FACV Nos 12 & 13 of 2015

IpsofactoJ.com: International Cases [2015] Part 12 Case 4 [CFA]



S.W. Chan

- vs -

Ryder Industries Ltd

Chief Justice Geoffrey Ma

Justice R.A.V. Ribeiro PJ

Justice Robert Tang PJ

Justice Patrick Chan NPJ

Lord Collins of Mapesbury NPJ

16 DECEMBER 2015


Chief Justice Ma

  1. For the reasons contained in the judgment of Lord Collins of Mapesbury NPJ, I agree that these appeals should be dismissed. 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 [1994] 1 AC 340 and also applied the proportionality test contained in ParkingEye Ltd v Somerfield Stores Ltd [2013] QB 840. Since the decisions of the lower courts, there have been important developments in the law in this area and reference is made below to the decisions of the UK Supreme Court in Hounga v Allen [2014] 1 WLR 2889, Les Laboratoires Servier v Apotex Inc[2015] AC 430 and Bilta (UK) Ltd v Nazir (No 2) [2015] 2 WLR 1168. 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. I would like, however, to make this point. Both the lower courts applied a proportionality test, this being the test advocated by both parties based on their reading of ParkingEye. I am not in favour of applying this test as the applicable test for illegality since it appears to suggest that some kind of judicial discretion to be exercised. It seems to me that the question of illegality must be based on firmer principle and policy, although I accept that the facts in any given case will inevitably differ. However, as I have indicated, it is not necessary to go into this aspect in the present appeals.

    Justice Ribeiro PJ

  2. I agree with the judgment of Lord Collins of Mapesbury NPJ and the observations made by the Chief Justice.

    Justice Tang PJ

  3. I agree with the judgment of Lord Collins of Mapesbury NPJ and the observations made by the Chief Justice.

    Justice Chan NPJ

  4. I agree with the judgment of Lord Collins of Mapesbury NPJ and the observations made by the Chief Justice.

    Lord Collins of Mapesbury NPJ

    I  Introduction

  5. These appeals from the judgment of the Court of Appeal arise out of two consolidated actions by Ryder Industries Limited, formerly known as Saitek Limited (“Saitek”) against Timely Electronics Company Limited (“Timely”), both of which are Hong Kong companies, and against Mr Chan Shui Woo (“Mr Chan”), the majority shareholder and director of Timely, as guarantor. At the conclusion of the hearing the Court indicated that the appeals would be dismissed for reasons to be given later.

  6. The claims are for about HK$6.5 million claimed to be due under a series of agreements between 2005 and 2007 in connection with a form of joint venture for the manufacture of mobile phones in China. Saitek was to make available factory facilities and part of the equipment necessary for the manufacture of the phones, and Timely was to introduce customers, provide also a part of the machinery to enable the manufacturing to take place, as well as provide management and supervision in the manufacturing process.

  7. Mr Recorder Anthony Houghton SC (“the judge”) gave judgment[1] for Saitek, and an appeal to the Court of Appeal was dismissed.[2]

  8. The appeals raise the question of the enforceability in Hong Kong of a contract governed by Hong Kong law when it has been performed in the PRC partly in breach of PRC law. The relevant contracts are the agreements referred to in paragraph 6 above. It was accepted by the parties that Mr Chan’s liability as guarantor stood or fell with the validity of the agreements.

    II The background: Co-operation Agreement and Supplemental Agreements

  9. In 2002 Saitek established an operating division doing business in China through a “Commission Processing Enterprise” (CPE) in conjunction with a local authority in Shenzhen, under the name Saitek Baoan Shanghe Saitek Electronics and Plastics Factory (“Saitek CPE”). Saitek also established in the PRC a Wholly Foreign Owned Enterprise (“Saitek WFOE”).

  10. Timely also had an associated wholly-owned company incorporated in the PRC which is a Wholly Foreign Owed Enterprise (“Timely WFOE”), and which operated a factory at Kung Ming Property Development Main Company, Baoan, Shenzhen (“the Kung Ming Factory”).

