Kan Wai Chung and Others v. Hau Wun Fai and Others

CACV 7/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 7 OF 2016

(ON APPEAL FROM HCA NO. 811 OF 2010)

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AND

(ON APPEAL FROM HCA No. 868 OF 2013)

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(Actions HCA 811/2010 and HCA 868/2013 consolidated
by the Order made by Master J Wong dated 18 November 2013)

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REASONS FOR JUDGMENT
AND
DECISION ON COSTS

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Hon Yeung VP :

1.I agree with the decisions of Cheung JA and an order will be made in terms of paragraphs 9 to 11 hereof.

Hon Cheung JA :

I. The appeal

2.On a trial of preliminary issues in these two consolidated actions, To J decided the issues in favour of the 1^st to 5^th defendants and entered judgment for them.  The plaintiffs appealed against the decision.  The defendants opposed the appeal while the 1^st and 2^nd third parties took a neutral stand.  At the conclusion of the hearing we dismissed the plaintiffs’ appeal.  I now give reasons for our judgment and decision on costs.

II. Background

3.1.These two cases are concerned with five pieces of land in Hang Hau, New Territories which are described in the judgment below as the Land Lots.

3.2.The background of the case is fully set out in the judgment below which I will respectfully adopt.

3.3.The plaintiffs are indigenous villagers in the New Territories (‘dings’) who, under the then Small House Policy of the Government (the ‘Policy’), were entitled to apply for building licence to build one village-type house on their land (the ‘ding right’).

3.4.The 1^st to 4^th defendants were the partners of Messrs Hau, Lau, Li & Yeung (‘HLLY’), a firm of solicitors.  The 5^th defendant in HCA 868/2013 was a clerk of HLLY.  The 1^st and 2^nd third parties (‘Sino Favour’ and ‘Shiny’ respectively or the ‘Developers’ collectively) are property developers. 

3.5.Between March and August 1994, the plaintiffs entered into similar agreements with Sino Favour (the ‘Co-operation Agreements’), which were in effect agreements to sell their ding rights to Sino Favour in return for $200,000 so that Sino Favour could build village-type houses on the Land Lots. Under the Co-operation Agreements, Sino Favour would assign a Land Lot to a plaintiff, the plaintiff would apply to the Government for building licence under the Policy, the Developers then built a village-type house on the Land Lot, and the plaintiff would hold the Land Lot and the house built thereon as nominee on trust for the Developers. 

3.6.Pursuant to the Co-operation Agreements, Sino Favour transferred or caused to be transferred the five Land Lots to the plaintiffs.  Although a monetary consideration was stated in the assignments, there is no dispute that no monetary consideration was in fact paid.  Building licences were applied for and village-type houses were built on the Land Lots at the costs of the Developers, who also paid premium to the Government in order to uplift the non-alienation clause in the Government lease so that the village-type houses may be sold to the public.

3.7.In mid-2005, the construction of some of the village-type houses was completed.  The Developers put them in the market for sale and subsequently entered into various sale and purchase agreements with the ultimate purchasers (the ‘First Set of SPAs’).  The First Set of SPAs was expressed as agreements by the plaintiffs to sell the respective Land Lots with village-type houses built on them.  The plaintiffs averred that these agreements, allegedly signed by them or with their authority, were forgeries and referred to them as ‘Falsified Documents’ in HCA 868/2013. 

3.8.HLLY was instructed by and acted for Sino Favour to carry out the conveyancing transactions relating to the First Set of SPAs. 

3.9.At about the same time, the plaintiffs entered into another set of provisional sale and purchase agreements (the ‘Second Set of SPAs’) with Barbican Capital Investment Limited (‘Barbican’) in respect of the village-type houses built on the same Land Lots.  The Second Set of SPAs was registered with the Land Registry, thereby affecting the interest in the Land Lots.

3.10.On 2 August 2005, soon after discovery of the registration of the Second Set of SPAs, the Developers took out an ex parte application for injunction to restrain the plaintiffs from selling or completing the sale of the Land Lots and village-type houses under the Second Set of SPAs and further claimed damages for breach of the Co-operation Agreements.  The application came before Hartmann J (as he then was), who granted an interim injunction restraining the plaintiffs from selling the Land Lots until further order.

