YIP ALICE AND OTHERS v. WONG SHUN

CACV 239/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 239 OF 2002

(ON APPEAL FROM HCA NO. 12614 OF 1999)

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J U D G M E N T

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Hon Rogers VP:

1. I agree with the judgments of Le Pichon and Yuen JJA.

Hon Le Pichon JA:

2. This is an appeal by the defendant from the order of Deputy High Court Judge Reyes SC dated 19 April 2002 ordering that final judgment be entered in favour of the plaintiffs for damages for breach of contract and for trespass covering the period from April 1998 to April 2002 with interest thereon, that there be an order nisi that the defendant do deliver possession of land known as No. 44 Praya Road, "C" Lei Yue Mun ("the land") to the plaintiffs no later than 30 April 2002 and that the defendant do pay mesne profits at the rate of $30,000 per month from the date of the judgment until delivery of possession.

Background

3. The plaintiffs are siblings. Their family ("the Yips") entered into possession of the land as squatters in the 1960s. They operated a restaurant on the land known as Hyde Park Garden Restaurant ("the restaurant"). The restaurant was started by the plaintiffs' father and after his death in 1972, their mother continued to run the restaurant until her own death in 1985. Thereafter, it was run by the plaintiffs.

4. In early 1986, the younger brother of the plaintiffs Yip Chee Wai introduced the plaintiffs to the defendant. The defendant was at the time a manager at a restaurant in Admiralty at which Yip Chee Wai was then working. Yip Chee Wai had told the defendant that his family was looking for someone to manage the restaurant and Wong was interested.

5. After negotiations, on 4 March 1986, the parties entered into an agreement (the 1st agreement) which was in English prepared by a firm of solicitors who acted for both parties. In the 1st agreement, the plaintiffs were collectively called "the employers" and the defendant was described as "the manager". The deputy judge found that the 1st agreement was not a lease as the defendant had sought to contend but a contract whereby the plaintiffs engaged the defendant to manage the business of the restaurant. The contract was for a period of ten years commencing 1 May 1986 with the defendant guaranteeing a minimum net profit of $8,000 per month from 1 May 1986 to 30 April 1991 and $12,000 per month commencing 1 May 1991 to 30 April 1996. The deputy judge found that the 1st agreement operated as a contractual licence under which the defendant obtained the right to enter and occupy the land for the purposes of operating the restaurant and that in consideration of those rights, the defendant had to pay a fixed fee whether the restaurant made money or not. Any profit in excess of this fixed amount was for the defendant himself. The deputy judge also found that the plaintiffs conveyed and the defendant obtained no interest in the land by reason of the 1st agreement.

6. After the 1st agreement expired, the defendant continued to remain on the land and continued to pay $12,000 per month which the plaintiffs accepted. The deputy judge found that each tender of $12,000 constituted an offer to extend the 1st agreement by an additional month. In September 1997, the parties entered into a new oral agreement (the 2nd agreement) which came into effect based on a monthly payment of $30,000. The deputy judge found that the 2nd agreement continued the relationship under the 1st agreement subject to either side having the right to terminate on one month's notice and subject to an increased payment of a fixed fee of $30,000 per month. The defendant paid the monthly fee of $30,000 from October 1997 until March 1998.

7. The defendant has continued to run the restaurant and has remained in occupation of the land ever since. The plaintiffs unsuccessfully demanded payment of the monthly fee on a number of occasions and on 23 June 1999 the plaintiffs' solicitors sent a letter accepting the defendant's repudiation of the 2nd agreement. Proceedings were commenced in August 1999 whereby the plaintiffs claimed possession of the land, $450,000 as sums due under the 2nd agreement between April 1998 and June 1999 and damages for trespass at the rate of $30,000 per month until delivery up of possession.

This appeal

8. There were, originally, two issues raised in the appeal: first, that the deputy judge was wrong in construing the agreements without reference to the parties' subsequent conduct, consequently finding that the contract was a management agreement and not a lease; second, that the deputy judge was wrong in holding that the agreements were neither illegal nor unenforceable.

