HO SHUK MING v. AND FONG KWOK SHAN, CHRISTINE AND OTHERS

   DCCJ 4739/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4739 OF 2007

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BETWEEN

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D E C I S I O N

1.  The dispute in this case arose out of a development of small village type houses, or what are commonly known as ting houses, in Sai Kung, New Territories. The present application was taken out by the 21^st Defendant, Secretary for Justice on behalf of the Director of Lands, for an order that the claim against the Director be struck out and for the Director to be removed as a party to this action.

2.  The other defendants have been served with the documents for these proceedings and elected not to make representation or be present at the hearing.

The small village type house policy

3.  The Government’s small village type house policy (“the Policy”) originated in the 1970’s. Under the Policy, adult male indigenous members, or tings, of recognised villages in the New Territories may apply to the Director of Lands (“the Director”) for permission to erect small village type houses for their own habitation within their villages.

4.  The Policy allows concessions and exempts such development from various statutory requirements that are applicable to ordinary building developments. At the same time, the Government exercises control by the imposition of restrictions as to the design, construction and conditions precedent to occupation. To prevent the flouting of the rationale behind the Policy, there is invariably the restriction against unauthorised alienation by the tings of their rights in the land or the building thereon.

5.  A ting may apply to the Director for a building licence to build a small house on the land he owns. If the land is somehow unsuitable for building, the ting may surrender his land in exchange for a new grant of land from the Government. A ting who does not have any land may acquire the land from the Government at concessionary rate.

6.  An applicant for a building licence is required to fill in a standard application form. The form consists of a statutory declaration. Wordings of the declaration have undergone changes over the years but it is to the effect that the applicant has never made or has no intention at present to make any private arrangement for his rights to be sold to others.

7.  Upon approval of the application, the Director will issue an offer letter to the applicant together with a demand note for payment of fees. Upon payment of the fees, the Director and the applicant will execute a building licence.

8.  The applicant will apply from the Director for exemptions in relation to the commencement of building works. Once the Director has issued the certificate of exemption, the applicant may commence the building works. In case the building works touch upon neighbouring Government land, the applicant may need to apply for a permission letter from the Government authorising his entry upon the Government land for the purpose of the works.

9.  Upon completion, the building works will be inspected. Upon compliance with the terms and conditions of the building licence, the Director will issue a certificate of compliance. With that, the applicant is entitled to occupy the small house newly built.

The development in question

10.  The development in question concerns Lot 104, DD 252 in Sai Kung (“the Land”) formerly owned by Ho, the Plaintiff. Ho is now 80 years old.

11.  Back in 1995, while she was the registered owner of the land, Ho entered into an agreement with Kennis Ltd trading as Green House Property Agency (“Green House”) to develop the land by building small village houses there.

12.  The development entailed the partition of the Land into sections. The sections would then be assigned to different persons and eventually to the tings who would be qualified for the development benefits under the Policy. The developer would be responsible for arranging the relevant applications to the authorities, the building works and the financing of the development. The relevant applications would be made in the names of the tings.

13.  Pursuant to the scheme, 6 small villages houses were supposed to be built. When completed, 2 houses were supposed to given to Ho while the rest would belong to the developer. Instead of any rights in the Land or the houses to be built, each ting received a fee in return.

14.  Pursuant to the development agreement, Ho and Green House entered into various other agreements at different points of time. A deed poll was executed whereby the Land was partitioned into 9 sections, namely, Sections A to H and the Remaining Portion.

15.  In 1995, Ho as the vendor entered into various sale and purchase agreements as well as assignments with the 2^nd, the 4^th, the 6^th, the 8^th, the 10^th, the 12^th, the 14^th, the 16^th and the 17^th Defendants as purchasers for various sections of the Land respectively.

16.  In 1996, further sale and purchase agreements and assignments were entered into between various defendants as vendors and the 3^rd, the 5^th, the 7^th, the 9^th, the 11^th and the 13^th Defendants as purchasers respectively.

17.  The end result was that Ho has ceased to be the owner of the various sections of the Land.

18.  In 1997, Green House assigned its rights and liabilities under the development agreement to the 1^st Defendant. This led to further agreements between Ho and 1^st Defendant for the development. Further agreements and assignments between various defendants as vendors and the 18^th, the 19^th and the 20^th Defendants as purchasers also came about.

