LI (or LEI) TING KIT TSO WITH LEE CHO TUNG AND LEE WING CHEONG AS MANAGERS v. CHEUNG TIN WAH AND ANOTHER

HCA 2500/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2500 of 2013

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J U D G M E N T

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A. THE FACTS

1.  The plaintiff, a “Tso” (祖) under Chinese customary law, was the owner of certain land in the New Territories, being “The Remaining Portion of Lot No 1327 in Demarcation District No 112”, described as “the Original Land” in the Amended Statement of Claim.

2.  It is the plaintiff’s case that:

(1)  In about early 1996, the 1^st defendant approached Lee Wing Cheong and other members of the Tso and expressed an interest to develop small houses (丁屋) on the Original Land.

(2)  At the time, Lee Wing Cheong was not yet a manager of the plaintiff, but he was present at the negotiations with the 1^st defendant as he was trusted by the members of the Tso.  He became a manager in May 1997.  Lee Cho Tung has been a manager since September 1981.  I shall call these two gentlemen “the Managers” herein.

(3)  Represented by the Managers, the plaintiff and the 1^st defendant reach an oral agreement (“the Oral Agreement”) regarding the development of small houses using the Original Land, with the following terms:

(a)  The plaintiff would provide the Original Land for the 1^st defendant to develop 15 blocks of 3‑storey small houses.

(b)  The plaintiff would assign the title of the Original Land to the 1^st defendant and/or his nominated persons who possess the right to build small houses.

(c)  Upon completion of the development, the plaintiff would be entitled to 3 blocks of the small houses, 9 car park spaces, and HK$900,000. The 1^st defendant or his nominated persons would be entitled to the remaining blocks and car park spaces.

(d)  If the 1^st defendant failed to complete the application procedure of small house development using the Original Land with the Lands Department within one year, the plaintiff had the option to terminate the Oral Agreement, in which case the 1^st defendant was to assign or cause to assign the title of the Original Land back to the plaintiff.

(4)  After the Oral Agreement had been reached, the 1^st defendant verbally represented to the Managers that:

(a)  As a matter of formality, the parties should sign a written agreement.

(b)  For ease of handling the procedures relating to small house development, the 1^st defendant nominated the 2^nd defendant to sign the agreement on his behalf since he was the controlling shareholder thereof.  However, notwithstanding the signing of the written agreement, the 1^st defendant guaranteed that after the assignment of the Original Land to him and/or his nominated persons (including the 2^nd defendant), they would not dispose of the interest of the Original Land or any part thereof, without the knowledge or consent of the plaintiff, and they would assign the title of the Original Land or any part thereof to the plaintiff upon request, and that he would remain personally liable under the Oral Agreement as well as the written agreement to be signed by the 2^nd defendant and undertook the due performance thereunder.

(5)  The plaintiff and the 2^nd defendant did sign a written agreement (“the Written Agreement”) as a result.  (I shall call the Oral Agreement and the Written Agreement collectively as “the Agreements”.)

(6)  The plaintiff assigned the title of the Original Land to the 2^nd defendant by way of an Assignment dated 12 November 1997 (“the Assignment”).  Although it was stated in the Assignment that the consideration for the assignment was HK$2,800,000, neither defendant had made any payment to the plaintiff.

(7)  By way of a Deed Poll dated 12 February 1998, the Original Land was divided into 13 sections, and 7 of those sections were then assigned by the 2^nd defendant to various assignees in February and March 1998.

(8)  The defendants were, however, unable to nominate sufficient number of persons who had the right to build small houses, and so the development of the Original Land did not proceed.  On 14 February 2011, solicitors for the plaintiff sent a letter to solicitors then acting for the defendants whereby the plaintiff terminated the Agreements pursuant to §3.4 of the Written Agreement (see below) or alternatively by way of accepting their repudiatory breach of the Agreements through the substantial delay in the development of the Original Land.  The letter also demanded the defendants to assign or cause to be assign back the title of the Original Land to the plaintiff.

