KING MOUNTAIN INVESTMENTS LTD AND ANOTHER v. TANG YUK LING DOBE AND ANOTHER

HCA 257/2023

[2024] HKCFI 606

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 257 OF 2023

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D E C I S I O N

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A.  INTRODUCTION

1.  By notice of appeal of 5^th October 2023 (“the Notice of Appeal”), the Plaintiffs appeal against the Master’s decision of 22^nd September 2023 giving unconditional leave to the 2^nd Defendant to defend the Plaintiffs’ claim for restitution.

B.  THE BACKGROUND

2.  The following is essentially undisputed.[1]

3.  The 1^st Plaintiff is a Hong Kong company, wholly owned by a Mr Chen. The 2^nd Plaintiff is a friend of Mr Chen; both were at all material times resident in mainland PRC.

4.  The 2^nd Defendant is a Hong Kong company, of which the 1^st Defendant was at all material times a director and 50% shareholder. The 1^st Defendant acted on behalf of the 2^nd Defendant in its dealings with the Plaintiffs.

5.  In early 2019, the 2^nd Plaintiff and Mr Chen were looking to emigrate to Hong Kong and to acquire property in Hong Kong for their own use. They were introduced to the Defendants through an acquaintance of Mr Chen.

6.  The 1^st Defendant told Mr Chen that the 2^nd Defendant held various plots of village lands, some of which had been developed with village houses and some which had not; both types were available for sale. The 1^st Defendant provided the Plaintiffs with a plan identifying the plots of land in Demarcation District 100 in Tsiu Keng Village which were available for purchase, and a price list identifying the development status and price of each plot of land.

7.  On 28^th August 2019, the 1^st Plaintiff and 2^nd Plaintiff each entered into an “Agreement for Transfer of Development Rights” with the 2^nd Defendant (“the Agreements”), relating to Lot 601 SA of DD 100 (“Lot 601”) for a consideration of $6,380,000 (in the case of the 1^st Plaintiff) and relating to Lot 598 SB ss.2 of DD 100 (“Lot 598”; together with Lot 601, “the Lots”) for a consideration of $5,830,000 (in the case of the 2^nd Plaintiff). The Agreements were not professionally drafted. The 2^nd Defendant describes the Agreements as being for the Plaintiffs’ purchase of the 2^nd Defendant’s rights to develop “Ding” (village) houses with “Ding” villagers on the two lots. As described by the Plaintiffs, the transactions were structured by way of an arrangement whereby each of the Lots would first be transferred to a “Ding” villager for them to apply for a building licence from the Government, the “Ding” villagers would then construct village houses thereon, and finally the Lots would be transferred to the Plaintiffs upon the “Ding” villagers obtaining a certificate of compliance and payment of the relevant fees for removal of restrictions on the disposal of the land. It is relevant to note for present purposes that the Agreements were not for the sale and purchase of the Lots.

8.  In the case of the agreement with the 2^nd Plaintiff, the 2^nd Defendant owned Lot 598 and was planning to transfer the land to an indigenous inhabitant; in the case of the agreement with the 1^st Plaintiff, an indigenous inhabitant of the New Territories owned Lot 601 (the indigenous inhabitants will collectively be referred to as “the Villagers”). Both of the Agreements recited that the 2^nd Defendant was authorised to deal with the development of the lot in question, and that after completion of construction, the original plan was that the village house and land rights would be sold or transferred to someone designated by the 2^nd Defendant. The Agreements went on to state that 2^nd Defendant had agreed that the 1^st Plaintiff (and 2^nd Plaintiff, respectively) could continue to apply, through the respective indigenous inhabitant, for a building licence for the construction of a village house in place of the 2^nd Defendant, and that upon completion of construction, obtaining of a certificate of compliance and removal of sales restrictions upon payment of land premia, the village house and land would be sold to the 1^st Plaintiff (and 2^nd Plaintiff, respectively).

