out of time on her notice.

49.  The plaintiff is now seeking to rely on Pan Jing for the purpose of the summary judgment application, not the injunction application.  Accordingly, I think the better view is that rule 7 should be given a purposive approach and “the first hearing” should be taken to mean the first hearing of the summary judgment summons.  The reference to “the date on which an appointment for the first hearing of the cause or matter is obtained” should then be the date when the summons was filed as that was the day when the return date was given by the Registry.  In our case, that date would be 28 December 2021.  Hence, it seems to me that the plaintiff’s notice to rely on section 59 is within time and complies with Order 38, rule 7(1)(b).  She has therefore satisfied the procedural requirement contemplated in section 59(3).

50.  Mr Lai makes two points on Order 38, rule 7. 

51.  First, he argues that the term “cause” or “matter” used in rule 7(1)(b) includes any interlocutory matter.  He relies on the definition of “cause” and “matter” in section 2 of the High Court Ordinance, Cap 4, which provides that “unless the context otherwise requires”, “cause means any action or any criminal proceeding”, and “matter includes every proceeding not in a cause”.   Construed this way, the present summons is itself the “matter” referred to in the sub-rule. 

52.  Second, Mr Lai relies on the ruling at para 26 in Lesnina. It appears to suggest that in the context of a summary judgment application, the 21 days in rule 7(1)(b) run from the first hearing of the summons.  

53.  Combining the two points, Mr Lai submits that the deadline for the service of the notice in the present case fell on 21 days after the call-over hearing on 10 February 2022.  The plaintiff’s notice, which was served in late December 2021, was therefore within time.

54.  I have some reservations over both strands of Mr Lai’s submissions.  I would think that a “cause” or “matter” generally refers to the entire action or proceedings as opposed to a discrete interlocutory application made in the course of the action or proceedings.  In any event, even if the word “matter” should include an interlocutory matter, it seems to me that “the date on which an appointment for the first hearing of the cause or matter is obtained” in the context of an application for summary judgment is referring to the date when the summons for summary judgment was filed as opposed to the first hearing of the summons itself.

55.  Ultimately, I do not think that it is necessary for me to express any definitive view on the construction point.  The 18^th defendant is not legally represented and has not made any submissions on this issue.  I have expressed my own view in paras 47 and 49 above.  If I am wrong on the injunction point, the plaintiff is out of time under Order 38, rule 7.  But in that case, I would be prepared to exercise my discretion to extend time for the service of the notice retrospectively. 

56.  The rationale of the notice requirement is plain.  It is for the party seeking to invoke section 59 to give ample notice of his intention to rely on a decision as evidence of foreign law to the other side so that the latter can consider what step he needs to take in respect of the foreign law issue and prepare his own evidence where appropriate.  Here, the 18^th defendant had had ample notice of the plaintiff’s intention to rely on Pan Jing well in advance of the call-over hearing in February 2022 and well before she was required to file her own evidence in opposition.  

57.  The upshot of all these is that the plaintiff has complied with the procedural requirements set out in Order 38, rule 7, either as a matter of construction of the rule or as a matter of discretion.

Findings on the PRC law

58.  It follows that the determination in para 40 of Pan Jing is admissible in this application as evidence that an individual who entered into a currency exchange transaction with an unlicensed agent in the PRC contravened PRC law and the individual would be liable to an administrative penalty.

59.  The 18^th defendant has not adduced any evidence to challenge or disprove the determination.  She simply says that she did not know that it was inappropriate to exchange currencies with a private individual. Mr Lai submits that it is therefore effectively common ground that she has breached the PRC regulations. 

60.  In my view, whether the 18^th defendant’s evidence amounts to an admission on her part that the transaction was illegal under the PRC law is not material.  Under section 59(2)(b), once the determination is admitted, the relevant laws of the PRC shall be taken to be in accordance with the determination “unless the contrary is proved”.  Here, the contrary is not proved.  By operation of the section, I find the PRC law evidence adduced by the plaintiff on the basis of Pan Jing, as summarised in para 42 above, as fact.