(9)  However, despite the said letter the defendants did not assign the Original Land or any part thereof back to the plaintiff. Instead, the 2^nd defendant assigned one section to an assignee on 27 April 2012, and 5 sections to various assignees on 14 June 2013.  Thus, by 14 June 2013, all 13 sections of the Original Land had been assigned away by the 2^nd defendant.

(10)  The plaintiff was able to secure oral agreements from current owners of 5 of the sections^[1] of the Original Land to assign the title back to it.   Thus, 8 sections^[2] are “lost” to the plaintiff.  Of these 8 sections, 3 were assigned by the 2^nd defendant to assignees in 1998^[3], and 5 were assigned on 14 June 2013.^[4]  Thus, some were assigned before the plaintiff terminated the Agreements, and some were after.

3.  The Written Agreement, which was dated 4 October 1996, was in Chinese and was called 「合作發展丁屋協議」.  Its terms were largely consistent with the Oral Agreement as alleged by the plaintiff.  §§3.1 and 3.3 of thereof provided for the purchase of ting rights (買丁權), and provided at §3.4 thereof:

「於本協議簽訂後壹年內，乙方[i.e. the 2^nd defendant]需完成買丁，割地及入紙地政處申請丁牌手續，如乙方未能依期辦妥，甲方[i.e. the plaintiff]有權立即終止本協議，並要求乙方六個月內歸運該地段的業權。」

4.  The matters stated in §§2 and 3 above are supported by the evidence of Lee Wing Cheong and/or by documentary evidence, which I accept, and I find them as facts.

B.  THE PLAINTIFF’S CASE

5.  The plaintiff argues that the Written Agreement was signed by the 2^nd defendant for and on behalf of the 1^st defendant as a corporate vehicle and/or an agent.  I take that to mean that the 1^st defendant was the contracting party to the Written Agreement rather than the 2^nd defendant. Alternatively, it is argued that if the 2^nd defendant was not the 1^st defendant’s corporate vehicle or agent acting on his behalf, it holds the 2^nd defendant liable under the Written Agreement, while the 1^st defendant remains personally liable under the Oral Agreement or alternatively he is personally liable due to his guarantee of the due performance of the Written Agreement.

6.  The plaintiff claims relief relating to the 8 sections “lost” to it (§2(10) above) on the following grounds:

(1)  Breach of the Agreements.

(2)  On the basis of a resulting trust over the Original Land, because although the Assignment stated that the assignment was for HK$2,800,000 the sum was never paid and so the defendants held the Original Land on resulting trust for the plaintiff.

(3)  If the Agreements are held illegal due to the small house policy, then:

“the Plaintiff relies on the doctrine of locus poenitentiae to recover the properties of Section D, F, H, K, L, M, N and the Remaining Portion of Lot No. 1327 in D.D. No. 112 and/or to claim loss and/or damages due to the wrongful disposal of them by the 1^st Defendant and/or the 2^nd Defendant, quantum of which is to be assessed”.

C.  DISCUSSION

7.  I can dispose of the first argument (breach of contract) shortly.

8.  Mr Yan, counsel for the plaintiff, accepts in his opening submissions that in the performance of the Agreements, it would be inevitable or likely that false representations would be made by indigenous villagers, in whose names the application to build small houses on the Original Land would be made, to the Lands Department and thus they were illegal.  Mr Yan refers to the judgment of Au‑Yeung J in Tang Teng Hong Tso v Cheung Tin Wah [2014] 2 HKLRD 1032 involving the same defendants but a different Tso as the plaintiff where the material facts were similar to the present.

9.  I agree that the Agreements were illegal and thus the plaintiff is not entitled to sue for their breach or to recover damages thereunder.  In the premises, it is not necessary for me to resolve the question of whether the 2^nd defendant entered into the Written Agreement as the corporate vehicle or agent of the 1^st defendant.

10.  As for resulting trust and locus poenitentiae, I hope that I would be forgiven for respectfully quoting extensively from Au‑Yeung J in Tang Teng Hong Tso:

“The parties’ cases

14.  It is not disputed that the agreement, the supplemental agreement and the undertaking (collectively ‘the agreements’) were illegal. The plaintiff’s case is that since the illegal purpose had not been carried into effect, the lands should be returned to the plaintiff under the doctrine of locus poenitentiae. Alternatively, the transfer of the lands to the company was a voluntary assignment and hence the company is holding the lands on resulting trust for the plaintiff.

