KAREX (HONG KONG) LTD. v. FORTUNE TALENT DEVELOPMENT LTD. AND OTHERS

HCA7422/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7422 OF 1998

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J U D G M E N T

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1. The hearing was heard in Chambers. I am handing down the judgment in Court.

Contracts for the sale of land

2. The 1st Defendant is the registered owner of a property known as Shop No.2, G/F, Nos.150, 152, 154, 156 and 158, Lockhart Road and Nos.7D, 7E and 7F O'Brien Road, Hong Kong ("the Property").

3. By an agreement dated 3rd March 1997 ("the Principal Agreement"), the 1st Defendant sold the Property to the 2nd Defendant for the sum of HK$34,500,000. A deposit of $3,450,000 was paid by the 2nd Defendant to the 1st Defendant. By a sub-sale agreement, the 2nd Defendant then sold the Property to the 3rd Defendant. By a series of sub-sale agreements, the Plaintiff eventually bought from the 5th Defendant the Property for the sum of $45,000,000. A deposit of $6,750,000 was paid by the Plaintiff to the 5th Defendant.

4. In the Principal Agreement and each of the subsequent sub-sale agreements, it was expressly agreed between the parties to the agreements that the interest of the 1st Defendant as the head vendor in the Property was sold to the purchaser or sub-purchaser as the case may be.

The Plaintiff's pleaded case

5. The Plaintiff seeks, among other reliefs, that it is entitled to a return of the deposit of $6,750,000 and a lien on the deposit. The Plaintiff's pleaded case is that the 5th Defendant, in breach of the sub-sale agreement between the Plaintiff and the 5th Defendant, failed to answer requisitions. It had wrongly rescinded the agreement with the Plaintiff and forfeited the deposit. As against the 1st - 4th Defendants, the Plaintiff's case is that it is entitled to claim as an equitable assignee and therefore the 1st - 4th Defendants are constructive trustees of the deposit paid by the Plaintiff.

Application to strike out and vacate lis pendens

6. The 1st Defendant applied before the Master to strike out part of the Plaintiff's claim against it. It also applied to vacate the registration of the writ of summons against the Property in the Land Registry. Both applications were dismissed by the Master. The 1st Defendant now appeals against that decision.

Causes of action

7. The Plaintiff's causes of action against the 1st Defendant are based on agency, constructive trust and an entitlement to a lien. The parties agreed that instead of dealing with individual paragraphs in the Statement of Claim on these three causes of action, I should in this appeal decide whether the Plaintiff has viable causes of action against the 1st Defendant and in the event I should decide that there is no such cause or causes of action, the parties will then submit an order dealing with the specific paragraphs that should be struck out as a result of my decision. Accordingly, I should proceed on this basis.

Agency

8. Mr Edward Chan, S.C., Counsel for the Plaintiff, does not seek to support the pleaded case of agency against the 1st Defendant. Accordingly, the cause of action on agency should be struck out.

Constructive trust

The Plaintiff's case

9. The Plaintiff's case on constructive trust is that the 1st - 5th Defendants had acted in breach of their duties as constructive trustees to the Plaintiff. The breach by the 1st Defendant is that it, together with the 2nd Defendant had, without any prior knowledge, consent or approval from the Plaintiff, entered into a Cancellation Agreement dated 24th January 1998 in respect of the Principal Agreement.

10. The Plaintiff's arguments on this cause of action are as follows :-

1) In a sub-sale the sub-purchaser's right to enforce the head contract is substantially the same as that of an assignee of the benefit of a contract.

2) The vendor is a trustee having a personal and substantial interest in the property, and the relation of trustee and cestui que trust subsisted between a vendor a purchaser.

3) It must therefore also follow that if a purchaser under a principal agreement is to enter into a contract to sell his interest to a sub-purchaser, immediately upon the entering into the sub-sale agreement, the original purchaser will be holding his interest under the principal agreement as constructive trustee for the sub-purchaser.

4) The sub-purchaser is entitled to step into the shoes of its vendor for the purposes of enforcement against the head vendor.

11. In the Court of Final Appeal's decision in Ji Shan International Investment Limited v. Resources Main Enterprises Limited [1999] 1 HKC 12, Hoffmann NPJ states that :-

"Ji Shan [the sub-purchaser] was entitled in principle to enforce the contract, whatever Resources [other sub-purchasers up the chain] might have to say about the matter ... When Ji Shan undertook to complete and when it commenced for proceedings for specific performance, the contract was alive and Ji Shan was entitled to enforce it ..."