19.  In 2004, Ho and the 1^st Defendant entered into a settlement agreement. Since then, progress in respect of the sections of the Land varied. For instance, 2 sections of the Land (A and F) have been surrendered in exchange for new grants of land from the Government. Building licences have been granted in respect of some sections while some applications are being processed. Certificates of exemptions have been issued in respect of some sections while some are pending. Some houses have been built while some sections only had their site formation works completed. No letter of compliance has ever been issued.

20.  It is not difficult to note that under the scheme, the benefits aimed for the eligible tings under the Policy would essentially fall into the hands of Ho and the developer that are not eligible. This is prima facie an abuse of the Policy.

21.  Further, there is no dispute that similar schemes have been declared unlawful and unenforceable for the reason that the schemes involved false declarations by the tings and commission of tort of misrepresentation against the Government: see Chung Mui Teck & Ors v Hang Tak Buddhist Hall Association Ltd & Anor [2001] 2 HKLRD 471 at 476F-479D adopting Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866.

The present action

22.  Ho commenced this action against all the parties involved, namely, the developer and the assignees of the various sections of the Land. The Director was also joined in the name of the Secretary for Justice.

23.  According to the pleading, Ho essentially alleges the follows:

(1)  Unknown to her, the agreements that she entered into constitute agreements to carry out tort of misrepresentation to and/or deceit on the Government.  They are thus illegal and/or against public policy and/or tainted with the illegality.

(2)  She entered into these agreements under a mistake that they were valid and enforceable.  Further or alternatively, she entered into these agreements as a result of misrepresentation by Green House or the 1^st Defendant that the Land could lawfully be developed by way of the scheme.  Had she known the truth, she would not have entered into these agreements.

(3)  In the premises, these agreements are void and liable to be set aside.  The incidental deed poll, sale and purchase agreements, assignments, building licences, permission letters, deeds of surrender and new grants are also void and liable to be set aside.

(4)  The beneficial interest in the Land remains vested in her and the various defendants hold the same as trustees for her benefit.  She is entitled to the return of the Land and damages for the loss of profitable use of the Land.

24.  Ho asks for the following relief:

(1)  In relation to Sections A to H and the Remaining Portion of the Land, against the respective defendants (including those who used to be and those who are the assignees of the relevant sections) and the Director, declarations that all agreements for sale and purchase and all assignments in relation to the conveyance of these sections be void and set aside;

[i.e., Prayers (6), (7), (10), (11), (14), (15), (18), (19), (22), (23), (26), (27), (30), (31), (32), (34), (35), (36), (38), (39) and (40)]

(2)  in relation to new lots granted by exchange with the Government, against the relevant defendants and the Director:

(a)  declarations that the deeds of surrender and the new grants in relation to the lots be void and set aside;

(b)  declarations that the legal and beneficial interests in the lots be vested in Ho; and insofar as necessary, all necessary steps be undertaken and all necessary documents be executed to convey the properties to Ho;

[i.e., Prayers (8), (9), (28) and (29)]

(3)  in relation to Sections B, C, D, E, against the defendants who are the owners of the respective parts and the Director, declarations that the building licences and permission letters in relation thereto be void and set aside;

[i.e., Prayers (12), (16), (20) and (24)]

(4)  in relation to Sections B, C, D, E, G, H and the Remaining Portion of the Land, against the relevant defendants and the Director, declarations that the legal and beneficial interests in the sections be vested in Ho; and insofar as necessary, all necessary steps be undertaken and all necessary documents be executed to convey the properties to Ho.

[i.e., Prayers (13), (17), (21), (25), (33), (37) and (41)]

25.  Ho invariably asks that interests in land be vested in him as well as steps be undertaken and documents be executed for such purpose. Though pleaded in terms of declaratory relief, the remedies sought are hardly declaration of rights or a state of affairs. At the hearing, Mr Khaw made clear that his client is indeed seeking orders of the court to compel the defendants, including the Director, to undertake the necessary steps and to execute the necessary documents for conveying such interests in land back to her.

26.  The Statement of Claim was first filed in January 2009. During the period between February and May 2009, Ho’s solicitors and the Department of Justice (“DOJ”), for and on behalf of the Secretary for Justice and therefore the Director, had correspondence with each other regarding their respective position in this action.

