TIU SUM FAT AND OTHERS v. SHUN SING DEVELOPMENT LTD AND ANOTHER

HCA1746/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1746 OF 2005

------------------------------

THE DISPUTE

1.  The dispute involved in this action relates to a “small house” which, at the time of the relevant agreements, was intended to be built on a piece of land in the New Territories.  The action raises certain interesting questions relating to the Government’s New Territories Small House Policy (“Small House Policy”).

2.  By a Chinese Agreement dated 2 June 1997 (“the 1^st Agreement”) signed between the 1^st defendant (as Party A) and the 1^st and 2^nd plaintiffs (as Party B), it was provided, inter alia, that:

(a)      the 1^st defendant was the agent (代理人) in respect of a piece of land in Tai Po, New Territories known as Lot 208RP DD14 (“the Land”);

(b)     an application was being made to the District Land Office (“DLO”) to erect on the Land a house (“the House”) with 3 storeys, each having an area of about 700 sq. ft;

(c)     the 1^st and 2^nd plaintiffs agreed to purchase the 2^nd floor (with roof) of the House (“the 1^st Property”) at the price of HK$2,250,000, to be paid as follows:

(a)      HK$50,000 to be paid upon the signing of the 1^st Agreement.

(b)     HK$175,000 to be paid on or before 16 June 1997.

(c)     HK$225,000 to be paid within 7 days after commencement of building work.

(d)     HK$225,000 to be paid before the delivery of the keys.

(e)      The balance of the purchase price in the sum of HK$1,575,000 to be paid within 14 days to Party A after Party A shall have obtained the land premium notice letter (補地價紙通知信) issued by the Hong Kong Government.

(d)     Party A would be responsible for the costs of construction, the land premium and the administration expenses of the Government.

(e)      The parties agreed that in the event of the death of the building licence owner (建屋牌照业权人), the 1^st Agreement would be immediately cancelled.  Party A would return to Party B all amounts that had been paid by it without interest, and the parties would not be responsible to each other for any expenses or legal liability.

(f)      Party B undertook and warranted that until Party A obtained from the Hong Kong Government the land premium notice (補地價紙), it would not make any addition or renovation to the garden or the roof.

3.  By another Chinese agreement dated 25 September 1997 (“the 2^nd Agreement”) and signed between the 1^st defendant (as Party A) and the 1^st, 2^nd and 3^rd plaintiffs (as Party B), the 1^st, 2^nd and 3^rd plaintiffs agreed to purchase the 1^st floor of the House (“the 2^nd Property”) at the price of HK$1,800,0000, to be paid as follows:

(a)      HK$50,000 to be paid upon the signing of the 1^st Agreement.

(b)     HK$175,000 to be paid on or before 16 June 1997.

(c)     HK$225,000 to be paid within 7 days after commencement of building work.

(d)     HK$225,000 to be paid before the delivery of the keys.

(e)      The balance of the purchase price in the sum of HK$1,575,000 to be paid within 14 days to Party A within 14 days after Party A shall have obtained the land premium notice letter (補地價紙通知信) issued by the Hong Kong Government.

4.  Other terms of the 2^nd Agreement are essentially the same as the 1^st Agreement.  In particular, the terms of the 1^st Agreement set out in paragraph 2(a), (b), (d), (e) and (f) above are also included in the 2^nd Agreement as part of its terms.  When the 1^st Agreement and 2^nd Agreement are collectively referred to below, I shall refer to them either as “the 1^st and 2^nd Agreements”, or simply as “the said Agreements”.  It is not in dispute that it was a Madam Lee Yin Ho (“Conly Lee”) of an estate agent company called Hing Lung Property Agency (“Hing Lung”) who introduced the plaintiffs to the 1^st defendant.  It is also not in dispute that a Mr Wan Hok Lim and his son, Mr Wan Hang Ping, were at all material times the partners of Hing Lung.  They were also the directors and shareholders of a limited company called “Hing Lung Holdings Limited” (“Hing Lung Holdings”).  Both Hing Lung and Hing Lung Holdings had their registered address at No. 8, G/F, Fook On Building, Wan Tau Street, Tai Po.

5.  It is the plaintiffs’ case that in making the said Agreements, the 1^st defendant contracted on its own behalf and as agent for an undisclosed principal, namely, the 2^nd defendant.  This is denied by the 1^st and 2^nd defendants.  It is the case of both the 1^st and the 2^nd defendants that the said Agreements were made by the 1^st defendant on his own behalf, and that the 2^nd defendant was never a party to the said Agreements.

6.  I should also add, for completeness’ sake, that it is the plaintiffs’ case that the 2^nd Agreement was first entered into on 25 September 2006 by the 1^st and 2^nd plaintiffs only, and that it was only a few days later the 2^nd Agreement was varied by consent and the 3^rd plaintiff was added as one of the purchasers.  This is however not a matter that would affect any of the issues in this case (there being no dispute that the 3^rd plaintiff was in fact a party to the 2^nd Agreement) and there is no need for me to refer to the evidence that relate to the circumstances under which the 3^rd plaintiff came to be joined as a party to the 2^nd Agreement.

7.  By April 2002, the 1^st and 2^nd plaintiffs had already paid a total amount of HK$225,000 to the 1^st defendant pursuant to the terms of the 1^st Agreement.  Similarly, the 1^st, 2^nd and 3^rd plaintiffs had already paid a total amount of HK$180,000 to the 1^st defendant pursuant to the terms of the 2^nd Agreement.  However, construction of the House had not begun.  The plaintiffs contend that it was an implied term of the 1^st and 2^nd Agreements that the 1^st and 2^nd defendants should proceed to apply for the building licence and to construct the House on the Land as soon as possible and/or within a reasonable time, and to complete the sale and purchase within a reasonable time.  It is the plaintiffs’ case that in breach of the said implied term, the defendants had failed to construct the House and to complete the sale and purchase of the 1^st and 2^nd Properties within a reasonable time.  By 2 letters both dated 11 April 2002 (“the letters of termination”) issued by Messrs Donald Yap, Cheung & Kong (acting on behalf of the 1^st and 2^nd plaintiffs in respect of the 1^st Agreement, and the 1^st, 2^nd and 3^rd plaintiffs in respect of the 2^nd Agreement), the plaintiffs purportedly gave notice to the1^st defendantthat they would accept the 1^st defendant’s alleged repudiation of the 1^st and 2^nd Agreements and demanded for the return of the amounts that had been paid by the plaintiffs under the 1^st and 2^nd Agreements (collectively as “the Deposits”).  By the letters of termination, the plaintiffs clearly indicated that they were putting an end to the 1^st and 2^nd Agreements.