9. The argument on the first issue was put on the basis that the arrangement was nothing but a 'sham', effectively dressing up a lease as something else i.e. a management agreement. In the course of the hearing, counsel for the defendant abandoned this ground of appeal. In the circumstances, I do not propose to say anything more on this point. There is therefore no longer any challenge to the deputy judge's findings in this regard. I now turn to the second issue.

Illegality

10. Section 4 of the Crown Lands Ordinance, Cap. 28 ("CLO") reads as follows:

"4. Occupation of unleased land

Unleased land shall not be occupied except under a licence or a deed or memorandum of appropriation."

"Leased land" is land "held under a Crown lease" or "vested in a person by an Ordinance" and "unleased land" is "land which is not leased land." See section 2. The CLO came into effect on 1 October 1972, inter alia, repealing section 10 of the Summary Offences Ordinance, Cap. 228 which had provided as follows:

"Occupation, etc., of Crown land without a licence

10. (1) Any person who, except under and in accordance with a valid current licence or permit issued by a lawful authority, occupies any land which is not held under a Crown lease shall be guilty of an offence and shall be liable to a fine of one thousand dollars. ..."

The CLO thus effected an important change in the law: the mere unlawful occupation of Crown land was no longer a criminal offence. The remedy open to the Crown would be either civil proceedings for trespass or an action under section 6 of the CLO, in the form it was in 1986, which provided as follows:

"6. Unlawful occupation of unleased land

(1) Subject to subsection (2A), if unleased land is occupied, otherwise than under a licence or a deed or memorandum of appropriation, the Authority may cause a notice, requiring the occupation of the land to cease before such date as may be specified in the notice, to be posted in one or more places- (Amended 56 of 1979 s. 3)

(a) on or near the land; or

(b) on any property or structure on the land.

...

(4) Any person occupying unleased land, otherwise than under a licence or a deed or memorandum of appropriation, who without reasonable excuse does not cease to occupy the same as required by a notice under subsection (1) shall be guilty of an offence and shall be liable on conviction to a fine of $10000 and to imprisonment for 6 months.

..."

The CLO was renamed the Land (Miscellaneous Provisions) Ordinance in 1998. For convenience I shall hereafter refer to Cap. 28 as "the Ordinance".

11. Counsel for the defendant submitted that as the 1st and 2nd agreements could only be performed by occupying unleased land and as the occupation of unleased land is 'prohibited' by section 4, the agreements were and are therefore illegal and unenforceable. The defendant's submission was in large part grounded on the observations of Huggins VP in Fung Siu Kam and others v Lo Shun Cheung [1984] HKC 107. In that case, the plaintiff obtained a default judgment against the defendants in an action for forfeiture of a tenancy and for rent and mesne profits. The plaintiff was himself a licensee from the Crown and had no interest in the land. In 1968, he purported to grant a tenancy to the father of the one of the defendants who remained in occupation until 1982 through a series of agreements. The father operated a business on the premises and later assigned the same to the defendants including the use of the premises. The defendants sought to set aside the default judgment on the basis that the tenancy agreement under which the plaintiff sued was illegal in that there was a statutory provision, namely, section 10 of the Summary Offences Ordinance, which prohibited such occupation.

12. Mr Cheung placed considerable reliance on the following passage from the judgment of Huggins VP (at 111D-G):

" It is not every contract prohibited by statute which is wholly unenforceable: see Halsbury's Laws of England (4th Ed) Vol 9 p 290 para 423. As in the interpretation of all statutes one must ask what was the intention of the legislature in so far as that is ascertainable from the language it has used. We should not interpret a statute so as to deprive a subject of rights which he would have at common law unless it is clear that the legislature intended to take away those rights. The question here is whether the prohibition against occupation of Crown land was intended for the benefit of the public at large or merely for the benefit of the Crown as a land owner. It seems to me that the former must be the correct view. The nature of a licence itself prevents the licensee from allowing another into exclusive occupation, so that the Crown as land owner would already have the right to terminate the plaintiff's licence and thus to defeat any tenancy by estoppel created in favour of the defendants. The statutory prohibition must, I think, have been intended to prevent any contract purporting to confer exclusive occupation of the land or any part thereof." (emphasis added)

There, Huggins VP was dealing with contracts prohibited by statute. In that case it was a tenancy agreement 'created' by a licensee from the Crown purporting to confer exclusive occupation over unleased land.

