The Application of the Principle of Illegality in Cross-Border Currency Exchange Litigation in Hong Kong
In civil proceedings in Hong Kong, it is often the case that a party claims that a contract or its performance involves a breach of Mainland law (the most common being cross-border currency exchange in breach of the Regulations of the PRC on Foreign Exchange Administration) and asserts that the other party’s claim or defense is unsubstantiated. As a Hong Kong lawyer engaged in Mainland-Hong Kong cross-border litigation, this article is intended to summarize the legal principles established in the relevant cases to facilitate learning, understanding and application.
Breach of Mainland law where contract is not enforceable in Hong Kong courts
Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544, established that based on the principle of international comity, a contract is not enforceable in Hong Kong courts if it involves a breach of Mainland law. The court’s summary includes the following scenarios:
(1) If the contract applies (whether by choice or under the conflict of laws) to Mainland law, and the terms of the contract are not compellable under Mainland law, they are also necessarily not compellable in Hong Kong courts;
(2) How the performance of a contract necessarily leads to the commission of an act which is contrary to the law of the place where the contract is to be performed (e.g. the Mainland), the Hong Kong courts will not recognize the validity of the contract;
(3) How the true purpose and intention of the parties to the contract at the time of entering into the contract involves the commission of a breach of local law in another jurisdiction (e.g. the Mainland);
(4) How the commission of a breach of the law of another jurisdiction (e.g. the Mainland) by either party (or both parties) in the course of performance of the contract (even if not intended at the time of entering into the contract) may (but does not necessarily) result in the contract not being able to operate in the Hong Kong courts depending on whether the breach of the law of the other jurisdiction (e.g. the Mainland) committed is of a very serious nature.
Hong Kong-Mainland Cross-Border Money Exchange (Currency Conversion) Dispute (1): Can Performance of Exchange Shops be Required on a Contractual Basis?
According to the judgment in Wong Chi Hung v Lo Wing Pun & Anor (DCCJ 1960/2019), a currency exchange contract in the form of a cross-border currency exchange through an exchange shop in Hong Kong is not enforceable in the Hong Kong courts because it contravenes Article 30 of the PRC Measures for the Administration of Individual Foreign Exchange and Article 45 of the PRC Foreign Exchange Administration Regulations. The Hong Kong courts will not compel any party to perform such currency exchange contracts on the basis of succession of contract law, as they are in breach of the Mainland laws and therefore do not have compulsory operation in the Hong Kong courts.
Hong Kong-Mainland Cross-Border Money Exchange (Currency Exchange) Dispute (2): Can the money changer be required to refund the funds on the basis of unjust enrichment?
A customer deposited RMB in the Mainland into a bank account designated by a money exchange shop at the request of the money exchange shop, and the designated account was deemed to have received the customer’s funds in the capacity of an agent of the money exchange shop, which was equivalent to the money exchange shop’s receipt of the customer’s funds. So, in the event that the currency exchange contract is ruled to be unlawful, does the customer have the right to demand the money exchange shop to return the funds on the ground that the exchange shop has been unjustly enriched?
In Wong Chi Hung v Lo Wing Pun & Anor (DCCJ 1960/2019), the customer’s side argued that the ‘wrongful’ element of ‘unjust enrichment’ was that the customer was in the wrong to pay the money, but the court held that the customer was not entitled to a refund on the basis of the illegality of the cross-border exchange. The court held that based on the illegality of cross-border exchanges, the customer could not claim a ‘mistake’, but that the customer could claim (due to the unenforceable operation of the contract) that the exchange shop party had received the funds without paying the total failure of consideration as an ‘improper’ element of its unjust enrichment. The element of ‘wrongfulness’.
The exchange shop party argued that because the cross-border knockout exchange was contrary to mainland law, the exchange contract was unlawful, and the funds paid by the plaintiffs in fulfilment of the unlawful contract were therefore contrary to public policy and could not be relied upon to be refunded on the ground of unjust enrichment. Reliance was placed on Aratra Potato Co Ltd v Taylor Joynson Garrett (A Firm) [1995] 4 All ER 695.