8.  I pause here to note that although it is the plaintiffs’ case that the said Agreements were made by the 1^st defendant on its own behalf and as agent for the 2^nd defendant, the letters of termination were addressed to the 1^st defendant only.  Indeed, on the evidence, prior to the commencement of the present proceedings, the plaintiffs had made no complaint or any demand at all against the 2^nd defendant.

9.  The present action was commenced on 5 June 2002 and the cause of action initially relied upon by the plaintiffs was solely based on the alleged breach of the implied term mentioned above.  Subsequently, however, the Statement of Claim was substantially amended and the following claims were added by the plaintiffs:

(a)      it is alleged that the performance of the 1^st and 2^nd Agreements necessarily involves a misrepresentation practised upon the Government by the 2^nd defendant and accordingly the 1^st and 2^nd Agreements are illegal as against public policy and are unenforceable;

(b)     it is alleged the 1^st and/or the 2^nd defendants have received the Deposits “for and to the use of” the plaintiffs and the plaintiffs are entitled to recover the same on the basis either that the illegal purpose of the 1^st and 2^nd Agreements had not been carried into effect, or alternatively that the plaintiffs were not in pari delicto with the 1^st and/or the 2^nd defendants;

(c)     it is alleged alternatively that the plaintiffs paid the Deposits as a result of a mistake that the 1^st and 2^nd Agreements were valid and enforceable, and the plaintiffs are entitled to repayment of the same; and

(d)     it is further alleged that it is an implied term of the 1^st and 2^nd Agreements that the defendants should convey a good title of the 1^st and 2^nd Properties to the plaintiffs.  By reason of the illegality alleged, the documents of title to be granted by the Government in respect of the House and the 1^st and 2^nd Properties were or were to be obtained by misrepresentation of the 2^nd defendant.  Accordingly, the defendants would not have been able to give a good title to the 1^st and 2^nd Properties and were in anticipatory breach of their obligation to convey a good title to the plaintiffs.

10.  By their Re-amended Statement of Claim, the plaintiffs claim for a declaration that the 1^st and 2^nd Agreements were illegal and unenforceable.  They also seek the return of the Deposits.  Although there is also a claim for damages to be assessed, the claim was not pursued at trial for it is plain that by the time when the plaintiffs terminated the said Agreements, the market had substantially fallen, and the plaintiffs would have been able to acquire similar properties from the market at a much cheaper price.

11.  Both the 1^st and 2^nd defendants deny the claims of the plaintiffs.  In addition, the 1^st defendant counterclaims against the plaintiffs for wrongful repudiation of the said Agreements, and seeks damages against them in respect of the loss and damage suffered by it as a result of the plaintiffs’ alleged wrongful repudiation.

THE SMALL HOUSE POLICY

12.  It is common ground between the parties that the House to be built on the Land is a small house (丁屋) to be constructed under the concessionary terms of the Small House Policy.  That is why a building licence was required to be obtained before the House could be built.  As pointed out above, the said Agreements refer expressly to an application to the DLO for the grant of a building licence.  In fact, a building licence (being Building Licence No. 11/99) was applied for and granted by the Government in the present case on 22 October 1999 (“the Building Licence”).  I shall deal with the circumstances leading to the application and grant of the Building Licence in greater detail below.

13.  In the case of Chung Mui Teck & others v Hang Tak Buddhist Hall Association Ltd and another[2001] 2 HKLRD 471, the Court of Appeal referred to the Small House Policy as follows (at 473E-I):

“This policy, implemented since December 1972, is designed to allow male indigenous villagers of a village which has been in existence since 1 July 1898 to apply for permission to erect small houses for their own habitation.  Strict limitations apply to the building of such houses.  Under the Buildings Ordinance (Application to the New Territories) Ordinance (Cap.121), a small house is to be no more than three storeys or 27 ft in height with a maximum roofed-over area of 700 sq ft but the building of such a house does not require the employment of an authorised person or approval of building plans under the Buildings Ordinance (Cap.123) … which are significant privileges, quite apart from the concessionary terms mentioned below.

Where a villager owns his own piece of land either in the village or within 30 ft of it, he is entitled to apply for a free building licence on this land or the Government might agree to grant new building land in return for the surrender of land elsewhere.  If he does not own any land in the village, he may apply for a private grant of land from the Government at a concessionary rate, generally between $1,000 and $2,000.  Procedurally, a villager who wishes to make an application is required to complete a standard Small House Application Form.”

14.  As pointed out by the Court of Appeal, the Small House Policy was designed to enable male indigenous villagers (colloquially called the “丁”—transliterated as “Ting”) to apply for permission to build small houses for their own habitation.  Accordingly, building licences granted under the Small House Policy are personal to the indigenous villagers making the applications.  In the case of Best Sheen Development Ltd v Official Reciever [2001] 1 HKLRD 866, Yuen J (as she then was) alluded to this and observed as follows (at 869B-E):

“According to a Lands Department publication exhibited by the Official Receiver, the [Small House] Policy is ‘designed to allow an indigenous villager to apply for permission to erect for himself during his lifetime a small house within his own village’.

It further states that in the case of application for building licences and exchanges (surrender and regrant), i.e. for building on private land (as opposed to Government land), the land under application must be registered in the applicant’s name.

The fact that the [Small House] Policy is personal to indigenous villagers can also be seen from the fact that applications for Small House grants on Government land from villagers living overseas would be refused unless the District Land officer was satisfied that the applicant intended to return and reside in the village.”  [Emphasis added]

I would add that a copy of the Lands Department publication referred to by Yuen J (entitled “The New Territories Small House Policy.  How to apply for a Small House Grant” issued by the Lands Department) is also included in the evidence before me.  The explanatory notes in the copy produced contain similar statements referred to by Yuen J.

