LIU CHI KEUNG v. LAW SIM YUK

HCMP 187/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 187 OF 2006

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J U D G M E N T

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1.  This is an application the plaintiff, Mr Liu, for declarations, the primary one being that the defendant Madam Law is not entitled to a lien over the Property named in the title of the Originating Summons, and for consequent orders for vacation of documents registered in the Land Registry and damages. 

2.  Mr Liu is the registered owner of the Property which is the top floor residential unit of a standard New Territories Small House (“the Building”).  Madam Law alleges that she is entitled to an equitable lien on the Property and is seeking to enforce it by an order for sale of the property, by High Court Action no. 3952 of 2000. 

3.  Mr Liu bought the Property from his predecessor in title, Lee Tim Choi.  Lee Tim Choi through his attorney, Lee Po Oi sold the Property to Mr Liu for $1,450,000 in 2000.  They entered into a provisional agreement for sale and purchase dated 3 March 2000 and a formal agreement dated 24 March 2000, and registered in the Land Registry on 6 May 2000, and they executed an Assignment in favour of Mr Liu dated 18 April 2000 which was registered in the Land Registry on 30 May 2000.

4.  On 17 April 2000, Madam Law filed her Writ in HCA 3952 of 2000 against Lee Po Oi and Lee Tim Choi (“the Lees”).  In it she alleged that Lee Po Oi was Lee Tim Choi’s agent or attorney in the sale and purchase of the land and the whole Building, which was yet to be constructed thereon under three written agreements, in Chinese (“the Chinese agreements”), dated 1 September 1997 at a total price of $5,700,000.  She pleaded that pursuant to these agreements, she paid a total of $570,000 as a provisional deposit.  However, the Lees were in breach of contract in that they built the Building materially differently from the plans provided by the defendant.  Madam Law accepted the breach and demanded her money back.  Later, there was a settlement agreement between the Lees and Madam Law that they would refund the deposit of $570,000 with interest, when they could re-sell the Building or any part of it.  In fact the Lees sold the ground and first floors of the Building to separate purchasers in 2000; but they did not pay Madam Law her deposit.  Accordingly, she claimed the return of the deposit and a declaration that she was entitled to an equitable lien over the Property.

5.  On 5 May 2004, Madam Law obtained default judgment against the Lees, on the ground of their failure to file and exchange signed witness statements, for $570,000 plus interest at the judgment rate from 17 April 2000 until payment, and a declaration that she was entitled to an equitable lien over the Property to secure the return of her deposit of $570,000, loss and damages and interest. 

6.  The Writ was registered in the Land Registry on 18 April 2000 and again on 2 April 2005.  The judgment was registered on 2 April 2005, and an amended order dated 30 May 2005was registered on 23 August 2005.  Mr Liu now seeks discharge of these registrations.   

7.  Madam Law has been unable to obtain satisfaction of her monetary judgment for $570,000 against the Lees.  Through solicitors, she informed Mr Liu and his mortgagee bank of her intention to enforce the lien by sale of the Property; but they have not paid up either. 

8.  On 4 October 2005 Madam Law took out a summons for an order for sale of the property.  Mr Liu says that he sought to have this Originating Summons, and the application for order for sale consolidated, but Madam Law did not agree to this.  I understand that her application has been adjourned pending the outcome of these proceedings. 

9.  In fact, the Chinese agreements each related to the interest in the land and to one floor of the Building.  The agreement in respect of the Property was for $2,000,000, and the separate receipt for the deposit in respect of that agreement was for $200,000.  Mr Lin, counsel for Madam Law, says that she is prepared to confine the enforcement of her lien to the extent of $200,000.  

10.  The grounds for Mr Liu’s application are:

(1)     Madam Law is not entitled to an equitable lien, because the original agreements between her and the Lees were illegal, and a purchaser has no lien for money paid by him under an illegal contract;

(2)     If the lien existed it was rendered extinct by the settlement agreement between the Lees and Madam Law;

(3)     If the lien exists it is a registrable equity.  The agreements between the Lees and Madam Law it were never registered and so the lien, if it exists, is void as against him, he being a bona fide purchaser for value without notice; and

(4)     The judgment in HCA 3952 is irregular; it was not obtained in good faith; and it is not binding on Mr Hui. 

Lien

11.  A purchaser acquires a lien on property at the time he pays the purchase price or any part of it.  The lien is a security on the property which is enforced when the vendor fails to complete the assignment but the lien itself arises when the price, or part of it, is paid.  See the judgment of Yuen J, as she then was, in Li Sze Fat v Chen Ka Leung Tommy & Anor[2000] 3 HKC 224 at 232; Rose v Watson (1864) 10 HL Cas 672; Whitbread v Watt [1901] 1 Ch 911. 