  11. Saitek CPE had substantial spare capacity at its factory. In 2005 a former employee of Saitek introduced Timely to Saitek, with a view to the introduction by Timely of customers seeking a manufacturing facility for mobile phones in China at Saitek CPE. Saitek CPE did not have all of the equipment necessary to carry out the manufacturing function and was not willing to invest in the purchase of the remaining necessary equipment. What was envisaged was that Timely would supply, in addition to customers, the machinery not then available to Saitek CPE to enable the manufacturing to take place, and Timely would also provide management and supervision of the manufacturing process.

  12. These discussions resulted in a written memorandum of understanding and, subsequently, in a written agreement (headed Agreement of Co-operation between Saitek and Timely) between Saitek and Timely in late October 2005. It was common ground that the agreement is governed by Hong Kong law. 

  13. The agreement recorded that Saitek and Timely had a mutual interest in the manufacturing of mobile phones and that Saitek would provide resources to support the manufacturing process in return for a share of revenue. Saitek was to be responsible for customs declarations and for logistics/freight costs of importing the components from Hong Kong to Saitek CPE’s factory, and the freight costs to export the finished goods to Hong Kong. Timely was to be responsible for the transportation costs between the Saitek CPE and Timely factories, and for payment collection from customers. Timely was to pay Saitek a monthly rental for the premises, and a monthly depreciation charge for the equipment, and also utility charges and staff wages. Saitek was to account for a share of the revenue received from customers.

  14. The parties operated a periodic mutual account, which by mid-2006 was considerably in favour of Saitek, and the sums due had been accruing and unpaid for some time.

  15. As a result, in September 2006 Saitek and Timely entered into a first supplementary agreement, which provided that Timely would pay all overdue debts to Saitek before September 2007, and would pay interest on overdue balances, at 1% above base lending rate. A second supplementary agreement was made in March 2007, under which Timely and Saitek agreed (inter alia) that the net outstanding payable to February 2007 was HK$5,615,394.97, and that Timely would pay the debts before December 31, 2007. Mr Chan personally guaranteed that all outstanding debts would be paid by then.

  16. When proceedings were commenced by Saitek, Timely and Mr Chan resisted payment on the ground that enforcement of the agreements was barred as a result of acts of performance of the co-operation agreement which were illegal under PRC law.

  17. The judge found that two of the four alleged illegalities had occurred, but that they did not affect the enforceability of the contracts, and his decision was affirmed by the Court of Appeal. Timely and Mr Chan now appeal to this Court.

    III Alleged illegalities under PRC law

  18. Four illegalities were alleged. The first was that the arrangement was designed to evade PRC law, which provided that Timely, a foreign company for these purposes, could only lawfully carry on an independent business through a mainland body. The judge rejected the allegation on the basis that, although the agreement envisaged the payment of something akin to rent by Timely to Saitek in respect of the factory premises for use by Timely, it had not created a lease of these premises; it did not envisage Timely operating a separate or independent business under the agreement, which was a co-operation agreement.

  19. The second allegation related to the fact that semi-finished processed goods were transported from the Saitek CPE premises to the Kung Ming Factory of Timely WFOE for testing before being returned to the Saitek CPE premises. Under the applicable law, materials (such as those used for processing the goods under the agreement between Timely and Saitek) imported to China for processing were imported duty free and should have been kept as bonded goods under constant supervision before being re-exported from China.   Transporting goods between the factories meant technically that the supervision was broken. Written authorisation could have been obtained from the customs authorities, but obtaining it was not practicable within the timeframe required. Accordingly this requirement was said to be frequently honoured in its breach. The expert witnesses were agreed that such conduct would be in breach of the customs law of the PRC, but disagreed as to how seriously the authorities would view a breach. In the event, following a raid by customs authorities on Timely’s Kung Min factory in 2007 goods which had been seized and impounded were released on payment of a substantial “administration fee”, described by the judge as “inferentially illicit”. The judge noted that Timely did not seek to rely on this alleged illegality as, by itself, constituting a defence to the claims of Saitek, but as a factor in assessing the extent to which the agreement was tainted by illegality. This was relevant to an assessment of the fourth allegation of illegality.