61.  On the 18^th defendant’s own case, it is plain that Mr Ma was not a licensed agent.  She has adduced no evidence in this regard.  Accordingly, when effecting the currency exchange transaction, she was (on her own case) in breach of PRC law and would be liable to an administrative penalty.   

LEGAL PRINCIPLES

62.  The principles governing summary judgment are well-known.  For present purposes, it is only necessary to highlight two points, which are pertinent to the disposal of the present application. 

63.  First, if a claim comes within Order 14 and the plaintiff has satisfied the preliminary requirements, he will prima facie be entitled to judgment.  The burden will then be on the defendant to show why judgment should not be entered.  To resist summary judgment, the defendant needs to show that there is a triable issue or an arguable defence or there is some other reason for a trial: Hong Kong Civil Procedure 2023 at para 14/4/9B.

64.  Second, there is nothing in the rule to suggest that a question of law may not be determined in the course of the usual Order 14 procedure.  Subject to that, where a difficult question of law is raised, leave to defend should be granted, eg, where the case turns on foreign law. Nevertheless, if the point is clear and the court is satisfied that it is really unarguable, leave to defend will be refused.  The court will determine disputed points of law provided that the relevant facts are not in dispute. See Hong Kong Civil Procedure 2023 at para 14/4/12.

Unjust enrichment

65.  The framework for approaching a personal unjust enrichment claim is set out in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at para 67. One should ask four questions – (1) Was the defendant enriched? (2) Was the enrichment at the plaintiff’s expense? (3) Was the enrichment unjust? (4) Are any of the defences applicable?  As regards question (4), the burden of proof of establishing the defences lies on the defendant: Chan Chun Chung v PBM (Hong Kong) Ltd (2004) HKCFAR 178 at para 14; Americhip at para 22.

66.  The relevant defences here are change of position and bona fide purchaser for value without notice.  The burden is on the 18^th defendant to demonstrate that the defences are arguable or there are triable issues in relation to them.   

67.  As regards the defence of change of position, the starting point of the analysis is Lord Goff’s judgment in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548.  His lordship explained the broad rationale of the defence, at 579F-G:

“The answer must be that, where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution.”

68.  While the issue did not arise in that case, his lordship made the following remark on the potential limits of the defence, at 580C-D:

“It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration.” (underline added)

69.  The legal issue which arises in the present case is this.  Where a defendant’s change of position is tainted with foreign illegality, is the defence still available to him?   To use the terminology in Lipkin Gorman, in that circumstance, is the defendant a “wrongdoer” so that it would not be inequitable to require him to make restitution to the plaintiff?  As the authorities stand, the current debate more specifically revolves around the following.  (1) Would any foreign illegality have the effect of depriving the defendant of the defence?  (2) Or should the court examine the type and seriousness of the illegality in each case together with other relevant circumstances in order to decide whether the defence is still available notwithstanding the foreign illegality?  One can readily see that the former is an absolute approach, under which the effect of foreign illegality is automatic.  This is to be contrasted with the latter approach, in which the court is to engage in an evaluation exercise.

70.  I shall address these questions in the “Illegality” section below. 

71.  As regards the defence of bona fide purchaser, where property is transferred pursuant to an illegal transaction, the defendant cannot be considered to have provided value for the property: see Pan Jing at para 56, citing and applying the statement in Virgo, The Principles of the Law of Restitution (3^rd ed) at 659; Americhip at paras 24 and 90; TTI Global Resources Hong Kong Ltd v Hongkong Myphone Technology Co., Ltd [2021] HKCFI 306 at para 46.  In that event, the defence is not available.

72.  In Tokić, doubt was raised as to the correctness of the above legal proposition: paras 39 to 47.  However, I agree with Mr Lai’s submission that the doubt raised in Tokić is inconsistent with the authorities. 

73.  Instead I consider the pertinent question here to be the same as that arising in relation to change of position.  That is, would every illegality have the automatic effect of rendering the transfer to be regarded as providing no value?

Proprietary claim

74.  Where property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient that the property is recoverable and traceable in equity: Westdeutsche Landesbank Gironzentrale v Islington London Borough Council [1996] AC 669 at 716C-D. 

