When the Law Says No: How Hong Kong Courts Navigate Tainted Agreements

The doctrine of illegality in Hong Kong – Part 1

How illegality affects your claim: The basics

Introduction 

The doctrine of illegality is a nuanced area of law.  It is a fundamental principle which can make or break a legal claim.  Whether you are pursuing a contractual claim, seeking restitution, or defending against a lawsuit, understanding how illegality affects your position is crucial for any successful legal strategy and staying ahead of potential disputes.

This area of law has seen significant developments in Hong Kong in recent years.  This three-part series provides a guide to navigating this complex area of law.  In Part 1, we examine the fundamental principles of how illegality affects civil claims, including the shift from the “reliance approach” to the “range of factors approach”.  Part 2 will explore the developments in how foreign illegality affects restitutionary claims, particularly the principles established in Wong Chi Hung v Lo Wing Pun & Ors [2025] HKCA 370 (which is subject to appeal as of the date of this article).  Finally, Part 3 will examine how illegality affects the defence to restitutionary claims (such as the defence of bona fide purchaser for value and change of position). 

What is illegality?

In general, only four types of situations may engage the illegality analysis: criminal acts, quasi-criminal acts, non-criminal acts which engage the public interest (such as dishonesty in the context of civil disputes), and infringements of rules enacted for the protection of the public.  Public interest is not engaged in torts (other than those where dishonesty is an essential element), breaches of contract, or statutory or other civil wrongs that offend private rather than public interests.

Domestic or foreign illegality?

The underlying rationale for recognising the effect of domestic illegality (illegality under Hong Kong law) on civil claims differs from that for foreign illegality (illegality under foreign law).

For the defence of domestic illegality, two of the key policy reasons are that (1) a person should not be allowed to profit from his own wrong and (2) the law should be consistent and the integrity of the legal system should be maintained.

These objectives are not readily applicable in cases of foreign illegality, where international comity coupled with Hong Kong public policy are at the heart of the issue (at least insofar as the effects on contracts and, as further discussed in Part 2 of this series, unjust enrichment claims are concerned).  Let’s look at these in turn.

Domestic illegality – Patel over Tinsley, as adopted by Court of Appeal in Monat

The proper approach

Monat Investment Limited v All Person(s) In Occupation [2023] HKCA 479 reflects the current approach adopted in Hong Kong regarding the defence of domestic illegality.

In Monat, a squatter claimed adverse possession over a piece of land.  The registered owner argued that the squatter had breached s. 14 of the Buildings Ordinance of Hong Kong (“BO”) (which had a criminal sanction).  One of the key issues before the Court of Appeal was whether the common law defence of illegality applied to defeat the squatter’s claim for adverse possession.     

Upon examining various case authorities, the Court of Appeal followed the “range of factors approach” in Patel v Mirza [2017] AC 467 instead of the “reliance approach” in Tinsley v Milligan [1994] 1 AC 340.  In assessing the effect of illegality on a claim, instead of asking whether the plaintiff has to rely directly on the unlawful conduct to succeed (in which case no remedy shall be granted), the court should consider the following “trio of necessary considerations”:

• consider the underlying purpose of the prohibition which has been transgressed;
• consider conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim;
• keep in mind the possibility of overkill unless the law is applied with a due sense of proportionality.

Applying the “range of factors approach”, the Court of Appeal noted that the underlying purpose of the BO was not to penalise squatters but to ensure public safety in building construction, and there had been no enforcement action for the subject violation in the past 40 years.  This was balanced against the justification for adverse possession in promoting the use of land as a natural resource and discouraging stale claims.  Accordingly, on the facts of the case, the defence of illegality did not apply to defeat the squatter’s claim for adverse possession.

Domestic illegality: a defence to unjust enrichment claims?

In Hong Kong, Monat was cited and referred to in numerous cases involving a claim for unjust enrichment, including Kwan Hung Shing v Fong Kwok Shan Christine [2023] HKCA 1020 and G v N [2023] HKCFI 3366. 

In Kwan Hung Shing, the defendants counterclaimed for unjust enrichment regarding the increase in value of the plaintiff’s land brought about by their investment in implementing an illegal development scheme and illegal agreements under Hong Kong law.  In particular, the defendants argued that they did not seek to enforce the illegal agreements and relied on Patel to the effect that an unjust enrichment claim might be allowed as it would unwind the transaction through repayment of money paid and restore the parties to their original position.

