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

HCA 811/2010

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AND

HCA 868/2013

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(Actions HCA 811/2010 and HCA 868/2013 consolidated by the Order
made by Master J Wong dated 18 November 2013)

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J U D G M E N T
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INTRODUCTION

The two preliminary issues to be tried

1.  This is the trial of two preliminary issues upon the application of the 1^st to 4^th Defendants by inter partes summons dated 1 June 2015, pursuant to Order 33 of the Rules of the High Court.  The two preliminary issues to be determined have been set out in the schedule annexed to the summons.  The first one is relevant to both actions.  The second one is only relevant to HCA 868/2013.  These issues are:

(1) Whether the Plaintiffs have any interest in the Land Lots and if so, what interest, having regard to the uncontroversial facts that:-

(i) the Land Lots, being the subject matters of the 1^st to 5^th Plaintiffs’ claim in HCA 811/2010, were transferred or caused to be transferred to the 1^st to 5^th Plaintiffs from the 1^st and 2^nd Third Parties between 1995 and 1999, without consideration;

(ii) the village-type houses were built and erected on the Land Lots by and at the costs of the 1^st and 2^nd Third Parties;

(iii) the payment of premiums for uplifting the non-alienation clauses in the building licences upon which the Government consented to the sale and purchase of the Land Lots were made by the 1^st to 2^nd Third Parties; and/or

(iv) the 1^st to 5^th Plaintiffs had declared in the Co-operation Agreements that they held the Land Lots upon trust for the 1^st Third Party.

(2) Whether costs incurred by the 1^st to 5^th Plaintiffs and costs orders made against them in the 2005 Actions were sufficiently caused by the production and use of the sale and purchase agreements by the 1^st and 2^nd Third Parties as set out in paragraph 9 of the Statement of Claim of HCA 868/2013, having regard to the facts that no material issue as to the validity of the said sale and purchase agreements was raised by the parties or any of them in their pleadings in the 2005 Actions.

2.  There is some argument by Mr Yip, counsel for the Plaintiffs that the term “Land Lots” is not defined in the schedule and that it appears from the written skeleton argument of Mr Neoh, counsel for the 1^st to 4^th Defendants that the term refers to the various agricultural land lots transferred to the Plaintiffs under various agreements (the “Co-operation Agreements”) but do not include the village-type houses built thereon.  On that basis, Mr Yip argues that determination of the Plaintiffs’ interest in the Land Lots simpliciter would not dispense with further trial or with the trial of other substantial issues in these actions, the subject matters being the village-type houses erected on the Land Lots.

3.  “Land Lots” is a term introduced by the 1^st to 4^th Defendants in the preliminary issues.  It is not defined in the schedule or in the statement of claim in HCA 811/2010.  Reading the statement of claim, one could have no doubt that “Land Lots” referred to in the schedule are the subject matters of the litigation in HCA 811/2010 and what they are.  They are the village-type houses erected on the various lots of land identified in paragraph 1 of the statement of claim and collectively referred to as (the “Plaintiffs’ Land”).  In their answers to requests for further and better particulars, the Plaintiffs confirmed that their “respective properties” in respect of which they suffered loss included “the land and the structures built thereon”.  Furthermore, it is a well established legal principle that “land” includes all permanent improvement thereon.  In no way could I understand Mr Neoh as referring to the Land Lots as separate from the village houses built on them.  To my mind, “Land Lots” refer to the five lots of land with the village-type houses built on them, if such houses had been erected; or to the five lots of land without the houses, if they have not yet been built. 

4.  It is unfortunate that the parties’ solicitors have not been consistent in their terminology.  The Plaintiffs’ solicitors used the term “Plaintiffs’ Land” to refer to the various plots of land without the structures erected thereon; and “small houses” and “properties” to refer to the structures built thereon, while the 1^st to 4^th Defendants’ solicitors introduced the term “Land Lots” in the preliminary issues.  It troubles me to think that the Plaintiffs’ solicitors seem to consider that there are separate and distinct legal interests in the land and the various storeys in the village-type houses built on that particular plot of land.  They seemed to have ignored the concept of land holding in Hong Kong is by way of co-ownership of land and building erected on the land with exclusive possession of parts of the building assigned to individual co-owners under a deed of mutual covenant.

5.  Mr Yip submits that the court will only determine a preliminary issue based on question of law if the relevant and necessary facts have been ascertained or not in dispute.  He argues that as there are serious factual disputes not yet resolved the court should not proceed to trial of the two preliminary issues until all material facts have been ascertained. I can see no merit in that submission.  The decision to try the two preliminary issues was made when I allowed the 1^st to 4^th Defendants’ application to set the issues down for trial.  I considered the facts stated in the preliminary issues adequate for a decision to be made, which if resolved in favour of the Defendants would dispose of the Consolidated Actions entirely. Insofar as disputes of facts not stated in the preliminary issues are concerned, if they turn out to be material, they will, for the purpose of this hearing, be assumed in favour of the parties against whom the preliminary issues are to be resolved, ie the Plaintiffs.  If the preliminary issues are resolved against the Defendants, the action will proceed to trial on those disputed issues together with any other material issues, and with the benefit of the legal issues determined at this hearing.  The time spent in this hearing would in no event be wasted.

The background

6.  The following factual background is based on uncontroverted or incontrovertible evidence.

7.  The 1^st and 2^nd Third Parties (“Sino Favour” and “Shiny” respectively or the “Developers” collectively) are property developers. 

8.  The Plaintiffs are indigenous villagers in the New Territories (“dings”) who, under the then Small House Policy of the Government (the “Policy”), were entitled to apply for building licence to build one village-type house on their land (the “ding right”).