75.  A victim of a fraud may assert a proprietary claim against a recipient insofar as the fraudulently obtained funds are traceable into the hands of the recipient unless the latter can establish that he is a bona fide purchaser for value without notice: Ferrari North America, Inc v Changhon International Energy Co., Ltd [2018] HKCFI 1603 at para 12.

76.  To raise the bona fide purchaser defence, a defendant has to show: (1) there was a purchase for value, (2) of the legal estate in property, (3) in good faith, (4) without notice, (5) at the time of transfer of the legal estate: TTI Global Resources at para 22.

77.  As regards the effect of foreign illegality on the defence, the same analysis in para 73 applies here.

Illegality

78.  In Hong Kong, the starting point of a discussion of illegality must be the House of Lords decision in Tinsley v Milligan [1994] 1 AC 340.  It was established that a claimant to an interest in property which had been acquired in the course of an illegal transaction was not barred from recovery if the claimant was not forced to plead or rely on the illegality.  The principle expressed in the ex turpi causa maxim is a principle of public policy – no court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act: 354E-355C.

79.  The principle in Tinsley applies in the context of unjust enrichment claim.   Where a fraud victim claims from a 2^nd tier recipient of the defrauded money based on unjust enrichment and where the latter raises the defence of change of position, the principle would apply to deprive the 2^nd tier recipient of the defence if the change of position is tainted with illegality.   That is the ruling in Arrow.  When raising the defence of change of position, the defendants there contended that payments had been made by them in the course of their money changing businesses.  However, their operations contravened the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance,Cap 615.  It was held that the defendants could not rely on the defence of change of position: paras 30 to 31.

80.  Tinsley has been overruled by the Supreme Court in Patel v Mirza [2017] AC 467.  However, it is still binding on the Court of First Instance in Hong Kong: Arrow at para 29.

81.  Both Tinsley and Arrow concern domestic illegality. 

Distinction between domestic and foreign illegality

82.  In Ryder, the Court of Final Appeal has firmly established that as a matter of legal analysis, one should draw a distinction between domestic and foreign illegality.  The former is governed by the principle in Tinsley whereas the latter is governed by conflict of laws principles.

83.  In issue in that case was the enforceability of a contract which was governed by Hong Kong law but was performed in the PRC.  The issue arose as the contract had been performed partly in breach of PRC law. There was no suggestion that the performance of the contract in accordance with its terms was prohibited by PRC law.  There was also no finding that the parties had agreed to a scheme whereby PRC law would be contravened.  The breaches were found to be not very serious and the conduct of the parties could not be described as iniquitous: para 59. 

84.  The case concerned foreign illegality.  In this connection, Lord Collins NPJ said that the effect of the PRC illegality on the enforceability of the Hong Kong contract should be addressed by reference to rules of the conflict of laws, not under the common law of illegality in Hong Kong.  He said, at para 36:

“But on this appeal the fundamental question of the scope and content of the illegality defence under the common law of Hong Kong does not fall for decision because, in my judgment, the Judge and the Court of Appeal were wrong to have treated the case as if it were purely an internal Hong Kong case, and should have addressed the issues on the basis of well-established rules of the conflict of laws, as the Court of Appeal had been invited, and declined, to do.”

85.  Ma CJ agreed and said, at para 1:

“Like Lord Collins, I believe that the outcome can be determined by reference to applicable conflict of laws principles (for we are here concerned with a foreign illegality). It is not necessary to discuss the matter in the context of a domestic illegality. As Lord Collins points out, the lower Courts determined the case on the basis of the principle contained in Tinsley v Milligan … It is not necessary, as I have said, to discuss illegality in the domestic context and I would accordingly leave open any detailed discussion of the applicable principles for a case in which the point arises.”

86.  As noted at the outset, the public policy underpinning the law relating to domestic illegality is ex turpi causa and consistency and that underpinning foreign illegality is international comity.

87.  On international comity, the rationale is one of public policy, as explained by Viscount Simonds in Regazzoni v K C Sethia (1944) Ltd [1958] 1 KB 301 at 318-319 and quoted by Lord Collins in Ryder, at para 49:

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

…

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

88.  The authorities on foreign illegality have to be read in the light of the foreign legislation which was involved: para 50.

