SINO FAVOUR DEVELOPMENT LTD AND ANOTHER v. KAN WAI CHUNG AND OTHERS

HCA 1517/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1517 OF 2005

____________

____________

(Consolidated by Order of the Honourable
Mr Justice Saunders dated 12 August 2005)

______________

D E C I S I O N

______________

1.  The 1^st Defendants (in each of the 5 consolidated actions) are applying for amendment of the respective Defence and Counterclaim.

2.  The 2^nd and 3^rd Defendants were absent at the hearing.  Mr Lam, for the 1^st Defendants, indicated that they were not opposing his application.

Introduction

3.  The 1^st Plaintiff is a joint venture company formed to develop land in New Territories by acquiring rights of indigenous villagers (or “Tings”) to build small village houses in Hang Tau, Sai Kung.  Initially, the equal joint venturers of the 1^st Plaintiff were 2 companies Wang Kee and Keep Profit on the one part, and the 2^nd Defendant on the other part.  The 2^nd Defendant is managed by the 3^rd Defendant.

4.  The New Territories small house policy is designed to allow male indigenous villagers of a village in existence since 1 July 1898 to apply for permission to erect small houses for their own habitation.  Concessionary terms are granted but subject to strict limitations (see Chung Mui Teck & Ors v Hang Tak Buddhist Hall Association Ltd & Anor [2001] 2 HKLRD 471, 473E (CA).

5.  In March 1994, 21 Tings (“Party A”) signed identical agreements in Chinese with the 1^st Plaintiff (“Party B”) for co-operation in the development of land (“Ting Agreements”):

(1) Party A shall make applications (to the Lands Department) for all necessary procedures with costs to be borne by Party B;

(2) The guaranteed profit of Party A is $200,000 under clause 5 or alternatively the right to purchase the house under clause 6;

(3) Party A shall apply to the Lands Department for the payment of the land premium within 3 months of the grant of satisfaction paper without delay and excuses;

(4) Party A is the mere trustee holding the land and building for Party B and apart from the payment under clause 5, Party B shall not pay Party A any other fees;

(5) The $200,000 shall be paid in the following manner:

(1)   $100,000 upon signing of the agreement;

(2)   $50,000 upon the permission to build the house;

(3)   $50,000 upon the completion of the house and grant of the satisfaction paper and Party A having paid the premium to the Government and completed transfer of the title at the solicitor’s office;

(6) Party A may choose to own the land and house upon payment of the costs of $8 million by serving notice in writing within 7 days of the grant of satisfaction paper or otherwise the right is deemed to be waived.

6.  The respective 1^st Defendants are 5 of the 21 Tings.

7.  The 1^st Plaintiff injected land into the joint venture.  However, the land to be injected by the 2^nd Defendant did not receive planning permission by the Government.

8.  In 1996, the development was restructured.  Only 10 small houses were to be built under Phase 1.  The remaining 11 Ting building rights were to be injected into a new joint venture company which is not of concern here.

9.  As the land under Phase 1 was provided by Wang Kee and Keep Profit, the 2^nd Defendant could only keep its 50% equity in the 1^st Plaintiff upon paying 50% of the costs of acquiring the land and the Ting rights.  Eventually, the 2^nd Defendant did not make any payment, and the 3^rd Defendant resigned as a director of the 1^st Plaintiff.

10.  The 2^nd Plaintiff became the joint venture partner of the 1^st Plaintiff in Phase 1.

11.  At some stage, sales and purchase agreements were purportedly signed by the 1^st Defendants (or their attorneys) with third party purchasers.  The option under clause 6 of the Tings Agreements was not exercised by the 1^st Defendants.

12.  Prior to the completion of the sales in 2005, the 1^st Defendants signed provisional sale and purchase agreements with the 2^nd Defendant allegedly at gross under value (“Barbican Agreements”) and gave irrevocable powers of attorney to the 3^rd Defendant, all registered against the respective Phase 1 small houses in the District Land Office.

13.  In August 2005, the Plaintiffs applied for interlocutory injunctions against the 1^st, 2^nd and 3^rd Defendants from selling and/or encumbering the Phase 1 houses, and to withdraw the registration of the Barbican Agreements.

14.  The 1^st Defendants were served with the summons, but were absent from the hearing for the interlocutory injunction.

15.  The 2^nd and 3^rd Defendants contested the injunction and alleged that they were entitled to share the profits of the Phase 1 houses.  The Plaintiffs undertook to pay $2.5 million from the sale proceeds to Messrs Hau Lau Li & Yeung (“HLLY”), solicitors for the vendors, as stakeholder.

