On 17 April 2025, the Court of Appeal handed down judgment in Wong Chi Hung v Lo Wing Pun and Another [2025] HKCA 370, providing significant guidance on when foreign illegality can serve as a defense to claims in unjust enrichment under Hong Kong law.

Background Facts

The defendants operated a money exchange business in Hong Kong. In June 2016, the plaintiff wished to exchange RMB 1 million he had in Mainland China into HKD. The arrangement involved the plaintiff depositing RMB into a Mainland bank account specified by the defendants, who would then deposit the equivalent amount in HKD into the plaintiff’s Hong Kong account at an agreed exchange rate.

This method of exchange, known as “match-and-knock” (對敲), is typically used by unauthorized money exchangers in Mainland China, commonly known as “underground banks” (地下錢莊), which is a colloquial expression and not a legal term. One can see from the media that in recent years, law enforcement agencies in Mainland China have cracked down on underground banks and illegal operations where individuals, for the purpose of unlawful profit, engage in cross-border remittances, foreign exchange trading, and financial payment settlements without approval from the relevant authorities.

In this case, the plaintiff duly transferred RMB 1 million to the specified account in Mainland China. However, shortly afterward, the account was frozen as part of an unrelated criminal investigation into a pyramid selling scheme. In March 2018, the entire balance in the account, including the plaintiff’s RMB 1 million, was confiscated pursuant to a Mainland court judgment, even though the plaintiff’s money had no connection to the pyramid scheme.

The defendants never paid the equivalent HKD amount to the plaintiff in Hong Kong as agreed.

Procedural History and Key Issues

At first instance, the District Court rejected the plaintiff’s claim in contract on the ground that it was unenforceable as a matter of Hong Kong public policy because of its illegality under Mainland laws. However, the Court upheld the plaintiff’s claim in unjust enrichment based on total failure of consideration.

The defendants appealed, arguing primarily that foreign illegality should bar the plaintiff’s claim in unjust enrichment for the same reasons it barred the contract claim.

The Court of Appeal’s Decision

In dismissing the appeal, G Lam JA (with whom Kwan Ag CJHC and Au JA agreed) made several significant determinations regarding the effect of foreign illegality on restitutionary claims:

1. Distinction between contractual and restitutionary claims: The Court emphasized that the obligation to restore unjust enrichment is an independent obligation imposed by law, separate from the contract between the parties. Unlike enforcing a contract, which puts parties in the position they would have been in had the contract been performed, restitution simply recognizes the ineffectiveness of the transaction and restores parties to their pre-transaction position.
2. General principles on foreign illegality and restitution: The Court held that while foreign illegality can potentially afford a defense to a claim in restitution, the fact that a contract is unenforceable due to foreign illegality does not necessarily mean that restitution will be denied.
3. Entitlement to restitution: In general, a plaintiff who has paid money to a defendant pursuant to a contract which the latter has not performed and which has been rendered ineffective due to foreign illegality should be entitled to restitution of the money.
4. Exceptions based on comity and public policy: The Court noted that restitution might be refused in exceptional cases involving egregious foreign illegality, where comity and public policy demand refusal of assistance.
5. Relevance of foreign law on restitution: The Court held that where the foreign law itself provides for restitution in such cases, this fortifies the general rule allowing recovery. Conversely, where the foreign law would be stultified by allowing restitution or expressly bars such claims, this may provide a defense to the claim in restitution, provided there is no countervailing Hong Kong public policy reason not to give effect to the foreign law.

Applying these principles, the Court found no reason in comity or public policy to deny restitution to the plaintiff, especially given that restitution would also be possible under Mainland law.

Takeaways

Generally, in cross-border disputes, foreign illegality can add layers of complexity to litigation strategy as courts have to balance comity and justice, ensuring fairness in claims.

This decision provides helpful guidance on how Hong Kong courts would approach restitutionary claims potentially tainted by foreign illegality. It strikes a balance between respecting comity and ensuring justice for parties who have parted with money under failed transactions.  The interplay between comity, justice, fairness and foreign illegality significantly impacts litigation strategy in complex cases, especially those involving restitutionary claims.

For further information or advice on cross-border transactions and restitutionary claims, please contact our Dispute Resolution team.

The full judgment can be accessed here.