9.  Between March and August 1994, the Plaintiffs entered into similar agreements with Sino Favour (the “Co-operation Agreements”), which were in effect agreements to sell their ding rights to Sino Favour in return for $200,000 so that Sino Favour could build village-type houses on the Land Lots.  Under the Co-operation Agreement, Sino Favour would assign a Land Lot to a Plaintiff, the Plaintiff would apply to Government for building licence under the Policy, the Developers then build a village-type house on the Land Lot, and the Plaintiff would hold the Land Lot and the house built thereon as nominee on trust for the Developers. 

10.  Pursuant to the Co-operation Agreements, Sino Favour transferred or caused to be transferred the five Land Lots to the Plaintiffs.  Although a monetary consideration was stated in the assignments, there is no dispute that no monetary consideration was in fact paid.  Building licences were applied for and village-type houses were built on the Land Lots at the costs of the Developers, who also paid premium to the Government in order to uplift the non-alienation clause in the Government lease so that the village-type houses may be sold to the public.

11.  In mid-2005, the construction of some of the village-type houses was completed.  The Developers put them in the market for sale and subsequently entered into various sale and purchase agreements with the ultimate purchasers (the “First Set of SPAs”).  The First Set of SPAs was expressed as agreements by the Plaintiffs to sell the respective Land Lots with village-type houses built on them.  The Plaintiffs averred that these agreements, allegedly signed by them or with their authority, were forgeries and referred to them as “Falsified Documents” in HCA 868/2013. 

12.  The 1^st to 4^th Defendants were the partners of Messrs Hau, Lau, Li & Yeung (“HLLY”), a firm of solicitors instructed by and acting for Sino Favour to carry out the conveyancing transactions relating to the First Set of SPAs.  The 5^th Defendant in HCA 868/2013 was a clerk of HLLY.

13.  At about the same time, the Plaintiffs entered into another set of provisional sale and purchase agreements (the “Second Set of SPAs”) with Barbican Capital Investment Limited (“Barbican”) in respect of the village-type houses built on the same Land Lots.  The Second Set of SPAs was registered with the Land Registry, thereby affecting the interest in the Land Lots.

14.  On 2 August 2005, soon after discovery of the registration of the Second Set of SPAs, the Developers took out an ex parte application for injunction to restrain the Plaintiffs from selling or completing the sale of the Land Lots and village-type houses under the Second Set of SPAs and further claimed damages for breach of the Co-operation Agreements.  The application came before Hartmann J (as he then was), who granted an interim injunction restraining the Plaintiffs from selling the Land Lots until further order.

15.  On 3 August 2005, pursuant to an undertaking given to court, the Developers instructed HLLY to commence actions against the five Plaintiffs, Barbican and Wilkie Tsang who is a director of Barbican.  These five actions are HCA 1517 to 1521 of 2005 (collectively, the “2005 Actions”).  The writs in those actions and the injunction application papers were duly served on all the defendants in the 2005 Actions, ie Barbican, Wilkie Tsang and the Plaintiffs herein.

16.  As the time for completion under the First Set of SPAs drew near, the Developers applied to court under the 2005 Actions for leave to complete those agreements.   The application came before Deputy High Court Judge Saunders (as he then was).  Barbican appeared and filed an affirmation of Wilkie Tsang made on its behalf.  The Plaintiffs did not appear.  In his affirmation, Wilkie Tsang conceded to the completion of the First Set of SPAs provided that the interests of Barbican and the Plaintiffs were secured by placing the proceeds of sale in an interest bearing account, pending further order.  Barbican’s interest was said to be the profits from its joint venture with Shiny; and the Plaintiffs’ interest was said to be the amount outstanding to them under the Co-operation Agreements.  Deputy Judge Saunders granted liberty to complete the First Set of SPAs and ordered $2.5 million to be set aside from the proceeds of sale and to be placed in an interest bearing account (the “Judge Saunders’ Order”).

17.  Thereafter, the Land Lots were sold by the Developers with HLLY acting as their solicitors in completing the sale and purchase under the First Set of SPAs.  This necessarily means that the completion by way of assignments was done in the name of the Plaintiffs who were the then registered owners of the Land Lots.

18.  It is not known when precisely the Plaintiffs became aware of the sale of the Land Lots to third parties in their names.  But it is reasonable to infer from the fact that Barbican having succeeded in obtaining the order to retain $2.5 million to secure Barbican’s and the Plaintiffs’ interest, the Plaintiffs would have been told of Judge Saunders’ Order soon after the hearing in the light of their claimed interest in the outstanding payments due to them under the Co-operation Agreements.  In any event, they would have been served with a copy of Judge Saunders’ Order.

19.  On 10 October 2005, the Developers filed their statements of claim in the 2005 Actions.  The Plaintiffs entered into appearance and filed their defence and counterclaim. 

20.  In their defence filed on 16 December 2005, the Plaintiffs admitted signing the Co-operation Agreements but alleged long delay in implementation of the Co-operation Agreements and counterclaimed outstanding payment under the Co-operation Agreements.  They denied executing or authorising the execution of the First Set of SPAs.  It is significant to note that the Plaintiffs made no claim for any interest in the Land Lots.  By that time, they must also know well that the Land Lots had been sold to third parties in their names as registered owner.

21.  On 6 February 2009, the Developers took out an inter partes summons seeking an order that the proceeds of sale of $2.5 million set aside be released to them.  The application was heard on 1 September 2009 before Reyes J.  The Plaintiffs were represented by counsel at the hearing. They did not make any claim for any proprietary interests in the Land Lots.   Reyes J allowed the application.

22.  On 26 February 2009, the Plaintiffs issued a third party notice in the 2005 Actions against the 1^st to 4^th Defendants seeking an indemnity against the Developers’ claim.  In the third party notice, they alleged that the 1^st to 4^th Defendants had not been given any authority to act for them and therefore were liable to indemnify them for any loss claimed by the Developers.  That notice was filed without leave.  On 20 March 2009, by consent the Plaintiffs withdrew the notice with costs against them.