16.  On 12 August 2005, an Order was granted by Saunders DHCJ (as he then was) upon the undertaking of stakeholding of the $2.5 million and the Order stated that the Plaintiffs were at liberty to complete the sales of the properties with the purchasers on the basis, inter alia, that the 1^st Defendants were bare trustees holding the legal title of the properties for the Plaintiffs (“Order for Sale”).

17.  The Order for Sale was not challenged and the sales were completed.

18.  On 10 October 2005, the Plaintiff issued identical actions herein against the 1^st and 2^nd Defendants (later adding the 3^rd Defendant) for:

(1) Breach of the Tings Agreements (by the 1^st Defendants);

(2) Procuring the breach of contract (by the 2^nd and 3^rd Defendants);

(3) Damages for slander of title;

(4) Damages for conspiracy to injure;

(5) Return of the $2.5 million stakeheld money.

19.  The 1^st Defendants’ Defence and Counterclaim stated that:

(1) They have not been paid in full the guaranteed profits of the $200,000 each under the Ting Agreements;

(2) One of the 1^st Defendant (Mr Kan Wai-chung) claimed an additional introduction fee of $300,000;

(3) The Barbican Agreements were devised by the 3^rd Defendant to enable the 1^st Defendants to get their guaranteed profits.

(4) Payment of the balance of the guaranteed profits;

(5) Damages for delay in the completion of the houses.

20.  The Reply and Defence to Counterclaims averred that:

(1) All the 1^st Defendants have been paid the guaranteed profits;

(2) No additional fee of $300,000 was agreed;

(3) There was no delay.

21.  The Defence and Counterclaim of the 2^nd and 3^rd Defendants averred that:

(1) The 2^nd Defendant never agreed to withdraw from the Phase 1 project;

(2) The 3^rd Defendant denied signing the withdrawal agreement;

(3) Phase 1 was carried out without knowledge of the 2^nd and 3^rd Defendants;

(4) The 3^rd Defendant is entitled to 50% of the sale proceeds.

22.  The Plaintiffs made a complaint of perjury against the 3^rd Defendant.  The 3^rd Defendant was charged and convicted of perjury after trial in July 2008.

23.  In 2009, the Plaintiffs applied for release of the $2.5 million.

24.  The 1^st Defendants opposed the payment application and Mr Kan Wai-chung filed affidavit evidence that:

(1) The Ting Agreements were illegal;

(2) The sales were improper as the 1^st Defendants had not authorized anyone to sell the properties;

(3) The 1^st Defendants did not execute any formal agreement in the presence of HLLY and they were guilty of false attestation;

(4) The 1^st Defendants only signed certain statutory forms in blank and they were still held by another firm of solicitors;

(5) HLLY had no authority to act for the 1^st Defendants.

25.  At the hearing on 1 September 2009, Reyes J observed that the properties had already been sold under the Order for Sale and queried whether it was too late for the 1^st Defendants to re-open the illegality of the Ting Agreements and the sales.  Counsel for the 1^st Defendants intimated possible amendment of the pleadings, and His Lordship queried without refusal that illegality was like a nuclear bomb given that the 1^st Defendants were counterclaiming payment of certain monies.  In the event, the $2.5 million were released to the Plaintiffs.

26.  Reyes J also granted leave for the actions to be set down.

27.  In May 2010, the Plaintiffs’ solicitors wrote to the 1^st Defendants’ solicitors to go before the Listing Officer to fix the date for trial.  The 1^st Defendants’ solicitors wrote back stating that this application for amendment was to be heard, and the fixing of date should be postponed.  The Plaintiffs’ solicitors wrote back stating that the amendment would be refused by the Court on their objection, and even if granted, it would not cause any delay to the trial.

28.  Hence, the Defendants’ solicitors went along and the trial date of March 2011 was fixed.

Proposed amendment

29.  The proposed amendment to the Defence and Counterclaims of the 1^st Defendants are that:

(1) The Tings Agreements were subject to the implied terms of completion of the houses within 3 years;

(2) The Ting Agreements were unenforceable as:

(a)   illegal in that the 1^st Defendants had to make false declarations in the application for building permission that they were the beneficial owners of the houses;

(b)   contrary to the public policy of construction of small village house for self use by the Ting only;

(3) The sales and purchase agreements and powers of attorney purportedly executed by the 1^st Defendants were forgeries;

(4) The Plaintiffs were not entitled to establish any interest in the land and houses under Phase 1;

(5) Sales of the land and houses by the Plaintiffs (if so entitled) were subject to the condition precedent of payment of the balance of the guaranteed profits of $100,000 each.