27.  By letter dated 31 July 2009, the DOJ informed Ho’s solicitors of their view that the Director has been wrongly joined as a party to this action. The reasons are that Ho has no reasonable cause of action against the Director and the presence of the Director is not necessary for the resolution of any dispute between Ho and the various other defendants.

28.  In their reply dated 7 August 2009, Ho’s solicitors explained that since the new grants were transactions between the Lands Department and the various defendants, the Director had to be an interested and necessary party, insofar as the relief sought were concerned.

29.  The DOJ obviously did not agree and hence took out the present application later in the same month.

The application

30.  The Director applies for, among others, the following orders:

(1)  so much of the Re-amended Statement of Claim as concerns the Director (i.e., parts of the prayers insofar as they concern the Director) be struck out as disclosing no reasonable cause of action and/or frivolous or vexatious and/or an abuse of process of the court, the court having no jurisdiction, power or basis to grant the remedies sought by Ho against the Director; and

(2)  the Writ of Summons and Re-amended Statement of Claim be amended by striking out or removing the Director (sued in the name of the Secretary for Justice) as a defendant.

31.  The striking out application is taken out pursuant to O.18, r.19 while the application to be removed as a party to this action is taken out pursuant to O.15, r.6(2)(a) of the Rules of the District Court. The former is allowed only if this is a clear and obvious case for striking out while the latter depends on whether the Director is a proper and necessary party to the proceedings.

Estoppel

32.  I could briefly dispose of one of the arguments advanced on behalf of Ho. Mr Khaw referred to the DOJ’s letter in February 2009 whereby the Department stated that the Director would adopt a neutral position in this case and would take such steps reasonable and necessary to convey the properties in question to Ho pursuant to the order the court. It was argued that the Director was estopped from changing her mind.

33.  No doubt the Director has changed their mind; but this was from what was apparently the Director’s initial stance. This was clear from their letter in February 2009. In the same letter, the DOJ also stated that the Director was considering not filing any Defence but this would be subject to Ho’s agreement to various conditions and clarification of various issues.

34.  The point is that it was not the above correspondence with the DOJ that led Ho to join the Director. Ho has already decided to join the Director as a defendant from the outset. The statement of the stance of the Director in the above correspondence, as a matter of law and fact, did not operate to estop the Director from objecting to the joinder and making the present application.

Lack of reasonable cause of action

35.  Insofar as the ground of lack of reasonable cause of action is concerned, the pleading has to be considered as it is and without reference to the evidence. In this regard, Mr Lam submitted that no cause of action or allegation of wrongdoing was pleaded against the Director.

36.  Mr Khaw acknowledged that; but he argued that it would be wrong to suggest that a party could not be joined as a party as a result. He relied on TSB Bank International v Chabra [1992] 1 WLR 231, which was adopted in Ong Yip Chung, Henry v Chou Tai Ting & Ors, HCA 9171/1998 (21 January 1999).

37.  I agree with Mr Khaw. A party may be joined in the legal proceedings because he or she is a necessary and proper party. What is necessary and proper is construed widely. As reference, O.15, r.6(2)(b) of the Rules confers on the court the power to join any person, who is yet to be party, in either of the following circumstances:

(1)  the person whose presence before the court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon; or

(2)  the person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.

38.  At the hearing, Mr Lam apparently accepted this. However, he also submitted that Ho is not entitled to the relief being sought against her and such claim ought to be struck out. Consequentially, the Director ceases to be a necessary and proper party in this action.

The sale and purchase agreements and assignments (para.24(1) above)

39.  Mr Lam submitted that in relation to Ho’s claim for declaration that the sale and purchase agreements and assignments between her and the various defendants are void and set aside, the Director is not a necessary or proper party. He submitted that the Director was neither a party to nor involved in the conclusion of these agreements and assignments. There is no basis for the Director to be a party bound by the orders sought in this respect. I agree with Mr Lam. The references to the Director in such prayers in the pleading ought to be removed.

Vesting of interests in the Land (other than sections A and F) in Ho, etc. (para.24(4) above)

40.  Sections A and F of the Land were surrendered to the Government in exchange for the new grants of 2 lots of land. Ho’s claim in respect of these 2 sections is covered by the other prayers (para.24(2) above). The Director was not involved in the sale and purchase agreements and assignments in respect of the other sections of the Land to the various defendants.