9.  The agreement with the 1^st Plaintiff went on to provide that the 1^st Plaintiff agreed to pay $6,380,000 to reimburse the 2^nd Defendant for its cost of purchasing the land, for obtaining the cooperation of the indigenous villager and the relevant rural committee, and for the 2^nd Defendant’s consent to surrender the development.

10.  The agreement with the 2^nd Plaintiff went on to provide that the 2^nd Plaintiff agreed to pay $5,830,000 as consideration for the purchase of the land, for obtaining the cooperation of the indigenous villager and the relevant rural committee, and for the 2^nd Defendant’s consent to surrender the development.

11.  Pursuant to the Agreements, the Plaintiffs have paid a total of $10,989,000 to the 2^nd Defendant (“the Payments”). The Plaintiffs have not received the Lots from the Villagers.

12.  The Plaintiffs now seek restitution of the Payments from the 2^nd Defendant. In their Statement of Claim, the Plaintiffs also make other claims against the Defendants, including for deceit, as they allege that the 1^st Defendant (mis)represented to them that the Agreements were proper, legal and widely adopted in the market. However, these other claims do not arise for present purposes, as the Plaintiffs’ application for summary judgment is only for their claim in restitution.

13.  It is common ground that the Agreements are illegal and unenforceable. The Defendants have admitted that the Agreements were for the sale and purchase of “an illegal subject matter”. It was common ground at the hearing that the illegality of the Agreements lies in the offence of fraud, and tort of misrepresentation (to the Government), which would need to be committed by the indigenous villager in his representations made during the application for a building licence under the Government’s Small House Policy to erect a village house (see Chung Mui Teck and others v Hang Tak Buddhist Hall Association Ltd & another [2001] 2 HKLRD 471 at 476H to 479B (Le Pichon JA)). The 2^nd Defendant added that apart from the indigenous villager, the Plaintiffs as developers of the land would also be involved in the illegality, conspiring with the villager in the fraud and misrepresentation.

C.  THE PARTIES’ CASES

14.  The Plaintiffs’ pleaded case in restitution is that there has been a total failure of consideration.

14.1  They plead that there was an implied term in the Agreements that the 2^nd Defendant would procure the Villagers to do four things, namely: (1) apply for a licence to construct a village house on the Lots, (2) apply for a certificate of compliance in respect of the house upon completion of building works, (3) pay the relevant administrative fees and premia for removal of restrictions on the sale of the Lots, and (4) transfer the Lots to Plaintiffs upon satisfaction of the foregoing three matters. See Statement of Claim (“SOC”) paragraphs 12 and 14.

14.2  They then plead that there has been a total failure of consideration under the Agreements because, inter alia, the 2^nd Defendant failed to procure the Villagers to do the aforesaid four things. See SOC paragraphs 27 to 31.

15.  The Defendants plead that there has been no failure of consideration.

15.1  The Defendants deny the construction of the Agreements pleaded by the Plaintiffs. In essence, they say that under the Agreements, the Plaintiffs purchased the 2^nd Defendant’s right to purchase the village houses to be built on the Lots after the certificate of compliance had been issued and the premia paid; that the 2^nd Defendant would give up developing the Lots and that the Plaintiffs would replace the 2^nd Defendant in carrying out the development; and that the Villagers would sell the rights in the Lots to the Plaintiffs. The 2^nd Defendant had no duties in respect of construction (other than certain obligations to enable vehicles to enter the Lots to carry out construction). Under the terms of the Agreements, the Plaintiffs were to bear the risks associated with the building of village houses on the Lots, including the risks of death of the Villagers or their bankruptcy, and the risk of revocation of the building licences. See Defence paragraphs 15 to 17.

15.2  The Defendants then plead that there was no failure of consideration because (inter alia) the Plaintiffs did in fact receive the rights to develop the Lots, which is exactly what they had bargained for under the Agreements. It was for the Plaintiffs to develop the Lots with the “Ding” villagers. The Defendants had no duties to ensure that the Plaintiffs successfully developed village houses on the Lots with the “Ding” villagers. See Defence paragraphs 23, 24.

