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

CACV 20/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 20 OF 2001

(ON APPEAL FROM HCA 4127 OF 2000)

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J U D G M E N T

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Hon Le Pichon JA:

1. This is an appeal from the order of Tong J made in an application by the plaintiffs for summary judgment under Orders 14 and 14A of the Rules of the High Court. The defendants were granted unconditional leave to defend. So far as concerns the 2nd defendant, the appeal was dismissed by order by consent dated 9 May 2001. The present appeal therefore only concerns the 1st defendant. It is to be noted that although the Notice of Appeal also relates to a costs order made by Tong J in relation to the application by the 1st defendant to strike out the statement of claim, that was not pursued at this hearing.

Background facts

2. The Hang Tak Buddhist Hall came into existence in the 1920s. In 1969, the 1st defendant was incorporated as a company limited by guarantee to take over the management and assets of the Hang Tak Buddhist Hall. The 1st plaintiff is a permanent director of the 1st defendant and chairman of the board. The 2nd and 3rd plaintiffs are respectively a permanent executive director and a director of the 1st defendant.

3. The 2nd defendant is a private limited company incorporated in 1997.

4. The 1st defendant is the registered owner of various lots of land in Shatin ("the Land"). On 31 January 2000, the 1st defendant entered into a Deed of Joint Development ("the Deed") with the 2nd defendant the purpose of which, according to the plaintiffs, is to develop the Land by erecting small houses for resale purposes. Before turning to the provisions of the Deed, it would be convenient to outline what is known as the New Territories Small House Policy.

The New Territories Small House Policy

5. This policy, implemented since December 1972, is designed to allow male indigenous villagers of a village which has been in existence since 1 July 1898 to apply for permission to erect small houses for their own habitation. Strict limitations apply to the building of such houses. Under the Buildings Ordinance (Application to the New Territories) Ordinance Cap. 121, a small house is to be no more than three storeys or 27 feet in height with a maximum roofed-over area of 700 square feet but the building of such a house does not require the employment of an authorised person or approval of building plans under the Buildings Ordinance, Cap. 123 (hereinafter referred to as "special privileges") which are significant privileges, quite apart from the concessionary terms mentioned below.

6. Where a villager owns his own piece of land either in the village or within 30 feet of it, he is entitled to apply for a free building licence on his land or the Government might agree to grant new building land in return for the surrender of land elsewhere. If he does not own any land in the village, he may apply for a private grant of land from the Government at a concessionary rate, generally between $1,000 and $2,000. Procedurally, a villager who wishes to make an application is required to complete a standard Small House Application Form.

The Deed

7. The parties to the Deed were the 1st defendant and the 2nd defendant respectively therein called "the Owner" and "the Developer". The Deed encapsulated the joint venture agreed between the parties to it, under which the 1st defendant would contribute the Land and the 2nd defendant would be responsible for its development including the attendant costs. Attached to the Deed is a plan of the Land divided into sections 'A' and 'B', the former being several times the size of the latter.

8. Clause 3.3 of the Deed contained, inter alia, the following covenant by the Owner:

"The Owner shall in accordance with reasonable directions of the Developer from time to time and for the purpose of the Joint Venture carve out the Land into sections and assign them to the Applicants against the Applicants' execution of the Security Documents for such consideration as the Development may deem fit after consultation with the Owner, which consideration shall be credited as paid by the Applicants on condition that each of the Applicant shall execute the Security Documents;"

"Applicant" was defined as meaning as "[i]ndigenous villager in the New Territories eligible for Grant under the Small House Policy procured by the Developer to make the Application" and "Security Documents" as "[d]ocuments prepared by the solicitors for the Developer for execution by the applicants to secure the respective interest of the parties." It is apparent from clause 23 that these include deeds of developments, powers of attorney to be executed by the applicants as well as wills to be made by them.