  20. The third allegation of illegality was that, in breach of PRC law, Saitek CPE was said effectively to be fulfilling orders for mainland customers (which subsequently expanded to an allegation that use of machinery by Saitek CPE for processing of domestic orders would also be in breach of bonded equipment regulations). The judge rejected this allegation on the basis that the work for mainland customers was done, not by Saitek CPE, but by Timely, and there was no misuse of the bonded equipment.

  21. The fourth ground, and the only ground of illegality which the judge accepted, was that Saitek CPE used materials imported duty-free by Saitek WFOE, another operation of Saitek in Shenzhen, for the production of mobile phones. If imported by Saitek WFOE duty-free, the materials should have remained under the control of Saitek WFOE, and it was undisputed that outsourcing of bonded materials from a WFOE to a CPE would be a breach of Article 23 of the Measures of the Customs of the People’s Republic of China for the Supervision of Goods for Processing Trade, which provides for outsourcing by an operating enterprise to be subject to the approval of the customs office. In the absence of approval, outsourcing is not permitted. Failure to comply attracts a sanction contained in the Regulation of the People’s Republic of China on the Implementation of Customs Administrative Punishment, the level of punishment depending upon the severity of the offence, and ranging from a reprimand or criticism to a fine and confiscation of gains. This ground of illegality can therefore be seen to be linked to the second ground.

    IV The decisions of the judge and the Court of Appeal

    The judge’s decision

  22. The judge noted that the evidence showed that there was a wide range of potential penalties, but that the evidence as to the seriousness with which any such breach would be viewed was very limited. His conclusion was that, so far as the evidence went for the fourth ground of illegality, although a substantial amount of goods were involved, he was not persuaded that the mode of performance would be considered a very serious contravention of the law. 

  23. The applicable legal principles were, according to the judge, not in dispute before him. He said that illegality was an aspect of public policy, and the courts would not, in the ordinary course of events, enforce a contract which was illegal under domestic law, and that a contract to be performed in a foreign jurisdiction, the performance of which would be illegal in that place of performance, would not be enforced (citing Regazzoni v KC Sethia (1944) Ltd [1958] AC 301 and Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287).

  24. The essence of his conclusion was based on the reasoning of the Court of Appeal in England in ParkingEye Ltd v Somerfield Stores Ltd [2012] EWCA Civ 1338, [2013] QB 840, from which he drew the following points, inter alia: a contract which was not formed for an illegal purpose and which was performed over a period of time might be susceptible to some illegality arising in its performance; whether such illegality tainted the whole contract such that it would not be enforced by the court required consideration of the proportionality of not enforcing the contract and the furtherance of the policy objectives underlying the illegality defence; and the necessity or otherwise for an illegal mode of performance to be adopted, and the question whether illegal performance was the object of the contract are relevant factors, as is the question as to whether the plaintiff has to plead or rely on any illegality as a basis for the claim.

  25. On that basis the judge, having found that there was illegality in the performance of the agreement, primarily on the part of Timely, in the arrangements described as the second illegality, and illegality in performance on behalf of Saitek in regard to the fourth illegality, decided that he should not, as a matter of policy, decline relief to Saitek. There had been some illegal conduct, for which the parties largely shared responsibility. It was not conduct which could be described as iniquitous, and it had not resulted in actual criminal or other enforcement proceedings in the PRC. There was no suggestion of any evasion of taxes or duties, and the contraventions were, in a sense, administrative. Saitek did not need to rely on the illegalities as a basis for the claim (inferentially a reference to the principle in Tinsley v Milligan [1994] 1 AC 340) and it would be disproportionate to decline to enforce the payment obligation under the agreement, particularly where it had otherwise been performed. 

    Court of Appeal

  26. On the appeal by Timely, Saitek contended in its respondent’s notice that the judge should have found that there are only two situations in which a contract governed by Hong Kong law may be held unenforceable by reason of a foreign illegality:

    1. the contract could not be performed in accordance with its terms without the commission of an illegal act, and/or

    2. the contract was entered into for the common purpose of doing an illegal act under the foreign law of the place of performance.