23.  In July 2009, the Plaintiffs took out an inter partes summons for discovery against the Developers and the 1^st to 4^th Defendants (as non-parties). The application was dismissed by Master de Souza. The Plaintiffs’ appeal against the master’s decision was also dismissed with costs against them by Bharwaney J in February 2010. 

24.  In February 2010, the Plaintiffs took out an inter partes summons seeking to amend their defence and counterclaim.  Three new defences were proposed by the Plaintiffs:

(a) that there was an implied term in the Co-operation Agreements that the Co-operation Agreements would be good only for three years;

(b) that the Co-operation Agreements were not enforceable as they were illegal and contrary to public policy; and that the Plaintiffs would have no need to comply with their terms; and

(c) that the Plaintiffs had never instructed the 1^st to 4^th Defendants to act for them and that the 1^st to 4^th Defendants had no authority to act for them.

Fung J only allowed the amendment relating to the plea of illegality.  As the matter progressed, it is now common ground, at least for the purpose of these proceedings, that the Co-operation Agreements were illegal.

25.  In June 2010, the Plaintiffs commenced HCA 811/2010 against the 1^st to 4^th Defendants, alleging them of conspiracy with the Developers to injure them by unlawful means thereby depriving them of their interest in the Land Lots, which they referred to as the “Plaintiffs’ Land”.  This is the first time they asserted interest in the Land Lots.

26.  In October 2010, the Plaintiffs and the Developers agreed to a “drop-hand” settlement in respect of the 2005 Actions. The parties discontinued their respective claims and counterclaims and waived their entitlement to the costs orders made in those actions.  However, HCA 811/2010 remains alive.

27.  In May 2013, the Plaintiffs commenced HCA 868/2013 against the 1^st to 4^th Defendants and one of their clerks, namely the 5^th Defendant, claiming their legal costs incurred in the 2005 Actions.

28.  HCA 811/2010 and HCA 868/2013 were consolidated (the “Consolidated Actions”) pursuant to the order of Master J Wong dated 18 November 2013.  They are set down for trial on 18 April 2016.

The Plaintiffs’ claims under the Consolidated Actions

29.  The Plaintiffs’ cause of action in HCA 811/2010 is conspiracy to injure by unlawful means (“unlawful means conspiracy”).  Their case is that the 1^st to 4^th Defendants and the Developers conspired together to injure them by using the Falsified Documents to sell the Land Lots, thereby causing them to suffer loss and damage to the extent of the total value of the Land Lots and the village-type houses built thereon.

30.  The Plaintiffs’ causes of action under HCA 868/2013 are: (1) unlawful means conspiracy in forging the Falsified Documents; and (2) conspiracy to prosecute them in the 2005 Actions with a real and predominant purpose to injure them (“unlawful purpose conspiracy”).  Their case is that by forging and using the Falsified Documents in prosecuting them in the 2005 Actions, the Defendants caused legal costs to be incurred by them in defending those actions (the “Wasted Costs”). They claim Wasted Costs in the total sum of $2,117,290.17.

31.  To succeed in unlawful means conspiracy, the plaintiff has to prove the means or overt act which is unlawful.  To succeed in unlawful purpose conspiracy as distinct from unlawful means conspiracy, it is not necessary to prove that the combination was carried out or executed by unlawful means; the means may be lawful.  Proof that the combination was carried out with a real and predominant purpose or object which is illegitimate and unlawful suffices.  But, the real and predominant purpose would be lawful if the action was taken to advance the defendants’ lawful interests in a matter under circumstances in which the defendants honestly believe that those interests would directly suffer if the action taken against the plaintiffs was not taken: Crofter Hand Woven Harris Tweed Co v Veitch[1] and Clerk & Lindsell[2].

32.  It is trite that conspiracy is not actionable per se: Pido v Compass Technology Co Ltd[3] and Crofter Hand Woven Harris Tweed Co v Veitch[4].  The plaintiff has to prove loss and damage as well as a causal link between the concerted acts of the defendants and the loss he suffered.  In Marrinan v Vibart[5], Salmon J said:

“ … the gist of the tort of conspiracy is not the conspiratorial agreement alone, but that agreement plus the overt act causing damage. It is true that the crime of conspiracy is the very agreement of two or more persons to effect an unlawful purpose, and any overt acts done in pursuance of the agreement are merely evidence to prove the fact of the agreement. The tort of conspiracy, however, is complete only if the agreement is carried into effect so as to damage the plaintiff. Accordingly, the acts done in pursuance of the agreement are an integral part of the tort…”

Thus, in order to succeed in an action for conspiracy, the Plaintiffs have to prove not only the alleged unlawful means or the real and predominant purpose to injure, but also that they have suffered loss and damage (the “damage issue”), and that the loss was caused by the Defendants’ tortuous acts (the “causation issue”).  The burden of proof of both issues is on the Plaintiffs.  These are the issues addressed respectively in the first and second preliminary issues.

THE FIRST PRELIMINARY ISSUE

The Plaintiffs’ case on beneficial interest

33.  The Plaintiffs’ claims in HCA 811/2010 and HCA 868/2013 are founded on the factual proposition that they were the legal and beneficial owners of the Land Lots.  In the premises, Mr Neoh submits that the Plaintiffs’ claims may succeed only if they can show that they had beneficial interest in the Land Lots at the time of commencement of the 2005 Actions.  I agree.  If the Plaintiffs had no beneficial interest in the Land Lots, they could have suffered no loss in HCA 811/2010 as result of Judge Saunders’ Order allowing the Developers to sell the Land lots, and the Wasted Costs claimed in HCA 868/2013 were not caused by the Defendants, but by their own wishful thinking that they had the necessary beneficial interest in the Land Lots to defend the 2005 Actions.  If the first preliminary issue is determined in the Defendants’ favour, that would be the end of the Consolidated Actions.  Proof of the conspiracies without proving their interest in the Land Lots would not entitle the Plaintiffs to judgment. 