13. The first point to note is that, unlike the tenancy agreement in Fung Siu Kam, the management agreement was not a contract purporting to confer exclusive occupation of the land on the defendant. The 1st agreement did not grant any right of exclusive possession to the defendant. Clauses 6 and 7 are particularly pertinent. They read as follows:

"(6) The Employers will not part with possession of the premises and may from time to time appoint a representative or agent to remain in and upon the premises and to ensure that all terms and conditions of this agreement including Government regulations are fully complied with and the Manager and their servants and agents shall at all times be sub-servient to any order made or given by the Employers or his representative or agent provided the Employers shall not interrupt the Manager in the course of his carrying on the said Business.

(7) The fact that the Manager shall be in and upon the said premises for the purpose of this Agreement shall not in any way create any tenancy thereof as between the parties hereto nor give the Manager any estate or interest in the premises but his being in and upon the premises shall determine with the determination of the service ..."

In fact, the parties recognised that were the landlord to repossess the land, the management agreement would terminate ipso facto. Clause 11 of the management agreement so provided. Second, the plaintiff in Fung Siu Kam was a permit holder from the Crown and the permit forbade any transfer of land. The tenancy agreement was thus made in breach of the terms of the permit. Here, the management agreement did not seek to create or confer any interest or estate in the land. Third, in Fung Siu Kam, the plaintiff framed his action for possession based upon an alleged forfeiture. He was thus relying upon a tenancy agreement which the court found was an illegal contract and, in that context, his claim for possession failed. But the court noted that if the claim had been based on his title as licensee, the defendants would have had no answer to that claim and would not be in a position to raise the illegal agreement. For that reason, the court, whilst denying the claim for rent and mesne profits, did not set aside the judgment for possession even though it had been obtained on a wrong basis.

14. Whilst a Court of Appeal decision and thus binding on this court, Fung Siu Kam's case is distinguishable for the reasons stated. However, counsel for the defendant submitted that given the definition of the word "occupy" in section 2 of the Ordinance, namely, "use, inhabit, be in possession of, enjoy, erect or maintain a structure on or over, and place or maintain anything on, land", there was no justification in limiting the statutory prohibition to contracts purporting to confer exclusive occupation of the land as Huggins VP had done. Mr Cheung submitted that the deputy judge was wrong in concluding that the type of act which the Ordinance prohibited was "an attempt to grant a right of exclusive possession to unleased land". Rather, he submitted that the statutory prohibition extended to any act which fell within the definition of "occupy" in the Ordinance and any contract which purported to grant the right to do such an act on unleased land was unenforceable.

15. A contract may be rendered unenforceable by statute where the statute on its true construction deprives one or both of the parties of their civil remedies under the contract in addition to, or instead of, imposing a penalty upon them. That is a question of construction. See Chitty on Contract 28th Ed. at 17-140. It may arise in the context of the formation of the contract or in the context of its performance. If the formation of the contract is prohibited by statute, neither party may enforce it. See Vol 9(1), Halsbury's Laws of England, 4th Ed. (Reissue) at para 870. In Fung Siu Kam, Huggins VP considered that the question was whether the prohibition against occupation of Crown (now Government) land was intended for the benefit of the public at large or merely for the benefit of the Crown/Government. He seemed to suggest that they led to different consequences. The difference is not readily apparent since the public at large has no right to enter Crown/Government land, and the public can only indirectly benefit through the Crown/Government as landlord. Neither could it be said that the public interest has been harmed by the running of the restaurant, which would lead a court to deprive the plaintiff of the benefit of the contract. In this respect it may be noted that the Government has taken no steps against the restaurant, despite the fact that a number of departments knew of its existence. Moreover, it is difficult to see what benefits the public can derive from depriving the parties of their civil remedies. In the instant case, the person who stands to reap a windfall would be the defendant: he would be in the happy position of being able to retain all profits of the business and not having to pay the agreed monthly fixed fee to the plaintiffs for the privilege of running the restaurant.

