KAN WAI CHUNG AND OTHERS v. HAU WUN FAI AND OTHERS

HCA 811/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 811 OF 2010

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BETWEEN

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D E C I S I O N

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1.  Before the court are two applications brought by the defendants (“the Solicitors”):

(a) by way of notice of appeal dated 21 October 2010 against the order of the master dated 11 October 2010, refusing to strike out the statement of claim; and

(b) by way of summons dated 25 November 2010 for an order that the judgment in default entered against them on 30 October 2010 be set aside.

2.  The background may be summarized as follows.

The Tings Agreements and the project

3.  The 1^st to 5^th plaintiffs were respectively the registered owners of Sections C, J, H, E and L of Lot 482 in Demarcation District 94, Hang Tau, New Territories.  The 5^th plaintiff was also the registered owner of Section A of Lot 485 in the same DD94.  They were “tings” having the right to build small houses on their land, according to the relevant government policy.  I will refer to the plaintiffs collectively as “the Tings” below.

4.  In about 1993, Wang Kee and Company Limited (“Wang Kee”) and Keeprofit Limited (“Keeprofit”) agreed with Barbican Capital Investment Limited (“Barbican”) to be partners in a joint venture project for developing small houses in Hang Tau.  Sino Favour Development Limited (“Sino”) was accordingly incorporated as the corporate vehicle for the joint venture, with Wang Kee, Keeprofit and Barbican holding 40%, 10% and 50% of the shares respectively.  Barbican was at all material times controlled by Tsang Wing Kei, Wilkie (“Tsang”).

5.  In 1994, Sino entered into agreements with 21 “tings” including the Tings for acquiring their right to build small houses on the Lots 482 and 485 (“the Tings Agreements”).  The terms of the Tings Agreements were identical.  In particular, the Tings agreed that Sino would be wholly in charge of the construction works with all the expenses to be borne by Sino.  The Tings would be responsible for obtaining all necessary government approvals for the construction of a 3 storey small house.  Each of the Tings was guaranteed a profit of HK$200,000 to be paid thus :

(a)   HK$100,000 upon signing of the Tings Agreements;

(b)   HK$50,000 upon the issuance of the building license by the District Lands Office;

(c)   HK$50,000 after completion of the building upon issuance of the certificate of compliance by the government and upon the payment of government premium.

6.  The Tings were not entitled to receive any further money save and except the guaranteed profit of HK$200,000.  The Tings finally agreed that they should hold their land as bare trustees on behalf of Sino.

7.  Pursuant to the Tings Agreements, Sino had already paid each of the Tings the said sum of HK$200,000 in full.  The Tings also assigned their land to Sino in September 1995.

8.  The development project involved the lands owned by Barbican, which were treated as its capital contribution for acquiring its 50% shares in Sino.  However, Barbican failed to obtain the necessary government permission for the development on its lands.  By an agreement dated 27 May 1996, Barbican agreed to relinquish all its interest in Sino and transferred its 50% shares to Wang Kee and Keeprofit at HK$1 per share.

9.  On 26 June 2003, Sino and Shiny Develop Limited (“Shiny”) agreed to be partners in Phase 1 of the project covering 10 small houses built on Lots 482 and 485.  Shiny further acquired beneficial interest in the Lots and the small houses.  Phase 1 was completed in or about early January 2005 when certificates of compliance in respect of the Lots were duly issued.  The premium to remove the non-alienation restriction was paid in or about April 2005.  I will refer to Sino and Shiny as “the Developers” below.

10.  In April to June 2005, the Developers entered into agreements for the sale and purchase of the small houses (“the Transactions”).  The Solicitors were solicitors acting for the Developers in the Transactions.

The 2005 Actions

11.  In August 2005, the Developers commenced HCA 1517-1521/2005 (“the 2005 Actions”) against the Tings, Tsang and Barbican.  They alleged that pursuant to the Tings Agreements, the Tings held their land and the small houses thereon as trustees for them.  They complained that the Tings had in May 2005 entered into provisional agreements for sale and purchase of the small houses to Barbican at prices substantially lower than the market value.  They claimed for damages.

12.  On 2 August 2005, the Developers obtained an ex parte injunction restraining the Tings, Tsang and Barbican from selling or disposing of interest in the properties in suit without their prior consent.

