MADAM CHUNG MUI TECK AND OTHERS v. HANG TAK BUDDHIST HALL ASSOCIATION LTD.

HCA4127/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4127 OF 2000

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J U D G M E N T

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1. This was an Order 14 summons taken out by the plaintiffs. By their Amended Statement of Claim, dated 20 September 2000, the plaintiffs asked for a declaration that a joint venture agreement ("the Agreement") dated 31 January 2000 made between Hang Tak ("the 1st defendant") and Goodmatch ("the 2nd defendant"), was unlawful and unenforceable. The plaintiffs also prayed for a number of injunction orders to prevent the Agreement from being implemented. It was the plaintiffs' case that they were entitled to have final judgment against the two defendants forthwith. There was another matter before the court arising out of the previous application by the defendants to strike out the Statement of Claim. I shall deal with it in turn.

2. Having heard the submissions and read the affirmations, I gave unconditional leave to the defendants to defend. The following are the reasons.

The background

3. The 1st defendant, Hang Tak, is a company limited by guarantee without a share capital. The 1st plaintiff is the permanent chairperson and permanent director of Hang Tak. The 2nd plaintiff is the permanent executive director, and the 3rd plaintiff is a director of Hang Tak. They are also members of Hang Tak. The 2nd defendant, Goodmatch, is a private company limited by shares, incorporated in January 1997.

4. Hang Tak is the registered owner of a number of land lots in Hin Tin Village, Sheung Keng Hau Village and Ha Keng Village. They were agricultural and building land, and the site was designated "Village Type Development".

5. In June 1987, Hang Tak had entered into a joint venture agreement with Million View Development Limited to develop the site. The plan was to build a complex for Buddhist religious purpose. However, the proposal fell through for various reasons. Then in September and October 1999, Mr Ng of Goodmatch held meetings with two other permanent executive directors of Hang Tak regarding the development of the site. It appeared that the plaintiffs were not present at these meetings. Later in December 1999, in the absence of the plaintiffs, the directors of Hang Tak held a meeting, chaired by a solicitor, and resolved that Hang Tak was to enter into the Agreement with Goodmatch, a draft of which was tabled. The formal agreement was concluded on 31 January 2000. The terms of agreement were contained in the Joint Development Deed.

The Plaintiffs submissions

6. Mr Ismail, Counsel for the plaintiffs, argued that Goodmatch's obligations under the Agreement, particularly clauses 3.3, 4.1, 4.3 and 23.2 were: unenforceable; ultra vires Goodmatch's powers; incapable of confirmation or ratification by a majority of members of Goodmatch; and, more importantly, contrary to the intent and spirit of the Small House Policy of the Government. It was so because the scheme required Goodmatch to enter into private arrangements with indigenous villagers to acquire their rights or special privileges under the Small House Policy for valuable consideration to be decided by Goodmatch in consultation with Hang Tak. Further, it was argued that Goodmatch's obligations under these clauses would be unlawful, illegal, unenforceable and ultra vires Goodmatch's powers because they required Goodmatch to aid, abet, counsel or procure indigenous villagers to falsely declare that they had never made and had no intention at present to make any private arrangements for their rights under the Small House Policy to be sold to other individuals or a developer. The new form of declaration, adopted in 1997, required such a declaration to be made.

7. Mr Ismail stated that the Agreement would be incompatible with the new declaration because the villagers could not make such a declaration in all honesty. He submitted that the Agreement was the type of contract that would be injurious to good government, against the public interest, and therefore contrary to public policy.

8. Mr Ismail also argued that the joint venture agreement would be unlawful, illegal, unenforceable, ultra vires the powers of Hang Tak and Goodmatch because it was, in effect, a conspiracy between Hang Tak, Goodmatch and those indigenous villagers procured by Goodmatch, to cause indigenous villagers to make false declarations. Furthermore, it was said that the joint venture agreement was also a conspiracy by these three parties to defraud the Government and/or to obtain from the Government an advantage by deception, namely, permission to erect Small Houses on the site at nil premiums under a false representation. It was the plaintiffs' case that the Agreement was apparently an attempt to develop the land without paying the proper premium to the Government.