15.  In the present case, the 2^nd defendant was a male indigenous villager entitled to take advantage of the concessionary terms and special privileges of the Small House Policy.  An application was made in his name to the Government for the grant of a building licence to build a small house on the Land.  That application was eventually approved by the Government resulting in the grant of the Building Licence.  By a letter dated 13 April 1999, DLO wrote to the 2^nd defendant to inform him of the terms upon which his application for building licence was approved.  In that letter, DLO made it clear that the approval was personal to the 2^nd defendant as follows:

“Please note that this offer is personal to you only and until the relevant legal documents to give effect to this approval are executed and registered in the Tai Po District Lands Registry, this letter is not binding upon Government in any way.  The proposed land grant will be withdrawn in the event of the death of the prospective grantee prior to execution of legal documents and registration of the relevant legal documents in the Registry.”

16.  As the purpose of the Small House Policy was to facilitate indigenous villagers building small houses for their own habitation, it is an integral part of the policy that an applicant for building licence shall be the true owner of the land on which the small house is intended to be built.  He must not only be the registered legal owner of the land, but has to be its true beneficial owner.  If he is not the true legal and beneficial owner of the land in question, he is not entitled to the grant of a building licence upon the concessionary terms and the special privileges under the Small House Policy.  That this is so is clear from the judgments of the court in the Best Sheen case and the Chung Mui Teckcasereferred to above.  It is also clear from the evidence before me in this case.  In 2 letters respectively dated 21 December 2006 and 31 August 2007 issued by DLO in answer to the queries raised by the plaintiffs’ solicitors, K.W. Ng & Co., DLO states that:

(a)      generally speaking, a building licence will only be granted to an applicant who is the true owner of the lot concerned and an indigenous villager;

(b)     unless a building licence has been duly granted, any application for proposed building works, site formation works, and drainage works, Certificate of Exemption and opening of side windows would not be approved and the Certificate of Compliance would not be issued; and

(c)     application for a building licence will be rejected if the applicant is found having entered into any agreement for alienation or disposal of his interest in the land or he is not the true owner of the lot.

17.  The Building Licence in the present case was granted to the 2^nd defendant.  It was granted to him on the basis that he was the true owner (in the sense of having both legal and beneficial ownership) of the Land.  That this is so is also clear from the terms of the Building Licence itself.  Condition 4 of the Building Licence provides (inter alia) that:

“… the Licensee… having obtained this Licence on concessionary terms under the Small house Policy of the Government for indigenous villagers in the New Territories, shall not assign, partition, mortgage, charge, demise, underlet, part with possession of or otherwise dispose of the lot or any part thereof or any interest or undivided shares therein… or enter into any agreement so to do…”

As Yuen J pointed out in Best Sheen (when referring to a similar condition in the building licence involved in that case), such restrictions “would have no meaning or effect if the licensee needed only to be the legal owner of the land, and beneficial ownership could be divested and freely transferred to anyone at any time” (at p. 872I).

18.  I would gratefully adopt the following passage from the judgment of Le Pichon JA in Chung Mui Teck (at p. 478G-H):

“An indigenous villager who holds the land as a mere nominee would not qualify given the purpose of the Small House Policy which is ‘to allow an indigenous villager to apply for permission to erect for himself during his lifetime a small house within his own village’… It is a once in a life time grant for the villager and the small house is intended for that villager’s own habitation.  It is plain that the benefits that accrue from a grant under the Small House Policy such as a free building licence, and the special privileges are intended to benefit the villager personally and not anyone else.” (emphasis added)

ILLEGALITY

19.  For the purpose of making an application to build a small house, an indigenous villager would have to make a statutory declaration in support of the application.  In the present case, the evidence shows that back in June 1994, 2^nd defendant had made an application to build a small house on another piece of land in Tai Po known as Lot 216 s.B, D.D. 28.  On about 17 December 1996, the 2^nd defendant amended his application and applied to build a small house on the Land.  In support of that application, he made a statutory declaration dated 17 December 1996 (“SD”).  In that statutory declaration, he declared, inter alia, that he was the “sole owner” of the Land (“唯一業權人”).

20.  It is plain that thedeclaration made by the 2^nd defendant, to the effect that he was the sole owner of the Land, was false.  At the time when the SD was made by him, the 2^nd defendant was neither the registered owner nor the beneficial owner of the Land.  According to the land search of the Land, at the time when the SD was made, the registered owner of the Land was one Grandhorn Development Limited (“Grandhorn”).  According to the 1^st defendant, Grandhorn is a company related to, or controlled by, Wan Hok Lim.  Mr Wan, together with his son, Wan Hang Ping, were the directors of Grandhorn.  According to the land search, it was only on 8 January 2007 that the 2^nd defendant became the legal owner of the Land and was registered in the land registry as such.

21.  It is not in dispute that although the 2^nd defendant was registered as the legal owner of the Land in early 1997, he never has, and does not claim to have, any beneficial interest in the Land.  The 2^nd defendant was merely a nominee owner.  The 2^nd defendant gave evidence to the effect that in about December 1996 to January 1997, his father told him that Wan Hang Ping was looking for an indigenous villager of Tai Po for a development project on the Land.  He agreed to join the project in return for the payment of a fee.  He would be assigned the Land and would be made the registered owner thereof so that he could make an application for the grant of a building licence in his name.  He would not, however, have any beneficial interest in the Land.  Other than making a declaration in support of the application for building licence, all matters relating to the building of the small house on the Land were handled by Wan Hang Ping.  He had given a power of attorney to Wan Hang Ping to facilitate his work.  He did not know the parties to this action at all and had not even been to the Land himself.  He remembered attending a solicitors firm (Kenneth Woo & Co.) at the end of 2006 during which he signed many documents, the nature and contents of which he could not remember (and to which he had paid little attention).  After attending the solicitors firm he went to the DLO to make the SD.  That was all he did and he took no other part in the project.  He was not aware of the making of the 1^st and 2^nd Agreements and had never received any money from the plaintiffs.  It was Wan Hang Ping who handled the application for the grant of building licence.  The relevant documents and correspondence in relation to the obtaining of the building licence and the building of the small house were sent to the address at No. 8, G/F, Fook On Building, Wai Tau Street, Tai Po.  As pointed out above, this was the address of Hing Lung and Hing Lung Holdings, companies controlled by Wan Hok Lim and Wan Hang Ping.  I also note that when DLO sent the letter dated 13 April 2006 (referred to above) to inform the 2^nd defendant of the approval of his application, the letter was sent to him at the address of Hing Lung.  I also note that when the Building Licence was issued, it was Wan Hang Ping who signed the same as the attorney of the 2^nd defendant, indicating acceptance on his behalf of the conditions of the Building Licence.