15.  The defendants contend that they had provided consideration in the amount of $2,447,900 (including the deposit). They say that the plaintiff is estopped by deed from denying the defendants’ provision of consideration. Further, the common intention of the parties at the time of the assignment was not for a trust to be created but for an outright transfer of the lands to the defendants.

16.  The issues are therefore:

(A)  Whether the doctrine of locus poenitentiae is applicable;

(B)  Whether the defendants had provided consideration for the assignment;

(C)  Whether the plaintiff is estopped by deed from denying receipt of the consideration; and

(D)  Whether there was an outright transfer of the lands to the defendants so that no resulting trust could arise.

...

Applicable legal principles

21.  The principles distilled from the authorities are as follows:

(1)  Where an agreement is entered into for an illegal purpose, the court will not enforce it. Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866, Maria Yuen J (as she then was); Cheerbond Development Ltd v Tung Kwok Yu [2010] 2 HKLRD 546.

(2)  A development scheme that takes advantage of the Small House Policy under which an applicant ting would have to represent himself as the legal and beneficial owner of a piece of land even though he would merely be holding it as a nominee is illegal, as it would necessarily involve making of a false declaration and hence commission of the tort of misrepresentation to the Government. See Best Sheen’s case at 874B‑C; affirmed in Chung Mui Teck v Hang Tak Buddhist Hall Association Ltd [2001] 2 HKLRD 471 at 477F‑H.

(3)  It is no answer that no false statutory declaration has yet been made if the implementation of the scheme necessarily involves the making of such a declaration: Chung Mui Teck’s caseat 477H.

(4)  However, a party to an illegality can recover by virtue of a legal or equitable property interest if he did not need to rely on the illegal contract for any purpose other than providing the basis of his claim to the property right: the Best Sheen case at page 874D‑E.

... a declaration that the plaintiff is the beneficial owner of the Land does not amount to enforcement of the illegal contract.

This is because the plaintiff is not forced to rely on the illegal contract for the declarations sought as to its property interests, even though the illegal contract explains why it came about that the bankrupt was registered as the owner of the land. (874C‑E)

(5)  A classic example was the claimant’s reliance on resulting trust where he provided the consideration for the acquisition of a property and was not the named purchaser or where a voluntary transfer was involved. See the Cheerbond case at [9(b)]; Best Sheen caseat 874F‑875A.

(6)  In respect of an assignment containing a clause acknowledging receipt of the consideration when it was not paid, even if pursuant to s.17 of the Conveyancing and Property Ordinance (Cap. 219), the effect was that the plaintiff did not retain a beneficial interest in the land, the plaintiff could recover the land under the doctrine of locus poenitentiae. Under the doctrine, a party who transferred his property for an illegal purpose can recover his property provided that he has withdrawn from the transaction before the illegal purpose has been wholly or partly performed. Best Sheen case at 875B‑E; Cheerbond case at [9(e)].

...

(A)  Whether the doctrine of locus poenitentiae is applicable

28.  The defendants contend that the doctrine of locus poenitentiae is not applicable as the parties have performed in a material manner.

29.  I reject the contention. The lands have been partitioned into a total of 33 lots on 10 March 1998, but the partitioned lots are still held under the name of the company. Even if the applications for building licences for Lot No 1327 were relevant, those applications have not yet succeeded by the time of the trial. The lands remain vacant as of now.

30.  Mr Leung argues that for the doctrine of locus poenitentiae to apply, it has to be additionally shown that the withdrawal from an illegal transaction was voluntary and not forced upon the plaintiff by exterior circumstances (such as intervention of the police, or of a third party, or by the other party’s breach of the contract). This argument is based on the obiter dictum of Deputy Judge Horace Wong SC in Tiu Sum Fat v Shun Sing Development Ltd [2010] 1 HKLRD 553at [55]‑[57].