34.  The Plaintiffs assert beneficial interest in the Land Lots by virtue of the assignments of the Land Lots to them by Sino Favour and their registration of the assignments in the Land Registry.  However, there is no dispute that they provided no monetary consideration for the assignments. Hence, Mr Neoh argues that as mere volunteer recipients of the Land Lots, the Plaintiffs could not be constituted beneficial owners when the assignments of the Land Lots were executed.  He draws support for the above proposition by referring to the following dicta of Barma JA in CACV 43/2012 which was an appeal from the decision of Poon J (as he then was) in one of the interlocutory applications in HCA 811/2010:

“6. In order to succeed on this claim, the Plaintiffs must establish that they had a beneficial interest in the houses that were sold. If they did not, they could suffer no loss or damage. As I understand their case, they assert that they did, because their declaration of trust in favour of Sino Favour under the Development Agreement is invalid and unenforceable by reason of illegality, as to uphold it would involve a misrepresentation (as to their being beneficial owners of the land on which their respective houses were built) having been made to the Government in order to obtain permission to build such houses.”

35.  Mr Yip argues that the Plaintiffs do have a beneficial interest in the Land Lots by reason of their applying for building licences under the Policy to erect village-type houses on the Land Lots.  His argument is as follows.  The indigenous villager is the intended beneficiary under the Policy.  Under normal circumstances, the village-type house will and will have to be registered in the name of the indigenous villager who applied for the building licence under the Policy.  After that the indigenous villager’s ding right will be exhausted.  The indigenous villager will become the legal and beneficial owner of the village-type house.  His interest in the village-type house erected can only be alienated upon payment of premium and with the written consent of the District Land Officer.  Mr Yip is not relying on the sale of the ding right as good consideration to support the Co-operation Agreements, which he asserts are illegal.  He is therefore arguing that by exercising his once in a lifetime right to enable the village-type house to be built, the indigenous villager somehow has acquired beneficiary interest in the village-type house.  He further argues that the Plaintiffs were the intended beneficiaries under the Policy, their ding rights had been exercised, exhausted and could not be revived, and by reason thereof, they have acquired beneficial interest in the village-type house.  In his skeleton submission, Mr Yip has been careful not to mention the legal and beneficial ownership or interest of the land on which the village-type houses were to be built.  It seems to me that his submission is rested on the basis that there is a separate and distinct interest in the superstructure built on land from the interest in the land on which the superstructure is built.  With respect, that is the flaw in his argument as it is trite law that land includes all permanent improvements on the land.  

36.  That aside, while there is no dispute that an indigenous villager has a once in a lifetime ding right, Mr Yip is factually incorrect about the Policy.  To exercise the ding right, the indigenous villager has to have a plot of land registered under his name first.  Then, he may apply for the licence and build a village-type house on his land.  He has to be the legal and beneficial owner of the land on which the village-type house is to be built in the first place, whether by way of purchase, inheritance or gift, before the licence would be issued.  He has to remain so throughout the course of construction of the house as each piece of brick was laid and when the house was erected.  The ding right is a personal right and not a proprietary right.  If the ding has no proprietary interest in the land to begin with, he could not have been issued the licence.  The indigenous villager does not all of a sudden “become the legal and beneficial owner of the village-type house” without having been the legal and beneficial owner of the land on which the village-type house was built.  The illogicality of Mr Yip’s submission is readily exposed if one strips his submission down to its skeleton.  In essence, he is submitting that by exercising his once in a lifetime ding right, the ding acquires beneficial interest in a house which someone else built on a piece of land which he has no beneficial interest for nothing.  With respect, his submission is lacking in logic and legal sense.

37.  Not only that Mr Yip’s argument is flawed, Mr Neoh submits that Sino Favour’s transfer of the Land Lots to the Plaintiffs without consideration would, per se, give rise to a presumption of resulting trust in favour of Sino Favour: Westdeutsche Landesbank Girozentrale v Islington London Borough Council[6]. This resulting trust arises by operation of law, even in the absence of an express declaration of trust.  Mr Neoh does not seek to rely on the declaration of trust in the Co-operation Agreements which he accepts are unenforceable because of illegality.

38.  Mr Yip argues that a party cannot succeed on the basis of a scenario that he or his opponent has not pleaded; and as the 1^st to 4^th Defendants never pleaded there is any other declaration of trust, Mr Neoh may not launch his argument on resulting trust.  In my view, there is a distinction between “pleading law” and “raising an issue of law”.  The latter is permissible but not the former.  As submitted by Mr Neoh, by pleading the admitted fact that no consideration had been paid by the Plaintiffs to Sino Favour in return for the Land Lots, the 1^st to 4^th Defendants have sufficiently raised an issue of law on the existence of a resulting trust.  It is not necessary to plead using the magic words “resulting trust”.  The 1^st to 4^th Defendants have rightly not so pleaded.  That does not prevent them from arguing on resulting trust.

39.  Next, Mr Yip argues that the proprietary right being founded on the illegal Co-operation Agreements is unenforceable.  Mr Neoh’s reply is that as the proprietary right relied on by the 1^st to 4^th Defendants arose by operation of law and is not founded on the illegal Co-operation Agreements, it is enforceable under the principle in Tinsley v Milligan[7]. 