89.  The distinction between the respective rules applicable to domestic and foreign illegality can also be seen from the fact that in the latter case, a claimant may still be refused recovery even though he does not have to rely on the foreign illegality in order to put forward his claim: para 51.  In other words, the procedural rule, or commonly known as the reliance rule, laid down in Tinsley does not directly apply to cases of foreign illegality.

90.  Mr Lai submits that Tinsley applies to the present case and invites the court to follow Arrow and to hold that because of the PRC illegality, the 18^th defendant is not entitled to rely on the change of position defence.  This is because, Mr Lai argues, the court will not allow a party to plead or rely on an illegal activity in his defence.  To allow the 18^th defendant to do so would be contrary to the Tinsley reliance rule.

91.  However, as explained above, Arrow is an authority on domestic illegality.  It is true that its reasoning was based on Barros in that it followed Barros to extend the analysis in Tinsley, which concerned a resulting trust claim, to the unjust enrichment context: see para 29.  Ultimately, however, Arrow itself remains an application of the Tinsley reliance rule.  Interpreted this way and applying Ryder, Arrow has no application in the present case.  I reject the submission accordingly.

92.  The directly relevant authorities are instead Barros and the Hong Kong cases which follow it, including Pan Jing and Americhip.  These cases are however to be read in light of the rulings in Ryder.

The effect of foreign illegality on the defence of change of position

93.  Barros applies the Tinsley principle to foreign illegality in the context of unjust enrichment.  It is unnecessary to recite the facts in that case here save to say that it is also a fraud case and the defendants there raised the defence of change of position as they had converted the defrauded funds into local currency in Nigeria and paid them away to third parties.  What they did was contrary to Nigerian legislation which required foreign exchange dealings to be conducted through authorised intermediaries.  The change of position was therefore tainted with foreign illegality. 

94.  Laddie J held, at para 43:

“It seems to me that the approach of Lord Goff in Tinsley v Milligan … applies to this sort of case. There is no room for the exercise of any discretion by the court in favour of one party or the other. If the recipient’s actions of changing position are treated here as illegal, the court cannot take them into account. The recipient cannot put up a tainted claim to retention against the victim’s untainted claim for restitution. It may be, as Mr Briggs suggests, that in some cases the illegality will be so minor as to be ignored on the de minimis principle. This is not such a case.” (underline added)

95.  In other words, according to Barros, any foreign illegality, regardless of its type or severity, would deprive the defendant of the change of position defence, except where the illegality is de minimis.  It is an absolute approach and the effect is automatic.  Pan Jing and Americhip expressly followed Barros: see para 68 and para 90 of the respective decisions.

96.  The correctness of the absolute approach adopted in Barros has been doubted in subsequent cases and in academic writing: see, eg, the observations made in paras 32 to 35 of Solyda. 

97.  Most importantly, in Ryder, Lord Collins also doubted the absolute approach.  In the context of enforceability of contract, his lordship said that there is no basis in authority or principle for holding that every breach of foreign law would have the effect of rendering the contract unenforceable on the basis that it is contrary to public policy to enforce it.  His lordship said:

“56. It has been suggested (obiter) that a contract which is valid by the governing law of the forum, English law, or in this case, Hong Kong law, may be refused enforcement if it has been “performed in such a way that one party (or both parties) commits a legal wrong”: Barros Mattos Junior v MacDaniels Ltd [2005] 1 WLR 247, [30] (Laddie J).  But, as Johnston, Conflict of Laws in Hong Kong, para. 5-012, text at note 80, rightly points out, this obiter suggestion states the principle much too widely …

57. There may nevertheless 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.” (original italics) (underline added)

98.  In para 69 above, I ask this question: would any foreign illegality have the effect of depriving the defendant of a change of position defence?  The answer must be “No”, according to what Lord Collins said in Ryder.  The court is not to adopt an absolute or rigid approach.  Instead, it should consider in each case what should be the proper effect or consequence of a foreign illegality when raised in the context of the defence of change of position.  

