PROSPEROUS NURSING CENTRE LTD v. CHEUNG YUK YING AND ANOTHER

HCA 3810/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3810 OF 2002

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J U D G M E N T

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1.  The case is concerned with the non-completion of the sale of the business of a residential care home.

Background

2.  The 1^st defendant (“Madam Cheung”) was a tenant of 1/F, Sham Tsung Court, 17 & 19 Wong Chuk Street, Kowloon (“the Premises”) under a tenancy for 3 years from 1 April 1999 to 31 March 2002 at the rent of $78,000 per month (“the Old Tenancy”).  The Premises were used as the Mercy Old Men House (“Mercy House”) since 1993.  At the material time, Mercy House was operated pursuant to a licensee issued to the 2^nd defendant (“Yek Tak”) under the Residential Care Home (Elderly Persons) Ordinance (Cap.459) (“the Ordinance”).  Madam Cheung is a director of Yek Tak. 

3.  The relevant licence was dated 1 January 2002 expiring on 31 December 2002.  It stated that the premises where the home may be operated at was the Premises, and the maximum accommodation for elderly residents was 59.  At the material time, there were about 40 elderly residents in Mercy House.

4.  On 10 September 2001, the landlord served 6 months notice to terminate the Old Tenancy effective on 31 March 2002 under the then Part V of the Landlord and Tenant (Consolidation) Ordinance (Cap.7).  Part V did not actually apply to the Old Tenancy as it was for a fixed term of 3 years or more. 

5.  Madam Cheung and the landlord did not agree upon the renewal of the Old Tenancy.  However, Mercy House did not move out after 31 March 2002. 

6.  In May 2002, the sale of the business of Mercy House was advertised in the newspaper.

7.  On 2 August 2002, the landlord issued a writ action in HCA 2993/2002 against Madam Cheung claiming vacant possession and mesne profits (“the Landlord’s Action”).  The Statement of Claim stated that the Old Tenancy was terminated on 31 March 2002 and Madam Cheung remained in possession thereafter as trespasser.  Up until then, there were arrears of rent/mense profits for 3 months.  No Defence was ever filed. 

8.  In mid-August 2002, Miss Chow Wai Yee of K&C Property Agency informed Madam Cheung that the 1^st defendant by counterclaim (“Madam Mak”) was interested in acquiring the business of Mercy House.

9.  On 23 August 2002, Madam Cheung entered into an agreement written in Chinese with Madam Mak (“the Agreement”).  The Agreement was drafted by Miss Chow, and the translation is as follows:

“	Agreement for Transfer of Tenancy
	Party A : Madam Cheung (“Transferor”)
	Party B : Madam Mak (“Transferee”)
	Agent : K&C Property Agency Ltd (“Agent”)
	The contracting parties agree to the terms of transfer of tenancy by the following terms:
	1.	Party A and Party B through the Agent, agree to transfer and assist to rent the property at [the Premises] operating as [Mercy House];
	2.	Party A agrees to make the following agreement on 15 September 2002 in respect of the transaction:
		I.	Party A will give up and surrender the tenancy agreement of the Premises currently in force and return the Premises to the landlord of the Premises.
		II.	Both parties agree that the landlord agree and sign a new tenancy agreement to let the Premises to Party B on the following terms:
			A.	Tenancy period : 3 years, with option to renew for 3 years
			B.	Commencement date of tenancy : Not later than completion date
			C.	Rent : Not more than $76,000 per month (inclusive of rates, management fees and Government rent)
			D.	Deposit : $228,000 (i.e. 3 months’ deposit)
			E.	Use : Old people’s home
			F.	Rent free period : 120 days (i.e. 4 months)
			G.	Payment by the landlord : land tax, property tax, rates, management fees and Government rent
	3.	Party B agrees to pay $450,000 to Party A as consideration for the transaction, to be paid as follows:
		I.	Deposit : $135,000 to be paid to Party A upon signing of this agreement.
		II.	Balance : $315,000 to be paid to Party A by cashier’s order on the date of delivery of possession of the shop.
		III.	The transfer includes the existing decoration and partition and tools of trade currently inside the Premises.
	4.	Both parties agree that the transaction shall be regarded to be completed upon Party A withdrawing from the Premises and Party B signing the new tenancy agreement with the landlord and obtaining the right to use the Premises.
	5.	Date of delivery of vacant possession shall not be later than 15 September 2002.  Party A guarantees that it shall have reached consensus with the landlord and signed surrender of the tenancy before 10 September 2002.  Party A undertakes to deliver the shop to Party B on 15 September 2002.  If Party A cannot deliver the shop on time on 15 September 2002, then the daily rent and outgoings shall be borne by Party A, such period be limited to 10 days, i.e. the shop shall be delivered at the latest on 25 September 2002, otherwise Party A shall be deemed to be in breach.  Party A guarantees to pay up all debts owed during the period of use of the Premises by Party A, and guarantees that Party B will not incur any loss, charges, claims or litigation from taking over the use of the Property.  This guarantee shall remain in force after the completion of the transaction.
	6.	Party A shall be responsible for holding the nd signed surrender of the tenancy before 10 Successful transfer of licence No. 1936 of [Mercy House] to Party B.
	7.	Party A shall bear all financial and legal responsibilities in relation to the Premises prior to the transaction date of 15 September 2002, and after the transaction date of 15 September 2002, all financial and legal responsibilities in relation to the Premises shall be borne by party B.
	8.	Further, apart from the consideration for the transfer transaction of the Premises, the fee for the transfer of the clients under the licensed business, after Party A and Party B having agreed, shall be $30,000 per client.  The maximum number of clients to be transferred is 10, and the average residence fee for each person per month shall not be less than $4,800.  Upon the signing of this agreement, Party A shall not take away the inmates to other old people’s homes of Party A, otherwise Party A shall pay compensation of $30,000 per inmate, the period is limited to 6 months from 15 September 2002.
	9.	Upon Party A obtaining the written consent of the landlord to the terms under Clause 2 of this agreement, and Party B is unable to perform this agreement, Party A is entitled to forfeit the deposit, but Party A cannot claim any other compensation for this from Party B or specific performance from Party B.
	10.	If upon Party B obtaining the written consent of the landlord to the terms under Clause 2 of this agreement, and Party A is unable to perform this agreement, Party A shall immediately return the deposit paid by Party B, and to compensate Party B a sum equal to the amount of the deposit, but Party B cannot claim any other compensation for this from Party A or specific performance from Party A.
	11.	If the landlord of the Premises refuses to accept the terms under Clause 2 of this agreement on or before the completion date, this agreement shall be of no effect, Party A shall only return the deposit to Party B, both parties shall not pursue the responsibility against each other.
	12.	In the premises of the service of the Agent in facilitating this transaction, the Agent is entitled upon the due execution of the formal tenancy agreement by the landlord and Party B to receive $30,400 from Party A and $38,000 from Party B as commission (including the service charge for the signing of the tenancy agreement).
	13.	If upon the landlord accepting the terms under Clause 2 of this agreement, either Party A or Party B is in breach of this agreement, then the party in breach shall immediately pay the Agent $68,400 as compensation for the loss of the Agent.
	14.	It is declared that the Agent is an agent of Party A and Party B at the same time.”