40.  In Tinsley v Milligan, the plaintiff and the defendant carried on a joint business.  They acquired a property with the profits of their business. The property was held under the plaintiff’s name alone to facilitate the defendant’s purpose of making fraudulent social security claims.  When the parties fell out, the plaintiff sought an order for possession.  The defendant counterclaimed a share under a resulting trust.  The House of Lords held, by a majority, that a party to an illegality can recover by virtue of a legal or equitable property interest if, but only if, he can establish his title without relying on his own illegality.  On the fact, the House of Lords held that as there was no evidence to rebut the presumption of resulting trust, the defendant was entitled to succeed on her counterclaim based on her beneficial interest in the resulting trust.  Lord Browne-Wilkinson said:

“The principle of locus poenitentiae is in my judgment irreconcilable with any rule that where property is transferred for an illegal purpose no equitable proprietary right exists. The equitable right, if any, must arise at the time at which the property was voluntarily transferred to the third party or purchased in the name of the third party. The existence of the equitable interest cannot depend upon events occurring after that date. Therefore if, under the principle of locus poenitentiae, the courts recognise that an equitable interest did arise out of the underlying transaction, the same must be true where the illegal purpose was carried through. The carrying out of the illegal purpose cannot, by itself, destroy the pre-existing equitable interest. The doctrine of locus poenitentiae therefore demonstrates that the effect of illegality is not to prevent a proprietary interest in equity from arising or to produce a forfeiture of such right: the effect is to render the equitable interest unenforceable in certain circumstances. The effect of illegality is not substantive but procedural.”[8]

After considering the relevant authorities, Lord Browne-Wilkinson held that the doctrine of illegality only barred the plaintiff from relying on the illegal transaction to rebut the equitable doctrine. He then concluded that a party claiming beneficial interest in a property which was transferred to or held by another party for illegal purpose or pursuant to an illegal agreement, was nevertheless entitled to recover his or her share so long as the party claiming beneficial interest did not found her claim on the illegal transaction.  He said:

“ The claim based on the equitable title did not fail simply because the plaintiff was a party to the illegal transaction; it only failed because the plaintiff was bound to disclose and rely upon his own illegal purpose in order to rebut the presumption of advancement. The Privy Council was plainly treating the principle applicable both at law and in equity as being that a man can recover property provided that he is not forced to rely on his own illegality.

I therefore reach the conclusion that, although there is no case overruling the wide principle stated by Lord Eldon, as the law has developed the equitable principle has become elided into the common law rule. In my judgment the time has come to decide clearly that the rule is the same whether a plaintiff founds himself on a legal or equitable title: he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction.”[9]

41.  Tinsley v Milligan is still being followed by the English courts: see Davies v O’Kelly[10].  Mr Neoh has identified the following Hong Kong cases in which Tinsley v Milligan was followed: Best Sheen Development Ltd v Official Receiver[11], Loyal Luck Trading Ltd v Tam Chun Wah[12], Peconic Industrial Development Ltd & Anor v Chio Ho Cheong & Ors[13], Wong Kwok Learn Baldwin v International Trading Co Ltd[14], Cheerbond Development Ltd v Tung Kwok Yu[15], Tang Wai Cho v Tang Wai Leung[16], Lau Kwai Kiu v Bian Xintian[17] and Ryder Industries Ltd v Chan Shui Woo[18].  All except two of these authorities are decisions of the Court of Appeal.  Best Sheen Development Ltd v Official Receiver and Lau Kwai Kiu v Bian Xintian are concerned with village-type houses in the New Territories.  In HKSAR and Lau Kam Ying[19], both Tinsley v Milligan and Best Sheen Development Ltd were considered and approved by the Court of Final Appeal. 

42.  Mr Yip seeks to distinguish Best Sheen Development Ltd from the instant case on the ground that the developer in that case withdrew from the illegal transaction before the ding applied for licence and before it was granted by the District Land Officer, whereas in the present case, the illegal purpose had been completed and the village-type houses built.  He submits that it was on the basis of the doctrine of locus poenitentiae that the court held the developer could recover its property provided that it had withdrawn from the transaction before the illegal purpose had been wholly or partly performed.

43.  With respect, the locus poenitentiae point in no way undermined the principle in Tinsley v Milligan adopted in Best Sheen Development Ltd and the other Court of Appeal authorities quoted above, and the approval of the principle by the Court of Final Appeal in HKSAR and Lau Kam Ying.

44.  Mr Yip argues that the approval by the Court of Final Appeal was only a passing comment.  He quotes Chitty on Contracts[20] in which the learned authors referred to the decision of the High Court of Australia in Nelson v Nelson [21] which adopted an approach wholly different from that in Tinsley v Milligan.  The learned authors in Chitty wrote:

“ 16-186 The approach in Tinsley v Milligan, depending as it does on proprietary concepts, was not followed in the important decision of the High Court of Australia, Nelson v Nelson. It is not possible to do justice to the subtlety and scholarship of this judgment. Nelson v Nelson involved a contract designed to acquire for the transferor of property under the contract a statutory benefit to which she would not have been entitled had the transfer not been effected. Thus it was a situation on all fours with Tinsley v Milligan. Rather than adopt the proprietary based reasoning of Tinsley v Milligan, the approach of the High Court was to determine whether the statutory rule which rendered the contract illegal precluded relief and the court held that it did not. The court cited with approval the views of an American author to the effect:

“ … if illegality consists of the violation of a statute, courts will give or refuse relief depending upon the fundamental purpose of the statute.”

The majority also held that in granting relief the court could do it on terms; such a power enables the harshness of the illegality doctrine to be tempered in appropriate circumstances.

16-187 The Bowmakers principle can, as with the illegality doctrine in general, operate in a capricious way. The capriciousness of its operation was trenchantly criticised in the Australian High Court decision, Nelson v Nelson:

“ The Bowmakers rule has no regard to the legal and equitable rights of the parties, the merits of the case, the effect of the transaction in undermining the policy of the relevant legislation or the question whether the sanctions imposed by the legislation sufficiently protect the purpose of the legislation. Regard is had only to the procedural issue; and it is that issue and not the policy of the legislation or the merits of the parties which determines the outcome. Basing the grant of legal remedies on an essentially procedural criterion which has nothing to do with the equitable positions of the parties or the policy of the legislation is unsatisfactory, particularly when implementing a doctrine that is founded on public policy.” ”

Based on the conflicting decision in Nelson v Nelson and the above observations in Chitty on Contracts, Mr Yip submits that the law is not settled and the court should not proceed to trial of the two preliminary issues if the question of law on which the dispute revolves is unsettled.

