COUNTRY RICH DEVELOPMENT LTD v. YAU CHI WING EDGAR

HCA1670/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1670 OF 2005

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D E C I S I O N

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1. This is an application for summary judgment under Order 86 of the Rules of the High Court.

2. The background facts leading to this action may be summarized as follows.

Background facts

3. The plaintiff is a developer.  It was at all material times the registered and beneficial owner of Section C of Lot No.35 in Demarcation District No.21, Tai Po, New Territories (“the Lot”).

4. By an undated Chinese agreement[1] (“the Profit-sharing Agreement”), the parties agreed to share the profit to be generated by erecting a small house on the Lot according to the terms therein.  The defendant further executed a last will and a deed relating to the said will, both dated 25 January 1995, devising and bequeathing to the plaintiff the Lot (the ownership of which he intended to and should acquire) and all buildings and erections erected or to be erected on the Lot.  Then by an assignment dated 27 January 1995 (“the Assignment”), the plaintiff assigned to the defendant for HK$190,000.

5. In the Assignment, receipt of the price was acknowledged.  But it is common ground that the defendant had not paid the price to the plaintiff at the time or at all.  The price is to be set off against the guaranteed profit (of no less than HK$380,000) to be paid to the defendant : see Clause 5 of the payment method contained in the Profit-Sharing Agreement.

6. On 29 March 2001, the defendant obtained a free building licence to erect a small house on the Lot (“the Building Licence”).

7. Also on 29 March 2001, the parties entered into a deed of development (“the Deed of Development”).  Pursuant to the Deed of Development, the plaintiff would develop the Lot and bear all the costs and expenditure.  Sale of the small house to be erected on the Lot was envisaged.  The parties agreed to spilt the profit : 8% to the defendant and 92% to the plaintiff.  A copy of the Profit-sharing Agreement was also annexed.  The defendant further executed 2 powers of attorney and 2 deeds of irrevocability on the same date (“the 4 Deeds” collectively”), irrevocably appointing the plaintiff to be his attorney to act on his behalf in connection with the erection of the small house on the Lot.

8. The parties subsequently entered into two supplemental development agreements dated 8 August 2002 and 10 May 2004 respectively (“Supplemental Agreements” collectively).  The date for completion of the physical construction of the small house on the Lot was thereby extended to 31 July 2006.

9. The small house to be erected on the Lot was in fact one of the several adjacent houses developed by the plaintiff.  Construction of the small house was completed some time before May 2005.

10. Disputes between the parties then arose.  On or about 9 May 2005, the plaintiff received from the District Lands Office, Tai Po a letter dated 9 May 2005 stating that the defendant had requested that office to inform the plaintiff that he had revoked his appointment of attorney on 6 May 2005 and that with effect form that date, the office should deal with the defendant direct.  Because of the defendant’s conduct, the plaintiff has been prevented to proceed with the intended sale of the units in the small house on the Lot.

11. On 27 August 2005, the plaintiff commenced the present action.  By summons dated 23 November 2005, it applied for summary judgment under Order 86 of the Rules of the High Court for, inter alia, specific performance of the Deed of Development as varied by the Supplemental Agreements and the 4 Deeds, consequential relief and damages to be assessed.

Defence of illegality

12. The defendant raised the defence of illegality in his affirmations.  He sought to rely on an opinion given by a counsel under section 9 of the Legal Aid Ordinance on his application for legal aid.  Among other things, counsel referred to Best Sheen Development Ltd v. Official Receiver [2001] 1 HKLRD 866, Chung Mui Teck & Others v. Hang Tak Buddhist Hall Association Ltd & Another [2001] 2 HKLRD 471, and Cheung Chi Fai v. Wan Hang Ping, HCA193/2002, unreported, 17 November 2004, and took the view that the transaction was illegal.  The applicant was then refused legal aid to defend these proceedings on public policy ground.

The plaintiff’s response

13. Ms Mak, appearing for the plaintiff, first took an objection on procedure.  She submitted that the defendant had, contrary to Order 18, rule 8(1) of the Rules of the High Court, failed to plead illegality in his defence.  That may well be true.  But it does not preclude the defendant from raising it as a defence on affirmations.  For he is entitled to show cause against the present application by affidavit : see Order 86, rule 4(1).