12. Other authorities relied on are :-

1) Ji Shan International Investment Limited v. Resources Main Enterprises Limited (unreported) CA No.213 of 1997, 30th March 1998, Hon. Nazareth, VP, Liu & Rogers JJA at pp.12-14 per Liu JA.;

2) Halsbury's Laws of England 4th Ed. Vol.44(1) Para.914;

3) Shaw v. Foster (1872) LR 5 HL 321 at p.338 per Lord Cairns, at pp.349 & 350 per Lord O'Hagan, pp.356-357 per Lord Hatherley LC; and

4) Clarke v. Ramuz [1891] 2 QB 456.

13. Accordingly the Plaintiff was entitled to enforce its contract, and such enforcement includes enforcement of a term of the agreement between the Plaintiff and the 5th Defendant. Such enforcement is also irrespective of what the other sub-purchasers up the chain might say in the matter. Therefore, even if the Plaintiff is not seeking specific performance, it is entitled to seek relief for return of the deposits under the terms of the agreement it had with the 5th Defendant.

The 1st Defendant's argument

14. Mr Kwok, S.C., Counsel for the 1st Defendant, referred to the case of Chattey and Another v. Farndale Holdings Inc. and Others, (CA) (Civil Division) [1997] O6EG 152, [1997] 1 EGLR 153, 75 PNCR 298. The report that was available to Mr Kwok was the report from Lexus. The case is complicated by references to provisions in statutes in the United Kingdom. However, the principle relied by Mr Kwok from this case is that the Court will not impose a constructive trust unless it is satisfied that the conscience of the estate owner is affected. He argued that in this case the 1st Defendant had not received any deposit from the Plaintiff and the question of conscience simply does not arise.

Arguable case

15. In my view, this being a striking out application, it is arguable that the cause of action based on constructive trust is available to the Plaintiff and as such, the pleading on this part should not be struck out. However, even if the Plaintiff has a viable cause of action based on constructive trust against the 1st Defendant, it is in the nature of a personal remedy against the 1st Defendant, the writ is not registrable as a lis pendens : Tians Plastics Industrial Company Limited (No.2) v. Tin's Chemical Industrial Company Limited [1971] HKLR 249 (Full Court) and Anstalt Nybro v. Hong Kong Resort Company Limited [1980] HKLR 76 (Privy Council).

Lien

16. The real dispute in this case is whether the Plaintiff is entitled to claim a lien against the 1st Defendant's property in respect of the deposit of $6,750,000 paid by it, not to the 1st Defendant, but to the 5th Defendant. There are two issues involved. The first is whether the Plaintiff is entitled to a lien and the second is, assuming it has a lien, the extent of the lien.

Is the Plaintiff entitled to a lien?

The Plaintiff's case

17. The Plaintiff's case is that a sub-purchaser has an equitable lien on any interest which the purchaser may possess in the property being sold. Lack of privity of contract is no defence. In Halsbury's Laws of England 4th Ed. Reissue Vol.28, para.765, the editors state that :-

"Sub-purchaser. A sub-purchaser has an equitable lien on any interest which the purchaser may possess in the property being sold and, if the purchaser has rescinded and the vendor has repaid the purchaser's deposit, the sub-purchaser will accordingly have such a lien on that deposit for any sums he may himself have paid. (Aberaman Ironworks v. Wickens (1868) 4 Ch App.101.)"

18. Mr Chan argued that as the purchaser will be holding the interest he acquired in the head contract as constructive trustee for the sub-purchaser, it must logically follow that the security he has by way of lien must also be held by him on constructive trust for his sub-purchaser. In this way each of the 2nd, 3rd, 4th and 5th Defendants will be holding the right to the lien as constructive trustee for his respective purchaser. The end result of this chain of constructive trust is that the 1st Defendant as head vendor becomes also the constructive trustee for the Plaintiff. Reliance was placed on Hambury & Maudsley : Modern Equity 13th edn. p.112 and 113 :-

" Reference should also be made here to the question of the way in which an absolute owner in equity (the legal title being in trustees) may create interests in favour of other persons out of his equitable interest.

In a well-known statement in Timpson's Executors v. Yerbury, Romer L.J. said: 'Now the equitable interest in property in the hands of a trustee can be disposed of by the person entitled to it in favour of a third party in any one of four ... ways. The person entitled to it (1) can assign it to the third party directly; (2) can direct the trustees to hold the property in trust for the third party (see per Sargant J. in Re Chrimes); (3) can contract for valuable consideration to assign the equitable interest to him; or (4) can declare himself to be a trustee for him of such interest.' Category (2), as Lord Evershed pointed out in Grey v. I.R.C. 'appears ... to have been regarded as distinct from both an assignment, on the one hand, and a declaration of trust of the interest in the beneficial owner's hands, on the other.'