9. The Developer's covenants are set out in clause 4. The Developer undertook (i) to procure eligible applicants to take up assignments of parcels or pieces of the Land from the Owner so that each applicant becomes the registered owner of a sufficient land parcel to support his application for a grant to build a small house; (ii) to procure eligible applicants to execute the security documents; (iii) to make all necessary arrangements for making the applications within stated time limits; (iv) to design, carry out and complete the Development (defined as meaning the demolition and clearance of existing building structures on the Land and erection, construction and completion of small houses and connected services). Additionally, the Developer undertook to apply for permission to erect on section B a two-storeyed building with an area of 3,000 square feet on section B with a minimum construction cost of $2 million ("the Building").

10. "Owner's Houses" was defined as meaning the eight houses to be erected on section B or the new small house lots granted by the government under the Small House Policy upon the surrender of the sections to be carved out from section B to the Government including the Building. The effect of clauses 14.1 and 14.2 is that these houses and the Building would belong to the 1st defendant to be dealt with as it saw fit. In the event of any refusal by the Government to permit the application to erect the Building, the Developer undertook to procure four applicants to apply for four grants on the site at section B originally intended for the erection of the Building and erect thereon four houses at its cost which would be at the disposition of the 1st defendant.

11. Clause 12 which bears the heading "Developer's Remuneration", provides that "the Developer shall have the Developer's Houses". The latter is defined as meaning all the houses to be erected on section A.

12. The significant features of the Deed are that (1) sections of the Land are to be assigned to indigenous villagers against execution by them of security documents; (2) applications are to be made by such villagers as owners of the lots so assigned for Small House Grants; (3) the Security Documents ensure that the small houses when erected would belong not to the villagers but to the Owner or the Developer (as the case may be) to be sold, let, licensed or otherwise dealt with as it sees fit.

The action

13. On 20 April 2000, the plaintiffs issued their writ. In brief, the plaintiffs' case is that the Deed is unlawful and unenforceable in that it would require indigenous villagers to swear false declarations and was contrary to the intent and spirit of the Government's Small House Policy. The plaintiffs seek a declaration that the Deed is unlawful and unenforceable and injunctions to restrain the defendants from carrying out or implementing the terms of the Deed.

The proceedings below

14. The plaintiffs contended that as the scheme embodied in the Deed required the 2nd defendant to enter into private arrangements with indigenous villagers to acquire their rights or special privileges under the Small House Policy for valuable consideration to be decided by the 2nd defendant in consultation with the 1st defendant, that was contrary to the intent and spirit of the Small House Policy of the Government. It was also submitted that the 2nd defendant's obligations required the 2nd defendant to aid, abet, counsel or procure indigenous villagers to declare, falsely, that they had never made and had no intention at present to make any private arrangements for their rights under the Small House Policy to be sold to other individuals or a developer. The form of declaration, adopted in 1997, required such a declaration to be made in connection with the application for a Small House Grant.

15. It was also the plaintiffs' case that the Deed was in effect a conspiracy between the defendants and those indigenous villagers procured by the 2nd defendant to make false declarations and a conspiracy by all these parties to defraud the Government and/or to obtain from the Government an advantage by deception, namely, permission to erect small houses on the site at no premium under a false representation.

16. The defendants opposed the plaintiffs' application for summary judgment. It was submitted that in view of the allegations of conspiracy, defrauding the government and making false declarations, etc., it would not be appropriate for the matter to be disposed of in a summary manner. It was further submitted that the Small House Policy was only a private matter between the government as grantor and the indigenous villager as grantee rather than one of public policy.

17. Tong J granted unconditional leave to defend on two grounds. First, applying the principle stated in Way Front Trading Limited v. Po Sang Bank Limited [1992] 2 HKC 130, he held that since the allegations made by the plaintiffs included allegations of intent to defraud the government, conspiracy and even criminal deception, summary judgment was not appropriate. Second, as the status of the Small House Policy was central to the present dispute, in the light of the observations of Chan CJHC (as he then was) in Lee Pui Wan v. Wong Mai Yin [1998] 1 HKLRD 84, the legal status of the Small House Policy and its bearing on the propriety of the Deed would be issues that needed to be sorted out at trial.

