In Hong Kong, whether a Hong Kong business heads north to trade or a mainland resident travels south for tourism and shopping, exchanging foreign currency is a very ordinary matter. Sometimes, for convenience, to save on fees or to obtain a more favourable exchange rate, some people turn to a service that money changers commonly call ‘mirror offset’ (dui qiao): the customer remits renminbi into a designated mainland account of the money changer, and the money changer remits Hong Kong dollars or foreign currency at the agreed rate into the customer’s Hong Kong or overseas account — or the other way round.

This apparently convenient ‘underground channel’ is in fact full of risk. On the surface, no funds cross the border in substance; the positions are offset through the money changer’s accounts on both sides or through other arrangements. In substance, however, such conduct circumvents the foreign exchange control regime of mainland China, disrupts foreign exchange order and may give rise to criminal or administrative liability.

Recently, the Hong Kong Court of Final Appeal delivered a landmark judgment in Wong Chi Hung v Lo Wing Pun [2026] HKCFA 14. The case concerned not only the handling of RMB 1 million, but also clarified a question that had troubled the legal profession for years: where a transaction is invalid because it breaches the law of a foreign or external jurisdiction, does the ‘defence of foreign illegality’ also extend to a restitutionary claim for unjust enrichment arising after the contract has been held unenforceable? In other words, can the party that received the money simply keep it?

The facts in brief: RMB 1 million seized, the money changer refuses to pay

In 2016, the plaintiff intended to carry out a mirror-offset currency exchange through a money changer operated by the defendant1. The parties reached agreement on the exchange arrangement, under which RMB 1 million was to be exchanged into an equivalent amount of Hong Kong dollars at the agreed rate. After the plaintiff deposited the funds into a mainland account designated by the defendant, that account was frozen by the police in connection with a separate pyramid-selling fraud case, and a mainland court ordered the confiscation of all funds in the account.

Although that pyramid-selling fraud case had nothing to do with the exchange transaction between the plaintiff and the defendant, the defendant nonetheless relied on it as an excuse, saying that the confiscation had caused the transaction to fail, and refused to pay the Hong Kong dollars. The plaintiff therefore brought proceedings against the defendant in Hong Kong, seeking restitution of RMB 1 million on the ground of unjust enrichment.

The first-instance proceedings began in the District Court in March 2019, and the matter went on appeal to the Court of Appeal of the High Court and then to the Court of Final Appeal, which handed down its final judgment in April 2026.

What about the validity of the contract in this case?

The parties did not dispute the applicable law, so the dispute was governed by Hong Kong law.

On the effect of foreign illegality on the validity of a contract, the Hong Kong Court of Final Appeal had set out the following four principles in Ryder Industries Limited v Timely Electronics Company Limited (2015) 18 HKCFAR 544, which are also known as the ‘Ryder principles’:

1. If a contract is already unenforceable under its governing law or the law of the place of performance, the Hong Kong courts will not enforce it at all;

2. If performance of the contract necessarily involves an act that is illegal in the place of performance, the courts will likewise not give it effect;

3. If the true intention of the parties at the time of contracting was to carry out together, in the foreign place, an act prohibited by the law of that place, the contract will also not be enforced;

4. If the illegality is not necessary for performance of the contract but arises only in the course of actual performance, the courts will decide whether to refuse enforcement depending on the seriousness of that illegality.

There is no doubt that mirror-offset currency exchange breaches mainland law. At first instance, the District Court held, on the basis of the second Ryder principle, that the exchange agreement in this case could not be enforced2.

Does an illegal contract mean there is no protection at all?

The central issue in this case was this: where a contract governed by Hong Kong law can no longer be enforced because it breaches foreign law, but the defendant has already obtained a benefit under the contract and the plaintiff has suffered loss because consideration has failed, on what principle, or in what circumstances, should the plaintiff’s restitutionary claim for unjust enrichment brought in Hong Kong fail on the basis of the ‘defence of foreign illegality’?

In law, the ‘defence of foreign illegality’ is founded on Hong Kong’s public policy and on the principle of comity towards the laws of other countries and regions. The defendant argued that (1) the defence of foreign illegality should apply to a restitutionary claim for unjust enrichment just as it does to a contractual claim; and (2) if the court upheld the plaintiff’s restitutionary claim, the plaintiff would in effect have achieved the purpose of ‘remitting the funds out’, that is, the parties’ illegal contract would have been enforced.

The defendant’s underlying strategy was clear: since the contract is illegal, the court should not enforce it; and, equally, to avoid indirectly achieving the result of remitting the funds out, the plaintiff’s restitutionary claim should also be dismissed.

The Hong Kong Court of Final Appeal, however, gave an answer grounded in legal reasoning: the court will not enforce an illegal contract, but it will not refuse the plaintiff relief merely because of illegality. Having reviewed the historical development of the relevant rules, and having referred to the Ryder principles and to the ‘range of factors’ approach set out by the UK Supreme Court in Patel v Mirza [2016] UKSC 42, the Court of Final Appeal pointed out that a rigid approach should be abandoned in such matters, and that the various policy factors should be considered and weighed flexibly.