The court held that the customer’s right to rely on the principle of unjust enrichment to require the exchange shop to return the amount paid by the customer was ‘unlawful’ and not contrary to public policy, on the following grounds: (1) One of the consequences of avoidance of a contract under Article 157 of the Civil Code of the Mainland is the return of the property and the payment of damages to the other party for losses suffered by the party at fault. damages suffered by the other party. The customer’s claim for the return of the money was based on Article 157 and did not depend on any ‘unlawful’ factor; (2) the principle of international comity established in Ryder applies not only to contractual causes of action but also to other causes of action such as unjust enrichment. The principle of international comity established in the As far as the cause of action for unjust enrichment in this case is concerned, since Article 157 of the Civil Code of the Mainland recognizes the right of the customer party to claim a refund of money in the event that the contract is null and void, according to the principle of international comity, the Hong Kong court should also recognize the customer party’s right to do the same; (3) the judgement that the customer party can claim back the funds in the Hong Kong court will not result in the Hong Kong court judgement contributing to the exchange of currency in breach of the laws of the Mainland, because the customer party The nature of the funds obtained by the customer under the Hong Kong court judgement is ‘damages’ under Article 157 of the Civil Code, rather than consideration for the performance of the contract.
Currency Exchange in the Recovery of Funds in Fraud Cases (1): Application of the Principle of Illegality
When a victim of fraud sues to recover funds, a common defense for the receiving party is that the funds were received by the receiving party as a result of a cross-border currency exchange with another person, and that the receiving party received the funds at the same time as it paid the counterparty to the currency exchange the same value in RMB. In such cases, the receiving party often relies on two defenses: (1) it is a bona fide purchaser without notice and should not have to return the funds received; and (2) after receiving the funds, it has already entered other transactions with the funds in good faith, thereby changing its position. Faced with these two defenses, victims of fraud cases can often rely on the illegality of such cross-border currency exchanges (in violation of Mainland law) to argue that the two defenses are not valid.
Currency Exchange in the Recovery of Funds in Fraud Cases (2): Whether the customer side of an exchange shop constitutes a bona fide change of position
Relevant cases are Barros Mattos Junior and others v MacDaniels Ltd and others, Pan Jing, Americhip and more recently She Ching Yan v Cai Yunxiang (HCA 1062/2020). In She Ching Yan v Cai Yunxiang (HCA 1062/2020), the court relied on the legal principles established in these cases to determine that cross-border exchanges made by the customers of the exchange shops necessarily involved a breach of the Mainland’s foreign exchange laws (the second of the four scenarios summarized in the Ryder case above), and that the customers of the exchange shops could not rely on a the defense of change of position against the fraud victim’s unjust enrichment and proprietary tracing.
Currency Exchange in the Recovery of Funds in Fraud Cases (3): Does the customer constitute a bona fide purchaser without notice?
In She Ching Yan v Cai Yunxiang (HCA 1062/2020), for exactly the same reasons as the above change of position, the court held that the customer of a currency exchange shop had the same defences that could not be relied upon to counteract the fraud victim’s unjust enrichment and proprietary tracing.
Evidence of illegality under Mainland law: Must a legal affidavit from a Mainland lawyer prove illegality under Mainland law?
In She Ching Yan v Cai Yunxiang (HCA 1062/2020), the court confirmed that a party claiming that a cross-border exchange contravenes Mainland law may also rely on section 59 of the Hong Kong Evidence Ordinance and rule 38(7) of the Rules of the High Court on the basis that the question of the foreign law (Mainland China law) involved in the case has been recognized by Hong Kong in other cases. The Court has avoided the need to reissue solicitors’ affidavits on foreign law (Mainland law) in the case by directly referring to cases in which the issue of foreign law has already been decided as the basis for determining the foreign law on the ground that the issue of foreign law has already been confirmed by the Court in other cases in Hong Kong.
For more information on Hong Kong civil litigation relating to Mainland-Hong Kong cross-border currency exchange, please contact Mr. Yan of our law firm.
(Bob Yan, principal solicitor of Yan Lawyers, solicitors. Email: [email protected], Tel: +852 31881995, +86 15018939249, WhatsApp: +852 5103 9249)