41.  Mr Lam submitted that even assuming that Ho obtains the orders sought, the Director could not conceivably be required to do anything or to take any step for the vesting of the interests in these sections of the Land back in Ho. This appears to be the stance of Ho too. In their letter to the DOJ in May 2009, Ho’s solicitors agreed that it might not be necessary for the Director to take any positive step to actually convey the interest of these sections of the Land to Ho. What is contemplated is that the Director should at least be required to correct the Land Register maintained at the Land Registry to fully reflect the fact that Ho’s ownership has never been varied. Yet this would have been consequential rather than a step of conveyance.

42.  I agree that there is no basis for the Director to be a party to such orders. References to the Directors in these prayers in the pleading ought to be removed.

The deeds of surrender, the new grants, the building licences and permission letters (paras.24(2) and (3) above)

43.  Sections A and F of the Land have been sold and assigned away by Ho. The assignees of these 2 sections subsequently surrendered the sections to the Government in exchange for the new grants of 2 lots of land respectively. The declaration sought is effectively that the exchanges are void and liable to be set aside. Though unclear in this part of the pleading, the pleaded case as a whole suggests that Ho also seeks to recover her interests in these sections of the Land prior to the illegal scheme and the exchanges.

44.  The Director was a party to the exchanges and documents and the orders sought definitely concern her. The Director too wants to be heard on whether the orders ought to be made. In fact, it was argued on her behalf that Ho’s claim in this respect is bound to fail. As such, the claim in this respect ought to be struck out. Consequentially, the Director ceases to be a necessary party to such claim.

45.  Ho alleges that she was ignorant of the objectionable nature and effect of the scheme or the facts rendering the scheme objectionable. But Mr Lam submitted that Ho’s alleged ignorance is irrelevant. He submitted that so long as a contract is made with the common design of using its subject-matter for a purpose, and that purpose turns out to be legally objectionable, the illegality of the contract works also against the party who tries to claim ignorance. He referred to J M Allan (Merchandising) Ltd v Cloke & Anor [1963] 2 QB 340; Chitty on Contracts (30^th ed) Vol.1 at 16-010 and 16-012.

46.  I can understand Mr Lam’s argument if Ho is recovering what she would have obtained from the illegal scheme. But this is not what Ho claims. Ho is claiming entirely the opposite, namely, the restoration of her previous position prior to the illegal scheme.

47.  Mr Lam submitted that as much as the court would refuse to enforce or give effect to a contract that is illegal or against public policy, it would not undo or reverse or nullify or set aside anything already done pursuant to the contract. He referred to Chitty (above) at 16-177 and 16-178.

48.  The editor in Chitty (above) at 16-177 discusses the principle in pari delicto potior est conditio defendantis and has this to say:

“……The result of this principle is that where both parties, contracting on an equal footing, are aware of the illegal contract, whether it be on its face illegal or whether the common intention be to carry out the contract in an illegal manner, neither party can recover anything paid or transferred thereunder……”

[emphasis added]

49.  As a matter of principle, it seems to be at least arguable that whether a contracting party to an illegal transaction is deprived of his right to recover the consideration that he has made out will depend on whether that party contracted on an equal footing with the other and with knowledge of the illegal nature of the transaction. As a matter of fact, the issue of Ho’s knowledge clearly cannot be resolved at this stage. In the circumstances, I would be slow to conclude at this stage that the fact that Ho was a party to the illegal scheme per se is fatal to her claim.

50.  Mr Lam submitted that even assuming the surrenders and new grants are affected by the tings’ misrepresentation to the Government, they are not void ab initio but only voidable at the instance of the Director. Hence the Director may elect to rescind or to affirm the land exchange. Mr Lam referred to Chitty at 6-103 and 6-124. It was also argued that the Director is a bona fide purchaser for value in the land exchange.

51.  There is probably no real dispute as to the bona fides of the Director in the land exchange. I also understand the general contractual principles that Mr Lam referred to. Nevertheless I am concerned whether in the context of the illegality and breach of public policy involved in the present case, this will really be a matter of pure exercise of the Director’s contractual right to elect to avoid or to affirm the land exchange at all.