31.  It is not necessary for this Court to decide whether there is this additional requirement for the doctrine. Assuming there is, there were no exterior circumstances to show that the withdrawal was forced upon the plaintiff. On the defendants’ case, the application for a building licence can take years. The application (in respect of Lot No 1327) is still ‘pending’ and not yet rejected. The plaintiff is not relying on the defendant’s breach. It is not too late in withdrawing.

32.  I hold that the principle of locus poenitentiae applies.

(B)  Whether the defendants had provided consideration for the assignment

...

35.  In any case, the defendants are relying on their performance under the illegal agreements to show provision of the consideration. This defence is not sustainable. See [21(1)] above.

(C)  Whether the plaintiff was estopped by deed from denying receipt of the consideration

36.  The defendants rely on the acknowledgement. The plaintiff has, rightly in my view, abandoned its plea of mistaken belief.

37.  Estoppel by deed is a rule of evidence founded on the principle that a solemn and unambiguous statement or engagement in a deed must be taken as binding between the parties and privies and therefore as not admitting any contradictory proof: Greer v Kettle [1938] AC 156, 171.

38.  Estoppel by deed may be applied in actions on the deed that contains the statement but not to collateral actions between the parties to the deed: Wilken and Ghaly, The Law of Waiver, Variation and Estoppel (3^rd ed., 2012) para. 12.37.

Estoppel by deed may only be used in actions on the deed that contains the statement relied on. It does not apply to separate or collateral actions between the parties to the deed. In such cases, the deed may be relied on as evidence of the facts asserted in it but there is nothing to stop the parties adducing contradictory evidence. For example, in Carpenter v Buller, W and M executed a deed pursuant to various building works which they were carrying out. The deed recited that W was the owner of a specified plot of land. M later sued W for trespass over the land specified. No estoppel arose to prevent M from asserting his title to the land. The action in trespass was wholly collateral to the deed and was not an action founded upon it.

39.  Specifically, where money has not been paid:

The well known rule of the Chancery Courts in regard to a receipt clause in a deed not effecting an estoppel if the money has not in fact been paid is a good illustration of the equity view. Greer v Kettle at 171.

40.  Prime Sight Ltd v Lavarello [2014] 2 WLR 84 is an example of an action on a deed where money was not paid. The deed recited that a sum had been received by a person as consideration. In fact, there was no payment and the person subsequently became bankrupt. The official trustee sued for consideration as being due on the deed, but was held to be estopped from challenging the assumed facts stated in the deed.

41.  Further, evidence as to the true nature of the transaction can be given. In Ali v Khan [2002] EWCA Civ 974at [20], it is said that:

[20]  Further, the limitation on the use of extrinsic evidence in relation to deeds or other written contracts has never excluded evidence as to the true nature of the transaction ... extrinsic evidence may be relied on to show that a conveyance in form absolute was only for a limited purpose for which a transfer of the legal estate was both sufficient and all that was intended ...

...

[23]  It is clear from Greer v Kettle [1938] AC 156, 171 as well as the two cases to which I have referred that an estoppel by deed does not preclude contradictory oral evidence admissible in accordance with equitable principles. ...

42.  There would be an exception to the estoppel if the deed was fraudulent or illegal or if one party induced an untrue recital by his own representation to the other party: Greer v Kettle, at 171; Prime Sight Ltd v Lavarello [2014] 2 WLR 84, at [33].

43.  Mr Leung, counsel for the defendants, relies on the cases of Rimmer v Webster [1902] 2 Ch 163 and Tsang Chuen v Li Po Kwai [1932] AC 715. With respect, the estoppel principle was applied there to prevent a party to a deed from asserting something contradictory to the deed because an innocent third party was involved.

44.  The circumstances are entirely different here where the direct parties to the assignment are before this Court. The plaintiff is not suing on the assignment for the unpaid consideration. It is just providing the basis of its claim to proprietary rights. See [21(4)] above. I hold that the plaintiff is not estopped from proving that the consideration stated was illusory and that the assignment was made with a view to deceiving the District Lands Office.

(D)  Whether there was an outright transfer of the lands to the defendants so that no resulting trust could arise

45.  Mr Leung submits that the arrangement between the parties was a joint venture whereby each party took risks. The plaintiffs assigned the lands outright to the defendants. The defendants had already allotted five houses to be built on Lot No 1327 to the plaintiff in exchange, so whether the defendants would use the lands for agricultural purpose should not concern the plaintiff.