We know however that such a direction is a 'disposition' within Law of Property Act 1925, s.53, according to the wide construction put upon that word by the House of Lords, and required therefore to be in writing. The writing need not include the names of the new beneficiaries. And if the beneficial owner does not direct the trustees to hold the property on particular trusts, but authorises them to transfer the legal estate to donees, then the beneficial interest passes to the donees without express mention.

It should also be noted that category (4) creates what is usually called a sub-trust; a situation in which A holds property on trust for B, and B declares himself to be trustee of his interest for C. Unless B has specific duties to perform, he is a bare trustee and drops out, the original trustee A holding on trust for C."

The 1st Defendant's submissions

19. Mr Kwok referred to Whitbread and Company Limited v. Watt [1901] 1 Ch 911 (Farwell J. at pp.914-915 and on appeal [1902] 1 Ch 835 at pp.838-840, and my earlier decision of Cheer King Investment Limited v. Rich Glory Investment Limited [1995] 1 HKC 663 where I applied the principles from Whitbread. He argued that the fundamental principle for a lien to arise is based on the existence of a debt. In the present case there is, and has never been any debt due by the head vendor, namely the 1st Defendant, to the ultimate sub-purchaser, namely the Plaintiff. The 1st Defendant is not alleged to have received any of the $6,750,000 deposit paid by the Plaintiff to the 5th Defendant. The deposit paid by the 2nd Defendant to the 1st Defendant was only $3,450,000. There is no reason in law or in equity or in justice that the 1st Defendant's property should be subject to a charge for $6,750,000.

20. Mr Kwok referred to Rose v. Watson (1864) 10 HLC 672, where Lord Cranworth stated that the lien acquired by a purchaser is to be "exactly in the same way as if upon the payment of part of the purchase money, the vendor has executed a mortgage to him of the estate to that extent." He argued that a mortgage executed by the penultimate purchaser (5th Defendant) in favour of the Plaintiff cannot bind the head vendor (1st Defendant) and cannot affect the land of the head vendor. A charge affects successors, not predecessors.

Legal analysis of a lien

Position of a purchaser

21. The purchaser's right to a lien is first of all based on the interest he has acquired in the estate by part performance. This is clear from the speech of Lord Westbury L.C. in Rose v. Watson where at p.678 he held that :-

"Where the contract undoubtedly is an executory contract, in this sense, namely, that the ownership of the estate is transferred, subject to the payment of the purchase-money, every portion of the purchase-money paid in pursuance of that contract is a part performance and execution of the contract, and, to the extent of the purchase-money so paid, does, in equity, finally transfer to the purchaser the ownership of a corresponding portion of the estate."

Position of a sub-purchaser

22. A sub-purchaser who has not paid deposit to the head vendor but to his own vendor is likewise entitled to a lien on the property of the head vendor. This is made abundantly clear by Aberaman Ironworks where the vendor of an estate agreed to sell it to the Defendant. The Defendant paid the vendor ￡50,000 as deposit. The Defendant agreed to sell the property to the Plaintiff for ￡350,000 of which ￡150,000 was paid to the Defendant, half in cash and half in bonds. The Plaintiff later rescinded the contract of sale. The Defendant brought an action against the vendor for the deposit which was compromised by the vendor repaying the deposit and rescinding the contract. The Plaintiff then proceeded against the Defendant and some other defendants who had agreed to share with him for the return of the money paid by the Plaintiff to the Defendant. At page 109, Lord Cairns L.C. held that :-

" I have next to advert to the demand which is made on the part of the Plaintiffs for a lien in respect of the purchase-money which has been paid. That question stands thus :-￡50,000 was paid by Wickens (i.e. the Defendant) to Bailey (i.e. the Vendor) on account of the purchase of the estate. According to the decisions which were referred to - the case of Wythes v. Lee, and the case of Rose v. Watson - Wickens, in the event of the purchase going off, would have a lien for this ￡50,000 upon the Aberaman estate belonging to Bailey. In like manner the company (i.e. the Plaintiff), in their turn, for the purchase-money which they paid Wickens would, in the event of their contract going off, have a lien upon any interest which Wickens might possess in the Aberaman estate;(emphasis added) and, according to the decisions to which I have referred, Wickens, to the extent of the ￡50,000 he paid, had become in equity the owner, by way of incumbrance, of a corresponding amount in value on the Aberaman estate. It appears to me, therefore, upon the authority of those decisions, to be clear that the company, supposing the ￡50,000 had not been repaid by Bailey to Wickens, would have been entitled to maintain a bill against Wickens and Bailey to prevent the money getting back into the hands of Wickens. In point of fact, when the bill was filed, the ￡50,000 had in part been repaid to Wickens, but part of the amount remained in specie in the form of a bill of exchange of Bailey's which had not been paid. This bill of exchange was intercepted by the injunction of the Court; and in respect of it I find ￡6232 is now in Court. Upon that sum it appears to me the Plaintiffs in this suit have established their right to a lien. The decree of the Vice-Chancellor, therefore, must, in my opinion, be reversed; and a decree must be made directing an account of the purchase-money paid by the company to Wickens, and repayment of it, with interest at 4 per cent from the time of payment."