99.  I should add here that it is because of these doubts and criticisms of Barros that summary judgment was refused in Lesnina (paras 51 to 60) and Solyda (paras 32 to 36).  The court in those cases refused to follow Barros and took the view that the issue was not suitable for summary disposal and should be left for determination at trial.

100.  I agree with the general approach adopted in Lesnina and Solyda.  However, as I will explain in the “Discussion” section below, I am of the view that for reasons specific to the present case, it is a suitable case for summary disposal and it serves no purpose for it to go to trial.  I shall therefore proceed to address the remaining legal issue in relation to the effect of foreign illegality.

101.  In Ryder, Lord Collins expressly approved the principles summarised in Johnston, The Conflict of Laws in Hong Kong (2^nd ed), as quoted at para 39:

“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” …

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.” (underline added)

102.  The above summary refers to five principles.  In this decision, I shall call the scenarios described in the second, third and fourth principles “the type 2 case”, “the type 3 case” and “the type 4 case” respectively.  The difference between these three types of cases arises from how the illegality came about in the first place. 

103.  I have underlined in the above extract the paragraph describing the type 2 case.  I do so because the present case is, in my view, a type 2 case, as I will explain in the “Discussion” section below.

104.  The distinguishing feature of type 2 cases is that the contract was required to be performed in the foreign state and the performance necessarily involved conduct which is illegal.  This type of case is described in Chitty as “illegality as to formation”.  It is because these contracts cannot be performed in accordance with their terms without the commission of an illegal act.   An example of illegal act which comes within this type is where a statutory requirement requires the parties to the transaction to possess a licence.  Where they do not, the contract is illegal as formed.  In this example, the contract can only be performed in accordance with its terms with the contravention of the licensing requirement: Chitty at para 18-050. 

105.  For this type of case, the parties might not have intended the illegality or they might not even be aware of the fact that what they have bargained for will involve an unlawful act in the place of performance.  However, so long as the bargain necessarily involves the illegal act, it comes within this type of case: see Magdeev at para 297.

106.  This is to be compared with the type 3 cases.  Type 3 cases arise because of the intention and object of the parties.  The contract could have been performed in a legal manner.  But it was the real object of the parties which taints the contract with illegality. 

107.  In gist, the type 2 cases look to action whereas the type 3 cases look to intention: Magdeev at para 300.

108.  In Ryder, the trial judge found that there were only incidental breaches under PRC law in the performance of the contract in question.  It was not a type 2 case.  Nor was it a type 3 case.  On the facts as found, it was a type 4 case.  Lord Collins concluded, in paras 58 and 59, that there is no basis in law or public policy to refuse to enforce the contract because of the incidental breaches under PRC law in its performance:

“58. 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.

59. It follows that, when these principles are applied to the facts of this case, there is no basis for denying relief. First, there is no suggestion that performance of the contract in accordance with its terms was prohibited by PRC law. Second, there was no finding that the parties had agreed to a scheme whereby PRC law would be contravened. … Third, there was no finding that Saitek always intended to commit what is described as the fourth illegality. But, even if it had so intended, 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; (d) to have been mere administrative contraventions (at [70]-[72]). 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.” (underline added)

109.  It is clear from the above extracts from, and the actual ruling in, Ryder that when considering the effect of foreign illegality, the first task is to identify which type of illegality the case falls within.  If it is a type 2 case or type 3 case, in line with Lord Collins’ express endorsement of the principles summarised in Johnston, the contract will not be given effect.  If, on the other hand, it is a type 4 case, the court should make a judgment as to whether comity should require it to give effect to the contract or deny its enforcement by evaluating the seriousness of the illegality and the important policies which may underlie the impugned foreign law.

110.  In this regard, I accept Mr Lai’s submissions on the principle governing type 2 cases.  That is to say, 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, it will not be given effect regardless of its proper law.  In other words, the court applies a strict approach in type 2 cases.  It is to be contrasted with the treatment of type 4 cases. 

111.  Applying that principle in the context of the defence of change of position, where the change involves the performance of a contract or a transaction which comes within the type 2 cases, the court should refuse to recognise or give effect to the transaction.  In that event, the change of position defence would fail.