9. Mr Ismail emphasized the point that the Small House Policy was an administrative policy, which was approved by the Executive Council and had been implemented since December 1972. It was designed to provide a place of residence to male indigenous villagers within their own villages. Such special privileges for the male indigenous villagers were recognized and entrenched by the Sino-British Joint Declaration and the Basic Law. He maintained that an agreement to build small houses under the Policy which were not really for the benefit of male indigenous villagers would be a gross abuse and contravention of the Policy. This important right should not be allowed to become a commodity.

The Defence case

10. There were common grounds adopted by the 1st and 2nd defendants in opposing the plaintiffs' application. Counsel for the defendants pointed out that in view of the very serious allegations raised by the plaintiffs, which included conspiracy, defrauding the Government and making false declaration etc, it would be inappropriate for this court to dispose of the matter in a summary manner as proposed. In this regard, the defence had cited the authority of Wavefront Trading Ltd v. Po Sang Bank Ltd [1992] 2 HKC 130. It was further submitted that the Small House Policy was not a public policy, but only a private matter between the Government as grantor and the indigenous villager as grantee. Mr Vaughan observed that there was no evidence produced by the plaintiffs to show that the policy is a public policy against which an agreement might be rendered illegal by virtue of its terms. Mr Law, on the other hand, submitted that it was simply not open to the plaintiffs to challenge the Agreement on the basis that it was contrary to public policy and therefore illegal.

11. In his written submissions, Mr Law had raised five specific issues, which, in his view, would be relevant to the present dispute. They were : (1) whether the plaintiffs could obtain the injunctions against the 2nd defendant, a different company, on the basis that the joint venture agreement was ultra vires of the 2nd defendant; (2) the distinction between a contract being illegal and a contract that a company lacked the capacity to enter into; (3) the status of the Small House Policy; (4) whether the plaintiffs have the locus standi to ask for an injunction even if the joint venture agreement were illegal; (5) is the joint venture agreement really illegal?

The conclusions of the Court

12. Having heard counsel and read the written submissions and the affidavits, I found I was in agreement with the defence. On the appropriateness of the Order 14 procedure, Keith J (as he then was) pointed out in Wavefront Trading Ltd that "Order 14 does not apply to actions which include a claim by a plaintiff based on an allegation of fraud. ... In my view, save in the clearest possible case, it is inappropriate for the court to decide in summary proceedings whether a defendant has been dishonest".

13. Although the case of Wavefront Trading Ltd was mainly concerned with a banking practice, I took the view that the same principle should apply in the present dispute. In fact, the allegations raised by the plaintiffs had gone beyond a simple complaint of dishonesty. The plaintiffs alleged that the Agreement was illegal and the two companies had entered into this agreement with the apparent purpose to defraud the Government. The plaintiffs had made a serious accusation that the Agreement involved a conspiracy and perhaps even a criminal act of deception. Despite what Mr Ismail had submitted regarding the urgency of the situation, I found it would be inappropriate for me to conclude, based on the affidavits and submissions alone, that these serious allegations could be established or otherwise.

14. Central to the present dispute was the status of the Small House Policy. In my judgment, the authority of Li Pui Wan v. Wong Mei Yin [1998] 1 HKLRD 84 would be relevant here. P. Chan CJHC (as he then was) had stated the following :

" According to the law of contract, if a contract upon its formation or performance contains elements of illegality and is in certain circumstances against public policy the court would not enforce it. What public policy in fact means is that there are certain principles which in the opinion of the court must persist in a civilized society. The question as to whether the court would refuse to enforce a contract depends on the seriousness and turpitude of the illegality. Generally, the court will consider whether the contract is in breach of common law or statute by its formation or performance; or injurious to good government either in the field of domestic or foreign affairs; or interferes with the proper working of the machinery of justice; or injurious to marriage or morality or economically against the public interest. (See Chitty on Contracts, vol.1, paras.16-001, 16-003 and 16-005, and Euro-Diam Ltd v Bathurst [1990] 1 QB 35 and Edler v Auerbach [1950] 1 KB 359).