22.  I accept the evidence of the 2^nd defendant, which is in line and consistent with the documentary evidence.  In any event, there is no serious dispute of his evidence by any of the other parties in the action.

23.  So it is clear that the 2^nd defendant was merely a nominee owner of the Land, having no beneficial interest therein.  The SD provided in support of his application for permission to build the small house was false insofar as he purported to claim that he was the sole owner of the Land.  The 2^nd defendant was never the true owner of the Land and never intended to build a small house on the Land for his own habitation. 

24.  Shortly after the 2^nd defendant became the registered owner of the Land, on about 17 March 1997 Wan Hok Lim signed an agreement (in Chinese) with Mr Ho Kam Chuen Franky (“Mr Ho”) whereby it was agreed that the Land would be sold together with all development rights to Mr Ho at the price of HK$2,100,000 (to be paid by various instalments the details of which I do not need to set out in this judgment).  Although the written agreement itself did not expressly state that Mr Ho was acting for the 1^st defendant in signing the same, it is not disputed that in fact he was.  On the same day, the board of directors of the 1^st defendant passed a resolution confirming Mr Ho’s authority to act on its behalf in negotiating, signing and executing all documents in relation to the acquisition of the Land “for small house development”.

25.  According to the agreement signed between Mr Ho and Mr Wan, the sale of the Land was to be “連丁連地” and inclusive of all development rights.  By Clause 6(4) of the agreement, in the event of the death of the “ting” (“丁權死亡”), it was agreed that Wan Hok Lim should refund all amounts paid to him without interest, and neither party would be responsible to each other for any legal liability or any expenses.  By Clause 6(3) of the agreement, Wan Hok Lim further agreed to assist in the handling of the matters relating to government procedures and development matters.

26.  Having signed the agreement with Wan Hok Lim to purchase the Land, the 1^st defendant considered that it had acquired the beneficial ownership of the Land.  In the words of Mr Ho, who gave evidence at trial for the 1^st defendant:

“Mr. Lee Wai Kwan, the 2^nd defendant herein, was an indigenous villager who was entitled to a concessionary building licence.  He was applying for a concessionary builidng licence through Hing Lung Holdings Limited.  The land was initially registered under the name of Grandhorn… of which Mr Wan [Hok Lim] and Wan Hang Ping were directors, and thereafter transferred to the 2^nd defendant which I believe was part of the arrangement whereby the 2^nd defendant sold the concessionary building licence to Grandhorn or Mr Wan [Hok Lim], who in turn sold all his interest in the Land to the 1^st defendant by the Agreement as aforesaid [referring to the agreement dated 17 March 1997].  The 2^nd defendant was the registered owner of the Land but in fact the 1^st defendant was the beneficial owner and was alone responsible for financing the building of the small house.

For the reason above, the 2^nd defendant was a bare trustee holding the title of the Land for the 1^st defendant and had no interest whatsoever therein.”

See, paragraphs 4 and 5 of the witness statement of Mr Ho dated 13 June 2005, which was confirmed by him in his evidence-in-chief.

27.  Miss Eva Sit, counsel for the plaintiffs, submits that in these circumstances the 1^st and 2^nd Agreements are tainted with illegality and are, for that reason, unenforceable.  In a very able submission, Miss Sit points out that by falsely declaring in the SD that he was the sole owner of the Land, the 2^nd defendant had made a misrepresentation to the Government that he was the legal and beneficial owner of the Land.  The misrepresentation continued throughout 1996 to 1999 and was never retracted.  It was on the basis that the 2^nd defendant was the true owner of the Land that DLO approved his application to build a small house on the Land and subsequently granted the Building Licence on 22 October 1999.  But for the misrepresentation made to the Government, the Building Licence would never have been granted.  Miss Sit accordingly submits that the performance of the 1^st and 2^nd Agreements would necessarily entail the commission of the tort of misrepresentation on the Government.  She relies heavily on the cases of Best Sheen and Chung Mui Teck in support of her submission that such agreements are illegaland unenforceable.

28.  Mr Eric Yao, counsel for the 1^st defendant, seeks to distinguish Best Sheen and Chung Mui Teck.  He points out that in Best Sheen, the “development scheme” between the developer and the indigenous villager required the latter to apply to the Government for the grant of a free building licence to build a small house, and the indigenous villager did, pursuant to the development scheme, apply for such a licence by making a misrepresentation to the Government that he was the true owner of the land in question, when in fact he was not.  In Chung Mui Teck, the “development deed” was made between the land owner and the developer, who was responsible for procuring indigenous villagers to make applications to the Government which necessarily involved misrepresenting to the Government the beneficial ownership of the lands in question (see, p. 479C of the judgment of Le Pichon JA).  Mr Yao submits that in the present case, the said Agreements were made between the developer and the end-purchasers, who were not indigenous villagers.  Neither the plaintiffs nor the 1^st defendant was required by the said Agreements to make false declarations or misrepresentations to the Government.  Neither was required by the said Agreements to procure an indigenous villager to make false declaration or misrepresentation.  The SD was made by the 2^nd defendant before the 1^st and 2^nd Agreements, and before the 1^st defendant even came into the picture (by its acquiring the Land and the “development rights” from Wan Hok Lim in March 1997).  Mr Yao rightly points out that there is no evidence to show that the 1^st defendant was in any way implicated in the making of the SD by the 2^nd defendant on 17 December 1996.