Sub-purchaser's lien depends on purchaser's interest in the property

23. What is equally clear from Aberaman Ironworks is that a sub-purchaser cannot have a lien on the vendor's property when the sale between the vendor and the purchaser had been terminated. In such a case, the purchaser no longer has any interest in the vendor's property which enables the lien to attach. It is not as if the Plaintiff in Aberaman Ironworks had elected to go after the money and not the property of the vendor. It simply had no choice in the matter. This is make abundantly clear in the judgment of Sir Malins V.C. [1987-68] 5 L.R. Eq.485 which was later reversed on the question of lien on the money. (The judgment of Sir Marlins was not cited at the hearing before me.) At p.512, Sir Malins held that :-

" There remains, then, only the principal Defendant Wickens. Against him the demand is merely for money and the delivery of the bonds. If he had been the owner of the estate, if he still had the Aberaman estate, it is clear that every payment on account of the purchase-money would have made the purchaser pro tanto the owner of the estate, and the contract having been abandoned on the ground of want of title in the vendor, that is in this case the want of quantity, assuming it to be rightly abandoned, the purchaser would have had a lien on the estate for the payments so made, and to enforce that lien a bill would have been sustainable, and would indeed have been the only proper remedy. This is established by the authorities relied upon by the Plaintiffs' counsel, Wythes v. Lee, and Rose v. Watson; but in this case the Defendant Wickens had no interest whatever in the Aberaman estate when the bill was filed, and there is consequently nothing upon which the Plaintiffs can have a lien.(emphasis added) So far, therefore, as concerns the money sought to be recovered, the demand resolves itself simply into a mere demand for the repayment of money paid for a consideration which has failed, which is the proper subject of an action of assumpsit, but has never been held to be the proper subject of a bill in equity."

Sir Malins then proceeded to deal with the question of lien on the money and held the lien did not attach to the money.

Cancellation Agreement

24. In the present case, the 1st Defendant and the 2nd Defendant had entered into a Cancellation Agreement of the sale and purchase of the Property prior to the present action. The 2nd Defendant clearly had no further interest in the Property of the 1st Defendant. In the circumstances, even if a trust can be established successively against the 2nd Defendant, the Plaintiff cannot have a lien on the 1st Defendant's Property.

25. The Plaintiff argued that the Cancellation Agreement has no effect. There is no plea of fraud or mala fides in respect of the Cancellation Agreement. While the Plaintiff may have a cause of action against the 1st Defendant for breach of trust in entering into the Cancellation Agreement, I fail to see how, as the matter now stands, the Cancellation Agreement can be said to be ineffective in terminating the interest of the 2nd Defendant in the Property.

26. The conclusion is that the Plaintiff is not entitled to a lien on the 1st Defendant's Property and the claim on lien should be struck out.

Extent of the lien

27. Having decided that the Plaintiff is not entitled to a lien, it is not necessary to consider the extent of the lien. However, as this point was argued, I will briefly deal with this as well. Mr Chan accepted that the traditional view is that the lien will only cover the deposit and the costs of investigation of title. However, in Superkeen Investment Limited v. Global Time Investments Limited and Others [1996] 4 HKC 355, in an application to amend the pleadings, Waung J. held that it is arguable that the lien may include damages the purchaser has suffered as a result of the transaction being rescinded. Mr Chan argued that in view of the chain of contracts, the 5th Defendant may claim a lien for $6,750,000 against the 4th Defendant on the basis that this would be the damages to which he would be liable to the Plaintiff and in this way, the 1st Defendant's property will be subject to the lien as claimed.

28. Personally, I would adopt the traditional view. It is also clear form Aberaman that the sub-purchaser is only entitled to a lien to the extent of the purchaser's own interest in the property. The position can simply be put as this. The 2nd Defendant's interest in the 1st Defendant's property was only to the extent of $3,450,000. It was the owner of the property to that extent only. Any interest of the sub-purchasers could not possibly exceed the amount the 2nd Defendant might have in the Property. In the circumstances, if the Plaintiff is entitled to a lien, such a lien is limited to $3,450,000.

Conclusion

29. Accordingly, the appeal is allowed and the Master's order is varied to the extent that the Plaintiff's claim against the 1st Defendant based on agency and lien is to be struck out and the registration of the writ against the Property is to be vacated from the Land Registry. The parties are required to submit a draft order regarding the specific paragraphs of the Statement of Claim to be struck out within 28 days. The 1st Defendant is entitled to costs nisi of the appeal and of the costs below.