45.  I can see the attraction and forcefulness of the reasoning in Nelson v Nelson.  However, Tinsley v Milligan has been accepted and consistently applied in the Court of Appeal in Hong Kong.  As submitted by Mr Neoh, as of today, no appellate jurisdiction of equal or higher standing has ever challenged or doubted the correctness of the principle in Tinsley v Milligan.  Nelson v Nelson had come to the notice of the Court of Appeal in Loyal Luck Trading Ltd v Tam Chun Wah[22]. The Court of Appeal held that the potential conflict between Tinsley v Milligan and Nelson v Nelson could only be resolved by the Court of Final Appeal. On the present state of authorities, Tinsley v Milligan is still good law in this jurisdiction.  I consider the various Court of Appeal decisions are binding on this court.  There is no basis to support Mr Yip’s submission that the law is unsettled in Hong Kong. 

46.  Thus, a transferor claiming beneficial interest under a resulting trust, is only required to prove that he transferred or caused to be transferred a property to the transferee without consideration from the latter.  It is not necessary for him to rely on any contract, legal or illegal in support of his claim.  Once he shows that the transfer is voluntary, the burden is shifted to the transferee to show that the transfer was intended to be an outright gift, either by legal presumption or by proof of actual intention.  In the instant case, the relationship between Sino Favour and the Plaintiffs do not give rise to a presumption of advancement.  In Tinsley v Milligan, it was the legal owner who pleaded and relied upon the illegality.  The House of Lords held that was impermissible.  The House of Lords also held that the beneficial owner who established a resulting trust by contributing to the purchase price of the property without relying on the illegality was entitled to claim her beneficial interest in the property.  In this respect, Sino Favour is in a much stronger position than the defendant in Tinsley v Milligan because the Land Lots were transferred or caused to be transferred by Sino Favour to the Plaintiff without any monetary consideration.  So are the Defendants who rely on Sino Favour’s beneficial interest in the Land Lots. 

47.  Lastly, Mr Yip argues that because at the time of transfer of the Land Lots to the Plaintiffs the village-type houses were not in existence, hence Sino Favour could not have any beneficial interest in the village-type house which were built subsequently.  He further argues that the village-type houses would not have come into existence but for the application for building licences by the Plaintiffs pursuant to the Policy.  He submits that the Developers were the driving force behind the illegal Co-operation Agreements and played an active role in performing them by paying the building costs and premium, it would be contrary to the intent and spirit of the Policy for the Developers to obtain benefit under the Policy.  That submission is only to be rejected as it ignored the basic principle of land law that land includes all permanent improvements thereon.  Besides, both the Developers and the Plaintiffs were culpable parties.  The Plaintiffs played no lesser or less active role in making false representations in their application for licences. Why should the Policy still favour the dings who are equally culpable and who abused the Policy and seek to benefit from their illegality?

Conclusion

48.  Accordingly, on the first preliminary issue, I find that the Developers have retained a beneficial interest in the Land Lots by operation of law under a resulting trust; and that the Plaintiffs have no beneficial interest in the Land Lots.  They were mere nominees holding the legal title of the Land Lots on trust for the Developers.

THE SECOND PRELIMINARY ISSUE

The alleged conspiracies

49.  The second preliminary issue is directed at the Wasted Costs claimed by the Plaintiffs under HCA 868/2013.  Apart from proving loss and damage, to succeed in an action for conspiracy, the Plaintiffs have to establish a sufficient causal link between the alleged conspiracy committed by the Defendants with the Developers and their alleged loss and damage.  The test is whether but for the tort committed by the defendant, the plaintiff would not have suffered loss and damage: Clerk & Lindsell on Torts[23]. 

50.  The Plaintiffs allege two conspiracies.  In paragraphs 3(ii) and 18 of the statement of claim in HCA 868/2013, they allege an unlawful purpose conspiracy between the Developers and the Defendants with the predominant purpose to injure the Plaintiffs by prosecuting them together with Barbican and Wilkie Tsang in the 2005 Actions.  In paragraph 19, they allege that one of the purposes of the conspiracy was to seek costs orders against them.  In these paragraphs they pleaded as follows:

“ 3. (ii) …

However, in or about 2005, the individual Defendants unlawfully and wrongfully conspired with the 2005 Plaintiffs with the predominant purpose to injure the plaintiffs by prosecuting the Plaintiffs (together with other co-defendants, (i.e. [Barbican and Wilkie Tsang]) in the 2005 Action:-

…

18. It is unlawful for the 1^st - 4^th Defendants in presenting the Falsified Documents to the Court in the 2005 Actions and induced the Court to accept it as genuine and by reason of so accepting it therefore an Injunction Order was granted for carrying through the Falsified Documents in addition to the Defendants’ breach of full and frank disclosure owed to the Court in the Injunction Application as officers of the Court.

19. Further, the Defendants are therefore guilty of conspiracy to injure the Plaintiffs by prosecuting the 2005 Action and seeking costs order against the Plaintiffs for the carrying through of the Forged Document sought by [the Developers].”

They rely, among other things, on the overt acts pleaded in paragraphs 1(a), 2(d), 3(ii), 3(a)-(g), 4(a), 8B, 18, 20(k), 20(n), 20(o) and 22.  Those overt acts include:

(a) between April to June 2005, forging the Falsified Documents; and

(b) between August 2005 to February 2009, applying for the injunction by:

(i) issuing the summons on 3 August 2005;

(ii) filing the affirmation of Yeung Kang Tim Timmy dated 2 August 2005 in support of the injunction application;

(iii) applying for the injunction order to give effect to the sale and purchase of the Land Lots stated in the Falsified Documents; and

(iv) failing to disclose to the court the falsity of the Falsified Documents.