3.11.On 3 August 2005, pursuant to an undertaking given to court, the Developers instructed HLLY to commence actions against the five plaintiffs, Barbican and Wilkie Tsang who is a director of Barbican.  These five actions are HCA 1517 to 1521 of 2005 (collectively, the ‘2005 Actions’).  The writs in those actions and the injunction application papers were duly served on all the defendants in the 2005 Actions, i.e. Barbican, Wilkie Tsang and the plaintiffs herein.

3.12.As the time for completion under the First Set of SPAs drew near, the Developers applied to court under the 2005 Actions for leave to complete those agreements.   The application came before Deputy High Court Judge Saunders (as he then was).  Barbican appeared and filed an affirmation of Wilkie Tsang made on its behalf.  The plaintiffs did not appear.  In his affirmation, Wilkie Tsang conceded to the completion of the First Set of SPAs, provided that the interests of Barbican and the plaintiffs were to be secured by placing the proceeds of sale in an interest bearing account, pending further order.  Barbican’s interest was said to be the profits from its joint venture with Shiny and the plaintiffs’ interest was said to be the amount outstanding to them under the Co-operation Agreements.  Deputy Judge Saunders granted liberty to complete the First Set of SPAs and ordered $2.5 million to be set aside from the proceeds of sale and to be placed in an interest bearing account (the ‘Judge Saunders’ Order’).

3.13.Thereafter, the Land Lots were sold by the Developers with HLLY acting as their solicitors in completing the sale and purchase under the First Set of SPAs.  This necessarily means that the completion by way of assignments was done in the name of the plaintiffs who were the then registered owners of the Land Lots.

3.14.It is not known when precisely the plaintiffs became aware of the sale of the Land Lots to third parties in their names.  But it is reasonable to infer from the fact that Barbican having succeeded in obtaining the order to retain $2.5 million to secure Barbican’s and the plaintiffs’ interest, the plaintiffs would have been told of Judge Saunders’ Order soon after the hearing in the light of their claimed interest in the outstanding payments due to them under the Co-operation Agreements.  In any event, they would have been served with a copy of Judge Saunders’ Order.

3.15.On 10 October 2005, the Developers filed their statements of claim in the 2005 Actions.  The plaintiffs entered into appearance and filed their defence and counterclaim. 

3.16.In their defence filed on 16 December 2005, the plaintiffs admitted signing the Co-operation Agreements but alleged long delay in the implementation of the Co-operation Agreements and counterclaimed outstanding payment under the Co-operation Agreements.  They denied executing or authorising the execution of the First Set of SPAs.  It is significant to note that the plaintiffs made no claim for any interest in the Land Lots.  By that time, they must also have known well that the Land Lots had been sold to third parties in their names as registered owner.

3.17.On 6 February 2009, the Developers took out an inter partes summons seeking an order that the proceeds of sale of $2.5 million set aside be released to them.  The application was heard on 1 September 2009 before Reyes J.  The plaintiffs were represented by counsel at the hearing.  They did not make any claim for any proprietary interests in the Land Lots.   Reyes J allowed the application.

3.18.On 26 February 2009, the plaintiffs issued a third party notice in the 2005 Actions against the 1^st to 4^th defendants seeking an indemnity against the Developers’ claim.  In the third party notice, they alleged that the 1^st to 4^th defendants had not been given any authority to act for them and therefore were liable to indemnify them for any loss claimed by the Developers.  That notice was filed without leave.  On 20 March 2009, by consent the plaintiffs withdrew the notice with costs against them.

3.19.In July 2009, the plaintiffs took out an inter partes summons for discovery against the Developers and the 1^st to 4^th defendants (as non-parties).  The application was dismissed by Master de Souza.  The plaintiffs’ appeal against the master’s decision was also dismissed with costs against them by Bharwaney J in February 2010. 

3.20.In February 2010, the plaintiffs took out an inter partes summons seeking to amend their defence and counterclaim.  Three new defences were proposed by the plaintiffs:

(a) that there was an implied term in the Co-operation Agreements that the Co-operation Agreements would be good only for three years;

(b) that the Co-operation Agreements were not enforceable as they were illegal and contrary to public policy; and that the plaintiffs would have no need to comply with their terms; and

(c) that the plaintiffs had never instructed the 1^st to 4^th defendants to act for them and that the 1^st to 4^th defendants had no authority to act for them.