10.  On 23 August, Madam Mak gave a cheque for $135,000 to Madam Cheung.

11.  On 26 August, the then solicitors for Madam Cheung sent a Calderbank letter to the solicitors for the landlord proposing settlement by delivery of vacant possession of the Premises on or before 31 August 2002, forfeiture of the rental deposit of $234,000 and payment of arrears of rental and/or mense profits of $10,000. 

12.  By 29 August, Mercy House has moved from the Premises.  All the elderly residents and the staff moved to another residential care home run by Madam Cheung at the nearby Maple Street.

13.  On 29 August 2002, vacant possession and the keys of the Premises were delivered to the landlord by Madam Cheung.

14.  On 30 August 2002, a Provisional Tenancy Agreement of the Premises was signed between the landlord and Mr. Dick Wong, the son of Madam Mak, for a term of 3 years commencing 15 September 2002 at the rent of $76,000 per month for use as an old people’s home.  Attached to the Provisional Tenancy Agreement were additional terms in Chinese with translation as follows:

“	(1)	If the landlord is unable to deliver vacant possession to the tenant on 15 September 2002, then the landlord and the tenant both agree that time for delivery of vacant possession may be extended to 15 November 2002, and the landlord may give 7 days’ notice of commencement of the tenancy, and the tenant shall comply with the tenancy agreement.  But if the landlord due to the old tenant not moving out and not letting to other tenant is unable to deliver vacant possession to the tenant on 15 November 2002, the landlord shall immediately return all deposits to the tenant without interest, thereafter each party shall not pursue against the other any responsibility or loss, and under such circumstances both parties shall not pay the commission.
	(2)	The tenant agrees to take possession in existing condition and agrees that upon the termination of the tenancy agreement, the property shall be restored to bare-shell condition.
	(3)	This Provisional Tenancy Agreement is signed by [Dick Wong], and the formal Tenancy Agreement signed on or before 15 September 2002 shall be Prosperous Nursing Centre Limited or a limited company nominated by it, where [Dick Wong] and [Madam Mak] will be directors and shareholders, and the tenancy agreement shall be personally guaranteed by [Mr. Dick Wong] and [Madam Mak].”

15.  After signing the Provisional Tenancy Agreement, Dick Wong, Madam Cheung and Miss Chow went to the Premises on the same day.  Dick Wong saw that all the elderly residents and staff had moved out.  Only some furniture and equipment were left behind. 

16.  On the next day 1 September, Dick Wong, his wife Kimmy Chan, Miss Hui, the decoration contractor, and Miss Chow went to the Premises and the place remained vacant.

17.  On 6 September 2002, a meeting took place between the two camps of Madam Mak’s and Madam Cheung.  Madam Mak handed a list of documents relating to the operation of Mercy House to be provided by Madam Cheung.  Both parties disputed over the transfer of the elderly residents and no resolution was reached. 

18.  Madam Mak alleged that the licence of Mercy House might be in jeopardy if it ceased to operate at the address of the Premises as stipulated in the licence.  Madam Cheung denied there was such dispute, and alleged that the real dispute was Madam Mak’s reluctance to take over any elderly resident because the transfer fee was too expansive, and Madam Mak had changed her mind and wanted to undertake major renovation of the Premises.

19.  There is in dispute as to whether the documents requested included a letter to be issued by Madam Cheung informing the Social Welfare Department (“SWD”) that Mercy House had temporarily ceased operation at the Premises, and the elderly residents had been well taken care of elsewhere.  No such letter was even written.

20.  On 10 September 2002, a consent order in the Landlord’s Action was filed that the action by the landlord be wholly discontinued.

21.  On 13 September, Miss Chow received a fax letter signed by Madam Cheung and his son Mr. Chu Kap Ning stating that Miss Chow could get the documents requested but the documents or copies could only be given to the other side after payment, and the 5 elderly residents could be moved back, and there should be no problem with the licence provided no major decoration work were undertaken.  Miss Chow so informed Kimmy Chan.  Madam Mak refused to look at the documents.

22.  Also on 13 September, the formal Tenancy Agreement was entered into between the landlord and the plaintiff (“Prosperous”) signed by Madam Mak (“the New Tenancy”).  Prosperous was formed on 6 September 2002, and Madam Mak and Dick Wong are the two shareholders and directors of Prosperous.

23.  On 14 September, Kimmy Chan received the keys to the Premises from Miss Chow.  She went to the Premises with the decorator Miss Hui and the Premises were chained up with a new lock.

24.  Between 29 August and 14 September 2002, the Premises were not occupied by either side. 

25.  On the completion date 15 September 2002, Madam Mak did not pay the balance of consideration of $315,000, and the elderly residents were not moved back into the Premises.

26.  In the evening of 16 September, Madam Mak sent a letter in Chinese to Madam Cheung through Miss Chow in the following terms:

“	Relating to matter of the transfer of [Mercy House], on 23 August 2002, I paid $135,000 as deposit for the transfer of the licence of [Mercy House].  Since then [I] have not received any documents about the transfer of the home and detailed information.
	The main point of the transfer agreement is transfer of a home under healthy operation.  [Mercy House] has ceased normal operation since 31 August.  [Mercy House] in fact cannot perform the contract agreed by me.  Please refund the deposit paid by me as soon as possible.”

27.  Miss Chow also told Madam Cheung that she had until 12 noon on 17 September 2002 to remove her belongings from the Premises.

28.  At 8 a.m. on 17 September, the decoration workers engaged by Madam Mak went to the Premises and started demolition of the partitions.  At 10:30 am, the two sides came to a head over the demolition work.  Police was called to the scene.

29.  In the evening of 17 September, Madam Mak’s husband and two elderly residents went back to the partly demolished Premises.  From then on until 15 October 2002, the two elderly residents stayed at the Premises, and were looked after Madam Cheung’s staff.

30.  On 19 September 2002, Messrs. Fairbairn Catley Low & Kong, then solicitors for Madam Cheung, wrote to Madam Mak stating that Madam Cheung had fulfilled the agreement by surrendering the tenancy of the Premises but Madam Mak was in breach by failing to complete.  Further, on 17 September 2002, Madam Mak’s agents attempted to occupy the Premises and caused loss and damage to the equipment, electrical and fire alarm system, partitions and beds, etc. which still belonged to Madam Cheung.

31.  On 20 September 2002, Messrs. Foo & Li, then solicitor for Prosperous, wrote to Madam Cheung stating that Madam Cheung had already delivered vacant possession of the Premises on 29 August 2002, and Prosperous had signed the tenancy agreement of the Premises for 3 years with the landlord on 15 September 2002, and Prosperous was legally entitled to entry and possession of the Premises.  However, Madam Cheung interfered with Prosperous’ decoration workers on 17 September 2002, and committed trespass by arranging several persons to occupy the Premises.  Madam Cheung was demanded to deliver up vacant possession and to indemnify Prosperous for its loss and damage.

32.  Thereafter, the two sides had further disputes over the occupation of the Premises.  On 28 September 2002, Kimmy Chan tried to enter the Premises without avail and the police was again called to the scene.

