Introduction

In Cheung Fai (張輝) (trading as Hang Fai Handbag Manufactory) v Pak Shun Enterprise (HK) Limited [2025] HKDC 1941, the Hong Kong District Court dismissed both the Plaintiff’s claim for loss of goods and the Defendant’s counterclaim for unpaid freight. The Court found that the underlying shipping agreements were entered into with the unlawful common intention of smuggling prohibited goods into the People Republic of China (“PRC”), rendering them unenforceable on public policy grounds.

Background

The shipping arrangements

In early 2019, Cheung Fai (張輝) (trading as Hang Fai Handbag Manufactory) (the “Plaintiff”), a handbag manufacturer, engaged Pak Shun Enterprise (HK) Limited (the “Defendant”), as its logistics provider.

The parties entered into two shipping agreements (the “Agreements”) to transport a total of 16 containers of goods declared as “irregular-shaped cowhide” from Hong Kong to Foshan in PRC. The agreed route was circuitous: the containers were to be shipped by sea to Haiphong, Vietnam, and then transported overland via the Friendship Pass into PRC’s Guangxi province for final delivery to Foshan.

The dispute

Disputes arose after only 4.5 containers were delivered. The Plaintiff claimed that the remaining 11.5 containers were lost or damaged. Relying on the terms of the Agreements, the Plaintiff claimed a breach of contracts and sought compensation calculated at 90% of the freight charge per container, totalling RMB1,464,300. In the alternative, the Plaintiff claimed the value of the lost goods totalling USD 310,078.20.

The Defendant denied liability and counterclaimed for outstanding freight. The Defendant pleaded that the Agreements contained an implied term that the Plaintiff’s goods could not be items prohibited from import by Vietnam or Chinese authorities. It claimed that if the goods were detained or prohibited by customs, the Plaintiff would be liable for all resulting freight, storage, duty and re-shipment costs. The Defendant further asserted that the goods were in fact prohibited “leather scraps” or “leather off-cuts”, classified as solid waste whose import was banned in both Vietnam and PRC. The Defendant argued that this prohibition frustrated the Agreements and/or rendered them unenforceable from the outset.

Court’s decision

Issue 1: Whether the goods were prohibited solid waste

The Court examined evidence including the Agreements, supplier invoices describing the goods as “leather off-cuts”, and communications between the parties. The Court concluded that the goods were indeed “leather scraps” classified as solid waste, the import of which had been prohibited in PRC since 2017 and in Vietnam from March 2019.

Issue 2: Whether the parties knew the goods were illegal

The Court found that both parties were aware of the illegal nature of the shipment. Key evidence included WeChat messages discussing waiting for a “Beijing working group” to leave before proceeding and references to agents being detained by authorities. The Court found these exchanges were indicative of an endeavour to evade customs enforcement, not mere logistical delays.

The deliberately circuitous shipping route only made commercial sense as a deliberate attempt to bypass stricter customs controls at direct entry points into PRC like Shenzhen. This further indicated a common intention to circumvent import controls.

The freight charges per container at RMB138,000 to RMB143,000 were unusually high, and in some instances, exceeded the declared invoice value of the goods. The Court viewed this as a strong indicator that the premium was for the elevated risk associated with smuggling, not standard logistics.

Issue 3: Whether the Agreements were enforceable

To determine whether the Agreements are enforceable, the Court had to first determine the applicable governing law of the Agreements. Despite the performance of the Agreements was to occur in Vietnam and PRC, the Agreements were negotiated, concluded, and signed in Hong Kong by parties operating their principal businesses there. Accordingly, the Court held that Hong Kong law had the “closest and most real connection” to the Agreements, and the governing law of the Agreements is Hong Kong law.

The Court of Final Appeal in Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544 held that where the “real object and intention” of the parties is to perform an illegal act in a foreign country, the contract is unenforceable on grounds of public policy. Applying the principle in Ryder and having found that both parties intended to smuggle the goods into PRC, the Court refused to enforce the Agreements.

Issue 4: Claims for damages and freight

Given the illegality of the Agreements, the Plaintiff’s claim for breach of contract failed. Similarly, the Defendant’s counterclaim for unpaid freight was dismissed. The Court also noted that the Plaintiff had failed to prove the value of the allegedly lost goods with credible evidence.

Conclusion

This case highlights the importance of compliance in cross-border logistics. Agreements and/or contracts formed with the intent to violate the import or export laws of another jurisdiction will not be enforced by Hong Kong courts, leaving both shippers and carriers without legal recourse. This case serves as a reminder for businesses to conduct thorough due diligence, ensure accurate cargo declarations, and avoid any arrangement that may imply an unlawful purpose.