52.  Indeed Mr Khaw submitted that the point is not as straightforward or settled as Mr Lam suggested. He referred to Nelson Enonchong, Illegal Transactions (1998 ed.). The author discussed (at pp.29-31) the distinction between a contract that is void and of no effect and one that is merely unenforceable. It is submitted there that in general under the English law, the illegal agreement is unenforceable, not void, since the agreement exists as something which can give rise to legally enforceable rights, though the agreement may not itself be enforceable.

53.  Having made that generalisation, the author goes on to point out that in exceptional cases, the particular illegality involved is such that it renders the agreement void and absolutely ineffective even to transfer property rights: see pp.149-151. In such cases, no right passes to the transferee and the right remains vested in the transferor.

54.  The above is a discussion of the general principles. But the only case in the present context that was cited was Chung Mui Teck. In that case, the court apparently accepted that the implementation of the scheme would involve swearing of false declaration and misrepresentation to the Government. This rendered the deed unenforceable on public policy grounds. There was however no specific argument and discussion as to the status of the things indeed done as a result of a partly carried out illegal scheme, like the transfer of interest and land exchange in the present case.

55.  In any event, Ho’s claim for the same relief against the other defendants remains to be tried. As the relief sought concerns the Director, it would be surprising if the Director would not seek to be heard on whether the orders sought should be made, even assuming that the Director is not made a party to the orders sought. As Mr Lam submitted, the Director could not afford being neutral in this action.

56.  From the way the prayers are pleaded, it seems that Ho makes no distinction between the sections surrendered and the lots granted in exchange. The Director contended that the newly granted lots, though substantially overlapping with the surrendered sections, are not the same. There have also been changes of profile including typographical changes and the carrying out of the site formation works. The Director suggested that it would be very difficult, if not impossible, to revert the 2 pieces of land to their pre-exchange condition and boundary.

57.  I have no doubt that the perceived difficulty suggested by the Director is relevant to whether the relief sought should be granted. But as this is a matter of fact and degree, the issue cannot be determined on affidavit and certainly does not afford a valid ground for striking out.

58.  So far, 4 building licences and 5 permission letters have been issued in respect of various parts of the Land. Ho seeks declarations that they are void and liable to be set aside. The Director raised similar arguments as to the merits of Ho’s claim in this respect. I shall not repeat the discussion above.

59.  It was also argued that whether the building licences and permission letters are to be set aside is an administrative decision within the discretion of the Director. Therefore the court has no jurisdiction to make an order that effectively usurps her function and discretion.

60.  I do not agree. Assuming that the Director is not a party to this action, and Ho manages to obtain the orders sought against the other defendants, Ho would almost inevitably call upon the Director to give effect to the orders. Depending on the Director’s stance, either Ho or the Director or both may have to seek the court’s assistance. Mr Lam certainly contemplated that. He submitted that Ho has the right to seek judicial review of the Director’s decision, if she is not satisfied with the Director’s stance.

61.  Now the Director is a party to this action. She will be heard about her concerns that would be relevant to the court’s determination of whether the orders sought ought to be made and, if made, what consequential orders ought to follow for the purpose of giving effect to the orders made. The court is certainly in a position to determine the question even if the decision would differ from that of the Director. There is no question of the court usurping the administration.

62.  It was argued that the setting aside of the building licences and the permission letters is wholly unnecessary. It was submitted that should the court grants the orders sought against the other defendants, it would be inconceivable that the building licences and the permission letters would still be of any value. That may well be true; but does not affect whether the Director could and should be a party. The Director may choose to make no representation in that event.

63.  Considering the legal and factual issues involved, I do not think that this is a clear and obvious case for striking out Ho’s claim in respect of the deeds of surrenders, the new grants, the building licences and the permission letters.

Order

64.  I order that:

(1)  the Director be removed as a party to the relief sought in the prayers in the Amended Writ of Summons and the Re-amended Statement of Claim as summarised under paragraphs 24(1) and (4) above;

(2)  the Amended Writ of Summons and the Re-amended Statement of Claim be amended accordingly and be filed and served within 14 days from the date hereof; and

(3)  the Director do file and serve Defence within 21 days from the service of the further amended pleading in (2) above.

65.  In view of the above conclusion, I think it is fair to make no order as to the costs of and occasioned by this application. Ho’s own costs shall be taxed according to legal aid regulations. This is a nisi order and shall become absolute in the absence of application to vary within 14 days.