33.  On 8 October 2002, Prosperous issued the Wirt herein and obtained an interlocutory injunction before A Cheung J restraining Madam Mak and Yek Tak from:

(1)	blocking, obstructing, preventing or hindering Prosperous, its servants, agents and lawful visitors from entering or using the Premises;
(2)	occupying, remaining or trespassing the Premises;
(3)	molesting or intimidating Prosperous, its servants, agents and lawful visitors from entering or using the Premises.

34.  On 15 October 2002, the two elderly residents moved out from the Premises.

35.  The costs of the interlocutory injunction are reserved for this trial.

Pleadings

36.  In the main action, Prosperous claimed against Madam Cheung and Yek Tak in trespass for:

(1)	the permanent injunction;
(2)	damages for loss of use of the Premises.

37.  The Defence of Madam Cheung and Yek Tak averred that:

(1)	Madam Cheung was not acting on her own account but only as agent of Yek Tak;
(2)	the 10 elderly residents were transferred to Madam Mak on 30 August 2002 in pursuance to the Agreement and were entitled to remain on the Premises;
(3)	Madam Cheung and/or her employees or agents entered the Premises as lawful visitors of the 10 elderly residents, and looked after them as Madam Mak failed to take care of them;
(4)	Prosperous was not prevented from entering the Premises.

38.  Yek Tak counterclaimed (as the undisclosed principal of Madam Cheung and there is no similar counterclaim by Madam Cheung) against Prosperous and additionally against Madam Mak in breach of the Agreement for:

(1)	payment of the balance of the consideration of $315,000 under the Agreement;
(2)	assignment fees of $210,000 for 7 elderly residents (as 3 had revoked their intention to stay);
(3)	damages of $736,886 for the furniture and items left behind in the Premises and destroyed by the decoration workers;
(4)	expenses for caring for the transferred elderly residents;
(5)	compensation paid to the elderly residents who decided to leave.

39.  The Defence to the Counterclaim averred that:

(1)	Yek Tak had no title to sue as Madam Cheung was not acting as its agent;
(2)	the Agreement was void ab initio and/or unenforceable on the ground of illegality in that the object of the Agreement was to transfer the operation, management and control of Mercy House from the licensee to Madam Mak whose name was not indicated in the licence in contravention of the conditions of the licence and/or section 21 of Cap. 549.

40.  Madam Mak also filed a Counterclaim to Counterclaim against Madam Cheung and Yek Tak (which locus was denied) for:

(1)	rescission of the Agreement and the return of the deposit of $135,000:
(2)	in the event that the Agreement were void for illegality, return of $135,000 as money had and received.

41.  The Counterclaim by Yek Tak for damages for conspiracy between Prosperous and Madam Mak to breach the Agreement, or alternatively, damages for wrongful interference with the performance by Madam Mak of the Agreement is abandoned at trial.  The loss of profits claim by Prosperous is also abandoned.

Plaintiff’s case

42.  The plaintiff’s case can be summarized as follows:

(1)	There was no tenancy currently in force capable of being surrendered in performance of the Agreement;
(2)	There was a vacuum in the possession of the Premises between 29 August when vacant possession was delivered by Madam Cheung to the landlord and 15 September when Prosperous obtained possession under the New Tenancy and Mercy House was not operated in situ at the Premises during the vacuum and there was a breach of the licence requirement;
(3)	Madam Cheung was in breach of the implied term to provide the necessary documents to complete the transaction, inter alia, a letter notifying the SWD that Mercy House had temporarily moved and there had been satisfactory alternative accommodation for elderly residents;
(4)	Madam Cheung was in breach of the Agreement by failing to ensure that the licence held was not in jeopardy until it could be successfully transferred to Madam Mak;
(5)	The Agreement was illegal as it sought to separate the holding of the licence by Madam Cheung and the operation and control of Mercy House by Madam Mak.

Defence case

43.  The defence case can be summarized as follows:

(1)	Madam Mak entered into the Agreement with full knowledge that the Old Tenancy had expired, hence, Madam Cheung did perform the Agreement by delivering vacant possession to the landlord and by assisting Madam Mak to enter into the New tenancy even without surrendering any subsisting tenancy;
(2)	Madam Mak was in breach in not accepting the transfer of any elderly residents;
(3)	Madam Mak never requested any letter notifying the SWD of the temporary removal of Mercy House;
(4)	Madam Mak changed her mind and decided to undertake major renovation to the Premises contrary to the licensing requirement, hence, the existing licence and the furniture and fittings were no longer of value to her;
(5)	Madam Mak cannot now rely on the allegation that Mercy House was not in healthy operation and the licence was at risk because she did not raise it at the material time, and had it been raised, the matter could have been remedied.

The issues

44.  The issues in the case are:

(1)	Whether Madam Cheung was contracting as an agent of Yek Tak as undisclosed principal;
(2)	What was the true nature of the Agreement;
(3)	Whether Madam Mak knew that the Old Tenancy had expired at the time she entered into the Agreement or whether the knowledge of the expiration of the lease by Miss Chow could be imported onto Madam Mak;
(4)	Whether there was performance by Madam Cheung and/or Yek Tak by yielding vacant possession to the landlord;
(5)	Whether there was an implied term for Madam Cheung and/or Yek Tak to supply the documents relating to the operation of Mercy House prior to completion;
(6)	Whether Madam Mak had raised that the licence was at risk because it was not operated on the Premises and whether she demanded the letter informing that the Social Welfare Department of the removal;
(7)	Whether Madam Cheung could have put right any risk to the licence;
(8)	What was the term as to the transfer of the elderly residents;
(9)	The effect of the escape clause under the Agreement (Clause 9);
(10)	Whether the Agreement was illegal;
(11)	Whether the deposit is recoverable notwithstanding any illegality;
(12)	Whether the claim based on money had and received is defeated by the partial consideration of Madam Cheung yielding vacant possession to the landlord;
(13)	Whether there was any trespass on the Premises;
(14)	What were the damages for trespass suffered by Prosperous;
(15)	What were the damages for breach of contract suffered by Yek Tak.

Undisclosed principal

45.  As a general rule, a contract made by an agent with the authority of the principal may be enforced by or against the principal, whether or not his name or existence was disclosed to the other contracting party.  However, where a party contracts in his own name, an undisclosed principal cannot sue on the contract if the terms are such as to import that the person so signing is the real and only principal (see Dunlop Pneumatic Tyre Co v Selfridge & Co [1915] AC 847, 863 per Lord Sumner).

46.  Where an agent signs an agreement without any qualification, he is personally liable unless a contrary intention appears in the instrument (see Transcontinental Underwriting Agency SRL v Grand Union Insurance Co Ltd & anor [1987] 2 Lloyds Rep 409, 413 per Hirst J).

47.  If an agent contracted in such terms as to imply that he was the real and only principal, extrinsic evidence to contradict the terms of the contract would not be admitted.  However, if the agent contracted in his own name but not in terms consistent with only having done so as principal, extrinsic evidence might be admitted to prove the identity of the principal.  Whether an agent had contracted on such terms depends upon the construction of the contract (see Shenzhen Baoming Ceramics Co Ltd v Companion-China Ltd [2002] 2 HKLRD 288, 290J-291D per Keith JA).