13.  The return date was on 12 August 2005. The Tings were absent at the hearing (“the 2005 Hearing”).  The Developers applied for an order to enable them to complete the Transactions.  Deputy Judge Saunders (as he then was) ordered that the Developers be at liberty to sell and/or complete the sale of the properties in suit, registered in the Tings’ name on the basis that the Tings “are just the bare trustees of [the Developers], holding the legal title in the properties on trust for [them]; and that [Tsang and Barbican] did not make any claim of interest in the properties” (“the Order”).  He then gave consequential direction that the sale proceeds be held by the Solicitors as stakeholder.

14.  Pursuant to the Order, the Developers completed the Transactions.

15.  The Tings filed their defence and counterclaim on 16 December 2005. For present purposes, I need not detail their allegations.  It will be sufficient to mention two points.  First, they denied that they were bare trustees (para 10.3).  Second, they claimed for, among other things, damages for breach of the Tings Agreements.  Their claims, as later observed by Reyes J, were purely personal in nature : see para 17 below.

16.  By a notice dated 25 February 2009, the Tings joined the Solicitors as a third party in the 2005 Actions.  They alleged that the Solicitors had without their authority or knowledge purported to act as their solicitors in the Transactions.  The Solicitors had been negligent and acted in breach of their professional duty.  The Tings claimed for an order of indemnity and damages.

17.  On 1 September 2009, Reyes J allowed the Developers’ application that the sale proceeds held by the Solicitors as stakeholder be released to them.  His Lordship said :

“3. In my view, none of the Defendants (that is, the Tings, Barbican and Tsang) can claim a proprietary interest.

4. [The Tings’] pleadings at best counterclaim for the payment of money and damages. The counterclaims are purely personal. The [Tings’] defences and counterclaims do not raise any or any viable issue of a proprietary interest traceable into the monies held by the [Solicitors].

…

8. In relation to illegality, I do not think that the question is relevant here.  The monies were paid to the [Solicitors] pursuant to [the Order].  The Order was made on the footing that it was perfectly legal and proper for the properties to be sold to the parties.  The only question then, today, is the proper destination of the proceeds of sale, namely, the monies held by the [Solicitors].”

18.  On 20 May 2010, the Tings were given leave to withdraw their third party notice against the Solicitors.

19.  On 17 June 2010, Fung J dismissed the Tings’ application to amend their pleadings save and except the plea of illegality of the Tings Agreements.  Fung J refused the amendment to challenge the Developer’s title to sell the properties and the execution of the consequent sales documents :

“38. As to the amendment relating to [Sino’s] title to sell, regardless of whether the Order of Sale was unnecessary [sic] wider than the negative injunction prayed for or it was res judicata, it remains that there was no appeal from it and the sales to third parties were completed. Realistically, Mr Lam (for the Tings) did not insist on challenging the sales as his main aim is the defence to the Plaintiffs’ claims, as they should not be allowed to recoup any ill-gotten gain whatever the interruption by the Defendants. As a matter of discretion, the amendment of impeachment on title to sell is not allowed, and correspondingly the challenge on the execution of the sales documents.”

20.  By a consent order dated 19 October 2010, the 2005 Actions were discontinued.  (I am told that the parties had reached a settlement.)

The present action

21.  The Tings commenced the present action on 2 June 2010 against the Solicitors for conspiring with the Developers with intent to injure them by unlawful means by selling the small houses without their prior knowledge or consent; and for malicious falsehood by representing to the purchasers that, inter alia, the Tings had agreed to the sale and purchase of the small houses.

22.  On 15 June 2010, the Tings issued a notice of intention to enter judgment if the Solicitors failed to serve the defence within time.  On 10 July 2010, the Solicitors took out the striking out application.  The master dismissed the application on 11 October 2010.  The Solicitors issued the notice of appeal on 21 October 2010.  In the meantime, no defence was filed.  The Tings entered default judgment on 30 October 2010.  The Solicitors then applied to set it aside on 25 November 2010.

The parties’ case

23.  Initially, the Solicitors argued that the default judgment is irregular.  But it is plainly a regular judgment.  The filing of the notice to appeal did not extend the time for filing the defence. When the defence was not filed within time, the Tings were entitled to enter judgment in default.  In the end, the Solicitors did not insist.