    But the Court of Appeal decided that it was unnecessary to decide the point, and affirmed the decision on the basis of what it described as the well established principle in Tinsley v Milligan that if a claimant seeking to enforce a contract does not need to rely on his illegal performance then the contract is enforceable.

  27. On the facts, the Court of Appeal considered that the judge was plainly right to find that Saitek did not need to rely on the fourth illegality. Timely’s own evidence was that the entire outstanding balance in the running account, the subject matter of Saitek’s claims, was exclusively referable to transactions within the third alleged illegality (which, as the judge had found, involved no illegality); and Timely’s evidence supported Saitek’s case that no reliance had been placed on the fourth illegality for its claims based on the running account. Even if the fourth illegality could be relied on as a ground for not enforcing the agreement, it would not take Timely’s defence any further. By applying the proportionality test as propounded in ParkingEye Ltd v Somerfield Stores Ltd, the Court of Appeal agreed that in the overall circumstances of this case it would be wholly disproportionate to decline to enforce the agreement.

    V Discussion

    The illegality defence

  28. As noted, the Court of Appeal in this case applied a combination of, first, the principle in Tinsley v Milligan [1994] 1 AC 340 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, and, second, the proportionality test in ParkingEye Ltd v Somerfield Stores Ltd [2012] EWCA Civ 1338, [2013] QB 840.

  29. It is notorious that the common law in England on the scope of application of the illegality defence is difficult and uncertain, and the position has not been made easier by recent, conflicting, decisions of the UK Supreme Court.

  30. Shortly before, and soon after, the decision of the Court of Appeal in this case, there were three decisions of the UK Supreme Court on the illegality defence: Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889 (claim for unlawful discrimination); Les Laboratoires Servier v Apotex Inc [2014] UKSC 55, [2015] AC 430 (claim for damages on a cross-undertaking) and Bilta (UK) v Nazir [2015] UKSC 23, [2015] 2 WLR 1168 (claim by a liquidator against directors arising out of a VAT fraud).

  31. In Hounga v Allenthe claimant was an illegal immigrant from Nigeria. It was held that she was entitled to compensation for the physical abuse inflicted on her by her employers, notwithstanding that an illegal contract of employment formed a material part of her complaint. Lord Wilson said (at [42]; Lady Hale and Lord Kerr agreed) that it was necessary to ask, first, what was the aspect of public policy which founded the defence, and second, whether there was another aspect of public policy to which application of the defence would run counter. It was held that the public policy against trafficking and in favour of the protection of its victims far outweighed the policy behind the illegality defence: [44]-[52]. Lord Hughes (with whom Lord Carnwath agreed) adopted the test of proportionality from Saunders v Edwards [1987] 1 WLR 1116 (at 1134, per Bingham LJ[3]) and concluded that there was an insufficiently close connection between the immigration offence and the claims for discrimination, since the former merely provided the setting or context for the claim (at [59], [67]).

  32. The decision in Hounga v Allen was handed down after argument had taken place before an entirely different constitution of the court in Les Laboratoires Servier v Apotex Inc but before judgment was given in the latter case.In that case the claimant’s defence on the claim for damages on a cross-undertaking was that the defendant would have made its profits through illegal conduct. On the facts, the Supreme Court held that there would have been no relevant illegality, but the majority rejected the notion that the court was entitled to make a value judgment about the seriousness of the illegality and the impact on the parties of allowing the illegality defence: [21], per Lord Sumption; while Lord Toulson, on the other hand, considered that Hounga v Allen was authority for a more policy-based approach: [61]-[62].