48.  The terms of the contract may, expressly or by implication, exclude the principal’s right to sue, and his liability to be sued.  The contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal (see Siu Yin Kwan (Administratrix of the Estate of Chan Ying Lung, Decd) & anor v Eastern Insurance Co Ltd [1994] 2 AC 199, 207D-E per Lord Lloyd of Berwick).

49.  Mr. Kenny Lin, for Prosperous and Madam Mak, submitted that Madam Cheung was the real and only principal.  She entered into the Agreement in her own name without indication of the capacity as agent.  There was no mention of Yek Tak in the negotiation nor in the Agreement.  Extrinsic evidence is not admissible.  In any case, Mercy House started operation in the Premises since 1993 and Yek Tak was only formed in 1997 and was under Madam Cheung’s control.  The contemporaneous correspondence were in the name of Madam Cheung and/or Mr. Chu.  Madam Cheung and Mr. Chu told the police that she was the licensee of Mercy House.  The demand letter issued by Fairbairn on 19 September 2002 stated that Madam Cheung was the party to the Agreement, and the chattels left behind in the Premises belonged to Madam Mak.  Yek Tak was never mentioned until the filing of the Defence in 2003.  All the circumstances pointed to Madam Cheung regarding herself as the principal and Yek Tak was the agent and vehicle for holding the licence.  Hence, the intervention of Yek Tak was merely to substitute personal liability of Madam Cheung with limited liability by Yek Tak.

50.  Mr. Chan, for Madam Cheung and Yek Tak, referred to the Siu Yin Kwan case where the Privy Council ruled that the contract did not exclude the undisclosed principal.  There, a third party liability insurance contract was entered into by the shipping agent (Richstone) as the employer of the crew and there was nothing in the proposal to indicate Richstone was acting as agent of the ship-owner and employer (Axelson) of the Barquentine Osprey.  The Administratrix for the crew member who died during Typhoon Ellen in 1983 sought the transfer of the rights against the insurer by the insured upon winding up under the Third parties (Rights against Insurers) Ordinance (Cap. 273).  The insurer argued that Richstone contracted as the real principal and Axelson was not entitled to intervene as undisclosed principal.  The Privy Council held that Richstone had actual authority on behalf of Axelson to obtain insurance against claims by members of the crew, and there was nothing in the terms of the proposal form or the policy effected which expressly or by implication excluded the employer’s right to sue.  Their Lordships observed that the insurer knew from a previous enquiry on another proposal that Richstone was acting as agents for unnamed owners.  Their Lordships said that if courts were too ready to construe written contracts as contradicting the right of an undisclosed principal to intervene, it would go far to destroy the beneficial assumption for convenience in commercial cases (see p.208H-209A). 

51.  Mr. Chan referred to the board minutes of Yek Tak dated 22 July 2002 authorizing Madam Cheung to deal with all matters and sign all documents relating to the transfer of business of Mercy House.  Madam Mak had a look at the licence displayed on the wall in Mercy House when she inspected the Premises before signing the Agreement, and the licence was also produced at the signing of the Agreement.  Hence, Madam Mak must have known that Yek Tak was the licencee.  Madam Cheung’s agency was also consistent with Prosperous signing the New Tenancy showing Madam Mak also acted an agent.

52.  The starting point must be to look at the Agreement, its terms and the circumstances surrounding its signing.  It is obvious that the Agreement touched on different aspects of Mercy Home: the Old Tenancy, the transfer of the elderly residents, the sale of the furniture and other tools of trade, and the transfer of the licence.

53.  The Old Tenancy was entered into under Madam Cheung’s own name, and clause 2(f) thereof expressly provided that the tenancy was personal to her.  On the aspect of the tenancy, Madam Cheung can only be contracting as a principal in the Agreement and I fail to see how she can be relegated to be a mere agent.  Clause 5 provides that the surrender of tenancy has to be signed by Madam Cheung and the Landlord on or before 10 September 2002; and Madam Cheung guarantees to pay up all debts owed during the period of use of the Premises by her and the guarantee shall remain in force after the completion.  Clause 6 provides that Madam Cheung shall assist in the successful transfer of the licence.  Clause 7 provides that Madam Cheung shall bear all financial and legal responsibilities prior to the transaction date of 15 September 2002.  Granted that the licence was issued to Yek Tak.  There must be a personal element on the part of Madam Cheung in dealing with the SWD and guaranteeing the liabilities.  I agree with Mr. Lin that Yek Tak was the agent and vehicle of Madam Cheung rather than the other way round.  Hence, I find that the Agreement expressly or by implication excludes Yek Tak as the undisclosed principal.

54.  Upon the exclusion of the undisclosed principal, the Counterclaim must be dismissed as Yek Tak was the only claimant on the record.

Illegality of the Agreement

55.  Where a contract is illegal as formed or it is intended that it should be performed in a legally prohibited manner, the courts will not enforce the contract or provide any other remedies arising out of the contract.  Contracts may be illegal when entered into because they cannot be performed in accordance with tier terms without the commission of an illegal act.  Thus the contract may involve a breach of criminal law, statutory or otherwise, or alternatively it may be a statutory requirement that the parties to the transaction possess a licence and where they do not the contract will be illegal as formed.  The illegality may arise of both or one of the parties may intend to perform the contract in an illegal manner (see Chitty on Contract (29^th ed., 2004) Vol. 1 paras. 16-007 to 16-009).

56.  The party alleging the illegality of the contract bears the legal burden of proving it.  If the contract is reasonably susceptible of two meanings or two modes of performance, one legal and the other not, the legal burden is undischarged and that interpretation is to be put upon the contract which will support it and give it operation (see Chitty Vol. 1 paras. 16-198).

57.  Where the statute is silent as to the civil rights of the parties but penalizes the making or performance of the contract, the courts consider whether the statute, on its true construction, is intended to avoid contracts to which the particular contract belongs or whether it merely prohibits the doing of some particular act.  Whether the statute does not expressly deprive the plaintiff of his civil remedies under the contract, the appropriate question to ask is whether, having regard to the statute ands the evils against which it was intended to guard and the circumstances in which the contract was made and to be performed, it would be in fact against public policy to enforce it (see Chitty Vol. 1 paras. 16-145 citing Shaw v Groom [1970] 2 QB 504).

58.  Section 6 of the Ordinance provides that:

“	Restriction on operation of residential care homes unless exempted or licensed
	(1)	Any person who on any occasion operates, keeps, manages or otherwise has control of a residential care home in respect of which neither of the conditions indicated in subsection (2) has been satisfied commits an offence and is liable to a fine at level 6 and imprisonment for 2 years and to a fine of $10000 for each day during which the offence continues.
	(2)	The conditions referred to in subsection (1) are-
		(a)	that a certificate of exemption has been issued under section 7(2) or renewed under section 7(5) in respect of the residential care home and is for the time being in force; or
		(b)	that a licence has been issued under section 8(2)(a) or renewed under section 9 in respect of the residential care home and is for the time being in force.
	(3)	It shall not be a defence that a person charged with an offence under subsection (1) did not know that neither of the conditions specified in subsection (2) had been satisfied.”