The purpose of granting of land by the government in accordance with Chinese customary law with additional terms and conditions to New Territories male indigenous villagers is to provide some of the New Territories residents with special care. This situation differs greatly from the principles in the law of contract where the court refuses to make orders to enforce certain contracts because they are against public policy upon formation or performance. The granting of land by the government to indigenous villagers who are male descendents is a measure made under special circumstances. It has nothing to do with the principle under which by virtue of public policy, certain contracts are found illegal by the court. In our view, such measure adopted by the government in the granting of land should not be regarded as a public policy, and is quite different from the principle in common law which requires the court of law to uphold public policy.

In this case, there was insufficient evidence to show that the granting of land by the government to male indigenous villagers was a public policy. The respondent failed to produce any evidence to prove or cite any authorities to show what was the difference, if any, between the grant issued by the government to male indigenous villagers and the contract between the government and private organizations or citizens in general. A breached contract cannot be categorised as against public policy and declined attention by the court by reason of it being a contract made with the government. In our opinion, there is no difference between the granting of land by the government to male indigenous villagers and a landlord leasing his property to a tenant in the eyes of law.

Even if it was illegal for the parties to agree to proceed with a sale and purchase or completion at a later date without government approval or before paying the premium, this, in our view, does not constitute a breach of public policy. In fact, the sale and purchase or assignment of title and development entitlement of small houses similar to that in this case is also good for the public as the payment of premium brings revenue to the government. It also helps to solve the housing problem because people other than male indigenous villagers can also live in this sort of houses. However, if a male indigenous villager cannot afford to build a small house due to financial constraints but is not allowed to assign his title to somebody else, he will not be able to benefit from the policy and consequently it will not do any good to the general public. Over the years, the government has been considerably indulgent towards this sort of sale and purchase and in effect has amended the formerly so-called land grant policy. From the practical point of view, this measure has done more good than harm to the public."

15. In light of the observations by the learned judge, I believe the legal status of the Small House Policy, and its bearing on the propriety of the Agreement, would be issues that need to be sorted out at the trial, with a proper evidential foundation. As the matters stood, I could not accept that these were matters fit for a summary disposal. Hence, I had given unconditional leave to the defendants to defend. But I had drawn the defence's attention to the contents of the letter from the Director of Lands dated 24 November 2000, particularly paragraph (l). Whether they still want to carry on the scheme, having considered the views expressed in this letter, is something for them to consider. On the issue of cost for the present proceedings, I shall, having heard counsel, order it to be in the course.

The costs in relation to the striking out application

16. What had transpired seemed to be that after the plaintiffs had filed the Statement of Claim, the defendants' solicitors had written to the plaintiffs' solicitors stating that the latter had no case based on the way the Statement of Claim was drafted. The plaintiffs did not agree with the criticism. The defence then took out the summons to strike out before the plaintiffs decided to make the amendments. However, in view of the amendments, the striking out application was adjourned and eventually not pursued. Master Kwan had reserved the cost issue. Now Mr Ismail opposed the application by the defence for costs occasioned by the application.

17. The question was whether the plaintiffs' amendments were in line with those matters initially raised by the defendants and yet there were no amendments made until after the striking out proceedings had been taken out. Having considered the relevant paper on the subject and Counsel's submissions, I would agree with the defence and therefore I shall order that the costs of and occasioned by the striking out application shall be borne by the plaintiffs, to be taxed if not agreed, with a certificate for Counsel.

Consequential orders

18. As a result of my order granting unconditional leave to defend, I shall make the following further directions :

(1) Leave to the defendants to file and serve their defence, within 14 days from today;

(2) Leave to the plaintiffs to file and serve their reply, if any, within 14 days thereafter;

(3) There be mutual discovery of documents, within 14 days of close of pleadings with inspection of documents within seven days thereafter;

(4) Each party to file into court and serve on the other parties signed witness statements as to facts, within 42 days after completion of discovery;

(5) Liberty to apply for further or other directions, if necessary; and

(6) Costs of this application be in the cause, with a certificate for counsel.