  33. In Bilta (UK) v Nazir the UK Supreme Court returned to the question. A panel of seven sat on this appeal, only one of whom (Lord Carnwath) had been on the panel in Hounga v Allen. In Bilta (UK) v Nazir the Court held that the claim by liquidators of a company against directors for losses caused by a VAT fraud was not barred by the illegality defence because the directors’ conduct was not attributable to the company. Lord Sumption (at [62]) repeated the view expressed by him in Les Laboratoires Servier v Apotex Inc that the illegality defence is based on a rule of law on which the court is required to act in every case to which it applies, and is not a discretionary power on which the court is merely entitled to act, nor is it dependent on a judicial value judgment about the balance of the equities in each case. On the other hand, Lord Toulson and Lord Hodge repeated, in a joint judgment, Lord Toulson’s view that the proper approach was the balancing of policy interests enunciated in Hounga v Allen; and they also cast doubt on the utility of the reliance test in Tinsley v Milligan [1994] 1 AC 340 in the light of criticisms by the Law Commission of England and Wales, by Lord Phillips in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39, 1 [2009] AC 1391, at [21]-[25] and Lord Wilson in Hounga v Allen at [30] and by McHugh J in the High Court of Australia in Nelson v Nelson (1995) 184 CLR 538, at [27]: see [2015] 2 WLR 1168 at [171]-[173].

  34. Lord Neuberger thought it was not appropriate for the Court to address this difficult and controversial issue without full argument (at [17]) and Lord Mance agreed (at [34]).

  35. Faced with these differences of view on the effect and correctness of the leading decisions and an apparent conflict of principle between two differently constituted panels, it is not surprising that the President of the UK Supreme Court, Lord Neuberger, said in Bilta (UK) v Nazir (at [15]) that the proper approach to the defence of illegality needed to be addressed by the UK Supreme Court as soon as appropriately possible in a panel of seven or nine justices. I also agree with the observations of the Chief Justice in relation to the position in Hong Kong.

    Illegality in the conflict of laws

  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.

  37. The HKSAR and the PRC are parts of one country, but for the purposes of the conflict of laws they are separate law districts: First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569, at [43].

  38. It was accepted by the parties that the co-operation agreement, and the supplementary agreements, were governed by Hong Kong law. Most of the performance (other than payment) was to take place on the mainland.

  39. The basic principles (which have to be read in the light of the fact that Hong Kong and the PRC are separate law districts rather than different countries) are helpfully summarised in Johnston, Conflict of Laws in Hong Kong, 2nd ed, 2012, at para 5.012 (footnotes omitted):

    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.

    Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287

  40. In the Ralli Brotherscase the issue was whether Spanish owners could require English charterers to pay the full amount of the unpaid balance of freight for a cargo of jute from Calcutta to Barcelona, when, as a result of changes in exchange rates, the freight exceeded the maximum permitted by Spanish law on pain of penalties. The question arose in an arbitration in England after the Spanish courts had ordered the owners to discharge the cargo against the deposit by the buyers of the freight allowed by Spanish law. The relevant question for the opinion of the court on the case stated was essentially whether payment by the buyers of the permitted amount into court discharged the charterers. It was held that the effect of illegality under Spanish law was that payment of the excess could not be enforced against the charterers even though the charter was governed by English law.

  41. All three members of the Court of Appeal referred with approval to the proposition in Dicey, Conflict of Laws, 2nd ed 1908, p. 553, that: “A contract .... is, in general, invalid in so far as .... the performance of it is unlawful by the law of the country where the contract is to be performed” – “the Dicey Rule” – and Ralli Bros has ever since 1920 been treated as authority for that proposition. In De Beéche v South American Stores (Gath & Chaves) Ltd [1935] AC 148, 156 it was said (per Viscount Sankey): “it cannot be controverted that the law of this country will not compel the fulfilment of an obligation whose performance involves the doing in a foreign country of something which the supervenient law of that country has rendered it illegal to do.” The same (or a closely similar) principle applies to existing illegality: Toprak Mahsulleri v Finagrain [1979] 2 Lloyd’s Rep 98, 107, per Robert Goff J, approved [1979] 2 Lloyd’s Rep 112, 117 (CA).

