The Singapore Law Gazette

Unjust Enrichment Claims in Illegal Cryptocurrency Transfers

Trading in digital tokens across borders where a country has banned its citizens from trading in cryptocurrency is a risky proposition. If a wrongdoer party refuses to perform his part of the contract, the innocent party’s claim in contract or unjust enrichment may fail on grounds of illegality. The article explores this problem mainly by considering the innocent party who chooses to sue in a Singapore court, and the Singapore court applying the rules of foreign law illegality to aid in the interpretation and enforcement of the contract.

Introduction

When Party A from Singapore is dealing with cryptocurrency and non-fungible tokens (NFT) with Party B from China that has banned cryptocurrency, they run the risk that the contract is illegal. An illegal contract is unenforceable. If Party B refuses to perform his obligations under the contract, Party A may not be able to sue for breach of contract because of the illegality involved. But Party A may be able to seek restitution under an unjust enrichment claim if Party B obtained a benefit at Party A’s expense. For the purposes of this discussion, it is necessary to assume that the dispute is heard in the Singapore court system.

For countries that have banned the use of cryptocurrency outright, even if there are two contracts, one, for the sale and purchase of an NFT and, second, for the sale and purchase of the underlying asset (and the corresponding payment of it using cryptocurrency), the contract which is tied with cryptocurrency as a payment method could be invalid.

Under Chinese law, a contract that is invalid (null and void) has no legal effect at all irrespective of the wishes of the parties. The grounds of illegality and contravention of the interests of the state, collective or third parties flow from the requirement that a valid contract should not violate law or the public interest (see Article 58 General Principles of the Civil Law of the People’s Republic of China (GPCL)).

Since Foster v Driscoll (Foster v Driscoll),¹(1929) 1 KB 470. common law courts have recognised that contracts made with the intention to commit a criminal offence in a foreign state are unenforceable, even if the contract contemplated an alternative mode or place of performance.

If the contract is prohibited either under a statute or an established head of common law public policy, no recovery is permitted as prohibited contracts are void and unenforceable. Depending on how the NFT transaction is structured, it may fall into the category of prohibited contract (under Chinese law) if it involves a disguised form of trading in cryptocurrency. Given China’s tough public policy stance against cryptocurrency, this is likely to be the position in China if its citizens trade in NFTs involving cryptocurrency.

Unjust Enrichment

Apart from prohibited contracts, there are contracts which are not illegal per se but nevertheless involve the commission of a legal wrong. For instance, trading in virtual collectibles is not illegal for now under Chinese law. But paying in cryptocurrency appears to involve the commission of a legal wrong. For such contracts, the Court will consider a range of factors, including the nature and gravity of the illegality; the object, intent and conduct of the parties; and whether denying the claim would be disproportionate – before deciding whether the contract is enforceable or not. Even if the contract is illegal and void, a claimant may still be able to recover payments made under the contract under one of three separate avenues ((a) in pari delicto, (b) locus poenitentiae) or (c) unjust enrichment, provided there is no stultification).

Avenues (a) and (b) are not applicable to this discussion. Avenue (c) instead is possible. If a Singapore buyer has paid an amount in cryptocurrency to a Chinese seller for an NFT, and the Chinese seller has refused to transfer the NFT to the Singapore buyer citing illegality, the Singapore buyer may be able to bring an independent cause of action in unjust enrichment, provided the claim does not stultify the fundamental policy that rendered the underlying contract void and unenforceable in the first place.

One argument that may assist the Singapore buyer would be to argue that even if the purpose of the Chinese law banning cryptocurrency would be to deter speculative trading in cryptocurrency in China, allowing a claim in unjust enrichment (to compel a transfer of the NFT) would not be in breach of the underlying policy of the cryptocurrency ban as this was a legitimate payment for the transfer of a digital asset.

Foreign Law Illegality

The rule in Foster v Driscoll concerned foreign law illegality – a principle of domestic public policy that a Singapore court will not enforce a contract or award damages for its breach if its object would involve doing an act in a foreign and friendly state which would violate the law of that state.²see BCBC Singapore Pte Ltd and another v PT Bayan Resources TBK and another (2016) 4 SLR 1 at (175); Lyu Yan v Lim Tien Chiang and others (2020) SGHC 145 at (14).