29.  I do not however think that Mr Yao’s submission is a sufficient answer to Miss Sit’s point.  It is true that the facts of the present case are different from Best Sheen and Chung Mui Teck.  It is true that the indigenous villager, namely the 2^nd defendant, was not a party to the said Agreements.  It is also true that in the present case, the said Agreements do not expressly provide for the procuring of indigenous villagers to make false declarations or misrepresentations to the Government.  Mr Yao is also right in pointing out that the SD had already been made by the 2^nd defendant before the said Agreements were entered into, and there is no evidence to show that the SD was procured by the 1^st defendant.  Nonetheless, in my judgment the crucial question is whether the performance of the said Agreements would necessarily entail the commission of a civil wrong—in the context of the present case the making of misrepresentation to the Government.  As has been rightly pointed out by Miss Sit, the said Agreements expressly stated that an application was being made to DLO for the grant of a building licence.  Not only was the application for building licence expressly contemplated by the parties, the successful application of the building licence was clearly regarded by the parties a matter of fundamental importance—as can be seen from the fact that provisions were expressly made to regulate the parties’ rights and obligations in the event of the death of the “owner of the building licence” (建屋牌照业权人).  In order to secure the grant of a building licence, it was necessary to represent to the Government that the indigenous villager making the application was the true owner of the Land.  As the indigenous villager was in fact not the true owner of the land, a misrepresentation would have to be made—or, if it had already been made, would have to be maintained or continued.  It follows that the performance of the said Agreements would necessarily entail either the making of a misrepresentation, or the continuation of a misrepresentation to the Government.  As a matter of fact, the misrepresentation by the 2^nd defendant (that he was the sole owner of the Land) was never retracted and the Government had approved the application for building licence on the basis that the 2^nd defendant was the true owner of the Land.  In the circumstances, I am of the view that Miss Sit is right in submitting that the performance of the said Agreements would necessarily involve the commission of a civil wrong.  Accordingly, I hold that the said Agreements are tainted with illegality and are unenforceable on ground of public policy.

30.  At the end of the day, the simple point is this: the House intended to be built on the Land was never intended to be built for the benefit of the applicant of the building licence, who was not the true owner of the Land.  For the said Agreements to be performed according to its terms, a building licence would have to be obtained.  It would not have been possible to obtain the building licence without misrepresenting to the Government that the applicant of the building licence was the true owner of the Land.  Hence the making of such a misrepresentation—or if it had already been made, the continuation of it—is crucial and fundamental to the performance of the Agreements.  In my view, it does not matter that the said Agreements do not expressly provide for the procurement of an indigenous villager to make an application for building licence, or to make false declaration or misrepresentation to the Government.  If the performance of the said Agreements would necessarily entail the making – or the continuation – of a misrepresentation to the Government, the absence of an express provision to procure an indigenous villager to make the application for building licence is neither here nor there.

RECOVERY OF THE DEPOSITS

31.  My holding above that the said Agreements are unenforceable on the ground of illegality would not in itself resolve the claim of the Plaintiffs for the recovery of the Deposits.  In seeking to recover the Deposits, the plaintiffs are not seeking to enforce the said Agreements.

32.  It is accepted by both Miss Sit and Mr Yao that whether the plaintiffs are entitled to recover the Deposits depends on whether the plaintiffs and the defendants are in pari delicto i.e. whether they are equally “at fault” in relation to the illegality that taints the said Agreements.  In essence, this requires an investigation into the parties’ respective knowledge of the circumstances that gave rise to the illegality, and whether they had assented to or participated in the acts of illegality in question.  An innocent party who is ignorant of the facts or circumstances that would make performance of a contract illegal may be allowed to recover money paid by him under the illegal contract: see, for example, Bloxsome v Williams (1824) 3 B&C 232, Fielding & Platt Ltd v Selim Najjar [1969] 1 WLR 357, Kiriri Cotton Co. Ltd v Ranchhoddas Keshavji Dewani [1960] AC 192, Archbolds (Freightage)Ltd v S Spanglett Ltd [1961] 1 QB 374, and Ashmore, Benson, Pease & Co. Ltd v A.V. Dawson Ltd[1973] 1 WLR 828.

The witnesses

33.  I turn now to consider the oral testimony of the witnesses.  All 3 plaintiffs have given evidence before this court.  Mr Ho and the 2^nd defendant have also given evidence.  I have closely observed their demeanours during their evidence in court.

34.  I have some reservation as to the credibility of the 1^st plaintiff as a witness.  There are some very significant discrepancies between what he originally alleged in his witness statements (which he confirmed in his evidence-in-chief) and what he said in his oral evidence upon cross-examination.  For example, in his witness statement, he denied that he had any interest at all in a neighbouring lot (Lot 207 s.A in D.D. 14) but upon cross-examination he admitted that he had an interest in Lot 207 s.A from 1996 to about 2001.  In his witness statement, the 1^st plaintiff claimed that prior to 2001, he was never involved in the development of any small house.  This is not quite true.  The 1^st plaintiff’s evidence given during cross-examination shows that for quite a number of years before 2001, he had had experience in the development of small houses in the New Territories.

35.  In 1993, the 1^st and 3^rd plaintiffs together with another person formed a company called Tai Lee Fat International Limited (“Tai Lee Fat”).  In his witness statement, when he refers to this company, the 1^st plaintiff describes it as a company whose “main business was to invest in properties in the Mainland”.  What he has not stated is that this is only true up to about 1996.  In about 1996, Wan Hok Lim and Wan Hang Ping joined Tai Lee Fat and became its shareholders and directors.  The annual return of Tai Lee Fat shows that as of July 1997, the 1^st plaintiff had 20% shares in the company, the 3^rd plaintiff 40%, and Wan Hok Lim and Wan Hang Ping each having 20%.  After the two Wans joined the company, Tai Lee Fat began to participate in the development of small houses.

