CHUNG TIN PUI, as manager of CHUNG MAN YIU TSO v. LI PAK SAU AND OTHERS

HCA 568/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 568 OF 2007

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REASONS FOR DECISION

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1.  This is an application by the plaintiff to re-amend his amended statement of claim (“ASoC”).

The amended statement of claim

2.  The writ was issued on 21 March 2007.  The statement of claim was issued on 12 June 2007 and amended on 3 July 2007. 

3.  The plaintiff is a manager of a Chinese ancestral worshiping tso.  The tso owns lots 800 and 848 in D.D. 10 of the New Territories (“the lots”).  He brought this action on behalf of the tso.

4.  By his ASoC, the plaintiff pleaded that the tso as represented by the manager had entered into two written agreements on 29 November 1992 with the 1^st defendant to develop the lots by constructing a number of small houses thereon.  On about 7 December 1992, the parties entered into two deeds of development in pursuance of the two agreements. 

5.  The terms of the agreements and deeds are that the tso would provide the lots for the development.  The 1^st defendant would in turn provide the finance and comply with all the necessary procedure to build 4 small houses on lot 800 and 8 small houses on lot 848 to complete the development. 

6.  The small houses are each of 3-storey and each storey of 700 square feet in area.  When the small houses are built, the tso can choose to have one small house constructed on lot 800 and two small houses constructed on lot 848 to be assigned to it in priority to the 1^st defendant.  The 1^st defendant would also rebuild the ancestral hall for the tso. 

7.  The 1^st defendant had a number of implied duties arising from the agreements and deeds.  I do not think it necessary to go into these for the purpose of deciding this application. 

8.  Pursuant to the agreements and deeds, the tso assigned the lots to the 1^st defendant and his wife, the 2^nd defendants as joint tenants without consideration to the tso for the purposes of the development on 29 December 1993. 

9.  The 1^st and 2^nd defendants then held the lots as trustees for the use and benefits of the tso.  They also held the lots jointly or severally as trustees for developing them into small houses for the use and benefit of the plaintiff.

10.  The 1^st and 2^nd defendants then divided the lots into smaller sections and assigned them to various assignees including the 3^rd to 13^th defendants. 

11.  All the defendants have actual or constructive knowledge of the development and are holding their respective small section as trustees for the sue and benefit of the plaintiff.

12.  Four small sections had been developed by the construction of small houses thereon and subsequently sold by the 1^st and 2^nd defendants for various sums. 

13.  The sales of the four small sections and the houses thereon by the 1^st and 2^nd defendants were fraudulent to the plaintiff and in breach of the trust, agreements and deeds as the sales were conducted by the 1^st and 2^nd defendants without the prior knowledge of the plaintiff and without giving the plaintiff the first priority to choose to have them assigned to it thereby prejudicing the plaintiff’s entitlement under the agreements and deeds.

14.  In breach of the agreements and deeds, the 1^st and 2^nd defendants had failed to complete the development within a reasonable time.  There has not been any progress of the development of the other sections of the lots.

15.  In further breach of the agreements and deeds, the 1^st and 2^nd defendants have also failed to rebuild the ancestral hall for the tso.

16.  Further or alternatively, the plaintiff pleaded that the tso is entitled to recover the lots as beneficiary for their conversion by the 1^st and/or 2^nd defendant as joint or individual trustee for the plaintiff.

17.  The plaintiff has by letters all dated 15 March 2007 demanded all the defendants to transfer the lots back to the tso.  The plaintiff also claims damages and an account of incomes and benefits from the defendants for fraudulent breach of trust or breach of the agreements and deeds. 

The amended defence

18.  The 1^st to 7^th, 10^th to 12^th and 14^th defendants have filed a defence to the action on 20 October 2007 and amended it on 23 May 2011.  The defendants purportedly explained the delay and maintained a counterclaim that the agreements and deeds should continue.

Case management conference

19.  A case management conference (“CMC”) was held before me on 6 March 2012.  I adjourned the conference to a date to be fixed for the plaintiff to consider the issue of illegality and whether the facts had been pleaded adequately.

20.  The CMC resumed on 14 February 2017.  Counsel for the plaintiff, counsel for the 2^nd defendant, and solicitors for the 1^st, 3^rd to 7^th, 10^th to 12^th and 14^th defendants attended the CMC.  The CMC was further adjourned and the plaintiff was directed to issue a summons to amend the amended statement of claim within 14 days.  The parties were also directed to file a mediation notice and mediation certificate.