In Ang Jian Sheng Jonathan and another v Lyu Yan (Lyu Yan),³(2021) 1 SLR 1091. the Respondent had engaged the Appellants to convert approximately RMB 21 million to US$3 million, and to remit the funds in USD from her China bank account with China Merchant Bank to her Singapore bank account with BNP Paribas Singapore. In breach of this agreement, the Appellants had failed to transfer the money to the Respondent’s Singapore bank account. The Respondent then commenced action against the Respondents for torts of conspiracy and negligence as well as unjust enrichment.

At first instance, the High Court Judge allowed the Respondents claims against the Appellants in conspiracy, negligence, and unjust enrichment, albeit not collectively. What is of interest is the defence of illegality relied upon by the Appellants against the Respondent’s claim in unjust enrichment. The Appellants contended that the rule in Foster v Driscoll was engaged, thereby defeating all of the Respondent’s non-contractual claims against them. This was apparently because the transaction of converting the RMB to SGD and thereafter remitting it to the Singapore account violated Chinese law. The Court found on the facts that the Respondent, at the material time when the agreement was entered into, did not know, let alone intended, that it violated Chinese law. Accordingly, the rule in Foster v Driscoll was not engaged.

Of significant interest is Phang JCA’s (delivering the Court’s judgement) obiter comments in Lyu Yan, where he had considered whether the principles in Foster v Driscoll could be read together with Ochroid Trading Ltd v Chua Siok Lui (Ochroid Trading)⁴(2018) 1 SLR 363. – put simply, whether the rules of foreign and domestic law illegality could apply to a same set of facts. The framework in Ochroid Trading is part of Singapore contract law, and thus only applies to contracts that are governed by Singapore law. However, the rule in Foster v Driscoll applies to any contracts that are being heard before the Singapore courts regardless of their individual governing laws.⁵See Dicey, Morris & Collins on the Conflict of Laws vol 2 (Sweet & Maxwell, 2012) at para 32‑193, as referred to in Lyu Yan at (30). Therefore, the rules of foreign and domestic law illegality could potentially apply when the impugned contract is governed by Singapore law (as lex contractus).

The above situation gives rise to an anomaly. A plaintiff whose cryptocurrency contract is governed by Singapore law is worse off compared to a plaintiff whose contract is not governed by Singapore law – the former would potentially have both his contractual claims and non-contractual claims barred, whereas the latter would have only his contractual claim barred.⁶See Marcus Teo, “Foreign law illegality and non-contractual claims” Conflictoflaws.net (31 March 2021). Take for example a contract governed by Chinese law – Ochroid Trading does not apply, only the rule in Foster v Driscoll. This results in a contract where contractual claims are barred pursuant to the rule in Foster v Driscoll. However, the Chinese contract still can avail themselves to a remedy through non-contractual means – unjust enrichment, given that Ochroid Trading does not apply.

Phang JCA had concerns whether this disconnect should be permitted, given that there is no principled reason as to why recovery via non-contractual means should be narrower for a contract governed by Singapore law, and broader when governed by a foreign law.

Principle of International Comity

Sankey LJ had explained the principle of international comity established in the seminal case of Foster v Driscoll (at 521-522) in the following terms – “[A]n 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.” [emphasis added]

This rule, founded upon the principle of international comity, was first accepted by the Singapore Court in Peh Teck Quee v Bayerische Landesbank Girozentrale.⁷(1999) 3 SLR(R) 842 at (45); see also Sheagar s/o T M Veloo v Belfield International (Hong Kong) Ltd (2014) 3 SLR 524 at (124). This rule held, in short, that an agreement whose object to be attained is a breach of international comity will be regarded by the courts as being against public policy and void (the “Comity Unenforceability Principle”).

It is suggested that the rule in Foster v Driscoll (and also Ralli Brothers)⁸Ralli Brothers v Compania Naviera Sota y Aznar (1920) 2 KB 287. was articulated in the context of proscribing a claim in a contractual context, and do not apply outside of contract.⁹Esben Finance at (166) and (223); see also the English High Court decision in Lilly Icos LLC and others v 8PM Chemists Ltd and others (2009) EWHC 1905 (Ch) at (26) and the recent decision of the court in Lyu Yan at (26). In fact, during the time when Foster v Driscoll was heard and determined, the laws of unjust enrichment as we know it today were not yet established. The Court in Esben Finance Ltd and others v Wong Hou-Lianq Neil (Esben Finance)¹⁰(2022) 1 SLR 136. noted that the authority in Goff & Jones had, broadly, only referred to cases in relation to contractual illegality, and not non-contractual illegality cases.¹¹Esben Finance at (168). As such, the issue of whether the principles in Foster v Driscoll applies or even ought to apply to non-contractual cases as well never arose for discussion.