112.  Hence, as regards question (2) which I pose in para 69 above, I would answer as follows.  Whether the court should adopt a strict approach or engage in an evaluation exercise would depend on how the foreign illegality came about or the circumstances in which the illegality arose. Where the change of position is tainted with any illegality coming within the type 2 cases, the defence is not open to the defendant.

The effect of foreign illegality on the defence of bona fide purchaser

113.  The same analysis should apply when considering the effect of foreign illegality in the context of the defence of bona fide purchaser.  See paras 73 and 77 above.

DISCUSSION

114.  I am satisfied that the claim comes within Order 14 and the plaintiff has satisfied the preliminary requirements set out in Order 14, rules 1 and 2: Hong Kong Civil Procedure 2023 at para 14/1/3.  I am also satisfied that the plaintiff’s evidence discloses a prima facie case of tracing of the sum in question into the hands of the 18^th defendant and hence a prima facie case of unjust enrichment and proprietary claim.  To resist judgment being entered summarily, the burden is therefore on the 18^th defendant to raise an arguable defence or a triable issue or to show that there is some other reason for a trial. 

Summary disposal 

115.  For the purpose of this application, Mr Lai accepts that the court should proceed by assuming that the 18^th defendant’s factual account to be true.  I shall do so accordingly and assume everything which she says is true.  I have already found as fact that a currency exchange transaction with an unlicensed agent in the PRC contravenes PRC law.  I shall therefore treat the 18^th defendant’s transaction with Mr Ma as illegal under the PRC law.  Furthermore, I shall assume that she had no knowledge of the fraud and also that she had no knowledge of the relevant PRC laws and did not know that what she did contravened those laws. 

116.  Illegality is a difficult area of law.  The precise issue which I need to resolve is to what extent an illegal conduct in a foreign state would preclude a defendant from relying on the defence of change of position.  It has been said that this is a “developing point of law”: Solyda at para 32.  I agree with the approach adopted in Lesnina and Solyda that generally speaking this kind of issue should be left to be resolved in a proper trial, instead of summarily at an interlocutory stage. 

117.  However, in the present case, in my view, I should proceed to deal with the issue summarily. 

118.  First, as the 18^th defendant has failed to adduce any PRC law evidence to rebut the determination in Pan Jing, by operation of section 59(2) of the Evidence Ordinance, I am in a position (and am indeed bound) to make the factual finding, which I have done above, on the PRC law.  There is no dispute at all in this regard.  Unlike Lesnina, the PRC law evidence was in dispute there and that was one of the reasons why summary judgment was refused: para 58.  

119.  Secondly, the 18^th defendant’s factual case is very straightforward.  I shall assume everything which she says now is true.  In fact, given the nature of her case, the expectation is that even if the case is to go to trial, there is not much more she will add to her factual case.  In any event, the burden is on her to raise triable issues now, not later. 

120.  Thirdly, and crucially, I am of the view that her case involves illegality falling with the type 2 case discussed in Ryder.  As seen above, the effect is automatic.  There are no further facts to be explored which warrant a trial. 

121.  For all these reasons, in my view, a trial would serve no purpose and this is a case which can be disposed of in a summary manner.

The effect of the PRC illegality

122.  The currency exchange transaction between the 18^th defendant and Mr Ma is illegal under PRC law.  It is a type 2 case under the classification of Johnston, as approved in Ryder. 

123.  Even though the 18^th defendant did not know that the transaction contravened PRC law, the objective fact is that its performance in accordance with its terms necessarily involved the commission of an illegal act in the PRC.  This is what Chitty refers to as “illegality as to formation”.  This is the kind of illegality which would require the court to refuse enforcement of the contract straightaway.  

124.  This is not a type 4 case where the performance does not necessarily involve or require the commission of an illegal act.  I would observe here that for one of the defendants in Lesnina, ie the 8^th defendant, the evidence suggests that it was a type 4 case.  The defrauded funds were said to have been received by that defendant as consideration for goods sold and delivered: paras 8 to 12.  Hence, the alleged PRC illegality would arguably go to the performance, rather than to formation.