In essence, they allege the Defendants of presenting the Falsified Documents, ie the First Set of SPAs, to court in order to obtain the injunction order to enable them to carry through the conveyancing transaction stated in the Falsified Documents. 

51.  In paragraph 16 of their statement of claim in HCA 868/2013, they pleaded an unlawful means conspiracy in forging the Falsified Documents. In paragraph 19, they sought to recover as damages the Wasted Costs in the 2005 Actions.  The conspiracy is only confined to the period between 2 August 2005 when the Developers issued the summons applying for injunction and 12 August 2005 when Judge Saunders’ Order was made.

52.  In paragraph 23, the Plaintiffs itemize the loss they suffered by way of legal costs in defending and counterclaiming in the 2005 Actions, ie the Wasted Costs.  These are:

(a) the Plaintiffs’ own legal costs for the general conduct of the proceedings in the amount of $1,490,829.60;

(b) the Defendants’ legal costs awarded by court against the Plaintiffs in their application for discovery before Master de Souza and the appeal before Bharwaney J in the amount of $586,920.57;

(c) the Developers’ legal costs awarded by court against the Plaintiffs for withdrawing the third party notice in the amount of $800;

(d) the legal costs of the Developers awarded by court against the Plaintiffs in their application to amend their defence and counterclaim before Fung J in the amount of $40,940; and

(e) Barbican’s and Wilkie Tsang’s legal costs awarded by court against the Plaintiffs for withdrawing the third party notice in the amount of $800.

The total amount is $2,117,290.17.

53.  The thrust of Mr Yip’s submission is focussed on the forgery aspect of the Falsified Documents.  It was my provisional view at the hearing of the application for trial of the preliminary issues that forgery is not a material issue.  For the reasons as stated in the following section, I confirm that view.  Even if forgery were relevant, the ultimate issues the Plaintiffs have to prove are loss and causation.  These are what the two preliminary issues are directed at.  Only if these issues are resolved in favour of the Plaintiffs, then they may need to prove forgery to further establish their claims.

54.  Mr Neoh made two observations.  First, he submits that once it is established that the Developers were the true beneficial owners of the Land Lots, it would be legitimate for them to commence the 2005 Actions with a view to protecting their own interest in the Land Lots and to seek costs against the Plaintiffs if they unreasonably sought to defend it: Crofter Hand Woven Harris Tweed Co v Veitch[24]. As the Developers were beneficial owners of the Land Lots at the material time, it can hardly be disputed that what the Developers did in instituting the 2005 Actions was to protect their own interest in the Land Lots.  The Defendants’ agreement with the Developers to institute the 2005 Actions could not have been unlawful.  I agree.  That is the impact my finding in the first preliminary issue will have on the Plaintiffs’ claim in HCA 868/2013.

55.  Second, Mr Neoh argues that the 1^st to 4^th Defendants were at all times solicitors acting for the Developers in the 2005 Actions.  It would be far-fetched and legally remote to suggest that the 2005 Actions were instigated with a predominant purpose to injure the Plaintiffs by making them incur legal costs.  This argument is directed at the existence or otherwise of the conspiracy.  It is outside the scope of the second preliminary issue.  It is a matter to be considered at trial if both preliminary issues are resolved against the Defendants.  I shall not take this submission into account in my consideration of the second preliminary issue.

56.  I shall deal strictly with causation in respect of each item of the Wasted Costs in the sections below.

(a) Plaintiffs’ own legal costs in defending the 2005 Actions

57.  In respect of this item of claim, Mr Neoh argues that the proceedings could be split into two stages: the first stage from 2 August 2005, ie the date of issue of the ex parte summons seeking an injunction against the Plaintiffs and Barbican, to the date of Judge Saunders’ Order on 12 August 2005 and the second stage thereafter. 

58.  In respect of the first stage, which includes the hearings before Hartmann J and Deputy High Court Judge Saunders (as he then was) when the parties had yet to file their pleadings, the Plaintiffs had not entered into appearance at the hearing at all.  No costs could have been incurred.  They could have suffered no loss.  That is entirely correct.

59.  The second stage includes all costs for the general conduct of the defence in the 2005 Actions, such as preparing the respective defence and counterclaims, witness statements and general conduct of the defence, etc, but do not include the costs of interlocutory applications awarded against the Plaintiffs.  To investigate the issue of causation, it is necessary to examine the Plaintiffs’ claim for Wasted Costs in HCA 868/2013 against the Developers’ statement of claim and the Plaintiffs’ defence pleaded in the 2005 Actions and see if there is any causal link between the Wasted Costs and the Defendants’ overt acts pleaded in HCA 868/2013.

60.  In the 2005 Actions, the Developers pleaded the following matters in support of their claim for breach of trust and/or the Co-operation Agreements:

“ 10. By reason of the provisions of [the Co-operation Agreements] and/or the performance of [the Co-operation Agreements] by [the Developers], [the Plaintiff] held [the Land Lots] as trustee, express or implied, for [the Developers].

16. Wrongfully and without the consent or knowledge of [the Developers],

(a) [the Plaintiff] and [Barbican] purportedly entered into [the Second Set of SPA] dated 30^th May 2005 whereby [the Plaintiff] purportedly agreed to sell and [Barbican] purportedly agreed to purchase [the Land Lots] …”

In paragraph 15, the Developers pleaded that they advertised the sale of the village-type houses in May 2005 and that the Plaintiffs entered into the First Set of SPAs, which the Plaintiffs referred to as the “Falsified Documents”.  In paragraph 17, the Developers pleaded that the Second Set of SPAs was caused to be registered against the Land Lots at the Land Registry.  In paragraph 21, the Developers pleaded that the registration was deemed an incumbrance on the title of the village-type houses as a result of which they suffered loss.