3.21.Fung J only allowed the amendment relating to the plea of illegality.  As the matter progressed, it is now common ground, at least for the purpose of these proceedings, that the Co-operation Agreements were illegal.

3.22.In June 2010, the plaintiffs commenced HCA 811/2010 against the 1^st to 4^th defendants, alleging conspiracy by them with the Developers to injure the plaintiffs by unlawful means thereby depriving them of their interest in the Land Lots.  This was the first time they asserted interest in the Land Lots.

3.23.In October 2010, the plaintiffs and the Developers agreed to a ‘drop-hand’ settlement in respect of the 2005 Actions.  The parties discontinued their respective claims and counterclaims and waived their entitlement to the costs orders made in those actions.  However, HCA 811/2010 remains alive.

3.24.In May 2013, the plaintiffs commenced HCA 868/2013 against the 1^st to 4^th defendants and the 5^th defendant, claiming their legal costs incurred in the 2005 Actions.

III.  The plaintiffs’ claims under the Consolidated Actions

4.1.The plaintiffs’ cause of action in HCA 811/2010 is conspiracy to injure by unlawful means.  Their case is that the 1^st to 4^th defendants and the Developers conspired together to injure them by using the Falsified Documents to sell the Land Lots, thereby causing them to suffer loss and damage to the extent of the total value of the Land Lots and the village-type houses built thereon.

4.2.The plaintiffs’ causes of action under HCA 868/2013 are: (1) unlawful means conspiracy in forging the Falsified Documents; and (2) conspiracy to prosecute them in the 2005 Actions with a real and predominant purpose to injure them (‘unlawful purpose conspiracy’).  Their case is that by forging and using the Falsified Documents in prosecuting them in the 2005 Actions, the defendants caused legal costs to be incurred by them in defending those actions (the ‘Wasted Costs’).  They claim Wasted Costs in the total sum of $2,117,290.17.

IV.  The preliminary issues

5.1.The plaintiffs’ claims in HCA 811/2010 and HCA 868/2013 are founded on the factual proposition that they were the legal and beneficial owners of the Land Lots.    

5.2.The two preliminary issues considered by the Judge were :

(1) Whether the plaintiffs have any interest in the Land Lots and if so, what interest, having regard to the uncontroversial facts that:-

(i) the Land Lots, being the subject matters of the 1^st to 5^thplaintiffs’ claim in HCA 811/2010, were transferred or caused to be transferred to the 1^st to 5^thplaintiffs from the 1^st and 2^ndthird parties between 1995 and 1999, without consideration;

(ii) the village-type houses were built and erected on the Land Lots by and at the costs of the 1^st and 2^ndthird parties;

(iii) the payment of premiums for uplifting the non-alienation clauses in the building licences upon which the Government consented to the sale and purchase of the Land Lots was made by the 1^st to 2^ndthird parties; and/or

(iv) the 1^st to 5^thplaintiffs had declared in the Co-operation Agreements that they held the Land Lots upon trust for the 1^stthird party.

(2) Whether costs incurred by the 1^st to 5^thplaintiffs and costs orders made against them in the 2005 Actions were sufficiently caused by the production and use of the sale and purchase agreements by the 1^st and 2^ndthird parties as set out in paragraph 9 of the statement of claim of HCA 868/2013, having regard to the facts that no material issue as to the validity of the said sale and purchase agreements was raised by the parties or any of them in their pleadings in the 2005 Actions.

V.  The Decision

6.1.The Judge held that :

(1) The 1^st and 2^ndthird parties have retained a beneficial interest in the Land Lots by operation of law under a resulting trust.

(2) The 1^st to 5^th plaintiffs in HCA 811/2010 and HCA 868/2013 have no beneficial interest in the Land Lots and they were mere nominees holding the legal title of the Land Lots on trust for the 1^st and 2^ndthird parties.

(3) The costs incurred by the 1^st to 5^th plaintiffs in 2005 Actions were not caused by the production and use of the sale and purchase agreements by the 1^st and 2^ndthird parties as set out in paragraph 9 of the statement ofclaim in HCA 868/2013, i.e. the Falsified Documents or the First Set of Sale and Purchase Agreements.