36.  The 1^st plaintiff admitted during cross-examination that he was involved, together with the 3^rd plaintiff and Wan Hok Lim in the development of a small house near Ting Kok Road in Tai Po.  He also admitted being involved in the development of a small house in Lot 1562 s.D in D.D. 76 in Kan Tau Tsuen.  In the course of cross-examination, he also revealed that he had had some small shares in the investments of other small house lands, including Lot 207 s.A), Lot 41 RP and other lots at Ting Kok Road.  He told me that in about 2001, he used his small shares in these small house developments to exchange for another small house development in Lot No. 183 in D.D. 14, which is another lot in the proximity of the Land.  He subsequently used his company, one Shui Fat Properties Limited (“Shui Fat”), to develop the small house in Lot no. 183 (in this connection, I note that in his witness statement, when he referred to Shui Fat, he referred to it as a company which was “used to derive rental income”, without mentioning its involvement in the small house development in Lot 183).  The 1^st plaintiff also had joint interests in Lot No. 187s.B and 187RP with Wan Hok Lim.  He told me that subsequently he agreed with Wan Hok Lim to “sever” their interests in these two lots. Wan Hok Lim took Lot 187RP and he took Lot 187s.B.  He later developed the small house in Lot187s.B himself but that was after 2001.  Apart from these small house developments, the 1^st plaintiff also had a joint venture with the 2^nd plaintiff in the development or re-development of an “Old House” in Lot 481s.A.

37.  The 1^st plaintiff initially said that his experience in small house development was, in the beginning, confined to purchasing land on which building licences (which he described as “開工紙”) had already been issued.  However, when the court sought to clarify his evidence on this point later, he admitted that there were other pieces of land, near Kan Tau Tsuen, that had been purchased by Tai Lee Fat without building licences, in around 1996 to 1997.  He told me that after Tai Lee Fat became involved in small house developments, he gradually began to know more about the procedures of small house development.  By about 1999, he was aware that an indigenous villager applying to the Government would have to declare to the Government that he was the true owner of the land in question.  I think that given the closeness between him and Wan Hok Lim and Wan Hang Ping (who clearly had very substantial experience in small house developments), the 1^st plaintiff would have acquired such knowledge even earlier, probably soon after 1996 or 1997.

38.  Under cross-examination by Mr Yao, the 1^st plaintiff told me that before he signed the 1^st and 2^nd Agreements, he knew that the 1^st defendant was the developer of the Land.  He knew that he was signing the said Agreements with the developer and not the “ting” (i.e. the indigenous villager).  He told me that by the time of the development of the small house in Kan Tau Tsuen (i.e. around 1996 and 1997—as shown by the land search records, the building licence for Lot 1562 s.D. was dated 16 February 1996 and the Letter of Compliance was issued on 7 July 1997), he became “more clear” that the “ting” was only a nominee owner and had no interest in the small house built by the developer.  Hence the “ting” need not be consulted when the small house was sold by the developer.

39.  Under cross-examination by Mr Kenneth Wong, counsel for the 2^nd defendant, the 1^st plaintiff admitted that by the time of the signing of the 1^st and 2^nd Agreements, he knew that the “ting” would have no right in the small house to be built.  He agreed with Mr Wong’s suggestion that at the time when the 1^st and 2^nd Agreements were made, he knew that he was contracting with the developer and not the 2^nd defendant.  He agreed that there was no point to contract with the 2^nd defendant as he had no property right in the House and was in no position to sell the same to the plaintiffs.  He further agreed with the suggestion by Mr Wong that the 1^st defendant entered into the said Agreements on its own behalf and not as agent of the 2^nd defendant.  The moneys paid under the said Agreements were paid to the 1^st defendant (for which the 1^st defendant had acknowledged receipt) and not the 2^nd defendant.  He told the court that before proceedings were instituted, there was never any letter sent to the 2^nd defendant to complain about breach of contract on his part.  He agreed that there was no reason to chase the “ting” in respect of the building of the House as the “ting” would have no say or control over the same.

40.  Although I have some reservation regarding the credibility of the 1^st plaintiff as a witness, I am of the view that his evidence given under cross-examination is basically truthful.  I have no doubt that at the time when he signed the said Agreements, he was aware that he was contracting with the 1^st defendant as a developer and that the 1^st defendant acted on its own behalf and not as agent for the “ting”.  He was aware that the “ting” did not have any interest in the House to be built on the Land.  He knew that the “ting” was in fact not the true owner of the Land.  I find that the 1^st plaintiff well understood the provisions of the said Agreements, including the provision regarding the application for building licence and what would happen in the event of death of the “ting” (as the “owner of the building licence”).  I find that by the time of the signing of the said Agreements, the 1^st plaintiff was generally familiar with the procedures regarding small house development.  He admitted in his evidence that by 1999, he knew that when the “ting” applied for the building licence, he would need to declare to the Government that he was the true owner of the land in question.  I find that the 1^st plaintiff probably knew about this earlier in 1996 or 1997.  I would add that even if I were to believe his evidence in this regard, the 1^st plaintiff would have acquired knowledge of the fact that the 2^nd defendant must have made a false declaration to the Government latest by 1999.  On the plaintiffs’ own case, they had not sought to terminate the said Agreements until April 2002 (and for a different reason that had nothing to do with the illegality of the said Agreements).  During the period between 1999 and April 2002, the 1^st plaintiff had never complained about the illegality of the said Agreements, nor had he taken any steps to withdraw from the same.  In my view, during this period clearly the 1^st plaintiff must have assented to the performance of the said Agreements despite his knowledge of the circumstances that gave rise to the illegality.

41.  Turning to the evidence of the 2^nd plaintiff, I regret that I find her to be an unreliable witness.  She appears to me to be an intelligent woman, but unfortunately she has shown herself to be somewhat economical with the truth.  She pretended to have no knowledge at all about the nature of the properties that she was buying.  She claimed that she did not know what a “small house” was, and until after the commencement of the present proceedings, she did not know that the House to be built on the Land was a small house.  She gave evidence that she thought that a “small house” was the equivalent of a “village house” and was a reference to the shape of the house.  I do not believe this.  The 2^nd plaintiff gave evidence that before she signed the said Agreements, she had read and understood the terms set out in the agreements.  As has been pointed out above, the terms of the said Agreements expressly referred to the application of the building licence, the possible eventuality of the death of the “owner of the building licence”, and the payment of the balance of the purchase price within 14 days after the issuance of the “land premium notice” by the Government.  These are special provisions which are peculiar to a small house, and I do not believe that given her working experience and experience in property transactions, she would have agreed to enter into the said Agreements without a proper understanding of the meaning and implication of these provisions.  When she was cross-examined by Mr Wong about her understanding of the provision regarding the land premium notice, she claimed to know nothing about it.  I find that to be wholly incredible given the fact that the obligation for payment of the balance of the purchase price was expressly made dependent upon the issuance of this notice.  She agreed that the sale and purchase was a substantial investment to her.  However, she offered no convincing explanation as to why she would sign the said Agreements when she knew nothing about the meaning of the reference to land premium notice.