16. Be that as it may, on the facts of the present case, the issue is whether as a matter of statutory construction, the effect of section 4 is to deprive parties of their civil remedies where the contract or its performance necessarily implicates an infringement of the section. One has to turn to the Ordinance itself to ascertain the legislative intent. Section 4 of the Ordinance comes under the heading "Occupation of unleased land" but it appears to be silent as to the effect of its contravention, whilst section 6 comes under the heading "Unlawful occupation of unleased land". Plainly the two sections must be read together when ascertaining the legislative intent. When read together, the statutory scheme which emerges is that whilst there is a general 'injunction' or 'prohibition' against the occupation of unleased land without a licence etc., such occupation does not become unlawful under the Ordinance (as distinct from the common law) unless and until a notice issued under section 6(1) is not complied with. In other words, the Ordinance imposes no penalty on a person who contravenes section 4 but who ceases to occupy the land within the period specified in a notice issued under section 6(1). The occupation of unleased land is only rendered 'unlawful' by such a person failing to cease occupation within the period of the notice. Section 6 was not mentioned at all by Huggins VP in Fung Siu Kam. Furthermore, it should not be overlooked that the issuance of a section 6 notice is discretionary rather than mandatory. In these circumstances, having regard to the statutory scheme, it could hardly have been intended that where a contract or its performance involves a contravention of section 4, the parties should be deprived of their civil remedies.

17. Moreover, there are considerable difficulties with the defendant's interpretation of section 4 to the effect that any "occupation" of unleased land would be unlawful and illegal, and rendering any agreement to do so unenforceable. Not only would such an interpretation sit uncomfortably with section 6, if correct, it is not apparent how it would ever be possible for a person to acquire title by adverse possession against the Government under section 7(1) of the Limitation Ordinance, Cap. 347. That section bars recovery of possession by the Government after the expiration of 60 years from the date on which the right of action accrued. By definition, a person who seeks to rely on section 7(1) of Cap. 347 must necessarily have contravened section 4 of the Ordinance. To adopt the defendant's interpretation would effectively 'repeal' section 7(1) by a side wind, a result that plainly could not have been intended and should be avoided in the absence of any express provision. If section 7(1) is not to be rendered otiose, it must follow that the legislature could not have intended that a contract or the performance of which implicates a contravention of section 4 of the Ordinance be made void.

18. The appropriate question to ask is whether it would be contrary to public policy to enforce the management agreement, having regard to the Ordinance and the evils against which it was intended to guard and the circumstances in which the contract was made and to be performed. See Chitty on Contracts 28th Ed at para 17-144. One important element of public policy is that stated by Lord Wright in Vita Food Products Inc. v Unus Shipping Co. Ltd. [1939] AC 277 at 293:

"Nor must it be forgotten that the rule by which contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds."

19. On the question of statutory interpretation, as Lord Simonds stated in Cutler v Wandsworth Stadium Ltd [1949] AC 398 at 407:

"The only rule which in all circumstances is valid is that the answer must depend on a consideration of the whole Act and the circumstances, including the pre-existing law, in which it was enacted."