The basis of appeal

18. This appeal falls within a narrow compass. Mr Macrae, SC, for the plaintiffs submitted that because the Deed cannot be performed in accordance with its terms without the commission of an illegal act, it is contrary to public policy and unenforceable.

Is the Deed illegal and unenforceable?

19. The nub of the plaintiffs' contention is that the Deed is unenforceable on public policy grounds because its performance will necessarily involve the swearing of false declarations and the making of misrepresentations to the Government and hence the commission of illegal acts. It is therefore necessary to examine whether or not this is so.

False representations

20. The starting point is that the implementation of the Deed requires the 2nd defendant to identify indigenous villagers who are eligible under the Small House Policy to build such houses to become the registered owners of sections of the Land. It is an intrinsic part of the Deed that these villagers make applications to the Shatin District Lands Office for the necessary permission to build small houses on the sections of the Land to be assigned to them by the 1st defendant. An application involves the completion by the applicant of a "Small House Application Form" which is in standard form obtainable from any New Territories District Lands Office. The form is a composite document consisting of several pages and includes a declaration to be made by the applicant.

21. There were three versions of the declaration before the court being Declarations "A", "B" and "C". Declaration "A" was issued by the former Hong Kong Government and in use prior to July 1997. Declarations "B" and "C" remain in use, Declaration "C" being used where an interpreter's services are required. Clause (e) of Declaration "B" which is identical to clause (g) of Declaration "C" ("hereinafter referred to as "the declaration") provides as follows:

"I have never made and have no intention at present to make any private arrangements for my rights under the Small House Policy to be sold to other individual/a developer."

Declaration "A" does not contain an equivalent clause.

22. An application made on or after the date of the Deed had of necessity to contain the declaration. At the hearing below, the defendants had submitted that the Deed could be performed by locating villagers who had lodged applications when Declaration "A" was in use. It was argued that the Deed could thus be performed without any applicant having to make the declaration.

23. After the hearing before Tong J, the plaintiffs' solicitors continued their correspondence with the Director of Lands. This correspondence is exhibited to the affidavit of Anthony Michael Bough sworn on 15 February 2001 which was admitted into evidence pursuant to Order 59 Rule 10(2) of the RHC. In his letter dated 10 January 2001, the Director of Lands stated that it is the Lands Department's "district practice to require the small house applicants to make a declaration in case the application form is in the old format without the declaration page." Counsel for the 1st defendant accepted that this meant that where the application which had been lodged was in the old format i.e. Declaration "A", the applicant would invariably be required to make the declaration. There is therefore simply no scope for an application to be made by applicants to whom sections of the Land are to be assigned without making the declaration.

24. In my judgment, the plaintiffs' case is unanswerable. Since the Deed does involve a "private arrangement", the declaration to be made by the applicants will necessarily be false. That being so, it must follow that the Deed cannot be performed according to its terms without the commission of an illegal act.

25. It is no answer that no false statutory declaration has yet been made if the implementation of the Deed necessarily involves the making of such a declaration.

26. Mr Vaughan, counsel for the 1st defendant submitted that as the plaintiffs' case rests on the intention of the parties, the court is not in a position to ascertain the intention of the parties in summary proceedings. I disagree. Insofar as intention is relevant, that falls to be ascertained from the Deed itself and if performance of the terms of the Deed necessarily involves the making of false declarations, that is sufficient to render the Deed illegal and unenforceable on public policy grounds.

Misrepresentation

27. It is also the plaintiffs' case that there is a further reason why the Deed is unenforceable. This is because if the Deed is implemented according to its terms, each application submitted to Government would necessarily involve the making of a misrepresentation to Government.