42.  There are other matters explored in the cross-examination of the 2^nd plaintiff which cast grave doubts on the credibility of her as a witness.  I do not need to go into the details of these matters.  Suffice for me to say that I have closely observed her during her testimony.  I find her to be an evasive witness and frequently feigned ignorance and innocence when she was asked questions which she had difficulty in answering.  I attach little weight to her evidence.

43.  Turning to the evidence of the 3^rd plaintiff, it is clear that the 3^rd plaintiff has great difficulty in recalling past events.  He even told me that he could not remember things that happened yesterday.  I also find him not to be a reliable witness.  While I can understand that given his old age and the fact that the events relevant to this case occurred a long time ago, it is not surprising that he would have difficulty in recalling them; it seems to me that the 3^rd plaintiff had a very selective memory.  While he could not remember much about the circumstances surrounding the signing of the 2^nd Agreement, he purported to remember clearly the contents of a telephone conversation that he allegedly had with the 2^nd plaintiff.

44.  The 3^rd plaintiff claimed that apart from his interest in Tai Lee Fat, he was not personally involved in the development of small houses. This was inconsistent with the evidence of the 1^st plaintiff, who told me that the 3^rd plaintiff was one of the investors in a small house development near Ting Kok Road.  Upon cross-examination, the 3^rd plaintiff agreed that he was in fact one of the investors in that development.  The 1^st plaintiff also gave evidence that the 3^rd plaintiff was one of the investors in the small house development in Lot 207 s.A.  Upon cross-examination, he alleged that he had no impression of that.

45.  It is clear to me that the 3^rd plaintiff was close to Wan Hok Lim and Wan Hok Ping, who were his business partners in Tai Lee Fat.  Tai Lee Fat was actively involved in the development of small houses, and the two Wans were very knowledgeable in the relevant procedures.  The 3^rd plaintiff had a 40% interest in Tai Lee Fat.  I do not believe him when he told me that he only came to know recently what a small house was.  I find the 3^rd plaintiff to be an unreliable witness as well.

46.  In contrast to the plaintiffs, I find Mr Ho (who gave evidence for the 1^st defendant) to be an honest and reliable witness.  Mr Ho has impressed me in the way he gave his evidence—he was straightforward, non-evasive, and was wholly unshaken in cross-examination.  Subject to what is said below, I accept his evidence.  Where the 1^st defendant’s evidence conflicts with that given by the plaintiffs, I prefer his to that of the plaintiffs.

In pari delicto

47.  I have already set out my findings regarding the 1^st plaintiff’s knowledge of the circumstances giving rise to the illegality of the said Agreements.

48.  As regards the 2^nd and 3^rd plaintiffs, I do not believe in their evidence insofar as they suggest that they did not know anything about the nature of small houses.  I find that they knew much more about small houses and the procedures for small house development than what they would have me to believe.

49.  The fact remains, however, that there is no direct evidence on the extent of the 2^nd and 3^rd defendants’ knowledge regarding the circumstances giving rise to the illegality of the said Agreements that would enable me to make a definite finding in that regard.

50.  In my view, it is not necessary for me to make a definite finding regarding the extent of the knowledge on the part of the 2^nd and 3^rd plaintiffs.  The 1^st and 2^nd plaintiffs have jointly agreed to purchase the 1^st Property from the 1^st defendant.  The 1^st, 2^nd and 3^rd plaintiffs have also jointly agreed to purchase the 2^nd Property from the 1^st defendant.  When the relevant deposits under the 1^st and 2^nd Agreements were paid, they were paid respectively by the 1^st and 2^nd plaintiffs jointly, and by the 1^st, 2^nd and 3^rd plaintiffs jointly.  It matters not to the 1^st defendant how the plaintiffs might have agreed amongst themselves in how they would respectively contribute to the Deposits paid to the 1^st defendant.  Conversely, if the 1^st defendant is to be liable to the plaintiffs for repayment of the Deposits, that liability would be owed to the plaintiffs jointly.

51.  If follows that the claim of the 1^st, 2^nd and 3^rd plaintiffs for the recovery of the Deposits must rise and fall together.  Their claims are joint and it is impossible for one plaintiff to succeed and the others to fail.  As I have found that the 1^st plaintiff had the relevant knowledge of the illegality, and had assented to the performance of the said Agreements despite such knowledge, it follows that the claim for the recovery of the Deposits must fail.

52.  Miss Sit has referred me to the cases of Taylor v London and County Banking Company[1901] 2 Ch 231 and Lindgren v L&P Estates Ltd[1968] 1 Ch 572 in support of her submission that the claims of the plaintiffs do not rise and fall together, but falls to be decided individually and separately.  I have carefully read the two cases, but have not found them helpful.  Not only are the facts vastly different from the present case, I do not find in the two authorities anything that supports the proposition that the plaintiffs’ right to claim recovery of the Deposits is other than joint.  Nor do I find s. 43 of the Conveyancing and Property Ordinance, referred to me by Miss Sit, relevant to the point in question.