Illegality

12.  Originally the argument put forward by Mr Chong, counsel for Mr Liu, was that the Chinese agreements were illegal as being in breach of provisions against alienation under the Building Licence.  Madam Law was knowingly in breach of these provisions by entering into the Chinese agreements.  She claims an equitable lien.  The principle is that one who comes to equity must come with clean hands.  Having entered into an illegal agreement in respect of the Property, she cannot now claim the benefit of any equitable lien. 

13.  The circumstances here are the common circumstances where a person who obtains a Building Licence under the New Territories Small House Policy builds the house and sells it on, in contravention of the provisions against alienation, but having agreed with the purchaser to bear the cost of the premium payable.  Clause 5 of the Chinese agreements provided that the vendor would bear the Government premium. 

14.  Li Pui Wan v Wong Mei Yin [1997] HKLRD 114 was a similar case.  It was argued that an agreement for sale in breach of conditions of grant, without permission or payment of premium, was illegal and contrary to public policy.  The Court of Appeal held that although the transaction was in breach of the conditions of grant, there was inadequate evidence in that case to show that the government’s grant of land to the male descendants of indigenous people was a matter of public policy.  In any event, even if the transaction had an element of illegality because the parties had not obtained the Government’s consent, it did not constitute a breach of public policy because the contractual documents showed that the parties had intended to carry out and complete the transaction according to Government requirements, including the payment of premium.  As described by Chan CJHC (as he then was), the transaction could only be regarded as “ technically jumping the gun” (p. 90). 

15.  Mr Chong could not, in the light of that authority, maintain that the Chinese agreements were illegal or contrary to public policy.  But, he said, they were still tainted with a civil wrong and the equitable principle applied. 

16.  I do not agree.  The Chinese agreements would not have been unenforceable against the Lees on the grounds of illegality or public policy.  It would follow that an equitable lien which came into being by operation of law on the payment of a deposit required by the agreements, or one of them in this case, would be not be unenforceable against the Lees either.  

Extinction

17.  The argument here is that the agreement between Madam Law and the Lees pleaded by her in HCA 3952 discharged the three Chinese agreements by way of accord and satisfaction.  This operated as a discharge of the lien because the Lees agreed to pay interest at the judgment rate on the deposit until its repayment; this was additional consideration. 

18.  I do not know what defence the Lees put up in that action.  Their Defence and Counterclaim has not been exhibited.  But assuming that there was such an agreement I do not see why it would extinguish an existing lien.  On the face of what is pleaded, all that was agreed was that Madam Law would give the Lees time to repay the deposit until they sold the Building, in return for extra interest.  This appears to be a separate contract for forbearance to pursue the claim, the consideration being the interest. 

19.  The case of Re Parkes, ex parte Parkes (1822) 1 Gl & J 228 cited by Mr Chong does not assist.  In that case the lien was discharged by a deed by which the vendor consented to receive his purchase money two years after resale of the premises by the bankrupt.  It was held that this was impliedly an authority by the vendor to take the premises discharged of the lien, and a consent to rely on the personal security of the bankrupt.  There is nothing in the contract pleaded to indicate any implied authority to the Lees to sell the Building discharged of any lien in Madam Law’s favour to which it might be subject.    

The judgment in HCA 3952 of 2000

20.  It is convenient to deal with this before proceeding to the question of notice. 

21.  The judgment was a default judgment, made pursuant to an “unless” order dated 2 April 2004, whereby it was ordered that unless the Lees filed and exchanged their witness statements within 35 days in compliance with an earlier order made on 19 February 2001, their Defence and Counterclaim be struck out and judgment entered against them. 

22.  The judgment contains a declaration that Madam Law validly and effectively terminated the three Chinese agreements, orders for return of the deposit of $570,000, payment of damages to be assessed, interest from 17 April 2000 until payment, and costs, as well as a declaration that Madam Law was entitled to an equitable lien against the Property to secure the return of the deposit and the other payments ordered.

23.  The order for interest dates from the date of the writ.  No date was pleaded for the making of the settlement agreement by which Madam Law was to receive interest at the judgment rate. 

24.  The Master had the jurisdiction to make the “unless” order.  See Kai Yip Air-Condition Engineering v Ma Hei Sun [2001] 3 HKC 458.  It is arguable that, as a matter of practice, he should not have made the order he did, because default would inevitably produce a default judgment granting a declaration, and because there is a rule of practice that the court does not make declarations of right either on admissions or in default of pleading, and the proper course is for the court not to make a declaration but to state on what footing the relief is to be granted: Wallersteiner v Moir [1974] 1 WLR 921. 

25.  This rule is, as I have said, a rule of practice, not law.  In Patten v Burke Publishing Co. Ltd [1991] 1 WLR 541 a default judgment was granted including a declaration that the contract had been determined by the defendants’ breach and that the plaintiff was no longer bound by its terms.  This was done because Millet J, as he then was, considered that “ the fullest justice cannot be done to the claimant by omitting the declaration sought”.  In considering the rule of practice Millet J however noted that that rule was:

“also justified by the fact that declarations in this division usually are declarations of legal right which may appear to affect third parties who are not bound by the declaration.” 