59.  Section 21(3) and (4) of the Ordinance provide that:

“	Offences in relation to certificates of exemption and licences
	…
	(3)	Any person who on any occasion operates, keeps, manages or otherwise has control of a residential care home in respect of which a licence has been issued-
		(a)	in contravention of any condition of the licence so issued;
		(b)	in any premises other than premises indicated in the licence so issued; or(c) under any name other than the name indicated in the licence so issued, commits an offence.
	(4)	Where any condition of a licence is contravened, the person holding the licence in respect of the residential care home commits an offence unless he proves that-
		(a)	he did not know and had no reason to suspect the existence of the circumstances giving rise to the contravention; and
		(b)	he could not, by the exercise of reasonable supervision and reasonable diligence, have prevented those circumstances arising.”

60.  Para. 1.3.2 of the Code of Practice issued by the Director of Social Welfare (“Director”) under s.22 of The Ordinance expressly states that neither the licence nor any certificate of exemption is transferable.

61.  The licence was issued to Yek Tak and was subject to the condition that the person to whom the licence was issued was responsible for complying with the advice of the Director.

62.  Mr. Lin submitted that it is plain that the object of the Agreement was to transfer to Madam Mak the operation, management and control of Mercy House with effect from 15 September 2002 in respect of which the licence was issued to Yek Tak.  Madam Mak would be the person bearing the legal and financial responsibilities after 15 September 2002 and Madam Cheung would be holding the licence not ultimately bearing such responsibilities.  It would be a contravention of sections 6 and 21 of Cap. 459 whereby the operator of a residential care home must be the named licensee.

63.  Mr. Chan submitted that mischief of Cap. 459 was the restriction of the operation of a residential care home without a valid licence, rather than operation, keeping, management or control by persons other than the named licensee. 

64.  Mr. Chan referred to section 2 of the Residential Care Home (Elderly Persons) Regulation (Cap. 459A) (“the Regulation”) where “operator” is defined to mean a person to whom a certificate of exemption or licence is issued, and “home manager” means person responsible for the management of a residential care home.  Parts IV and IV of the Regulation do not allow the operation, etc. of the residential care home by anyone without a licence.  There seems to be no direct restriction against persons other than the licensee to operate, keep, manage or control a residential care home.

65.  Mr. Lin submitted that Part IV of the Regulation merely sets out the duties of the operator, including the employment of a home manager, and Part V sets out the duties of a home manager.

66.  Section 8 of the Ordinance deals with the application for and issue of licence.  Section 8(2)(a) provides that the Director may determine the application by issuing to and in the name of the applicant a licence imposing such conditions in relation to the operation, keeping, management or other control of the residential care home, and under section 8(3)(a), the Director may refuse to issue a licence to the applicant if it appears to him that the applicant or any person he proposes to employ at the residential care home is not a fit person to operate, take part in the management of or be employed at the residential care home.  It is clear that the licence is issued to a named applicant with consideration of the fitness and propriety.

67.  I agree with Mr. Lin that the Agreement in separating the holding of the licence and the operation, keeping, management, and control of Mercy House is contrary to the public policy of the Ordinance.  Hence, the Agreement is tainted with illegality.

Knowledge of the expiry of the Old Tenancy

68.  Madam Mak’s evidence and those testifying on her side was that they did not know about the expiry of the Old Tenancy until early October 2002.

69.  Miss Chow’s evidence in chief was that she had told Madam Mak that the Old Tenancy had expired on 31 March 2002, and the landlord would only accept a new tenant if Madam Cheung formally surrendered the tenancy and not renewed the agreement.  However, under cross-examination, Miss Chow conceded that it was more probable than not that she had not told Madam Mak about the expiry of the tenancy before the signing of the Agreement.  Mr. Chan asked the Court to prefer the Miss Chow’s evidence in-chief to what she said under cross-examination. 

70.  It has been said that cross-examination is the most effective weapon in testing the veracity of the witnesses, especially where the evidence-in-chief takes the form of a written statement.  I find that Miss Chow did not tell Madam Mak about the expiry of the Old Tenancy, as otherwise, why would the Agreement be drafted in terms of the surrender of a tenancy agreement currently in force?  I consider that there would not be any real incentive for Madam Mak to pay money to a trespasser to yield vacant possession to the landlord.

71.  Mr. Chan tried to argue that the knowledge on the part of Miss Chow would be imputed onto Madam Mak as Miss Chow was an agent for Madam Mak under the Agreement.

72.  The scope of the authority of an agent to bind the principal depends on precisely and exactly what instructions were given to the agent (see So Amy & ors v Au Leslie [1995] 2 HKC 113, 116 per Godfrey JA).  Whether the information coming into the knowledge of an agent is imputed on the principal also depends on whether it is the duty of the agent to impart that information under the terms of the engagement (see Halsbury’s Laws of Hong Kong Vol. 1(2) (2003 Reissue) para. 15.064).

73.  Chitty on Contract Hong Kong Volume – Hong Kong Specific Contracts (2004) at para. 1-128 stated the proposition that the normal estate agent’s contract is a unilateral one, the agent being under no obligation to do anything should he not wish to.  The learned author cited Lord Russell of Killowen in Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, 124 that no obligation is imposed on the estate agent to do anything, and the contracts are merely promises binding on the principal to pay a sum of money upon the rendering of service by the agent.

74.  In Cheng Kwok-fai v Mok Yiu-wah Peter & anor [1990] 2 HKLR 440, an estate agent acted for both the vendor and the purchaser of the property.  The provisional sale and purchase agreement recited that the vendors had appointed the agent as their agent for the selling of the flat and that the purchaser had appointed the agent as his agent for procuring the purchase of the flat.  The vendors all along thought that the area of the flat was between 800 and 900 sq ft.  The agent produced from their own record the sketch and represented that the are was 950 sq ft.  The actual area was only 846 sq ft.  That affected the amount the bank was prepared to lend on the mortgage.  The purchaser sought to rescind on misrepresentation.  Godfrey J (as he then was) said at p.445F that an agent in the property market in Hong Kong is not in quite the same position as an estate agent in England and Wales.  An agent in Hong Kong acts as a broker usually, taking “commission” from both the vendor and purchaser.  On the facts of that case, the agent did not have actual or ostensible authority to represent the area was 950 sq ft or to produce the sketch to him.  He was acting as the agent of the purchaser and not the vendors when he supplied the purchaser a plan from his own record.

75.  In Empire Trend Enterprise Ltd v Double Mind Co Ltd [2001] 1 HKC 302, 312H-I, Deputy Judge Woolley also said that estate agents do not as a general rule have authority to bind their principals unless they are given such authority in clear and unambiguous terms.  In that case, there was no evidence that the estate agents’ representative ever had any authority to do more than a go-between to relay offers and proposed terms.

76.  In this case, I observed that Miss Chow acted for both Madam Cheung and Madam Mak, and she had no general authority to bind them, or to communicate between them unless specifically instructed to do so.  She did not tell Madam Mak that the Old Tenancy had expired.  Miss Chow drafted the agreement in question and it in fact stipulated the surrender of a tenancy currently in force.  In the circumstances, it would be contrary to law and common sense to hold that her knowledge of the expiry of the Old Tenancy would be imputed to Madam Mak.