In ascertaining the legislative intent behind section 4, one has to read that together with all relevant provisions of the Ordinance, in particular, section 6 and bearing in mind the difference between that regime and the old regime, i.e. section 10 of the Summary Offences Ordinance. Adopting that approach, the occupation of unleased land of itself is plainly not 'unlawful' for the purposes of the Ordinance although a civil action for trespass may be maintainable against the person occupying the land at the suit of the Crown/Government as a result. As a matter of construction, I see nothing in the Ordinance that requires depriving parties of their civil remedies in relation to the making or performance of a contract such as the management agreement, albeit that it can only be performed by occupying unleased land.

Conclusion

20. I would dismiss the appeal. I would also make an order nisi for costs in favour of the plaintiffs.

Hon Yuen JA:

21. The Plaintiffs have sued the Defendant for (a) breach of the management agreement and (b) trespass. Apart from the Land (Miscellaneous Provisions) Ordinance, it is clear that the fact that the Plaintiffs have no lease, licence or permit over the land does not provide the Defendant with a defence - the defence of jus tertii is not available against someone who has had actual possession of the land prior to the defendant.

22. As for the defence based on the Ordinance, whilst this case is distinguishable on the facts from Fung Siu Kam in that no tenancy was created here, I share concerns about the decision in that case.

23. There is no criminality in a person occupying unleased land unless and until a notice has been issued under s.6(1) requiring the occupation to cease and a person "without reasonable excuse does not cease to occupy the [land] as required by a notice" (s.6(4)).

24. No notice has been issued in respect of the land in this case. Therefore even if the management agreements were to be treated as contracts letting the Defendant into occupation of the land, there were no criminal objects disentitling the Plaintiffs to contractual relief under common law (Chitty on Contracts 28th ed Vol. 1 Chap. 17, para 17-014).

25. Therefore the Defendant's case had to be (as pleaded by amendment in paragraph 6A) that the management agreements were illegal and unenforceable by statute, by reason of s.4.

26. However, just because a contract or its performance is implicated with breach of a statute, that does not entail that the contract should be avoided. Section 4 (and the rest of Part II) is silent as to the civil rights of parties who have dealings with each other regarding occupation of unleased land. "Where the [Ordinance] does not expressly deprive the plaintiff of his civil remedies under the contract, the appropriate question to ask is whether, having regard to the Ordinance and the evils against which it was intended to guard and the circumstances in which the contract was made and to be performed, it would in fact be against public policy to enforce it" (Chitty on Contracts, para 17-144).

27. In seeking to answer this question, the focus must be, not on what acts are prohibited by the legislation, but on whether the legislation is intended to prohibit the contracts in question (Chitty on Contacts, para 17-140).

28. It seems to me, reading Part II as a whole, that it was intended to provide the Government as land-owner with "extra-civil law" remedies to enable it to manage its unleased land more effectively. Thus,

(1) s.4 disallows the occupation of unleased land;

(2) s.6(2) provides the relevant authority (the Director of Lands, the Director of Food and Environmental Hygiene or the Housing Authority) with speedy "self-help" remedies to re-take possession of unleased land, and s.6(4) visits with criminal sanctions the occupation of unleased land, in both cases after the issue of a warning notice under s.6(1);

(3) s.6(2A) provides the relevant authority with self-help remedies regarding structures on unleased land which are in the course of erection or which are not being habitually and bona fide used, and s.6(4A) visits with criminal sanctions the erection of structures, in both cases without the issue of a warning notice.

Thus even if s.4 itself may be said to be "silent" as to the effect of its contravention, the way Part II is set out shows that the effect of its contravention is express - in the specific provisions of s.6.

29. If the mischief of Part II is effective land management for the Government as land-owner, I do not see why s.4 should impact (independently, without more) upon the civil rights and remedies of private parties whose dealings involve the occupation of the land, and I can see nothing in Part II that points clearly (expressly or impliedly) to such an intention of the legislature. (I do not include the erection of structures, which is not relevant to the present case). I agree that the appeal should be dismissed and that there should be an order nisi for costs to the Plaintiffs.

Hon Rogers VP:

30. There will therefore be an order as set out in paragraph 20.