The first instance judge dismissed the counterclaim, applying the approach in Tinsley.  On appeal, the Court of Appeal recognised illegality as a potential defence to unjust enrichment claims and held that applying the Patel approach would also lead to rejection of the defendants’ counterclaim based on the facts of the case.  In particular, the Court of Appeal noted that the defendant/appellant assumed a pivotal role in organising and implementing the illegal development scheme, whereas the plaintiff was not found to have the relevant knowledge.  Patel may be distinguished on its facts – the defendant there was a finance professional, but the plaintiff (who sought to recover money transferred under an illegal contract to trade in shares based on inside information that ultimately could not be carried out) was not and would not necessarily have known of the illegality of the conduct.

In G v N, the parties had entered into a securities purchase agreement pursuant to which N was to allot shares to G at a certain price.  Such placement was set aside by the BVI court.  G commenced arbitration in Hong Kong seeking inter alia restitution of the consideration it had paid for the placement under the agreement based on unjust enrichment for mistake or total failure of consideration.  In its defence, N claimed inter alia illegality of the placement.

The arbitrator decided on illegality under the test in Tinsley (rather than Patel) and dismissed G’s personal restitutionary claim.  G applied to set aside the awards on the ground that the awards (applying Tinsley instead of Patel) conflicted with Hong Kong public policy on illegality.  Alternatively, G sought an order to suspend the setting aside proceedings for the matter to be remitted to the arbitrator to give the arbitrator an opportunity to take such action as he considered would eliminate the grounds for setting aside.

Ultimately, the Court of First Instance declined to express any definitive view on whether the awards were indeed contrary to Hong Kong public policy on the facts of the case, but indicated that the Patel approach as acknowledged in Monat reflected the current public policy of Hong Kong. Accordingly, the matter was remitted to the arbitrator so that he could consider Monat and decide whether his decision would be affected in any way.

In summary, these recent Hong Kong cases confirm that domestic illegality can serve as a defence to unjust enrichment claims. With the application of the Patel approach, a careful analysis of the specific facts of each case is required.

Foreign illegality – Ryder principles in contractual cases

Regarding the effects of foreign illegality on contracts, the relevant principles are set out in the Court of Final Appeal’s landmark decision in Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544:

• First, if the contract is unenforceable under its proper law (whether chosen by the parties or otherwise), it will not be enforced by the Hong Kong courts, regardless of the place of required, intended or actual performance. 
• Second, 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.
• Third, 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, the contract will not be given effect regardless of its proper law, notwithstanding the fact that there may be alternative modes or places of performing which permit the contract to be performed legally.
• Fourth, violation of foreign laws in the actual performance of a contract where it is not required or initially intended may lead to the unenforceability of the contract regardless of its proper law. The Hong Kong courts will have regard to the seriousness of the foreign illegality to determine whether public policy and comity require enforcement of the contract to be denied. 
• It is noteworthy that while a contract under the first Ryder principle may be said to be void (i.e. not a contract at all and incapable of giving rise to legally enforceable rights and liabilities under that law), a contract under the second Ryder principle (which is a principle of contract law relating to impossibility of performance) is not void but “will not be given effect”.

By way of illustration, Ryder involved a joint venture for manufacturing mobile phones in the PRC.  Payment under the co-operation agreements was resisted on the ground that enforcement of the agreements (which were governed by Hong Kong law) was barred as a result of acts of performance that were illegal under PRC law.  On the facts, none of the first three Ryder principles applied.  The breaches in the PRC were found not to be serious contraventions of the law, not to be ‘iniquitous’ conduct, not to have resulted in actual criminal or enforcement proceedings in the PRC, and to have been mere administrative contraventions.  It was therefore held that judicial comity did not require the Hong Kong courts to treat such contracts as unenforceable due to incidental breaches under PRC law in their performance.

Commentary

The doctrine of illegality has evolved significantly in Hong Kong, with a discernible trend away from rigid, one-size-fits-all approaches.

As this area of law continues to develop, practitioners must keep abreast of new developments and carefully analyse the factual matrix of each case when addressing illegality issues.

The next article in this series will examine the latest developments in Wong Chi Hung v Lo Wing Pun & Ors [2025] HKCA 370 in the context of foreign illegality and restitutionary claims which is particularly relevant to Hong Kong practitioners given its cross-border nature.

Acknowledgments to James Yeung for research and contribution to this article.