77.  Madam Mak and Mr. Chu intimated that it would be in the interest of Madam Mak to find out the details of the Old Tenancy.  The additional terms of the Provisional Tenancy Agreement dated 30 August 2002 absolving the landlord from liability in the event that the tenant did not yield possession indicated that Dick Wong did foresee that possibility.  Be that as it may, the Provisional Tenancy Agreement did not mention the expiry of the Old Tenancy, and the additional terms were not inconsistent with Madam Mak and Dick Wong not knowing of the expiry of the Old Tenancy.  

78.  Hence, I find that Madam Mak’s side did not know about the expiry of the Old Tenancy until October 2002.

Nature of the Agreement

79.  Mr. Lin submitted that the Agreement has the following key elements:

(1)	Surrender of the tenancy currently in force by Madam Cheung;
(2)	Transfer of the licence to Madam Mak.

80.  Mr. Lin submitted that Madam Cheung was in no position to perform the Agreement as:

(1)	The Old Tenancy came to an end on 31 March 2002, and as at the time of the Agreement, there was no existing tenancy to surrender;
(2)	The licence issued under the Ordinance is personal to the licensee

81.  Mr. Chan submitted that:

(1)	“Surrender” should not be assigned any legal or technical meaning but simply means to return the Premises to the landlord in the common and commercial sense;
(2)	The objective under Clause I of the Agreement was to assist Madam Mak to rent the Premises from the landlord;
(3)	Madam Cheung is holding the licence and Mercy House may be in operation so long as a valid licence is issued.

82.  Mr. Lin pointed out that in para. 9(5) of the Defence and Counterclaim, it was pleaded that Madam Cheung’s duty was to surrender the Old Tenancy.  The Chinese term “退回” in the Agreement is defined as “surrender” under s.2 of the Conveyancing and Property Ordinance (Cap. 219).  Hence, given that Madam Mak and her side did not know about the expiry of the Old Tenancy at the time of the Agreement, surrender cannot simply means delivery of vacant possession as a trespasser. 

83.  Mr. Chu claimed that they had rendered assistance to Madam Mak by not renewing the tenancy with the landlord.  The hard facts were that Madam Cheung demanded rent free period upon the renewal and there was no agreement with the landlord.  Mr. Chu said he made some enquiries of the asking rent by the landlord though other agents.  I find that the deal between the landlord and Madam Mak’s side was closed through Miss Chow.

84.  Both Miss Chow and Mr. Chu said the landlord would not agree to the New Tenancy if Madam Cheung did not move out.  That goes without saying given the additional terms of the Provisional Tenancy Agreement. 

85.  Looking that Agreement objectively, the mere delivery of vacant possession to the landlord is not what the parties have bargained for.  Hence, Madam Cheung did not perform the Agreement by simply delivering vacant possession to the landlord.

86.  As to transfer of the licence, I have found that the Agreement was illegal in separating the holding of the licence and the operation of Mercy Home.  The transfer envisaged under the Agreement entails this illegal operation.  Hence, there can be no performance of the transfer.

87.  In passing, I note that Yek Tak is a limited company.  However, there is no evidence nor argument of the transfer of licence by the transfer of the shareholding of Yek Tak.

Implied term to supply documents before completion

88.  I have already ruled on the illegality of the contract.  But for argument’s sake, I shall consider the implied obligation to notify the SWD of the removal of Mercy Home.

89.  The court will only imply a term into the contract: (1) where it is necessary to give the transaction such efficacy as both the parties must have intended that in all event it should have (see The Moorcock (1889) 14 PD 64, 68 per Bowen LJ); or (2) where the term implied represents the obvious, but unexpressed, intention of the parties, so that while the parties were making their bargain, if an officious bystander were to suggest some express provision for it in the agreement, both parties would, as reasonable men, have agreed to it as a matter of course (see Chitty Vo1. 1, paras. 13-004 to 13-007).

90.  Madam Mak said she was outside Hong Kong on 30 August 2002 when Dick Wong signed the Provisional Tenancy Agreement.  After Dick Wong went to the Premises, he rang her and told her the premises were vacant.  She was worried that under the licence might be at risk as Mercy House could only be operated at the Premises as stipulated in the licence.

91.  Under section 10(e)(i) and (ii) of Ordinance:

“	The Director may at any time by notice in writing served on the person holding a licence in respect of a residential care home cancel or suspend the licence or refuse to renew the licence or amend or vary any condition of the licence-
	…
	(e)	if it appears to him that-
		(i)	that residential care home has ceased to be operated as such or to exist;
		(ii)	that such persons has ceased to operate, keep, manage or otherwise control, that residential care home;
	…”

92.  Madam Mak said she therefore requested the meeting on 6 September to discuss about the operation of the Mercy House.  Madam Mak said she handed Madam Cheung a list of documents at the meeting and requested her to produce the documents before completion. 

93.  The list of documents states as follows:

“	(1)	Electrical works safety papers;
	(2)	Gas safety papers;
	(3)	Additional licensing conditions issued by the Social Welfare Department;
	(4)	Content of letter issued to Social Welfare Department;
	(5)	Information relating to the company of Madam Cheung and BR information;
	(6)	Transfer of deposit arrangements for electricity and water, etc.;
	(7)	Question of clearing the area;
	(8)	Question of maintenance of all electrical and other equipment;
	(9)	Change of name of Madam Cheung and her role in the new home;
	(10)	Question of transfer of the elderly;
	(11)	All correspondence issued to the House by Social Welfare Department;
	(12)	Cheque”

94.  Madam Mak said that item (4) was the letter to notify the SWD that Mercy House was temporarily moved from the Premises in order that the licence would not be in jeopardy.

95.  Madam Cheung said a list was shoved to her at the end of the meeting but there was no discussion on it.  Save as to item (4), she never disputed the documents were necessary for the continual operation of mercy House.  But they were to be provided upon payment at completion.

96.  As to item (4), Madam Cheung said there was no discussion on the removal of Mercy House at the meeting, the only argument being the number of elderly residents to be transferred.  Madam Cheung said that the issue of major declaration was pre-meditated, as otherwise, the decorator could not have amassed 20 odd workers early in the morning of 16 September 2002, just one day after the supposed completion.

97.  Dick Wong said Madam Mak only wanted to take up 5 elderly residents as it cost $30,000 each.  Madam Mak said she was not willing to take up any until the validity of the licence was issued.  Be that as if may, Madam Cheung later agreed that only 5 would be transferred, but Madam Mak did not agree to take any until she could see the documents before completion. 

98.  Miss Chow said that the issue of the removal of Mercy House was raised at the meeting.  She also recalled, either said at the meeting or no later than the end of September, that if Mercy house were moved, that would render it not in healthy operation.

99.  I find that the issue of the removal of Mercy House was raised at the meeting on 6 September 2002, and Madam Mak demanded Madam Cheung to notify the SWD in writing.

100.  Madam Cheung said the removal of the house did not mean that licence would be invalid.  At first Madam Cheung said it would not be invalid and there was no need to notify the SWD since Madam Mak knew well about it.  Later, Madam Cheung likened it with not having any resident in the first place would not make the licence invalid.  Then, Madam Cheung said if the SWD were notified of the removal and were satisfied with the alternative arrangement, the licence would not be invalid.  She said she had spoken to an officer of the SWD and asked hypothetically whether there would be any problem if the elderly residents were temporarily moved because the Premises had to undergo certain repair and the answer was no. 