  42. The underlying basis of the Ralli Brothers decision has been a matter of controversy for most of the 95 years since it was decided. It has been cited in many cases. But it has been applied in very few commercial decisions to hold that performance of a contract or a particular obligation was discharged. Examples include Harrison, Sons & Co Ltd v Jules Cavroy (1922) 12 Ll LR 390; Kursell v Timber Operators and Contractors Ltd [1927] 1 KB 298; Zivnostenska Banka v Frankman [1950] AC 57, 71; Nile Co for the Export of Agricultural Crops v H & JM Bennett [1986] 1 Lloyd’s Rep 555. But in the vast majority of the many reported cases in which reliance has been placed upon the decision, it has not been applied, most often either because performance was not found to be illegal, or because performance was not required at the place of the illegality (applying Kleinwort, Sons and Co v Ungarische Baumwolle Industrie AG [1939] 2 KB 678).

  43. Although the Dicey Rule has sometimes been treated as if it were a statutory provision or a strict rule of private international law, it has long been recognised that it forms part of the law of contract. F A Mann, Proper Law and Illegality in Private International Law (1937) 18 BYIL 97 argued (at 111) that the decision in Ralli Brothers turned on the doctrine of impossibility of performance in English law. That continues to be the prevailing view: “.... Ralli Bros established a principle of the domestic law of contract relating to discharge by supervening illegality and does not establish a rule of the conflict of laws”: Chitty on Contracts, 32nd ed, 2015, para 30-360; see also Dicey, Morris & Collins, Conflict of Laws, 15th ed, 2012, paras 32-097 et seq. In practice the distinction would only matter if the governing law of the contract were not the law of the forum.

    Foster v Driscoll [1929] 1 KB 470

  44. In this famous case, Sir Harry Foster, the Conservative and Unionist Member of Parliament for Portsmouth Central, entered into an agreement with Driscoll and Miller (shipbrokers), Lindsay (a distiller in Scotland), and Attfield (a retired schoolteacher). The agreement provided that Lindsay would sell 7000/7500 cases of Scotch whisky fob Leith or Glasgow; the syndicate would take delivery of the goods on board a regular line of steamships; and Attfield would lend the syndicate £2500 to buy the steamship Wearhome. The plan was that Attfield would see to the disposal of the whisky in the United States if that were possible, or if not, in Canada, or on the high seas at some point sufficiently near the territory of the United States to facilitate a sale in violation of the United States prohibition laws. The whisky was never shipped, and the financial transaction unravelled, leading to three actions, which raised the question (inter alia) whether Foster was liable to Lindsay on bills drawn by him for the purchase of the whisky.

  45. The Court of Appeal decided by a majority that the object to be attained by this agreement was a breach of international comity and therefore that the agreement was contrary to public policy and void. Lawrence LJ said (at 510):

    .... a partnership formed for the main purpose of deriving profit from the commission of a criminal offence in a foreign and friendly country is illegal, even although the parties have not succeeded in carrying out their enterprise, and no such criminal offence has in fact been committed; and none the less so because the parties may have contemplated that if they could not successfully arrange to commit the offence themselves they would instigate or aid and abet some other person to commit it. The ground upon which I rest my judgment that such a partnership is illegal is that its recognition by our Courts would furnish a just cause for complaint by the United States Government against our Government (of which the partners are subjects), and would be contrary to our obligation of international comity as now understood and recognized, and therefore would offend against our notions of public morality ....

    There only remains to be considered the statement in Dicey’s Conflict of Laws, 4th ed., p. 620, that an English contract will only be held invalid on account of illegality if it actually necessitates the performance in a foreign and friendly country of some act which is illegal by the law of such country .... I am of opinion that, in view of the main object of the contract of partnership between the parties in the present case, it is not saved from illegality merely because the partners may have contemplated the event of not being able themselves to import the whisky into the United States, and may have considered the possibility of having to deliver the whisky to the illicit buyers on the high seas or at such other convenient place as might be arranged between themselves and their buyer consistently with their being able to obtain the high price ruling on the illicit market in which they intended to sell the whisky.

  46. Sankey LJ said (at 518-519):

    .... the mere fact that a vendor of goods knows that the purchaser proposes to run them into a country where they are prohibited by some revenue law is not sufficient to render the contract of sale illegal, but if beyond mere knowledge the vendor actively engages in an adventure to get the goods into such country, the Court will not assist the parties to the adventure by entertaining or settling any dispute between the parties arising out of the contract .... [T]he Courts of this country are not bound to entertain such actions in view of the obligations of international comity ...

