CHAN YAU v. CHAN CALVIN AND ANOTHER

     HCA666/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 666 OF 2007

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REASONS FOR DECISION

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1. On the plaintiff’s application for summary judgment Master S. Kwang made an order on 19 December 2009 granting the plaintiff interlocutory judgment on liability against the 1^st and 2^nd defendants with damages to be assessed and costs.

2. By a notice of appeal dated 2 January 2009 the 1^st and 2^nd defendants ask for an order that the master’s order be set aside and that they be given unconditional leave to defend the action.  The appeal has been fixed for hearing on 25 May 2009.

3. By a summons dated 21 April 2009 the 1^st defendant applied for leave to rely on his 3^rd affirmation made on 21 April 2009 at the hearing of his appeal. 

4. On 11 May 2009 I gave leave to the 1^st defendant to rely on his 3^rd affirmation at the hearing of his appeal with costs of the application to be costs in the appeal.  This was to enable the 1^st defendant to rely on the further evidence contained therein.  I also gave directions for the filing of further evidence by the plaintiff and reply evidence by the 1^st defendant.  I indicated at the time that written reasons would be given later.  These are my reasons.

5. The plaintiff’s primary claim as set out in the amended statement of claim is for damages for breach of contract.

6. On 22 July 1992 the 2^nd defendant became the registered owner of the land known as Lot 660E in the New Territories when he obtained the assignment of the same from his brother the 1^st defendant.

7. As pleaded in the amended statement of claim the plaintiff relies on three agreements dated 25 November 1997, 9 December 1997 and 15 December 1997 respectively, entered between the plaintiff, the 1^st defendant and the 2^nd defendant.  As pleaded, the costs of the acquisition of the 2^nd defendant’s right to develop Lot 660E under the Small House Policy would be borne by the plaintiff and the 1^st defendant.  The 2^nd defendant would apply for a building licence under the Small House Policy for the construction of a village house on Lot 660E.  The 2^nd defendant would hold his interest in Lot 660E on trust for the plaintiff and the 1^st defendant.  Upon completion of the village house, the legal and beneficial interest in the village house to be built would be assigned to the plaintiff and the 1^st defendant.

8. On 4 December 2000 the plaintiff, 1^st defendant and the 2^nd defendant agreed to partition Lot 660E into two portions i.e. subsection 1 of Lot 660E (“Lot 660E1”) and the Remaining Portion of Lot 660E (“Lot 660ERP”) and that the three agreements remained in full force and effect save that the reference to Lot 660E would be substituted by Lot 660E1.

9. On 18 December 2000 the 2^nd defendant caused and procured the partition of Lot 660E.  On the same day Lot 660ERP was assigned by the 2^nd defendant to the plaintiff upon payment of the sum of $200,000.

10. In or about August 2003 a building licence was granted by the Government.  Lot 660E1 was surrendered to the Government in exchange for a new lot namely, Lot 745 and the formal exchange was completed in or about July 2005.

11. The plaintiff further pleads that pursuant to the three agreements the plaintiff has made various payments between 16 December 1997 and 17 July 2006 to and for and on behalf of the 1^st and 2^nd defendants as particularized.  

12. It is further pleaded that by 25 August 2006 at the latest the 1^st and 2^nd defendants have evinced an intention no longer to be bound by the three agreements and they have wrongfully repudiated the same.  The plaintiff has accepted the repudiation and has suffered loss and damage. 

13. The plaintiff claims the sum of $3,752,656.25 as damages.  Alternatively, the plaintiff claims the sums of $381,145.25, $146,911 and $3,752,656.25 under paragraph 13 of the amended statement of claim for the return of the sums paid by the plaintiff by reason of total failure of consideration and the loss of the plaintiff’s contractual right to assignment of part of Lot 745 upon completion of the development.  He also claims a declaration that pending enforcement of his remedies referred to in paragraph 13 of the amended statement of claim he is entitled to a lien on the 2^nd defendant’s interest in Lot 745.

14.  It is convenient to set out briefly what the Small House Policy is.  This has been succinctly summarized by Le Pichon JA in Chung Mui Teck v Hang Tak Buddhist Hall Association Ltd [2001] 2 HKLRD 471 at page 473 as follows :

“       This policy, implemented since December 1972, is designed to allow male indigenous villagers of a village which has been in existence since 1 July 1898 to apply for permission to erect small houses for their own habitation.  Strict limitations apply to the building of such houses.  Under the Buildings Ordinance (Application to the New Territories) Ordinance (Cap.121), a small house is to be no more than three storeys or 27 ft in height with a maximum roofed-over area of 700 sq ft but the building of such a house does not require the employment of an authorised person or approval of building plans under the Buildings Ordinance (Cap.123) (hereinafter referred to as “special privileges”) which are significant privileges, quite apart from the concessionary terms mentioned below.  