101.  Under section 8(3)(b) of the Ordinance, the Director may refuse to issue a licence if the situation, building, design, construction, means of ingress and egress or equipment of the premises are not fit for the purpose of a residential care home, and the licence stipulates the premises that the home may be operated at.  Hence, the address of the residential care home is important.

102.  The elderly residents of a care home are vulnerable as they do not have their kins to depend on for their board and lodge, and the SWD must be assured that suitable arrangement are in place for their care and attention.  The vacation and removal of an entire home is a major matter and the SWD must be concerned as to the alternative arrangement in place, albeit temporarily.  I agree with Madam Mak that there is a real likelihood that the licence might be in jeopardy if the SWD were not notified of the situation.

103.  Madam Cheung intended that Mercy House would continue in operation until Madam Mak was to take it over on 15 September 2002, and it did not cross her mind that there would be such a vacuum.  Mr. Chu admitted that the alternative accommodation at the Maple Street home was beyond the licensed capacity once the elderly residents from Mercy House were moved there, hence, they had to rent extra premises urgently.  Under such circumstances, it really begs the question as to whether Madam Cheung would be disposed to notify the SWD of the situation, or indeed whether she would reveal that the whole saga was caused by the delivery of vacant possession to the landlord after she had remained in possession of the Premises without any valid tenancy agreement for 5 months.

104.  I find that the vacuum was all of Madam Cheung’s own making, and in the circumstances, there was an implied obligation to inform the SWD of the removal of Mercy House and to satisfy the SWD there were appropriate alternative accommodation.  I find that she done none neither.  Hence, Madam Cheung was in breach of the implied term of the Agreement.

Putting right the risk to the licence

105.  Mr. Chan submitted that a party cannot rely on a ground which he did not specify at the time of his refusal to perform if the point which was not taken could have been put right (see Chitty Vol. 1 24-014, and Heisler v Anglo-Dal Ltd [1954] 2 All ER 770, 773 per Somervell LJ).

106.  I have found already found that Madam did raise the issue of the removal and healthy operation of Mercy House at the meeting on 6 September, and that was the reason for her refusal to complete in the letter of 16 September 2002.  That is not a ground which is only raised now for the first time.

107.  Further, I query what Madam Cheung could have done to put right the situation.  Given the policy against transfer of licence in the Code of Practice, and the fact the alternative accommodation at the Maple Street home was beyond the licensed capacity, perhaps all Madam Cheung could have done was to tell the SWD in terms of the hypothetical question she raised with the officer.  I do not think that the Court can accept anything but the whole truth as a satisfactory remedy of the complaint raised.  Hence, I cannot see how Madam Cheung can succeed on this point either.

Transfer of the elderly residents

108.  There was an argument as to the interpretation of clause 8 of the Agreement as to the transfer of the elderly residents, in that whether there is a minimum which Madam Mak has to take up.  The clause is poorly drafted.  In view of my finding above, I do not attempt to breath any life into the dead letters.  I find that Madam Mak refused to discuss the transfer of residents pending solution of the problem of removal of Mercy House.

Escape clause

109.  Clause 9 provides that if Madam Cheung obtained the written consent of the landlord to the terms of the New tenancy under clause 2 of the Agreement, and Madam B is unable to perform the Agreement, Madam Mak is entitled to forfeit the deposit and she cannot claim any other compensation from Madam Cheung.

110.  Mr. Chan submitted that the situation where clause 9 is applicable did not arise, as Madam Cheung had in fact delivered vacant possession and Prosperous had entered into the New tenancy and not merely obtaining the consent of the landlord. 

111.  I find some force in Mr. Chan’s argument, but it is no longer necessary for me to decide on the matter.

Recovery notwithstanding illegality

112.  Notwithstanding the illegality of the contract, Madam Mak claimed restitution of the deposit of $135,000 paid as money had and received.

113.  In Tribe v Tribe [1996] Ch 107, the plaintiff transferred his shareholding in his family company to his son, the defendant, for a pretended consideration which was not paid and not intended to be paid.  The transaction raised the presumption of advancement and the burden of proving that it was not intended as a gift lies upon the transferor.  The judge found that the plaintiff transferred them to the defendant as a nominee in order to conceal them from the creditors.  Millet LJ (as he then was) referred to Tinsly v Milligan [1994] AC 340, 375 per Lord Browne-Wilkinson and said that ordinarily, a man who makes a gratuitous transfer of property to another for an illegal purpose is not allowed to rely on his purpose in making the transfer in order to rebut the presumption of advancement.  However, the question arises as to whether there is an exception to this principle where the transferor withdraws from the transaction before any part of the illegal purpose has been carried into effect.  The judge held that there was such an exception.  The illegal purpose was never carried into effect.  Neither of the landlords knew of the plaintiff’s shareholding or was aware that he had disposed of it.  Negotiation with the landlords were brought to a satisfactory conclusion without resorting to deception.  It never became necessary.  The judge held that because the illegal purpose had not been carried out, the plaintiff was entitled to withdraw from the transaction and to rely on his evidence of the reason why he transferred the shares to the defendant on order to rebut the presumption of advancement.  According to the judge he had what is called a locus poenitentiae.  The defendant submitted that the judge was in error.  First, it is said, the doctrine of locus poenitentiae allows a party to an illegal contract to withdraw while the contract is still executory, but it has no application to transfer of property.  In such a case the illegal purpose is partly carried into effect as soon as the property is transferred.  Secondly, and in the alternative, a transferor cannot rely on his illegal purpose to rebut the presumption of advancement, and it makes no difference that the illegal purpose has not been carried into effect.  Thirdly, there was no true repentance in the present case.  The plaintiff never abandoned his illegal purpose; he did not demand the return of his shares until the danger has passed and it was no longer necessary to conceal them from his creditors.

114.  Millet LJ said at p. 124 B-F:

“	The presumption of advancement and the locus poenitentiae
	In Tinsley v. Milligan [1994] 1 A.C. 340, 370 Lord Browne-Wilkinson summarised the common law rules which govern the effect of illegality on the acquisition and enforcement of property rights in three propositions:
	“	(1)	property in chattels and land can pass under a contract which is illegal and therefore would have been unenforceable as a contract; (2) a plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right; (3) it is irrelevant that the illegality of the underlying agreement was either pleaded or emerged in evidence: if the plaintiff has acquired legal title under the illegal contract that is enough.”
	The decision of the majority of their Lordships in that case was that the same principles applied in equity. It is, therefore, now settled that neither at law nor in equity may a party rely on his own fraud or illegality in order to found a claim or rebut a presumption, but that the common law and equity alike will assist him to protect and enforce his property rights if he can do so without relying on the fraud or illegality. This is the primary rule.
	It is, however, also settled both at law and in equity that a person who has transferred property for an illegal purpose can nevertheless recover his property provided that he withdraws from the transaction before the illegal purpose has been wholly or partly performed. This is the doctrine of the locus poenitentiae and it applies in equity as well as at law: see Symes v. Hughes (1870) L.R. 9 Eq. 475 for the former and Taylor v. Bowers (1876) 1 Q.B.D. 291 for the latter. The availability of the doctrine in a restitutionary context was expressly confirmed by Lord Browne-Wilkinson in Tinsley v. Milligan [1994] 1 A.C. 340, 374.”