Application to amend the amended statement of claim

21.  The plaintiff issued a summons on 28 February 2017 seeking leave to re-amend the statement of claim.  The plaintiff at the same time indicated his intention of discontinuing the action as against the 8^th, 9^th and 13^th defendants and they have been deleted in the proposed re-amendments. 

22.  The summons was heard on 14 March 2017 and was adjourned for argument with directions for filing of affirmation by the 2^nd defendant and the plaintiff.

The proposed re-amendments 

23.  The proposed re-amendments plead a further cause of action based on resulting trust on the ground that the lots were assigned to the 2^nd defendant without consideration and with notice of the agreements and deeds and subject to the resulting trust. Furthermore, the 2^nd defendant was the wife of the 1^st defendant and had been actively involved in the development of the lots by construction of small houses thereon.

24.  The resulting trust was extended to all the other defendants on the ground that they were aware of the purpose of assigning the small sections to them was to further the object of the development. 

25.  The proposed re-amendments contain a further alternative cause of action based on the doctrine of locus poenitentiae.  The plaintiff pleaded that the agreements and deeds are void and unenforceable.  The reason being the incompatibility between the way the development was to be undertaken and the Small House Policy of the government. The crux is that the defendants who are registered as owners of the small sections will have to apply to the government under the Small House Policy for building licences to develop their respective sections by constructing small houses thereon.  They will have to apply on the basis that they are the beneficial owners of their respective sections.  They have to support their applications with their statutory declarations.  However, these registered owners of the small sections are only nominees of the 1^st and 2^nd defendants and apply for building licences for the purposes of the 1^st and 2^nd defendants.  In a nut-shell, these defendants are not developing their respective sections as the beneficial owners thereof but are only holding the sections as nominees and making the application for development at the direction and for the purposes of the 1^st and/or 2^nd defendants.  Hence, the declarations will be false.  To obtain building licences to develop the lots by false declarations is contrary to the law or public policy.

26.  Since the perpetration of the development will be contrary to the law or public policy, the plaintiff thus by the service of the re-amendments withdraws from it to the extent of the lots that are not yet developed and seeks the setting aside of the agreements and deeds. 

27.  The plaintiff further pleaded that upon his withdrawal from the development, the defendants will hold the small sections of the lots on resulting trust for the benefit of the plaintiff. 

The plaintiff’s grounds for leave for effecting the re-amendments

28.  Mr Wong, counsel for the plaintiff relies on §20/8/6 of the Hong Kong Civil Procedure and submitted that all such amendments should be made “for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or errors in any proceedings”.  He also referred to §18/8/16 and submitted that when illegality becomes a real issue, it must be pleaded with all necessary facts (see also §16-222 of Chitty on Contracts (32^nd ed)).

The position of the other defendants

29.  The 1^st, 3^rd to 7^th, 10^th to 12^th and 14^th defendants were excused from attending the hearing on 10 August 2017 and have not indicated any objection.   

30.  The 8^th, 9^th and 13^th defendants were absent from the hearing and also have not indicated any objection.  I have already said above that the plaintiff intends to discontinue the action as against them. 

The 2nd defendant’s affirmation of objections

31.  The solicitors for the 2^nd defendant filed an affirmation of the 2^nd defendant on 8 June 2017 to oppose the application save and except the deletion of the 8^th, 9^th and 13^th defendants from the claim.

32.  The 1^st ground of objection is that the 2^nd defendant has been legally advised that the proposed cause of action of illegality is misconceived and unarguable as the agreements have been partly performed.

33.  The next ground is that the plaintiff’s pleas are inconsistent as illegality of the agreements is pleaded alongside the plea of acceptance of the defendants’ repudiation of the agreements. 

34.  The 2^nd defendant further objects that most of the proposed re-amendments are unnecessary for disposing the action fairly as there are improperly formulated and inconsistent allegations that are plainly frivolous and/or vexatious.

35.  I will deal with these objections together with the objections raised by her counsel, Mr Koo.

The grounds of opposition raised by the 2^nd defendant’s counsel

36.  The 1^st ground advanced by Mr Koo, counsel for the 2^nd defendant is the ambiguity of the new cause of action based on illegality.   He submitted that the plaintiff has not made it clear if he wanted to rely on the doctrine of locus poenitentiae or resulting trust. 

37.  I think the stance of the plaintiff in proposing the re-amendments is tolerably clear.  He wants to follow the decision in Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866 at 874 B-E.  He wants to rely on the doctrine of locus poenitentiae to withdraw from the agreements, deeds and development and get back the lots.  However, the draft re-amendments presented at the hearing on 10 August 2017 have not presented the new cause of action clear enough.  I agree with the 2^nd defendant’s criticism.  There is a need for clarification.