       Where a villager owns his own piece of land either in the village or within 30 ft of it, he is entitled to apply for a free building licence on his land or the Government might agree to grant new building land in return for the surrender of land elsewhere.  If he does not own any land in the village, he may apply for a private grant of land from the Government at a concessionary rate, generally between $1,000 and $2000.  Procedurally, a villager who wishes to make an application is required to complete a standard Small House Application Form.”

15.  The further evidence in the 3^rd affirmation of the 1^st defendant is mainly to place before the court the leaflet known as “How to apply for a Small House Grant” and the correspondence between the 1^st defendant’s solicitors and the District Lands Office after the master’s order.  These show that an applicant under the Small House Policy has to make a declaration before he will be granted building licences, certificates of exemption pursuant to the Building Ordinance or exchanges issued under the Small House Policy.  The evidence also shows what was contained in the standard declarations in use at the material time.

16.  In Chung Mui Teck it was held that the deed of joint development in that case was unlawful.  The villagers would be making false declarations and the deeds could not be performed without the commission of an illegal act.  Moreover, the deed would involve the commission of the tort of misrepresentation.  To satisfy the condition of the Small House Policy an applicant villager would have to represent himself as the legal and beneficial owner of the land even though he would merely be holding it as a nominee.  The fact that the deed could not be performed without the commission of a civil wrong meant that it was unlawful and unenforceable.

17.  It was submitted by Mr Yip, for the 1^st defendant, that the further evidence shows that the 2^nd defendant would have made declarations in the standard form in use at the material time.  These would have included a declaration that the 2^nd defendant was the sole owner of the Lot on which he wished to erect a small house, and also a declaration that he had never made and had no intention to make any private arrangements for his rights under the Small House Policy to be sold to other individual or developer.

18.  Mr K M Chong, together with Mr Chong Tin Chun, opposed the application for leave to adduce the 3^rd affirmation of the 1^st defendant at the hearing of the appeal.

19.  By the amendments to O. 58; r. 1 RHC no further evidence may be received on the hearing of an appeal except on special grounds (r. 1(5)).  It was submitted that the Ladd v Marshall [1964 1 WLR 1489] conditions had not been fulfilled and that the evidence should not be admitted.  The Ladd v Marshall conditions are:

(1)             that the evidence could not have been obtained with reasonable diligence for use at the hearing below;

(2)             the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive;

(3)             the evidence must be such as is presumably to be believed.

20.  I would observe that in Langdale v Danby [1983] 1 WLR 1123 when dealing with the Ladd v Marshall conditions in an appeal from a summary judgment, Lord Bridge said at page 1133:

“ In the situation arising on an appeal to the Court of Appeal from a summary judgment, the application of these conditions and perhaps the conditions themselves will require some modification.  It may well be that the standard of diligence required of a defendant preparing his case in opposition to a summons for summary judgment, especially if under pressure of time, will not be so high as that required in preparing for trial.  The second and third conditions will no doubt be satisfied if the further evidence tendered is sufficient, according to the ordinary principles applied on applications for summary judgment, to raise a triable issue.”

21.  In Chung Mui Teck further evidence was adduced at the hearing of the appeal before the Court of Appeal.  This is clear from the judgment of Le Pichon JA at page 477 E to F.  That further evidence was admitted pursuant to O. 59; r. 10(2) which states that no further evidence shall be admitted at the appeal except on special grounds.  That is the same restriction as in the current O. 58; r. 1(5).  I would observe that the Court of Appeal had no difficulty in allowing the further evidence to be adduced in that case.  It was obviously highly relevant to the question of illegality.

22.  It is abundantly clear that where a court is satisfied that there had been an illegality the court was bound to take the point of its own motion even if neither of the parties did so.  The overriding basic principle of public policy is that the courts would not assist a plaintiff by enforcing an illegal contract(Snell v Unity Finance Co. Ltd [1964] 2 QB 203).

23.  It was also held in Snell that the court was not precluded from applying that overriding basic principle of public policy by the statutory limitation on appeals from the county court.