16.  The Defendants further aver that the Agreements were illegal and unenforceable and that the Plaintiffs are barred by illegality from recovering any money from the Defendants. See Defence paragraphs 23, 26.

17.  At the hearing, the Plaintiffs focussed on the second of the defences advanced. They say that the defence of illegality is unsustainable in the light of Monat Investment Ltd v All Person(s) in Occupation of Part of No 16 Ma Po Tsuen [2023] 2 HKLRD 1311, in which the Court of Appeal held that the common law on the defence of illegality is that as expounded by the Supreme Court of the United Kingdom (“UKSC”) in Patel v Mirza [2017] AC 467.

18.  In Patel, the claimant paid a sum of money to the defendant pursuant to an agreement that he would use it to bet on the movement of shares on the basis of inside information. The agreement contravened a statutory prohibition on insider dealing. The agreement ultimately could not be carried out as the insider information was not forthcoming. The claimant brought a claim to recover his payment. The issue was whether the claim was barred by illegality.

19.  By a majority of six to three, the UKSC held that the “range of factors” approach based on a “trio of necessary considerations” should be adopted in considering whether to allow a claim involving an illegal act (rather than the “reliance approach” in Tinsley v Milligan [1994] 1 AC 340 that a person should not be granted a remedy where he has to rely directly on unlawful conduct to succeed). Lord Toulson JSC (who gave the main judgment and with whom Baroness Hale DPSC, Lord Kerr, Lord Wilson and Lord Hodge JJSC agreed) summarised the “range of factors” approach at [120]. Whilst not all members of the UKSC were in agreement with the “range of factors” approach, they were unanimous in their view that the illegality of the activity under the contract was not a bar to the claimant’s recovery of the sum paid.

D.  FAILURE OF CONSIDERATION

20.  As mentioned, the Plaintiffs focused on the defence of illegality. It seems to me, however, that before one gets to the question of whether illegality bars the Plaintiffs’ claim, there is a prior issue of whether the Plaintiffs’ claim in restitution for total failure of consideration is made out, and whether there is anything in the 2^nd Defendant’s defence that there was, in fact, no failure of consideration. In Patel, for example, the discussion of the defence of illegality took place in the context of the claimant having first established his claim to restitution on the ground of total failure of consideration, the agreement having remained unexecuted (see for example Lord Toulson at [121], Lord Neuberger PSC at [145], [154]).

21.  In the present case, the 2^nd Defendant’s defence that there has been no failure of consideration was set out in the Defence and in its evidence, and was also the subject of oral submissions by Ms Sezen Chong, counsel for the 2^nd Defendant, although the point was not addressed in Ms Chong’s skeleton.

22.  Ms Chong’s submission was that the Agreements had already been executed, with the Plaintiffs having paid for and obtained the rights to step into the shoes of the 2^nd Defendant to continue with the development of the Lots in conjunction with the Villagers. There remained nothing further for the 2^nd Defendant to do; the 2^nd Defendant was not the one responsible for developing the Lots, nor did it have the obligation to ensure that the Villagers remained alive or stayed out of bankruptcy; it was for the Plaintiffs to follow up the building licence and construction with the Villagers. The Plaintiffs therefore obtained what they wanted in return for the Payments. All of this also meant that the case was also distinguishable from Patel, as the agreement in that case was for something to be done in the future, which event did not materialise.

23.  In response, counsel for the Plaintiffs, Mr Bernard Man SC (appearing with Mr Jonathan Fung) referred to Goff & Jones on Unjust Enrichment, 10^th ed., paragraphs 13-26 and 13-27, where the learned authors stated that where parties have transferred benefits under arrangements which turn out to be legally ineffective, a claim in unjust enrichment for the return of the benefits is recognised. However, insofar as it is being suggested that this provides a basis for a restitutionary claim on the ground of “ineffective arrangement” which is distinct from the ground of total failure of consideration, the two authorities discussed in those paragraphs do not appear to support such a proposition.