  47. The principle of the case is that “an English contract should and will be held invalid on account of illegality if the real object and intention of the parties 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” (at 521-522, per Sankey LJ).

    Regazzoni v KC Sethia (1944) Ltd [1958] AC 301

  48. The decision in Foster v Driscoll was endorsed by the House of Lords in Regazzoni v Sethia. An Indian company, the sellers, agreed to sell to Regazzoni, resident in Switzerland, cif Genoa, 500,000 jute bags. Both parties knew that it was impossible to obtain so large a quantity of the type of jute for early shipment from any source other than India. Both parties knew that the ultimate destination was South Africa, and that Indian law prohibited the export of designated goods from India to South Africa, directly or indirectly, and that the prohibition included the goods which were the subject of the contract. The sellers intended, and Regazzoni knew that they intended, to evade the Indian prohibition by finding a shipper in India who would not ask inconvenient questions about the destination of the goods and who would be able to get the goods out of India. English law was the governing law of the contract. The sellers repudiated the contract.

  49. Foster v Driscoll was applied and the contract was held to be unenforceable. Viscount Simonds said (at 323) that it had been conclusively found that the common intention of the parties was to violate the law of India, and it was of no consequence that the documents did not disclose their intention. Lord Reid also said that the crucial fact was that both parties knew that the contract could not be performed without the suppliers procuring a breach of the law of India within the territory of that country. He said (at 318-319):

    It is .... nothing else than comity which has influenced our courts to refuse as a matter of public policy to enforce, or to award damage 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.

  50. Because these were international cases, the decisions speak of international comity, but the principle applies when the case concerns, as here, separate law districts rather than separate countries. The principle is one of public policy, and these decisions have to be read in the light of the foreign legislation which was involved. In Foster v Driscoll it was the prohibition laws mandated under the 18th amendment to the US Constitution. In Regazzoni v Sethia it was Indian sanctions against South Africa. Plainly, it does not apply to every breach of foreign law.

  51. It is not a pre-condition to the application of the Foster v Driscoll/Regazzoni v Sethia principle that the plaintiff is relying on its own illegality. In Foster v Driscoll the seller of the whisky was suing on the bill drawn to pay for the whisky. In Regazzoni v Sethia the buyer was suing the seller for repudiation of the contract to sell the jute. Neither had to rely on the illegality abroad, but neither was allowed to recover.

  52. It is possible that the line between foreign illegality and domestic illegality has been blurred in two recent cases on enforcement of cross-undertakings in damages following the grant of injunction ultimately held to have been wrongly granted. In each of the cases it was argued, unsuccessfully, that the defendant was not entitled to damages on the cross-undertaking because its profits would have accrued through illegal conduct abroad.

  53. First, in Lilly Icos LLC v 8PM Chemists Ltd [2009] EWHC 1905 (Ch), [2010] FSR 95 the claimants contended that the defendants were not entitled to recover profits for lost sales of generic pharmaceuticals to Canadian internet pharmacies, because the drugs would have been imported into the United States in breach of United States law. Applying dicta of Robert Walker LJ in Ispahani v Bank Melli Iran [1998] Lloyd’s Rep Banking 133, 136-137, Arnold J accepted that where a contract was governed by English law, the relevance of illegal performance under foreign law was limited to the application of the Ralli Brothers and Foster v Driscoll/Regazzoni v Sethia lines of authority: [262]-[264]. But the case was not one of contract and the judge held (at [287]) that

    1. the court would not award compensation under a cross-undertaking for the loss sustained by an unlawful business or where the beneficiary of the cross-undertaking has to rely to a substantial extent upon his own illegality in order to establish the loss, and

    2. as a matter of international comity it did not matter whether the acts in question were unlawful under English law or foreign law.