61.  Initially, in their defence, the Plaintiffs pleaded that they treated Wilkie Tsang, a director of Barbican, as the de facto developer of the Land Lots behind the Developers and alleged that he agreed to pay them the outstanding remuneration under the Co-operation Agreements in consideration for their executing the Second Set of SPAs.  They disputed signing the Falsified Documents.  They counterclaimed for the outstanding remuneration payable by the Developers under the Co-operation Agreements and damages arising from the delay in construction of the village-type houses. 

62.  As the matter then stood before Deputy High Court Judge Saunders, the Developers’ claim was made on the strength of their own beneficial interest in the Land Lots under the Co-operation Agreements. The Plaintiffs did not plead illegality as a defence.  They also relied on the Co-operation Agreements as the basis for their counterclaim for the outstanding remuneration.  The execution of the Falsified Documents was not the basis of the Developers’ claim and could not have been the basis of the court’s grant of injunction order restraining the sale and purchase of the Land Lots under the Second Set of SPAs or the order for sale under Judge Saunders’ Order.  It only served as a factual background, leading to the discovery of the registration of the Second Set of SPAs, the subsequent application for injunction and the issue of the writs in the 2005 Actions.  Simply put, the Developers’ case was that someone with whom the Plaintiffs were connected unlawfully registered an incumbrance against the title of the Land Lots of which they were the beneficial owners.  With or without alleging the execution of the Falsified Documents, Judge Saunders’ Order would have been granted just the same.

63.  Later, on 24 June 2010, after having obtained leave to amend the statement of claim from Fung J, the Plaintiffs pleaded that the Developers were not the beneficial owners of the Land Lots by reason of illegality.  But as the Developers can rely on their beneficial interest in the Land Lots under resulting trust without relying on the illegal Co-operation Agreements, the amendment has no impact on the Developers’ claim.  Even if illegality had been pleaded and argued before Deputy High Court Judge Saunders, the outcome would still have been the same.

64.  In either event, the Plaintiffs’ case based on the Falsified Documents cannot provide them a meritorious defence to or counterclaim in the 2005 Actions.  Thus the real operative cause of their loss in term of legal costs in the 2005 Actions was the conduct of their defence and counterclaim which did not concern the falsity of the Falsified Documents.  The Plaintiffs are unable to establish the necessary causal link between the use of the Falsified Documents by the Developers and their legal costs.

65.  Furthermore, such costs were wasted and caused by the Plaintiffs’ conscious decision to waive their costs under the settlement agreement with the Developers.  The causal link is blatantly missing. 

(b) Costs in the discovery application and appeal and (d) Costs in the application to amend the defence and counterclaim

66.  Against the above background, it must necessarily follow that it was a futile exercise to seek discovery of the sale and purchase agreements used by the Developers to sell the Land Lots, ie the Falsified Documents.  The Plaintiffs’ application was rightly dismissed with costs by Master de Souza and their appeal against the master’s decision was dismissed by Bharwaney J, also with costs.  These results repeatedly demonstrate that the Falsified Documents are irrelevant.  The costs ordered to be paid were caused by the Plaintiffs’ conduct of their defence.  Again, they failed to establish the causal link between the use of the Falsified Documents and the costs in the discovery application and in the appeal.

67.  For the same reasons, the application to amend the defence and counterclaim was another futile exercise.  After all, it was the Plaintiffs’ own fault not to have pleaded illegality in the first place. But even if they had done so, it could not have availed them.  The costs ordered to be paid were due to the Plaintiffs’ conduct of their defence. Again, they failed to establish the necessary causal link.

68.  In any event, as submitted by Mr Neoh, the Developers’ entitlement to costs against the Plaintiffs arising out of the interlocutory applications had been scrutinized by the court in the 2005 Actions.  These are “extra costs” as described by Brett MR in Quartz Hill Consolidated Gold Mining Co v Eyre[25], and are unrecoverable.

(c) and (e) Costs to the Developers, Barbican and Wilkie Tsang defendants for withdrawing the third party notice

69.  For similar reasons, there is no causal link between the use of the Falsified Documents and these costs.  In particular, the third party notice was issued without leave.  The Plaintiffs only had themselves to blame for the costs awarded against them.

Conclusion

70.  For the above reasons, the Plaintiffs have failed to prove any causal link between the alleged conspiracies and the alleged loss and damage suffered by way of legal costs.

CONCLUSION

71.  In conclusion, I answer the questions of law set out in the schedule to the 1^st to 4^th Defendants’ inter partes summons dated 1 June 2015 as follows.

72.  In respect of the first preliminary issue, I find that the Developers have retained a beneficial interest in the Land Lots by operation of law under a resulting trust; and that the 1^st to 5^th Plaintiffs in HCA 811/2010 and HCA 868/2013 have no beneficial interest in the Land Lots.  They were mere nominees holding the legal title of the Land Lots on trust for the Developers. “Land Lots” refer to the subject matters of the Plaintiffs’ claim in HCA 811/2010 which are also the lots of land on which the “Houses” referred to in paragraphs 1(a) and 9 of the statement of claim in HCA 868/2013 were erected.

73.  In respect of the second preliminary issue, I find that the costs incurred by the 1^st to 5^th Plaintiffs in HCA 868/2013 were not caused by the production and use of the sale and purchase agreements by the 1^st and 2^nd Third Parties as set out in paragraph 9 of the statement of claim in HCA 868/2013, ie the Falsified Documents or the First Set of SPAs. 

74.  Both preliminary issues are resolved in favour of the 1^st to 5^th Defendants.  Accordingly, I make a costs order nisi that the 1^st to 5^th Plaintiffs shall pay the costs of the 1^st to 5^th Defendants with certificate for two counsel.  Such costs are to be taxed if not agreed.