23.1  Paragraph 13-26 refers to Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 4 All ER 890, saying that Hobhouse J held that the basis of payments under the interest rate swap agreements (which were void ab initio, unlike the Agreements in the present case) had failed, and that the Court of Appeal and the House of Lords had agreed with this in obiter dicta. In fact, Hobhouse J’s analysis was that there was an absence of consideration (929e, 930e, 936b) (although he distinguished this from a failure of consideration). In the House of Lords ([1996] AC 669), the nature of the ground of recovery in restitution was not in issue, but in any event, Lord Goff considered that it might properly have been regarded as one of failure of consideration (683G), and Lord Browne-Wilkinson said that the Court of Appeal was right to hold that the consideration had wholly failed (710H to 711A). The other members of the House of Lords did not expressly comment on this aspect.

23.2  Paragraph 13-27 refers to Guinness Mahon & Co Ltd v Kensington and Chelsea RLBC [1999] QB 215, another interest rate swap agreement case. The Court of Appeal there held that a contract which was ultra vires a party was void ab initio, and that there was therefore a total failure of consideration, entitling the claimant to recover payments made (see 230B-C). In the course of his judgment, Morritt LJ considered Westdeutsche Landesbank Girozentrale and observed that the true basis for recovery by the bank in that case was failure of consideration (224B, 227D).

24.  I do not propose to go into any further analysis of these authorities as they were not the subject of argument. I would simply note that in Patel, Lord Sumption JSC observed at [246] that:

“English law does not have a unified theory of restitution. Failure or absence of basis, which supplies such a theory in most civil law systems, was rejected as the overarching rationale of the law of restitution in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70, 172 … For the moment, therefore … “the claimant has to prove that the circumstances in which the payment was made come within one of the categories which the law recognises as sufficient to make retention by the recipient unjust”.

25.  In the present case, the category in which the Plaintiffs have mounted their claim in restitution, as shown by the pleadings, is that of failure of consideration, and not one of the Agreements being ineffective (insofar as this is said to be a distinct ground).[2] In this regard, the applicable authority is Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79. A claim for restitution based upon principles of unjust enrichment predicated on the total failure of consideration involves asking four questions: (a) was the defendant enriched? (b) was the enrichment at the plaintiff’s expense? (c) was the enrichment unjust? (d) were there any applicable defences applicable? (see [66], [67]). It is crucial to correctly identify and characterise the transaction providing the basis for the defendant’s enrichment; only then can one identify the relevant anticipated performance and ascertain whether it has totally failed (see [77] to [81]).

26.  As referred to above, the Plaintiffs plead that the 2^nd Defendant had implied obligations to procure the Villagers to apply for a building licence, obtain a certificate of construction, pay the relevant fees and premia and transfer the Lots to them. The 2^nd Defendant pleads that it had no such obligations under the Agreements.

27.  I remind myself that this is an application for summary judgment. The 2^nd Defendant’s burden is to show a real or bona fide defence. It seems to me that it is indeed arguable that there has not been a total failure of consideration. The failures of performance which the Plaintiffs rely on are based on alleged implied terms, rather than any express obligation to be found in the Agreements. It is a matter of construction of the Agreements, in the light of the factual matrix at the time, as to what the 2^nd Defendant was to perform in return for the Payments. Whilst the Plaintiffs have submitted that they have not received the Lots under the Agreements,[3] under the express terms of the Agreements, it was indeed not for the 2^nd Defendant to transfer the Lots to the Plaintiffs – what was contemplated in the preamble of the home-made Agreements was that the Villagers would be doing this upon completion of development of the Lots. What the Agreements did expressly provide was that it was the Plaintiffs who were to bear the risk of death or bankruptcy of the Villagers, and the risk that the building licences might be revoked; and that it was the 2^nd Defendant who was to follow up with construction and the obligation and fees associated with the transfer of the Lots – all of which support the 2^nd Defendant’s case that it had nothing further to perform under the Agreements and that the Plaintiffs obtained what they paid for (or at least that there was not a total failure of consideration).