53.  I must now turn to consider the 1^st defendant’s knowledge.  As the 1^st defendant acknowledged in its evidence (both in the witness statement of Mr Ho and in Mr Ho’s oral evidence in court), the 1^st defendant was fully aware that the 2^nd defendant was merely a nominee owner (or in the words of Mr Ho’s witness statement, a “bare trustee”).  The 2^nd defendant never had any interest in the Land or in the House to be built, and indeed for that reason, it is the 1^st defendant’s case that it made the said Agreements with the plaintiffs on its own behalf and not as agent for the 2^nd defendant.  If follows that the 1^st defendant was fully aware of the fact that the 2^nd defendant was not the true owner of the Land.  I find that Mr Ho must have knowledge that the 2^nd defendant was registered as the nominee owner of the Land in order that he could serve as the applicant in the application for the grant of the building licence.  He must also have knowledge of the terms of the Building Licence that was subsequently granted by the Government.  The Building Licence was in the name of the 2^nd defendant and by its terms were clearly personal to the 2^nd defendant.  In my view, Mr Ho clearly understood the reason why it was necessary for the 2^nd defendant to be registered as a nominee owner.  He knew that the Building Licence could only be obtained by presenting the 2^nd defendant to the Government as the owner of the Land.  Otherwise there could have been no reason why the 2^nd defendant was required to be registered as a nominee owner when he had no interest in the Land at all.  It does not matter whether Mr Ho was aware of the detailed procedure (such as the need for a statutory declaration to be made by the “ting” applying for the building licence).  It suffice that he knew that a façade would be put up whereby the 2^nd defendant would be held out to the Government as the true owner of the Land.  In my view, such knowledge was sufficient to put him in a position in pari delicto to that of the plaintiffs.  As Mr Ho was the person who handled the small house development on behalf of the 1^st defendant, his knowledge must be imputed upon the 1^st defendant.

54.  It follows from the above that the plaintiffs and the 1^st defendant are in pari delicto in regard to the illegality of the said Agreements.  This being the case, neither the plaintiffs nor the 1^st defendant may seek to recover against each other, whether for recovery of the Deposits or for damages.

Locus poenitentiae

55.  The plaintiffs also seek to recover the Deposits by relying on the doctrine of locus poenitentiae.  Under that doctrine, a party to a contract tainted by illegality may withdraw from the contract and recover money thereunder if he can show firstly, that at the time when he resiled from the contract, the illegal purpose had not wholly been or substantially performed; and secondly, that his withdrawal was voluntary and was not forced upon him by exterior circumstances (such as intervention of the police, or of a third party, or by the other party’s breach of the contract).

56.  In my judgment, the plaintiffs in the present case fall on the first hurdle.  Miss Sit relies upon the letters of rescission given by the plaintiffs’ solicitors on 11 April 2002 to the 1^st defendant as evidencing the plaintiffs’ withdrawal from the said Agreements.  However, by that time the illegal purpose under the said Agreements had already been substantially performed.  It is true that the House was not yet built and the construction work had not been commenced.  But the Building Licence had already been granted by the Government in October 1999.  The primary purpose behind the making of the misrepresentation to the Government was to induce it into approving the application for Building Licence.  That purpose had been substantially achieved.  In my view, the illegal purpose had been substantially performed by then, and it is obviously too late for the plaintiffs to purport to resile from the said Agreements more than 2 years later.

57.  As the plaintiffs have fallen on the first hurdle, it is not necessary for me to decide whether the 2^nd requirement is satisfied in the present case.  While Miss Sit is correct in submitting that no genuine repentance need be proved for a party to rely on locus poenitentiae (see Tribe v Tribe [1996] Ch 107 at 135), it is necessary for him to show that his withdrawal was voluntary.  The case of Bigos v Bousted [1951] 1 All ER 92 suggests that where a party seeks recovery after the other party has failed to perform, it is not a voluntary withdrawal.  It is perhaps arguable whether the case of Bigos v Bousted continues to stand as good law after Tribe v Tribe.  Despite Tribe v Tribe, Bigos v Bousted is still referred to in the leading textbooks as the authority in support of the proposition that a party who seeks to terminate a contract on the basis of the other party’s breach is not withdrawing from the contract voluntarily.  The point is an interesting point, but it is not necessary for me to come to a definite view on it.

58.  It follows from the above that I reject the plaintiffs’ claim based on locus poenitentiae.

59.  On the basis of my finding that the plaintiffs and the 1^st defendant are in pari delicto, I dismiss both the claim of the plaintiffs (for recovery of Deposits) and the counterclaim of the 1^st defendant (for damages).

OTHER ISSUES

60.  In the light of my findings above, there is no need for me to deal with the other issues raised in this case.

61.  I would only add, for completeness’ sake, that if I had not held that the said Agreements to be illegal and the parties to be in pari delicto, I would have dismissed the claim of the plaintiffs based on the alleged breach of the implied term.  I would have preferred the evidence of the 1^st defendant to that of the plaintiffs and would have held that there was no unreasonable delay in the construction of the House.  I would also have held that time was not of the essence to the said Agreements and there was never any effective notice given by the plaintiffs to make time of the essence.  As it is, in the light of my ruling on illegality, it is not necessary for me to deal with this aspect of the case in any detail.

CLAIM AGAINST THE 2^ND DEFENDANT

62.  In my judgment, the 1^st defendant was not acting as agent for the 2^nd defendant in making the said Agreements with the plaintiffs.  As the 1^st plaintiff admitted in his evidence, the 2^nd defendant was not the true owner of the Land and there was no reason why the plaintiffs would want to contract with him, and no reason why the 1^st defendant would contract as agent on his behalf.  In any event, it is clear from the evidence that the Deposits were never paid by the plaintiffs to the 2^nd defendant, and it is not in dispute that the 2^nd defendant never received the Deposits for its own use.  In my view, there is simply no basis at all for the plaintiffs to sue the 2^nd defendant.  The claim against the 2^nd defendant is accordingly dismissed.

COSTS

63.  To a large extent the counterclaim of the 1^st defendant is reflected by its defence to the plaintiffs claim.  It is unrealistic to separate the costs of the claim and the counterclaim.  Subject to any arguments which the parties may wish to advance on the question of costs, my provisional view is that a fair order would be to order the plaintiffs and the 1^st defendant to each bear their own costs in this action.  As the plaintiffs fail in their claim against the 2^nd defendant, there is no reason why they should not pay the costs of the 2^nd defendant.  I will accordingly make a costs order nisi in terms as aforesaid.