125.  For the above reasons, the court would not recognise the currency exchange transaction altogether.  There is no need to conduct any evaluation of the seriousness of the contravention by reference to PRC policies which underlie the relevant rules.  There is therefore nothing more to be explored in a trial.  The upshot is that it is not open to the 18^th defendant to rely on the transaction in her defence of change of position or her defence of bona fide purchaser.

126.  At the hearing, the 18^th defendant stresses that the sum was received by her in exchange for her RMB and is her personal asset.  If she needs to return the money to the plaintiff now, the same would also apply to many money changers in Hong Kong. 

127.  The issue which arises in this case, like Pan Jing, is which of the two parties innocent of the fraud is to bear the loss.  Having gone through the legal analysis above, because of the PRC illegality, the 18^th defendant fails on her own factual case and has to bear the loss.

128.  There being no defence available to her and there being no reason for a trial, I conclude that summary judgment should be entered in favour of the plaintiff.

129.  Lastly, I wish to complete the discussion by considering the application if I am wrong in my legal analysis of Ryder. If I should instead hold that the court should in all types of foreign illegality conduct an evaluative exercise having regard to the seriousness of the illegality and the underlying foreign policies in order to determine its effect, I would still conclude that the 18^th defendant has failed to raise any triable issue. 

130.  The burden is on her to put forward an arguable defence, which is sustainable in law.  The currency exchange transaction contravened PRC law and the 18^th defendant is liable to an administrative penalty.  That is the finding which I have made.  It is for her to raise at least an arguable case that the contravention was not of a sufficiently serious degree which reflects important policies of the PRC such that it would be contrary to Hong Kong public policy to recognise the currency exchange transaction.  But she has not done so.

131.  I ask myself this question – if this case goes to trial and I am presented with the same evidence, should I find the defence to be sustainable?  I would answer “No”.   It must follow that summary judgment should be granted now.

132.  In view of the result, it is unnecessary for me to consider the plaintiff’s interim payment application.

THE COUNTERCLAIM

133.  The 18^th defendant counterclaims for losses she had suffered as a result of the interlocutory injunction granted against her since August 2020. 

134.  It is trite that a defendant does not have any independent cause of action to claim monetary compensation for loss which she has suffered as a result of an injunction.  He cannot bring separate proceedings, whether by writ or counterclaim in the existing proceedings.  The claim arises out of the plaintiff’s undertaking.  The defendant’s only remedy is to enforce the undertaking by applying under the liberty to apply in the proceedings in which the undertaking was given: Wingames Investments Ltd v Mascot Land Ltd (No 2) [2013] 1 HKLRD 1186 at para 23.

135.  As such, the 18^th defendant’s counterclaim should be struck out on the basis that it discloses no reasonable cause of action, it is scandalous frivolous or vexatious, and/or it is an abuse of the process of the court.

ORDERS

136.  For the above reasons, I enter judgment in favour of the plaintiff as follows:

(1)  The sum of HK$140,000; 

(2)  A declaration that the 18^th defendant holds the sum of HK$140,000 (out of HK$150,500) which was transferred by the 2^nd defendant to the 18^th defendant on 5 June 2020 on trust for and on behalf of the plaintiff and is liable to account to the plaintiff for the same;

(3)  An order that the 18^th defendant do pay the above sum to the plaintiff forthwith;

(4)  Interest at 1% above prime rate from 5 June 2020 to the date of this judgment, and after that at judgment rate until payment;

(5)  The 18^th defendant’s counterclaim be struck out.

137.  I also order that the injunction be continued against the 18^th defendant until 28 August 2023 or further order of the court.  This is to allow time for the plaintiff to execute the judgment.

138.  On costs, I make an order nisi that the 18^th defendant do pay the plaintiff’s costs of the action and the counterclaim and the costs of the summons, including all costs reserved, as between the plaintiff and the 18^th defendant, such costs to be taxed if not agreed, with certificate for one counsel (Mr Lai). 

139.  If the 18^th defendant requires translation of this judgment into Chinese, she should contact my clerk within 14 days from the date of this judgment to arrange an appointment for a court interpreter to verbally translate this judgment to her.