Opposition by the Plaintiffs

30.  Mr Li, for the Plaintiffs, opposed the proposed amendment:

(1) The application is seriously belated and there is no satisfactory explanation of the delay;

(2) The plea of illegality is tantamount to withdrawal of the admission of the Ting Agreements without any explanation;

(3) The plea of illegality is inconsistent with the Order for Sale affirming the Plaintiffs’ beneficial interest in the properties;

(4) The challenge of the Plaintiffs’ title to sell is prejudicial to the interests of the third parties purchasers;

(5) The 1^st Defendants choose not to challenge the Plaintiff’s title by raising illegality and forgery at the interlocutory injunction stage and it is now too late to re-open the case;

(6) Claims of guaranteed profits and illegality are inconsistent;

(7) The implied term of completion within 3 years purportedly based on a minute of the of the 1^st Plaintiff’s Board dated 5 February 1996 that in normal practice of village house development, the validity of villager’s right was only 3 years from the date of signing, and the villagers would claim compensation after this period by reason of market variation is vague and imprecise and can in no way satisfy the test of necessary implication for business efficacy;

(8) The allegation of false declarations of beneficial ownership in the building application is contrary to the previous affidavit evidence of Mr Kan Wai-chung that the 1^st Defendants had never made any such declaration;

(9) The allegation of forgeries of the sales and purchase agreements is inconsistent with the allegation of mere false attestation in previous affidavit;

(10)  Full payment of the guaranteed profit as a condition precedent to sale is contrary to the terms of the Ting Agreements.

Discussion

31.  The proposed amendment is seriously late, especially when the case has been set down.   Be that as it may, good case management should always include the consideration of the attainment of the substantive rights of the parties and the interest of justice, especially when illegality is raised, the Court should be careful to inquire into whether late amendment should nevertheless be allowed lest the Court be unwittingly used as an instrument of fraud.

32.  Mr Lam’s explanation of delay was that the proceedings were stalled for 3 years from 2005 to 2008 when the 3^rd Defendant was being investigated for perjury.  True that 3^rd Defendant was entitled to the right against self-incrimination, the present amendment do not involve the 3^rd Defendant such that he has chosen to be absent at the hearing and not raise any objection.

33.  Mr Li submitted that the 1^st Defendant’s change of stance on illegality is tantamount to withdrawal of an admission.  Strictly speaking, it is not so because the 1^st Defendants never admitted legality but simply not raised the illegality of the Ting Agreements.

34.  The claims of payment and avoidance of the contract are inconsistent, but not such as based on inconsistent facts.  The plea of illegality is one based on illegal performance of the contract, in that false declarations of beneficial ownership were made to the Lands Department for building permission.  This plea is merely late, but not contrary to facts previously pleaded so as to be inconsistent alternatives.

35.  Mr Li criticized that the allegation of false declaration in the application for building permission was imprecise and incomplete.  Be that as it may, insofar as the declaration of beneficial ownership and self-use by the Ting is required, the declaration of bare trusteeship in the Ting Agreements prima facie suggests illegality, regardless of how the application was actually proceeded with.

36.  There are bound to be steps taken in discovery of the application process, but no undue delay or difficulty have been indicated.   Given there are still 9 months before trial and with a tight timetable on case management, the prediction by the Plaintiffs’ solicitors that even if the amendment were granted, it would not cause any delay to the trial should hold.  In any case, even if there were to be delay of 1 or 2 months, it would still be justified in the circumstances.

37.  Hence, the amendment on illegality is allowed.

38.  As to the amendment relating to the 1^st Plaintiff’s title to sell, regardless of whether the Order of Sale was unnecessary 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 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.

39.  As to payment of the guaranteed profit as precondition to sell, insofar as it is an impeachment of title it will likewise be refused, and insofar as it is a claim of the guaranteed profit it is unnecessary as a counterclaim of payment is on foot.  Hence, the amendment is not allowed.

40.  As to the implied terms to complete within 3 years, I agree with Mr Li that the effect of the 1^st Plaintiff’s minute was vague and imprecise and no arguable case on the necessary implication for business efficacy can be raised.  Hence, the amendment is not allowed.

Conclusion

41.  In the event, only the amendment on illegality (i.e. paras.6, 6A to 6A.5) is allowed.

42.  The other amendments are refused.

Directions

43.  The 1^st Defendants are allowed 7 days to file the amendment, and 21 days for consequential amendment by the Plaintiffs and the 2^nd and 3^rd Defendants (if any).

44.  The solicitors shall come back before me for further directions (on discovery etc.) within 1 month.

Costs

45.  The Plaintiffs should bear the costs of and occasioned by the amendment allowed.

46.  As to the hearing, taking into account the respective success and failure on the divers issues, I make an order nisi thatthe 1^st Defendants do bear 1/2 of the costs of the Plaintiffs which shall be $40,000 in terms of summary assessment based on figures submitted at the hearing.

47.  I thank counsel for their submissions.

48.  I shall forward a copy of this decision to the Lands Department for reference.