38.  The 2^nd ground of objection is that the plaintiff does not appear to have withdrawn from the “illegal” agreements, deeds and development.  I also agree with this attack. §17L of the re-amendments can be revised to make the withdrawal clear.  

39.  Mr Koo’s 3^rd ground is that the illegal development had been wholly or substantially performed and it is too late for the plaintiff to rely on the doctrine of locus poenitentiae. He referred to the lots having been subdivided into small sections and assigned to various owners, building licences have been issued for some sections and four blocks of small houses had been built and sold.  This used to be a correct statement.  I will deal with it below.

40.  The 4^th ground is directed at §14 of the submissions of Mr Wong for the plaintiff which says that the plaintiff has no knowledge of the illegality that the agreements involved. Mr Koo said that the manager of the tso who assigned the lots on behalf of the tso to the 1^st and 2^nd defendants has passed away and to allow the plaintiff to rely on the lack of knowledge of its then manager would be unfair to the 2^nd defendant.  As a result of the development of the law to be discussed below, this argument is no longer relevant.  I will deal with it below.

41.  Mr Koo also argued that the plaintiff is not retracting from the agreements and deeds, but is seeking to enforce them (by saying that the 1^st and 2^nd defendants have repudiated the same).  Hence, he is making inconsistent statements which is impermissible.

42.  On the strength of these grounds, Mr Koo submitted that the proposed cause of action based on illegality is bound to fail, of no use in disposing fairly the cause or matter and would be a waste of costs.

43.  In addition to attacking the proposed cause of action based on illegality, Mr Koo also relied on the law of limitation.  He relied on s. 4 of the Limitation Ordinance; Cap. 347 and referred to The New China Hong Kong Group Ltd (in creditors’ voluntary liquidation) and Ors v Ernst & Young (a firm) and Anor HCCL 41/2004 at §§152 and 153 and Andrew McGee, Limitation Periods (7^th ed) §10.006.  These cases decided that a restitutionary claim for money on the basis of money had and received and a claim for repayment of tax paid pursuant to an unlawful demand by the revenue are subject to the 6-year limitation in s 4 of the Limitation Ordinance which applies to action founded on simple contract.  However, Mr Koo did not explain how the principles that applied in those situations would apply to a claim seeking retransfer of land, not money, and is based on trust, not simple contract.

44.  Apart from the above attacks, Mr Koo has also highlighted some imperfections in the re-amendments which should be tidied up.

The revised draft re-amendments and the adjourned hearing

45.  Since the stance of the plaintiff in proposing the re-amendments is tolerably clear, I therefore allowed him to revise the draft re-amendments.  I adjourned the hearing to 22 September 2017 for a revised draft to be presented for consideration.  The plaintiff presented a revised draft re-amended statement of claim on 25 August 2017. 

46.  The revised draft abandoned the proposed further cause of action of resulting trust.  The pleadings in support of that proposed cause are retained but revised to become an amplification and elaboration of the existing cause of action based on trust. 

47.  The proposed cause of action based on illegality and the doctrine of locus poenitentiae is clarified and the withdrawal from the agreements, deeds and development is clearly pleaded in the first §17L.  The other imperfections pointed out by Mr Koo have also been corrected.  

48.  The 2^nd defendant through her solicitors advised the court on 30 August 2017 that she maintained her opposition to the re-amendments and has no more submissions to make.

The doctrine of locus poenitentiae

49.  Before considering the arguments of the parties, I would deal with the development of the law of restitution in relation to illegality or the doctrine of locus poenitentiae.  This doctrine has given rise to conflicting case law and been criticized.  It was not followed by the High Court of Australia in Nelson v Nelson (1995) 132 A.L.R. 133.  The Supreme Court in England reviewed it in Patel v Mirza [2016] UKSC 42.  It was a case heard by 9 Law Lords. 

50.  In that case, Mr Patel paid £620,000 to Mr Mirza to bet on the price of shares in the Royal Bank of Scotland using insider information which Mr Mirza was expecting to obtain.  The two of them thus committed a crime of conspiracy to commit the offence of insider dealing under section 52 of the Criminal Justice Act 1993.  Mr Mirza did not receive the information and the bet was not made.  But he did not return the money to Mr Patel either.  Mr Patel brought a claim based on contract and unjust enrichment for the return of £620,000.  Mr Mirza argued that no such obligation could be enforced on him because the contract was illegal and any claim would be precluded by the principle of ex turpi causa non oritur actio.