28. In Best Sheen Development Limited v. The Official Receiver and Trustee of the Property of Lai Thomas, A Bankrupt, HCMP 7250 of 1999, unreported, 24 April 2001, Yuen J found on the facts of that case that there was a 'development scheme' between the plaintiff and L whereby (1) the plaintiff would provide the land and bear all construction and other costs for the building of a small house; (2) L would apply to Government for the grant of a free building licence to build the small house; and (3) L would have no interest in the land or the house to be erected. L also executed powers of attorney in favour of the plaintiff as well as a Will appointing the plaintiff his sole executor to whom the land was bequeathed. She held that the agreement was illegal: its purpose was to misrepresent that L was the true owner in order to enable the plaintiff to obtain the concessionary terms in the building licence available under the Small House Policy only to individual indigenous villagers and not the plaintiff.

29. Central to the decision is the holding that in making the application, the villager is representing to the Government that he is the legal and beneficial owner of the land in respect of which the application for a grant under the Small House Policy is made. That holding appears to me to be correct. An indigenous villager who holds the land as a mere nominee would not qualify given the purpose of the Small House Policy which is "to allow an indigenous villager to apply for permission to erect for himself during his lifetime a small house within his own village". See para (1) of the Explanatory Notes to the pamphlet published by the Lands Department in September 1997 entitled "The New Territories Small House Policy, How To Apply For A Small House Grant." It is a once in a life time grant for the villager and the small house is intended for that villager's own habitation. It is plain that the benefits that accrue from a grant under the Small House Policy such as a free building licence, and the special privileges are intended to benefit the villager personally and not anyone else.

30. Under the terms of the Deed, the applicants would not be purchasing the sections or lots of the Land to be assigned to them. Whilst they would have legal title to the relevant section or lot which is a condition precedent to an application as owner, the small houses when erected would belong, not to the applicants, but to the Owner or the Developer. In other words, the applicants will not be or become beneficial owners of the relevant sections or lots of the houses erected on them.

31. It is evident that neither of the defendants is eligible to apply for a grant under the Small House Policy. The concessionary terms and special privileges that become available as a result of the applications being successful will be for the benefit of the defendants and not the applicants under the Deed. In essence, the arrangement under the Deed is no different from the development scheme considered in Best Sheen. Indeed, they share many common features.

32. Under the Deed, an applicant will inevitably be making a representation in his application as to the legal and beneficial ownership of the section or lot in respect of which the application is made and which is untrue. Although the tort of misrepresentation is not committed until an application is made, in effect the Deed is an agreement to procure villagers to make applications which necessarily involve misrepresenting to Government the beneficial ownership of the section or lot in question. That being so, I agree this is a further reason why the Deed cannot be performed without the commission of a civil wrong. In my judgment, it is an additional reason rendering the Deed unlawful and unenforceable under common law.

Order

33. In my judgment, the Deed is plainly unenforceable on public policy grounds because performance according to its terms necessarily involves the swearing of false declarations and the making of misrepresentations to Government.

34. For these reasons, I would set aside the judgment below and enter final judgment against the 1st defendant by

1. declaring that the joint venture agreement contained in or evidenced by a 'Deed of Joint Development' dated 31 January 2000 between the 1st and 2nd Defendants ('the Deed') is unlawful and unenforceable; and

2. granting

(a) an injunction to restrain the 1st defendant by its permanent executive directors, servants, agents or otherwise howsoever, from carving out agricultural land in Shatin, New Territories, (approximately marked Section A and Section B on the plan annexed to the Statement of Claim and coloured edged pink and edged green respectively including all those Remaining Portion of Lot No. 221, Lot No. 511, Lot No. 500, Lot No. 245, Lot No. 514 and the Remaining Portion of Lot No. 513 all in Demarcation District No. 187) into sections and assigning such sections to the 2nd Defendant, its nominee, indigenous villagers or their nominees for the purpose of carrying out the joint venture agreement contained in or evidenced by the Deed; and

(b) an injunction to restrain the 1st defendant by its permanent executive directors, servants, agents or otherwise howsoever, from carrying out whether directly or indirectly, all or any of the 1st defendant's covenants contained in the Deed.

35. I would also make an order nisi that costs be to the plaintiffs here and below.

Hon Rogers VP:

36. I agree. There will be an order in terms of the order as proposed in the judgment of Le Pichon JA.