In this case, the Court of Final Appeal considered that the core question in deciding whether the plaintiff’s claim should be upheld was whether, on the basis of the principle of comity, allowing the plaintiff’s claim would constitute an unacceptable breach of mainland law or defeat the purpose of the mainland legal system. In considering that question, the Court of Final Appeal also took into account the following factors:

1. A restitutionary claim for unjust enrichment differs in nature from a contractual claim: a contractual claim seeks to realise the agreed benefit and is founded on recognising the validity of the contract, whereas a restitutionary claim ‘presses the stop button’ and puts the clock back to the position before the transaction; it does not itself involve enforcing the contract — on the contrary, it negates the contract’s validity.

2. The plaintiff’s conduct amounted only to a breach of mainland administrative regulations, rather than a grave criminal offence; its illegality was peripheral rather than central to the transaction as a whole.

3. Article 157 of the Civil Code of the People’s Republic of China provides for the legal consequences where a civil juristic act (including a contract) is invalid, revoked or determined not to take effect; it does not cut off every avenue of relief for the parties.

4. Ordering the defendant to return the money on the basis of unjust enrichment, even if it appears similar to enforcing an illegal exchange contract, rests on a completely different legal foundation. Allowing the money to be returned is not the same as recognising the legality of the transaction, and the exchange rate applied under the judgment (for example, payment in Hong Kong dollars) is different from the rate agreed in the exchange agreement.

On that basis, the Hong Kong Court of Final Appeal held that where a contract governed by Hong Kong law can no longer be enforced because it breaches foreign law, but the defendant has obtained a benefit under the contract and the plaintiff has suffered loss because consideration has failed, then — save for possible rare exceptional circumstances, and save where restitution of the unjust enrichment would breach the foreign law and thus offend the principle of comity — the defendant’s obligation to make restitution of the unjust enrichment should be treated as a separate and distinct obligation, and should be upheld.

Reaffirming the doctrine of precedent

The Court of Final Appeal took the opportunity in this case to reaffirm the binding force of English precedents on Hong Kong courts in civil cases:

1. Only decisions of the Privy Council on appeals from Hong Kong handed down before 1 July 1997 are binding on Hong Kong courts, subject to any later decision of a Hong Kong court departing from them.

2. Privy Council decisions on appeals that did not come from Hong Kong, and House of Lords decisions, given before 1997 are not binding on Hong Kong courts, although the reasoning in those decisions is deserving of consideration and attention.

3. The same applies to decisions of other jurisdictions that adopt the common law system, including decisions of their highest courts.

The Court of Final Appeal further made clear that English precedents after 1997 are only of persuasive value and are not binding on Hong Kong courts. Hong Kong may develop its own distinct common law system in the light of its own circumstances, and this is a manifestation of the autonomy and maturity of Hong Kong’s judicial system.

It is worth noting that the Court of Final Appeal pointed out that the earlier Ryder decision was handed down about half a year before the UK Supreme Court’s decision in Patel v Mirza, and had already been the first to establish a flexible and nuanced set of principles for assessing and dealing with the effect of foreign illegality on the validity of contracts according to the seriousness of the illegality — an approach of reference value.

A word of caution for the public and for the industry

Although the plaintiff in this case had the opportunity to recover the principal, and the outcome did in a sense achieve the purpose of remitting the funds out, the litigation began in 2019 and went all the way to the Hong Kong Court of Final Appeal, taking seven years to reach a final judgment. If the time and money costs of the proceedings are taken into account, the plaintiff also paid a heavy price, and its legal costs may even have exceeded the amount in dispute itself.

Beyond the situation in this case, currency exchange through money changers carries other risks. One is the source of the funds exchanged: some money changers may mix in proceeds of crime, and a customer who receives such funds may find that their Hong Kong or overseas accounts are investigated and frozen by the police, and may be drawn into further legal disputes.

Even if nothing happens on the Hong Kong side, that does not make conduct that circumvents foreign exchange control lawful on the mainland; using money changers for mirror-offset exchange may still lead to investigation and administrative penalties by mainland law enforcement agencies or the relevant authorities.

As for the performance of contracts, foreign illegality or the principle of international comity is no longer necessarily a trump card. Hong Kong courts have shown a tendency to adopt a flexible approach to such questions. The law will not support illegal transactions, but neither will it allow illegality to become a safe harbour for unjust enrichment.

1. The case involved several defendants, including the money changer and persons connected with its operation, but for ease of reading they are referred to collectively in this article as ‘the defendant’.

2. Neither party raised any appeal ground concerning the validity of the contract in the subsequent appeals, so the later appeal proceedings were conducted on the basis that the exchange agreement was unenforceable.