51.  Mr Patel lost the claim before the High Court but succeeded before the Court of Appeal.  Mr Mirza appealed to the Supreme Court.  All 9 Law Lords dismissed his appeal, but the reasoning was not unanimous.  Five Law Lords subscribed to the judgment given by Lord Toulson and another Law Lord gave substantial support to it.  It is of very high persuasive authority to me.

52.  Lord Toulson said in §§44, 110, 115, 116, 120 and 121:

“44. The [Law] Commission observed that one might have expected to find that illegality has little role to play as a defence to a claim for unjust enrichment, since the claimant is not seeking to execute the contract. However, after a more liberal start, the courts adopted a much tougher stance, applying the ex turpi causa maxim to such claims unless the claimant could bring himself within certain recognised exceptions. These were a) duress, b) possibly ignorance of a fact or law that rendered the contract illegal, c) possibly membership of a vulnerable class protected by statute and d) locus poenitentiae. The locus poenitentiae exception has given rise to difficult and conflicting case law, which was meticulously analysed in the judgments of the courts below in the present case with different conclusions. I do not propose to repeat their analysis because I do not consider it necessary to do so. The topic has only acquired importance because of the strictness of the basic rule which the courts have applied.

…

110. I agree with the criticisms made in Nelson v Nelson and by academic commentators of the reliance rule as laid down in Bowmakers and Tinsley v Milligan, and I would hold that it should no longer be followed. Unless a statute provides otherwise (expressly or by necessary implication), property can pass under a transaction which is illegal as a contract: Singh v Ali [1960] AC 167, 176, and Sharma v Simposh Ltd [2013] Ch 23, paras 27-44. There may be circumstances in which a court will refuse to lend its assistance to an owner to enforce his title as, for example, where to do so would be to assist the claimant in a drug trafficking operation, but the outcome should not depend on a procedural question.

…

115. … Mr Patel is seeking to unwind the arrangement, not to profit from it.

116. It is not necessary to discuss the question of locus poenitentiae which troubled the courts below, as it has troubled other courts, because it assumed importance only because of a wrong approach to the issue whether Mr Patel was prima facie entitled to the recovery of his money. In place of the basic rule and limited exceptions to which I referred at para 44 above, I would hold that a person who satisfies the ordinary requirements of a claim in unjust enrichment will 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. I do not exclude the possibility that there may be particular reason for the court to refuse its assistance to the claimant, applying the kind of exercise which Gloster LJ applied in this case, just as there may be a particular reason for the court to refuse to assist an owner to enforce his title to property, but such cases are likely to be rare. (At para 110 I gave the example of a drug trafficker.) In Tappenden v Randall (1801) 2 Bos & Pul 467, 471, 126 ER 1388, 1390, a case of a successful claim for the repayment of money paid for an unenforceable consideration which failed, Heath J said obiter that there might be “cases where the contract may be of a nature too grossly immoral for the court to enter into any discussion of it: as where one man has paid money by way of hire to another to murder a third person”. The case was mentioned by the Law Commission (LCCP 189, para 4.53), but there is a dearth of later case law on the point. This is hardly surprising because a person who takes out a contract on the life of a third person is not likely to advertise his guilt by suing. But as a matter of legal analysis it is sufficient for present purposes to identify the framework within which such an issue may be decided. No particular reason has been advanced in this case to justify Mr Mirza’s retention of the monies beyond the fact that it was paid to him for the unlawful purpose of placing an insider bet.

…

Summary and disposal

120. The essential rationale of the illegality doctrine is that 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.

121.     A claimant, such as Mr Patel, who satisfies the ordinary requirements of a claim for unjust enrichment, should not be debarred from enforcing his claim by reason only of the fact that the money which he seeks to recover was paid for an unlawful purpose.  There may be rare cases where for some particular reason the enforcement of such a claim might be regarded as undermining the integrity of the justice system, but there are no such circumstances in this case.  I would dismiss the appeal.”

53.  Hence,  the formal test in Tinsley v Milligan[1994] 1 AC 340  no longer applied (§110 of above judgment).  It is not necessary to discuss the question of locus poenitentiae (§116).A person who satisfies the ordinary requirements for a claim in unjust enrichment should be entitled to the return of his property; he should not be debarred from enforcing his claim only because the property which he seeks to recoverwas transferred to the defendant for an unlawful purpose (§§116 and 121).  There may be a particular reason for the court to refuse to assist an owner to enforce his title to property, but such cases are likely to be rare (§116).

54.  In considering such a claim, the Court should consider whether the public interest like the integrity of the legal system (or certain aspects of public morality) would be harmed by the enforcement of the claim by taking into account:

(1) the underlying purpose of the prohibition which has been transgressed, and whether the purpose would be enhanced by the denial of the claim;

(2) any other relevant public policy on which the denial of the claim may have an impact; and

(3) 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 (§120).