28.  In this regard, there are also triable issues of fact between the parties. Ms Chong submitted that there were factual issues as to whether the 1^st Defendant made a fraudulent representation about the legality of the Agreements, and whether the Plaintiffs knew of the illegality of the proposed arrangements. It seems to me that these matters are part and parcel of the factual matrix to be considered when construing the Agreements to ascertain the scope of the 2^nd Defendant’s obligations, for example, whether it was for the 2^nd Defendant to procure the Villagers to carry out the construction, or for the Plaintiffs to liaise with the Villagers to do so. The 2^nd Defendant’s evidence is that the Plaintiffs knew of the illegality but were confident that they could overcome the risks and get the Lots developed for profit; Mr Chen of the 1^st Plaintiff selected Lot 601 as it was more advanced in the process as the land had already been transferred to a “Ding” villager. (Ultimately, however, the Plaintiffs were ultimately unable to procure any “Ding” villagers to cooperate with them to develop the Lots.)[4]

29.  The Plaintiffs say that the claim that they knew of the illegality is incredible, when they were mainland residents unfamiliar with the sale and purchase of “Ding” land and relied on the 1^st Defendant to advise them and handle the arrangements. They say that the 1^st Defendant told them that the arrangements were legal. The 2^nd Defendant says that Mr Chen had legal expertise and would no doubt have carried out due diligence regarding the Small House Policy and the legality of the proposed arrangements, that the 1^st Defendant told the Plaintiffs about the illegality of the arrangements, that information about the illegality was readily available on the internet, that the difference between the pricing of undeveloped and developed “Ding” land as offered to the Plaintiffs could only be explained by the illegality, and that the fact that the Agreements were neither executed at lawyers’ offices nor registered or stamped suggests that the Plaintiffs were aware of the illegality.

30.  Whether the 1^st Defendant made a misrepresentation, and whether the Plaintiff knew of the illegality, are not issues that can be resolved on affidavit evidence. I cannot go so far as to hold, at this stage, that the 2^nd Defendant’s case in this regard is incredible.

E.  ILLEGALITY

31.  In the light of my views above, strictly speaking, it is not necessary for me to go on to consider the defence of illegality, but I will go set out my views about this briefly.

32.  As referred to above, a majority of the UKSC in Patel were in agreement with the “range of factors” approach. Lord Toulson held (at [115] to [116], [120]) that a person who satisfied the ordinary requirements of a claim in unjust enrichment would not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration, or by reason of the fact that the money was paid for an unlawful purpose. Exceptions were likely to be rare, to be in cases where for some particular reason the enforcement of such a claim might be regarded as undermining the integrity of the justice system. He summarised the “range of factors” approach as follows.

“The essential rationale of the illegality doctrine is it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system (or, possibly, certain aspects of public morality, the boundaries of which have never been made entirely clear and which do not arise for consideration in this case). In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather by than the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate.”

33.  Mr Man submitted that given that Monat Investments Ltd held that the common law on the defence of illegality is that as expounded in Patel, the approach in Patel should be applied in the present case as regards the 2^nd Defendant’s reliance on illegality. He submitted that the illegality in the Agreements cannot be a defence to the Plaintiffs’ claims for restitution. The Plaintiffs are simply seeking to unwind a transaction which (they say) was not consummated,[5] so as to be put back into the position in which they were before they entered into the Agreements. Granting restitution of the Payments recognises the illegality of the Agreements; it would not amount to enforcement of the Agreements or result in the Plaintiffs profiting from them. There is no reason why the 2^nd Defendant should end up with a windfall[6] and profit from the illegal transaction.

34.  In her skeleton, Ms Chong argued that the law as to illegality as a defence was unsettled, as Monat Investment Limited was only decided in March 2023, and it was unknown whether there might be an appeal therefrom to the Court of Final Appeal. Furthermore, whether the Court of Final Appeal might overrule the approach in Tinsley v Milligan, adopt the “range of factors” approach or formulate some other test in relation to the defence of illegality in a future case had yet to be decided. However, the appeal before me should be decided on the basis of the law as it currently stands, and at the hearing before me, Ms Chong accepted that the applicable approach was that in Patel.