24.  As Danckwerts LJ said at pages 220 to 221 :

“ In my judgment the court is bound to take a point of illegality of this kind of its own motion, and it cannot allow any statutory or other limitations on appeals from a county court, whether they be conditions contained in the County Courts Act or in the practice of the court, to fetter its functions in such a case.  If this were not so, the court would be lending itself to the enforcement of a fraudulent and illegal contract.  I cannot believe that the court is required to do that, or that it is proper for the court to do it.  It seems to me that the requirements of the public interest must override any considerations of hardship to the individual in a case of this kind.”

25.  What the Court of Appeal did in Snell was to resolve a conflict between two principles.   As Willmer LJ said at page 219 :

“          In my judgment Mr. Croom-Johnson was right when he submitted, in the course of his reply, that what we have to do in the present case is to resolve a conflict between two well-established and basic principles.  The first principle, on which he relies, is the principle that the court will not lend its assistance for the purpose of enforcing an illegal contract, once the illegality has come to light and the court is satisfied of the illegality.  The principle invoked on the other side is that with which I have been concerned in the last few minutes, namely, that appeals from county courts are limited by the rule laid down by the House of Lords in Smith v. Baker & Sons, and limited in such a way as would, it is said, preclude the present appeal.

          This is not the first time that the court has been asked to resolve a conflict between two well-established principles.  Faced with that conflict, I have no doubt as to which is the principle that must prevail.  I am satisfied that the principle to which we must give effect is the principle that the court will not lend any assistance to enforce an illegal contract where that illegality has plainly appeared in the evidence.  It seems to me that this is just such an exceptional case as was referred to by Lord Moulton in North Western Salt Co. Ltd. V. Electrolytic Alkali Co. Ltd. in the passage to which I have already referred, in relation to which he said : “In such a case the court would act upon it,” that is to say, the illegality to which he had referred.

          It appears to me in those circumstances that, the illegality having been brought to our attention, it is our duty to give effect to it.”

26.  It seems to me that although the illegality point was not raised prior to the 3^rd affirmation of the 1^st defendant, the court is bound to deal with it as it has been brought to its attention. 

27.  Despite Mr Chong’s submissions that the further evidence was irrelevant, it seems to me that the evidence is highly relevant as to whether the performance of the three agreements was unlawful.  It would have an important influence on the result of the case.  The evidence is also credible.

28.  It must be borne in mind that the plaintiff’s primary claim is for damages for breach of contract.

29.  I would refer to what Mellor J said in Taylor v Chester LR4 QB 309 at page 313 :

“        The maxim that “in pari delicto potior est conditio possidentis,” is as thoroughly settled as any proposition of law can be.  It is a maxim of law, established, not for the benefit of plaintiffs or defendants, but is founded on the principles of public policy, which will not assist a plaintiff who has paid over money or handed over property in pursuance of an illegal or immoral contract, to recover it back, “for the courts will not assist an illegal transaction in any respect:” per Lord Ellenborough in Edgar v. Fowler (1); Collins v. Blantern (2); Lord Mansfield in Holman v. Johnson. (3).

       The true test for determining whether or not the plaintiff and the defendant were in pari delicto, is by considering whether the plaintiff could make out his case otherwise than through the medium and by the aid of the illegal transaction to which he was himself a party : Simpson v. Bloss (4), Fivaz v. Nicholls. (5).”

30.  The three agreements are relied on by the plaintiff in his amended statement of claim.  Not only have they been expressly pleaded by the plaintiff it also seems to me that he does need to rely on them to found his cause of action for breach of contract and for the relief claimed.

31.  In my view the 1^st defendant should not be shut out from adducing the further evidence.

32.  I appreciate that the plaintiff wishes to investigate the matter further and to file evidence in answer to the 3^rd affirmation of the 1^st defendant so that all the relevant facts are placed before the court at the hearing of the appeal.  That being so, I should not express any concluded view on the question of illegality at this stage.  However, on the material presently before me, it seems to me that it is at least arguable that the further evidence does tend to show that the performance of the three agreements would require the 2^nd defendant to make misrepresentations to the Government when applying for a building licence in respect of his Lot.  The further evidence shows that he was required to make declarations as to his sole ownership of the land and the absence of any private arrangement for his rights under the Small House Policy to be sold to other individual or developer.

33.  It is accepted that the plaintiff must be given an opportunity to answer the further evidence and I have given directions as to this.

34.  For the above reasons I gave leave to the 1^st defendant to rely on his 3^rd affirmation at the hearing of the appeal.