46.  This line of defence can be dismissed outright as it has not been pleaded.

47.  Even if this defence can be considered, it was clear that the actual intention was not for an outright transfer of the lands. The transfer was for a specific development purpose so that the plaintiff was to receive five houses, not another unbuilt portion of Lot No 1327. If the District Lands Office does not grant the building licences, the lands have to be returned to the plaintiff: cl.3.7 of the agreement.

48.  In any case, since the defendants have to rely on the illegal agreements to establish its defence, the court will not assist them. This line of defence is unsustainable.

Conclusion

49.  The agreements were illegal.  The plaintiff is entitled to rely on the principle of locus poenitentiae as the illegal agreements have not been carried into effect.  Since they have not provided consideration to the plaintiff for the assignment, the defendants are holding the lands on resulting trust for the plaintiff.  The plaintiff does not have to rely on the illegal agreements to establish its property rights.” 

11.  Her Ladyship declared that the 2^nd defendant in that case (the same as the 2^nd defendant here) held the land there (before and after partition) on resulting trust for the plaintiff there.

12.  In my judgment, there is a difference between the facts of this case and those in Tang Teng Hong Tso, namely that the land in that case remained with the 2^nd defendant, while in this case all the sections the subject of the claim have been assigned to others and the legal title is no longer with the 2^nd defendant.  This is of fundamental significance.

13.  There is no tracing claim regarding the sections in the hands of the assignees, who are not parties to this action, and there is no evidence of the latter’s knowledge and involvement of the illegality in any event and there is therefore no basis to trace the sections into their hands.  The result is that the plaintiff here, unlike the plaintiff in Tang Teng Hong Tso, cannot claim a return of the land which is no longer held by the defendants.

14.  As for the doctrine of locus poenitentiae, it allows a party to an illegal contract to recover his property.  This was what the plaintiff in Tang Teng Hong Tso sought to do.  But this is not what the plaintiff in this case is seeking to do, no doubt because the 2^nd defendant no longer has the sections in question.  Mr Yan does not seek to support his claim for monetary relief under this doctrine, as he accepts that this doctrine is based on restitution of property only. 

15.  That leaves the resulting trust argument.  I accept and find, for the same reasons given by Au‑Yeung J mutatis mutandis, that the 2^nd defendant was holding the Original Land on resulting trust for the plaintiff after the Assignment.  That being so, the 2^nd defendant was and is under a duty to account to the plaintiff for the trust asset, i.e. the Original Land, or for equitable compensation for its loss if it fails to account therefor: Lewin on Trusts (19^th ed, 2015) at §39‑010.  I am satisfied that, since the 2^nd defendant had assigned away the sections and is no longer in a position to account for, or restore to the plaintiff, the Original Land, as demanded by the plaintiff in the letter of 14 February 2011, and with no other equitable relief available, the plaintiff should be awarded equitable compensation: see Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 at §§84‑96 per Ribeiro PJ, and Lord Millett, “The Common Lawyer and the Equity Practitioner”, in Clarry and Sargeant(eds), The UK Supreme Court Yearbook Volume 6 (2015), at 202‑205. Even though the plaintiff has not claimed equitable compensation expressly, in my judgment I can so order under the “Further or other relief” claimed.

16.  The 2^nd defendant was the trustee under the resulting trust, and not the 1^st defendant.  There is no basis advanced as to why the 1^st defendant should be liable for equitable compensation or other remedies.

17.  I accept the evidence of the expert, CS Surveyors Limited, that the value of the sections the subject of the claim[5], as at the date of the writ (20 December 2013), was HK$14,900,000.  I order the 2^nd defendant to pay to the plaintiff the sum of HK$14,900,000 together with interest thereon at the rate of 1% above prime rate from time to time as from 14 February 2011 until the date of this judgment, and at the judgment rate thereafter until payment.

18.  I also make an order nisi that the 2^nd defendant is to pay the costs of this action to the plaintiff, to be taxed if not agreed.

19.  I thank counsel for his assistance.