26.  I do not think there is any question of the declaration itself affecting any third party.  The declaration recognises the lien, which Madam Law would have in any event, because it would arise on her payment of the deposit; but the lien would only effect a third party to the extent that that third party had notice of it. 

27.  It seems to me that the making of the declaration here can be justified on the basis that the fullest justice could not be done to Madam Law against the Lees unless it was made.  There is some irregularity in the fact that the lien for $570,000 is declared against the Property only, when the deposit for the Property itself was $200,000.  However, I do not see that this affects the situation before me.  Madam Law is only seeking to enforce her lien for the lesser amount.  

28.  Of itself, of course the judgment is not binding against Mr Liu.  It recognises the existence of the lien in a question between Madam Law and the Lees.  Whether Mr Liu takes the property subject to the lien is a different question.  I do not see that the judgment can be regarded as irregular, or not binding.  In any event the validity of the judgment is academic.  I cannot set aside the judgment in these proceedings; but even if I could, that would not mean that the lien did not exist, only that there was no declaration in respect of it. 

Registration

29.  The Chinese agreements were not registered.  Mr Chong’s argument is that they were registrable but since they were never registered, they are null and void as against Mr Liu who is a subsequent bona fide purchaser for value.  That is no doubt right as far as it goes.  But it leaves out the registration of Madam Law’s writ as a lis pendens. 

30.  As indicated above, Mr Liu’s provisional agreement for sale and purchase of the Property is dated 3 March 2000, and was not registered.  The formal agreement is dated 24 March 2000, and was registered in the Land Registry on 6 May 2000.  The Assignment in favour of Mr Liu is dated 18 April 2000 and was registered in the Land Registry on 30 May 2000. 

31.  Madam Law’s writ, issued on 17 April 2000, was registered in the Land Registry on 18 April 2000. 

32.  Priority of registered instruments is governed by sections 3, 5 and 5A of the Land Registration Ordinance, Cap 128.  The effect of section 3 is that instruments have priority according to their respective dates of registration; but an unregistered instrument is null and void against a subsequent bona fide purchaser for value.  The effect of section 5 is that instruments registered within one month of execution have priority according to their dates.  Section 5A provides that notwithstanding section 3 or section 5 a lis pendens shall have priority from the commencement of the day following the date of its registration.

33.  Both the formal agreement and the Assignment in favour of Mr Liu were registered outwith one month of their respective dates of execution.  Section 3 applies to them; section 5 does not.  They take priority respectively from 6 May and 30 May 2000.  Madam Law’s lis pendens, however, takes priority from 19 April 2000.  The lis pendens therefore has priority over both the formal agreement and the Assignment. 

34.  It is argued that the lis pendens is not itself an incumbrance but merely notice of a claim.  It does not, of itself, create an incumbrance, apart from the equity on which the litigation is founded; per the Master of the Rolls, in Bull v Hutchens (1863) 32 Beavan’s Reports 615 at 618. 

35.  This is no doubt right, but the effect of the lis pendens would be to give notice of Madam Law’s claim to an equitable lien, and once the court recognised the existence of the lien, as it did by giving judgment on 5 May 2004, it seems to me the judgment would merge with the writ, so that there would be an incumbrance which took priority over the formal agreement and the Assignment.  Mr Liu would therefore take his title, albeit retrospectively, subject to Madam Law’s. 

Conclusion

36.  I conclude, then, that that Madam Law is entitled to a lien on the property; it has not been abandoned, waived, lost or extinct; and that Mr Liu’s right, title and interest in the Property are subject to it. 

37.  This, it seems to me, is extremely hard on Mr Liu.  Years after the event, he finds that his title to the Property is subject to a claim by a previous unsuccessful purchaser from the same vendor, about which he knew nothing, and indeed could know nothing. 

38.  I said as much, during the hearing.  Mr Lin pointed out that, had the formal agreement or the Assignment been registered within a month of their respective dates of execution, section 5 would have applied, and both instruments would have taken priority according to their dates of execution; and Mr Liu may therefore have a claim against his solicitors arising from this late registration. 

39.  That, I fear, will be of little comfort to Mr Liu.  Unfortunately, however, I can see no other outcome.  Even had it been possible to set aside the judgment, the lis pendens would still be in existence, because the writ was registered again 2 April 2005, and the underlying claim would still be alive.  That claim is, it seems to me, unavoidable, because Madam Law paid the deposit, and ultimately she would inevitably obtain a declaratory judgment in respect of her lien. 

Result

40.  In the result, the Originating Summons is dismissed with costs (nisi) to the defendant to be taxed if not agreed.