115.  His Lordship said further at p. 134E-H:

“	In my opinion the following propositions represent the present state of the law.
	(1)	Title to property passes both at law and in equity even if the transfer is made for an illegal purpose. The fact that title has passed to the transferee does not preclude the transferor from bringing an action for restitution.
	(2)	The transferor's action will fail if it would be illegal for him to retain any interest in the property.
	(3)	Subject to (2) the transferor can recover the property if he can do so without relying on the illegal purpose. This will normally be the case where the property was transferred without consideration in circumstances where the transferor can rely on an express declaration of trust or a resulting trust in his favour.
	(4)	It will almost invariably be so where the illegal purpose has not been carried out. It may be otherwise where the illegal purpose has been carried out and the transferee can rely on the transferor's conduct as inconsistent with his retention of a beneficial interest.
	(5)	The transferor can lead evidence of the illegal purpose whenever it is necessary for him to do so provided that he has withdrawn from the transaction before the illegal purpose has been wholly or partly carried into effect. It will be necessary for him to do so (i) if he brings an action at law or (ii) if he brings proceedings in equity and needs to rebut the presumption of advancement.
	(6)	The only way in which a man can protect his property from his creditors is by divesting himself of all beneficial interest in it. Evidence that he transferred the property in order to protect it from his creditors, therefore, does nothing by itself to rebut the presumption of advancement; it reinforces it. To rebut the presumption it is necessary to show that he intended to retain a beneficial interest and conceal it from his creditors.
	(7)	…”

116.  And at p. 135B-C:

“

The doctrine of the locus poenitentiae

It is impossible to reconcile all the authorities on the circumstances in which a party to an illegal contract is permitted to withdraw from it. At one time he was allowed to withdraw so long as the contract had not been completely performed but later it was held that recovery was barred once it had been partly performed (see Kearley v Thompson (1890) 24 QBD 742, [1886-90] All ER Rep 1055). It is clear that he must withdraw voluntarily, and that it is not sufficient that he is forced to do so because his plan has been discovered. In Bigos v Bousted [1951] 1 All ER 92 this was (perhaps dubiously) extended to prevent withdrawal where the scheme has been frustrated by the refusal of the other party to carry out his part.”

117.  And at p. 135E

“	… But I would hold that genuine repentance is not required.  Justice is not a reward for merit; restitution should not be confined to the penitent.  I would also hold that withdrawal from an illegal transaction when it has ceased to be needed is sufficient…”

118.  Mr. Lin submitted that Madam Mak withdrew from the illegal transaction before it had been carried into effect.  In the premises, she is entitled to recover the deposit of $135,000 paid.  To hold otherwise would mean that Madam Cheung would be able to retain the benefit of the illegal contract.

119.  On the other hand, Mr. Chan submitted that the parties were in pari delicto, and the court should not order recovery.  He referred to Taylor v Chester (1869) LR 4 QB 309 where the plaintiff deposited a half of a £50 bank note by way of pledge to secure the payment of money due for wine and suppers supplied by the defendant to be consumed in a debauch in a brothel kept by the plaintiff.  The plaintiff claimed in bailment and detinue.  Mellor J said at p.314 that 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.  It was held that the plaintiff could not do so and he was precluded from recovery.

120.  Mr. Chan also submitted that Madam Cheung has provided consideration to Madam Mak by vacating the premises, as that was of real benefit to Madam Mak.  Performance of a duty though already owed to a third party is good consideration (seeChitty Vol. 1 para. 3-075, and Pao On v Lau Yiu Long [1980] AC 614).

121.  Mr. Lin submitted that the delivery of vacant possession related to the surrender of the Old Tenancy part of the Agreement and was separate from the illegal holding of the licence.

122.  I find that Madam Mak withdrew from the illegal contract after she demanded Madam Cheung to issue the letter purportedly to pacify the SWD on the removal of Mercy House.  Madam Mak did what she had to do and it was Madam Cheung who did not send the letter.  Hence, I find that Madam Mak was in pari delicto and not in locus poenitentiae.  I also find that Madam Cheung had given consideration by vacating the premises.  Hence, the restitution claim fails.

Trespass

123.  Mr. Chan did not seek to dispute the liability of Yek Tak as admittedly, the elderly persons who returned to the Premises were in the care of Yek Tak.  However, it was submitted that the evidence against personal liability of Madam Cheung is not as strong.

124.  Madam Cheung said in her statement to the police that she locked up the Premises after 18 September 2002, and that is the evidence to attach personal liability.  In any case, she was the controlling mind behind Yek Tak and the trespass could not have happened without her approval.  Hence, Madam Cheung is also liable for the trespass.

Quantum

125.  The only relevant quantum is the mesne profits for trespass for the period 16 September to 15 October 2002.  I fix it as $76,000 with reference to the rent under the New Tenancy.

126.  I wish to say a few words on the claim of the items left at the Premises.  Madam Mak did allow Madam Cheung time until noon on 17 September 2002 to remove the items, but demolition started between 8 to 9 a.m..

127.  Yek Tak’s Counterclaim has been dismissed on locus.  It is also dismissed on merits.  In any case, I do not find the quantum proved.   

128.  Prosperous stored the items found in the Premises and had repeatedly demanded Madam Cheung to retrieve them and it had been refused as Madam Cheung alleged that those items were sold under the Agreement.  Insofar as the allegation that the items should be dealt with under the Agreement, such claim fails as the Agreement falls away.

129.  In any case, Madam Cheung’s evidence on quantum was hopelessly vague.  She said the items left on the Premises included those to be transferred und under the Agreement, and those put in a storeroom belonging to Yek Tak and hopefully also to be bought by Madam Mak.  There was no evidence as to what was left on the Premises when vacant possession was delivered to the landlord on 29 August 2002.

130.  The evidence on the value of the chattels depends on the memory and estimation of Madam Cheung and it is not satisfactory.  To give an example, the 4 calligraphy scrolls claimed to be priceless but fixed at $100,000 is definitely an exaggeration, as otherwise they could hardly be expected to be placed there without proper safe custody.

Conclusion

131.  In the premises, I find that Prosperous is entitled to the permanent injunction against trespass by Madam Cheung and Yek Tak, and mense profits of $76,000.

132.  The Counterclaim by Yek Tak, and Counterclaim to Counterclaim by Madam Mak are dismissed.

Costs

133.  I make an order nisi that Prosperous be entitled to the costs of the main action on trespass and the costs of the interlocutory injunction before A. Cheung J.

134.  I make no order as to costs nisi on the Counterclaim and the Counterclaim to Counterclaim.

135.  Bearing in mind the facts common to all claims, and the respective success and otherwise of the issues, I fix the costs of the main action (apart from the interlocutory injunction) to be 1/3 of the total costs incurred.

136.  Lastly, I thank counsel for their helpful submissions.