Such disparity between the treatment of contractual and non-contractual claims viz the rule in Foster v Driscoll appear to go against the international comity principle in which the rule in Foster v Driscoll was founded upon in the first place. The Court of Appeal in Esben Finance¹²Esben Finance at (164); see also Foster v Driscoll at 510 where Lawrence LJ stated that “The ground upon which I rest my judgment that such a partnership is illegal is that the 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.”. had recognised that the rule in Foster v Driscoll stems from the common root centring on considerations of international comity.

The Court in Lyu Yan, in their assessment of the disconnect between the rule in Foster v Driscoll and the framework in Ochroid Trading, had proceeded on the central premise that the rule in Foster v Driscoll only applies to contractual claims.

For now, the outcome in Lyu Yan suggests that an innocent party suing in Singapore against a wrongdoer Chinese buyer would have an available remedy in unjust enrichment. But this analysis may quickly change if the treatment of foreign law illegality in Singapore is updated to be in line with the position where the contract is governed by Singapore law in Ochroid Trading.

For instance, in Lyu Yan, the Court had relied on the authority in the English High Court decision of Lilly Icos LLC v 8PM Chemists Ltd.¹³(2010) FSR 4 at (266). There, the English Court had accepted the proposition that the rule in Foster v Driscoll only applies to bar claims in contract, and is not applicable to non-contractual claims. However, this argument was accepted without argument nor authority. The proposition that the rule in Foster v Driscoll can only be used to defeat a claim in contract may therefore be revisited soon.

The Court of Appeal in Esben Finance was presented with two novel issues concerning illegality that have not been presented before. We are interested in the first novel issue – whether the policy of international comity ought to apply to bar claims not only in contract but also in unjust enrichment (i.e. non-contractual claim). Put simply, should a court disallow a claim in unjust enrichment if to permit it would otherwise result in the contravention of the laws of a foreign country?¹⁴Esben Finance at (171).

The Court answered the above issue affirmatively. The Court held that there was a general proposition that the concept of illegality has been accepted as precluding claims in unjust enrichment. This is because, as with contractual claims, there are wider and broader concerns of public policy that override claims between specific parties.

Conclusion

In conclusion, there is a case to be made that where cases involve illegality, specifically foreign law illegality, the general role of the Court is to ensure that the established heads of public policies are not offended, and not to ensure justice as between the two parties involved. There is therefore a broader principle of protecting the integrity of the Courts. This is manifested by the principle of international comity.

Indeed, Lord Mansfield in Holman v Johnson¹⁵ (1775) 1 Cowp 341. emphasised that the focus was not on achieving justice between the parties. The defendant may be equally undeserving, and it was not for his sake that the rule operated. Rather, it was premised on the unworthiness of the plaintiff and the broader public policy in protecting the integrity of the courts.¹⁶Ochroid Trading at (25).

If a Singapore court takes the view that the principle of comity is an established head of public policy, and permitting recovery under a contract would result in the contravention of the laws of a foreign country, then the principle of comity would prevent such recovery. In that case, if the Singapore buyer pays cryptocurrency to a Chinese seller and the Chinese seller refuses to transfer the NFT to the Singapore buyer, then the Singapore buyer may not be able to recover under unjust enrichment. In a future case, there is a possibility that the Comity Unenforceability Principle may be extended to claims not only in contract, but in unjust enrichment as well (either by analogy or general principle).

Where statutory illegality is engaged, as was the case in Ochroid Trading, the Court held that there could not be full contractual recovery, given that the contract in question had fell afoul of a statute. Notwithstanding this bar, there was a potential avenue to seek recovery via restitutionary means if to permit it will not stultify the policy underlying the statute. Therefore, in short, there is a broad principle undergirding the decision in Ochroid Trading that any recovery, whether via contract or unjust enrichment, is subject to policy reasons – that if to permit the claim would stultify any head of public policy (read principle of comity) or statutory policy underlying the relevant statutes, the claim will fail. For now, it seems that the Singapore buyer as discussed above relying on foreign law illegality in Lyu Yan would appear to have a remedy in unjust enrichment.