24.  In contending that they have a defence with a reasonable prospect of success for setting aside the default judgment, and that the statement of claim should be struck out, the Solicitors relied essentially on the same point.  That is to say, according to the decisions made by the courts previously in the 2005 Actions, the Tings were bare trustees of the properties in suit.  By reason of the doctrine of res judicata or abuse of process, the Tings can no longer deny that they were bare trustees.  Nor can they assert that they were the absolute owners of the properties in suit.  Accordingly, they do not have any locus or entitlement to commence the present action, thus rendering it an abuse of process.

25.  The Tings argued that, by reasons of estoppel by deed and illegality, the Solicitors’ contention that they were bare trustees must fail.  They went further to argue that they were the absolute owners.  They also argued that the doctrine of res judicata or abuse of process did not apply.

Res Judicata/Issue estoppel

26.  The Solicitors contended that the narrow form of the doctrine of res judicata, that is, issue estoppel, applied.  The issue whether the Tings had beneficial interest in the properties had already been determined with finality in the 2005 Actions, which is binding on the Tings.  They cannot re-litigate this issue here.

27.  It is trite that for issue estoppel to arise, three requirements must be satisfied :

(a)   The issue raised in the same proceedings is the same;

(b)   The issue has been determined with finality in the earlier proceedings;

(c)   The parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised or their privies.

28.  The first requirement is plainly satisfied.  In both the 2005 Actions and the proceedings herein, the Tings are said to be bare trustees of the Developers with no beneficial interest in the properties.

29.  The second requirement needs a closer examination of what took place at the 2005 Hearing. I have called for the transcripts, which shows how Deputy Judge Saunders came to make the Order as he did.

30.  As said, the Tings were absent from the 2005 Hearing.  Deputy Judge Saunders was satisfied that they had been served and chose not to appear.  He proceeded to deal with the matter on that basis.  It is significant to note that subsequently, the Tings had not disputed that they had not been properly served with the notice of the 2005 Hearing.  In other words, they had in fact made a conscious decision of not appearing.  Nor had they put in any evidence to contest the application by the Developers for an order to complete the Transactions.

31.  The Developers initially urged upon the Deputy Judge to make the order on the basis that the Tings had no valid claim of interest in the properties.  The Deputy Judge observed that they were in effect applying for summary judgment against the Tings.  He was however very conscious of the fact that he had to have a proper basis for acceding to the Developers’ application.  He was in particular concerned about the fact that the Tings remained the registered owners of the properties.  He wanted to be satisfied that they would have no valid claim of interest in the properties.  Eventually, counsel for the Developers submitted that the Tings were trustees holding the legal title of the properties.  The Deputy Judge then said, “I think that satisfies my problem with it.”  He then granted the Order.

32.  Mr Mok, for the Tings, submitted that the Deputy Judge simply dealt with the Developers’ application on balance of convenience so as to allow the Transactions to go ahead and to avoid any potential claim from the purchasers arising from any defect in title.  He had not dealt with the question whether the Tings were bare trustees on merits.  I disagree.  In my view, it is clear from what transpired at the 2005 Hearing that the Deputy Judge had decided that question on merits based on the evidence then available to him.  His decision was final, although it was an interlocutory hearing.  See M & R Marketing Systems Inc v Tse Mee Shuen & Others, HCA 1598/2001, unreported, 13 December 2001, per Chu J (as she then was) at paras 19-21.

33.  It is significant to note that the Tings had not appealed against the Order.  So although they had denied that they were bare trustees in their pleadings, they are still bound by the determination of the Deputy Judge.  Further, it is quite apparent that both Reyes J and Fung J had proceeded to deal with the matters before them on the basis that the Tings were bare trustees.  In particular, Reyes J ruled that the defence and counterclaim raised no proprietary claim that would allow the Tings to trace into the sale proceeds of the Transactions.

34.  Subject to the third requirement, I do not think it is now open to the Tings to re-litigate the issue if they were bare trustees anymore.  To the third requirement I now turn.