Analysis and decisions

55.  Regarding the 1^st ground that there is ambiguity in the pleading of the cause of action based on illegality, this has been put right in the revised draft re-amended statement of claim.  I would say that the change in the law effected by Patel v Mirza has strengthened this cause. 

56.  Once the plaintiff has withdrawn from the illegal development, the lots cannot be said to be held by the defendants for the purpose of the development of which the plaintiff is a party.  Hence, there will be no consideration to support the transfer of the lots by the tso to the 1^st and 2^nd defendants.  The lots would then be held by the 1^st and 2^nd defendants and the other defendants as their nominees on resulting trust for the plaintiff.  It is then for the court to consider along the principles pronounced by the majority in Patel v Mirza on whether the lots or so much of them that remain undeveloped should be returned to the plaintiff.

57.  The revised draft pleaded the plaintiff’s withdrawal from the development clearly and the 2^nd ground of objection is disposed of.

58.  Mr Koo’s 3^rd ground that the illegal development had been wholly or substantially performed so that the plaintiff could no longer rely on the illegal development is no longer correct.  §16-205 of Chitty on Contracts (32^nd ed) had stated this principle.  But as a result of Patel v Mirza, this paragraph was deleted in the first supplement published in 2016 which brought the law up-to-date to 31 July 2016.  There is no such principle anymore.  The principles to be considered are those outlined in §120 of the judgment in Patel v Mirza. 

59.  I would further observe that the development in question is not just to build one house on the lots but twelve independent houses thereon.  Only four houses have been built.  Now that the plaintiff has taken the illegality point, it is unlikely that the 2^nd defendant will or will be able to continue with the remaining part of the development.  It is a well-known fact that developments of small houses in the New Territories with the use of indigenous male villagers “as nominee land owners” and “as applicants of building licences” will entail the making of false declarations by the villagers and are contrary to the law and public policy.  The first judgment saying so is illegal is Madam Chung Mui Teck and Others v. Hang Tak Buddhist Hall Association Ltd. and Another [2001] 2 HKLRD 471.  Since then there has been a line of cases deciding in the same vein.  Furthermore, the plaintiff has also lodged an objection to the District Lands Office in July 2007 against the issuance by the department of building licences for the lots (§12(11) of amended defence).  The question now is whether by allowing the 2^nd defendant and her nominees to keep the rest of the lots is a proportionate response to the illegality that the plaintiff has hitherto subscribed.  Mr Koo’s 3^rd ground therefore has no merit.

60.  Mr Koo’s 4^th ground based on Mr Wong’s claim that the previous manager of the plaintiff was ignorant of the illegality is also not relevant as, since Patel v Mirza, knowledge of the illegality is not a matter to be considered.

61.  Regarding the criticism that the re-amendments are inconsistent as they have pleaded illegality of the agreements but also relied on them by accepting the 2^nd defendant’s repudiation of them.  I do not think the draft re-amendments have pleaded any inconsistent facts.  The inconsistency is in the conclusions of law deduced therefrom which are relied on as alternatives.  I see no problem in this.

62.  With regard to Mr Koo’s last point of limitation, I have doubt whether s. 4 of the Limitation Ordinance can apply to a claim for retransfer of land based on resulting trust.  In any case, the claim does not arise unless and until the plaintiff has withdrawn from the illegal agreements.  I cannot see how the plaintiff can maintain his involvement in the illegality and at the same time seek retransfer of the property in question.  Hence, the cause of action only arose upon withdrawal from the agreements.  This ground of objection thus has no merit.

Delay

63.  Though Mr Koo has not raised this question, I would also advert to it.  This action was started in 2007.  But 2^nd defendant’s listing questionnaire filed on 10 February 2017 still said that it was not appropriate to set the case down for trial.  Furthermore, the development cannot proceed further because the District Lands Office will not issue any more building licence for the lots as a result of the plaintiff’s complaint.  The situation is thus in a deadlock.  There is no pressing need for the actin to be disposed of.  I have also observed that the new cause of action based on illegality may assume core importance in this action.  Hence, delay is not a factor against the granting leave to re-amend the statement of claim.

Decision

64.  I will grant leave to the plaintiff to effect the proposed re-amendments with consequential directions and costs order.  However, I would give the plaintiff one more opportunity to consider and advise me no later than 6 October 2017 on whether he would have further revisions to make to the draft re-amendments to take into account of the development of the law in Patel v Mirza and if so, when the revisions will be ready.