14. Ms Mak then submitted that the aforesaid authorities could all be distinguished from the present case.  Hence the present transaction is not illegal.

Discussion

15. For present purposes, I do not propose to consider the authorities in great details.  I believe the following discussion will be sufficient.

16. In Chung Mui Teck, Le Picheon JA described the New Territories Small House Policy at p.473E-I in these terms :

“Central to the decision is the holding that in making the application, the villager is representing to the Government that he is the legal and beneficial owner of the land in respect of which the application for a grant under the Small House Policy is made.  That holding appears to me to be correct.  An indigenous villager who holds the land as a mere nominee would not qualify given the purpose of the Small House Policy which is ‘to allow an indigenous villager to apply for permission to erect for himself during his lifetime a small house within his own village’.  See para.(1) of the explanatory notes to the pamphlet published by the Lands Department in September 1997 entitled ‘The New Territories Small House Policy, How To Apply For A Small House Grant’.  It is a once in a life time grant for the villager and the small house is intended for that villager’s own habitation.  It is plain that the benefits that accrue from a grant under the Small House Policy such as a free building licence, and the special privileges are intended to benefit the villager personally and not anyone else.”

17. A transaction said to be illegal because it offends the Small House Policy may vary from case to case.  But it would appear that the central objection is that the transaction necessarily involves the villager making a false representation to the Government that he is the legal and beneficial owner of the land in respect of which the application for a grant under the Small House Policy is made, when he is in reality not the beneficial owner.  He has wrongfully misrepresented to the Government that he is qualified to make the application.  See Chung Mui Teck, at p.478F-H.

18. Ms Mak referred to various terms of the Deed of Development and submitted that the defendant is the beneficial owner and was all along intended to be the beneficial owner.

19. In my view, all the circumstances pertaining to the whole transaction must be taken into account in order to ascertain whether the defendant was at the time of the application for the Building Licence the beneficial owner of the Lot.

20. The enquiry naturally begins with the Assignment.  For it was the Assignment that purported to confer beneficial ownership of the Lot on the defendant.  When the circumstances are closely scrutinized, a number of important questions arise.

21. The Lot was assigned by the plaintiff to the defendant for a sum of HK$190,000.  The defendant had not paid the price at the time.  Why was it necessary to falsely state in the Assignment that the price had been received?  The price was to be set off against the guaranteed profit that the defendant would receive under the Profit-sharing Agreement.  According to the second affirmation of Mr Chan Kam Biu (the plaintiff’s representative) dated 25 April 2006, the sale was financed by the plaintiff’s advance of a loan to the defendant.  This is inconsistent with what was stated in the Assignment and the Profit-sharing Agreement.  And why was it necessary for the plaintiff to finance the sale by a set-off or a loan, whether the case may be?  Under Clause 5 of the Profit-sharing Agreement on the defendant’s undertakings, he had to sign all documents to protect the plaintiff’s interest in the Lot as might be required.  But what interest would the plaintiff have in the Lot when presumably after the Assignment, both the legal and beneficial interest in the Lot had already been assigned to the defendant?  If the defendant was intended to be the legal and beneficial owner of the Lot, he should be able to deal with the Lot freely as he wished.  Why did he choose to make the last will in favour of the plaintiff (and not somebody else), even before he had acquired the ownership of the Lot?

22. In my view, all these questions need to be resolved in order to ascertain the true intention of the parties at the time of the Assignment as to whether the defendant was really to become the beneficial owner of the Lot.  They can only be canvassed at trial and not on affidavits.  It follows that the question whether the defendant had made a false representation to the Government at the time of the application for the Building Licence that he was the beneficial owner of the Lot can only be determined at trial and not on this application.

Conclusion

23. For the above reasons, I rule that there are issues to be tried on the illegality defence.  I will therefore give unconditional leave to defend.

24. On costs, there will be an order nisi that the costs be in the cause.

[1]  According to the defendant’s case, which is undisputed by the plaintiff, this Chinese agreement was signed on 25 January 1995.