35.  The Tings argued that as the Solicitors have no degree of identification with the Developers.

36.  Privies are of three classes :

(a)   Privies in blood, for example, ancestor and heir;

(b)   Privies in law, for example, testator and executor;

(c)   Privies in estate or interest, for example, assignor and assignee, employee of a defendant company.

See generally Halsbury’s Laws of England, 4^th Ed, Reissue, Vol 16(2), para 999 at p 452.

37.  On what constitutes privy in interest, Megarry VC in Gleeson v J Wippell & Co Ltd [1977] 3 All ER 54 expounded at p 60 b-d that there has to be a sufficient degree of identity between the parties before they can be privies in interest; and that a party does not need to be the alter ego of the other before they can be privies, although there must be a sufficient degree of identification between the two to make it just to hold that the decision to which one was party should be binding in proceedings to which the other is party.

38.  In my view, there is a sufficient degree of identification between the Developers and the Solicitors for two reasons. First, the Solicitors were solicitors for the Developers in the Transactions. As such, they were the Developers’ agents.  Second, the Tings are now alleging that the Solicitors and the Developers were co-conspirators in effecting the Transactions.  As against the Developers, any claim of conspiracy, if ever made by the Tings, must fail in light of the finding by Deputy Judge Saunders in the 2005 Actions that they were bare trustees.  It is plainly just to bind the Tings by the same finding in their claims against the Solicitors, the agent and alleged co-conspirator of the Developers, in these proceedings.

39.  The third requirement is satisfied.

40.  I fully accept that the rules relating to res judicata in interlocutory matters may be less stringent than those generally applicable : see Chu Hung Ching v Chan Kam Ming [2001] 1 HKC 396, per Mayo VP at p 402.  The court may allow an issue to be re-litigated if certain exceptions exist :

(a)   If the ruling on the first application was not based on the merits of the issue but on a technical objection;

(b)   If upon the first application the applicant had failed to prove essential facts from mistake or inadvertence;

(c)   If there is new evidence that seriously justifies reconsideration of the issue;

(d)   If there is material change of circumstances of a non-evidentiary nature.

However, none of the above exceptions exists here.

41.  Mr Mok argued that the Solicitors were estopped by the assignments effected between the Tings and Sino, which referred to the Tings as beneficial owners of their land, from denying that the Tings were beneficial owners.  This argument is misconceived. For it is plain from the evidence, which is admissible as an exception to the parol evidence rule, that as between Sino and the Tings, the latter were bare trustees.  Sino was not bound by the assignments.  Nor are the Solicitors, their privies.

42.  Mr Mok next relied on illegality.  He submitted that the Tings Agreements between the Developers and the Tings were tainted by illegality.  But the Solicitors were not trying to enforce the Tings Agreements.  They were relying on it to show why the Tings were bare trustees.  The Developers could do so if they were sued here : Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866.  So can the Solicitors, their privies.  So Mr Mok’s submission does not assist the Tings.

43.  For the above reasons, I hold that the doctrine of issue estoppel applies with full force against the Tings.  They are estopped from contending against the Solicitors in these proceedings that they were beneficial owners of the properties in suit.

44.  The significance of holding the Tings to the finding that they were bare trustees is this.  They can no longer maintain their pleaded claim of conspiracy, which presupposes that they had beneficial interest in the properties in suit.  Nor can they sue on malicious falsehood. For as bare trustees, they must follow the Developers’ wish to sell the properties and the Solicitors were entitled to act in accordance with the Developers’ instructions.

Abuse of process

45.  Further, the present claims of conspiracy and malicious falsehood against the Solicitors could and should have been raised in the 2005 Actions after the Tings had joined them as a third party.  They chose not to do so and later withdrew the third party proceedings.  It is plainly an abuse of process if they were allowed to raise these causes of action in these proceedings : Henderson v Henderson (1843) 3 Hare 100; Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1.

Dispositions and costs

46.  For the above reasons, I set aside the default judgment, allow the Solicitors’ appeal and order the statement of claim be struck out and the Tings’ claims be dismissed.

47.  Costs should follow the event.  I make an order nisi that the Tings do pay the Solicitors costs of the action including the costs of their appeal and the setting aside application and the costs before the master below, to be taxed if not agreed.  There be a certificate for two counsel.