35.  Ms Chong submitted that it should be left to the trial judge to decide whether the Plaintiffs’ claim was barred by illegality; alternatively, it was arguable that it was barred by an application of the approach in Patel.

36.  When asked to identify the relevant considerations under the first factor in Patel (the underlying purpose of the prohibition which has been transgressed and whether that purpose would be enhanced by denial of the claim), Ms Chong pointed to the prevention of abuse of the Government’s Small House Policy, and submitted that denial of the Plaintiffs’ claim would assist in deterring future developers from engaging in such abuse – if the Plaintiffs could get back the Payments, future developers would feel that they could take the risk of attempting to build village houses, as they could always get their money back if they should be unsuccessful in their attempts to defraud the Government. Furthermore, to allow the return of the Payments would be inconsistent with the criminal sanctions imposed against “Ding” villagers and developers in cases such as DCCC 25/2015.

37.  However, the other side of the coin is that granting restitution of the Payments would deter persons in the position of the Defendants from entering into arrangements along the lines of the Agreements; and it is, after all, persons such as the Defendants who own the land which can potentially be developed in the first place, rather than persons in the position of the Plaintiffs. Furthermore, granting restitution of the Payments would be to recognise the illegality of the Agreements rather than to enforce them.

38.  Ms Chong did not identify any policies relevant for consideration under the second factor in Patel.

39.  As for the third factor in Patel, namely, that of proportionality, Ms Chong submitted that it was unclear whether the concept of locus poenitentiae remained a relevant consideration under the “range of factors” approach, particularly when it came to considering whether denial of the claim would be a proportionate response to the illegality. However, as explained in Grondona v Stoffel & Co [2021] AC 540 at [26] (Lord Lloyd-Jones JSC), there is no need to consider the issue of proportionality if it is clear from the first two considerations that the defence of illegality should be denied, because the claimant will not be suffering any harm arising from a refusal of relief. In the present case, therefore, there is no need to consider the issue of proportionality.

40.  Ms Chong cited two authorities (Tiu Sum Fat v Shun Sing Development Ltd [2010] 1 HKLRD 553 and  Chan Yau v Chan Calvin [2014] 5 HKLRD 304) in which restitution in similar circumstances was denied by reason of illegality. I agree with Mr Man that since they were decided before Patel and Monat Investments Ltd, they are of limited assistance as to whether the defence of illegality would now be allowed. The conclusions in those cases were reached after consideration of (inter alia) whether the parties were in pari delicto. As Lord Lloyd-Jones in Grondona explained (at [22]), the real consideration underlying this maxim (and that of ex turpi causa) was the question of whether to allow recovery for something that was illegal would produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system. These are considerations which are now dealt with under the “range of factors” approach.

41.  Ms Chong also argued that there were authorities such as Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866 granting developers a declaration of trust in respect of land which had been assigned to “Ding” villagers pursuant to illegal arrangements to obtain building licences to develop the land in the “Ding” villagers’ names using their “Ding” rights, and that it was uncertain whether such authorities remained good law after Monat Investment Ltd. However, this is not an issue that arises in the present case.

42.  Had it been necessary to decide, therefore, I would not have been persuaded that 2^nd Defendant has established an arguable defence of illegality.

F.  DISPOSITION

43.  I therefore dismiss the Notice of Appeal, and give the 2^nd Defendant unconditional leave to defend the Plaintiffs’ claim.

44.  I further make a costs order nisi that the Plaintiffs are to pay the costs of and occasioned by the Notice of Appeal to the 2^nd Defendant, to be summarily assessed on the papers. The 2^nd Defendant is to lodge and serve a statement of costs, limited to 2 pages, within 7 days; the Plaintiffs are to lodge and serve a list of objections in bullet point form, limited to 3 pages, within 7 days thereafter; the 2^nd Defendant has leave to lodge and serve a reply in bullet point form, limited to 2 pages, within three days thereafter.