    Arnold J rejected the claimants’ contention on the basis that the defendants did not have to rely on their own illegality in order to establish their loss, since their sales to the Canadian internet suppliers was not illegal, and it was the claimants who were relying on the illegal acts of importation into the United States by others. Consequently, the judge did not have to address the question whether the whole scheme might have fallen within an extended version of the principle in Regazzoni v Sethia.

  54. Second, in Les Laboratoires Servier v Apotex Inc,as indicated above (para 32),the claimant resisted a claim for damages on the cross-undertaking on the basis that the defendant’s lost profits would have accrued from sales in England of products manufactured abroad and infringing foreign patents. Arnold J applied his decision in the Lilly Icos case above, and held that the defendant failed because its claim was founded on its own illegality: [2011] EWHC 730 (Pat), [2011] RPC 574. It was conceded in the Court of Appeal that the illegality defence could apply where the source of the profits from sales in England was illegality under foreign law ([2012] EWCA Civ 593, [2013] Bus LR 80, at [69]), but the point was not discussed in the Supreme Court, which decided that patent infringement was not an illegal act for the purposes of the illegality defence: [2014] UKSC 55, [2015] AC 430. In that case neither the Court of Appeal nor the UK Supreme Court articulated the reason why illegality under foreign law was relevant.

  55. No principle can be derived from that case (or the Lilly Icos case) which is relevant to the present case, or which suggests that purely domestic rules of illegality can be applied to the consequences of the illegal performance of a contract in a foreign country.

  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 Jnr v MacDaniels Ltd [2004] EWHC 1188, [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. Thus in Re O’Connor’s Bill of Costs [1993] 1 Qd 423 a Queensland solicitor was entitled to recover on his bill of costs although he had done some of the work in New South Wales where he was not entitled to practise, and where therefore his work was illegal (and must have been contrary to an implied term of the retainer). But he was entitled to recover because the contract did not require an illegal mode of performance and he did not seek to enforce any illegal mode of performance by the client.

  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. In Euro-Diam Ltd v Bathurst [1990] 1 QB 1 diamond dealers exported diamonds to the Federal Republic of Germany and when the diamonds were stolen from the warehouse insurers refused to pay on the ground that the dealers had misrepresented their value in an invoice in order to reduce VAT payable in Germany. This was a criminal offence in Germany. The Court of Appeal decided that it was not contrary to public policy to enforce the insurance contract because (among other reasons) the false invoice did not involve any deception of the insurers and the dealers were not relying on the invoice in their action against the insurers. Aspects of this decision must be treated with considerable reserve because its “public conscience” discretionary approach to illegality was disapproved in Tinsley v Milligan [1994] 1 AC 340, at 360-361, and in Apotex[14]-[15] and Bilta at [61], although it may be consistent with Hounga v Allen.

  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.

    The judge refused to allow Timely to broaden the scope of evidence to encompass assertions that the agreement had been formulated with an illegal objective in mind: at [24]. 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

    1. not to be a very serious contravention of the law;

    2. not to be conduct which could be described as iniquitous;

    3. not to have resulted in actual criminal or enforcement proceedings in the PRC;

    4. 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 commonsense and justice.

  60. I would therefore dismiss both appeals.

  61. As to costs, I would make an order nisi that the appellants pay the costs of these appeals, such costs to be taxed if not agreed. Should any party wish to have a different order for costs, written submissions should be served on the other party or parties and lodged with the court within 14 days of the handing down of this judgment, with liberty on the other party or parties to lodge written submissions within 14 days thereafter. In the absence of such written submissions, the order nisi will stand absolute at the expiry of the time limited for these submissions.

    Chief Justice Ma

  62. For the above reasons, the appeals are dismissed. The order as to costs is as set out in para 61 above.

[1] HCA 2358/2007 & HCA 109/2009 (July 11, 2013).

[2] Lam VP, Barma JA and Poon J, CACV 164 & 165/2013 (September 22, 2014).

[3] Which seems to have been disapproved in Tinsley v Milligan [1994] 1 AC 340, at 359-361.


Edward Chan SC, Simon Chiu and Albert Chan, instructed by Allen Chan & Co., for the Appellants.

Richard Zimmern and Jason Yu, instructed by Munros, for the Respondent.

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