6.2.The finding that the Developers are the legal and beneficial owners of the Land Lots is decisive not only of the first issue but also of the second issue as well.  This is what the Judge held :

‘ 54. Mr Neoh [former counsel for the Developers] made two observations. First, he submits that once it is established that the Developers were the true beneficial owners of the Land Lots, it would be legitimate for them to commence the 2005 Actions with a view to protecting their own interest in the Land Lots and to seek costs against the Plaintiffs if they unreasonably sought to defend it: Crofter Hand Woven Harris Tweed Co v Veitch. As the Developers were beneficial owners of the Land Lots at the material time, it can hardly be disputed that what the Developers did in instituting the 2005 Actions was to protect their own interest in the Land Lots. The Defendants’ agreement with the Developers to institute the 2005 Actions could not have been unlawful. I agree. That is the impact my finding in the first preliminary issue will have on the Plaintiffs’ claim in HCA 868/2013.’

6.3.It is clear from the written submission of Mr Yip for the plaintiffs that the plaintiffs’ case on conspiracy was based on their view that if they ‘could have some form of interest in land in respect of the Land Lots, the Developers would not be entitled by the 2005 Actions (inclusive of application for injunctive relief) to recover the Land Lots, nor would they be entitled to sell the Land Lots to third parties’.  In other words, as Mr Chong (together with Ms Wong) for the 1^st to 4^th defendants submitted, if the plaintiffs’ case on the 1^st preliminary issue is rejected, there will be no basis upon which they could contend that the 2005 Actions was brought by the Developers maliciously.  I agree with this view and as such, unlike the Judge below, it is not necessary for me to discuss the law on conspiracy.

VI.  Illegality and resulting trust

1)  Operation of the Small House Policy

7.1.Under the New Territories Small House Policy a male indigenous villager (known as a ding) is entitled to what is called a ding right, namely an once-in-a-lifetime right to build a small house in his village for his own use on a piece of land owned by him or assigned to him by the Government at a concessionary rate (HKSAR v Lau Kam Ying (2013) 16 HKCFAR 595 at paragraph 1).  Hence, in order to take advantage of the Policy, indigenous villagers like the plaintiffs must have both the ‘ding’ right and a piece of land upon which the house is to be built.  What happened here is that the plaintiffs only have the ding right without the land, but by reason of the Co-operation Agreements, the Developers were able to supply them with the land without consideration in order for them to exercise their ding right.  The Developers were further responsible for the costs of the construction of the houses, although the plaintiffs would apply for the licence to build.

7.2.The question then arises whether such an arrangement is illegal in that it would involve a misrepresentation by the plaintiffs, when they applied for the licence to build, that they were beneficial owners of the land on which the houses were to be built when in fact the Developers remained to be the beneficial owners.  In such a situation, if the Developers were to enforce the Co-operation Agreements against the plaintiffs, the Court would not assist them because to do so would involve the Court lending its aid to the performance of such an illegal contract which is contrary to public policy : see Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866 at page 874. 

2)  Tinsley v Milligan

7.3.In Tinsley v Milligan [1994] 1 AC 340, Lord Browne-Wilkinson reviewed the authorities and at page 376 concluded with the proposition that a plaintiff :

‘ ..... is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction.’

7.4.A specific instance where the plaintiff could be so entitled is where the plaintiff could rely on resulting trust to establish his title by reason of the land being voluntarily transferred to a person without consideration as in the present case.  As Lord Browne-Wilkinson explained at page 371 :

‘ ... Where the presumption of resulting trust applies, the plaintiff does not have to rely on the illegality. If he proves that the property is vested in the defendant alone but that the plaintiff provided part of the purchase money, or voluntarily transferred the property to the defendant, the plaintiff establishes his claim under a resulting trust unless either the contrary presumption of advancement displaces the presumption of resulting trust or the defendant leads evidence to rebut the presumption of resulting trust. Therefore, in cases where the presumption of advancement does not apply, a plaintiff can establish his equitable interest in the property without relying in any way on the underlying illegal transaction.’

7.5.In Tinsley, the plaintiff was the sole owner of a property although both she and the defendant had contributed to the purchase price and it was the understanding that they were joint beneficial owners.  The purpose of that arrangement was to enable the defendant, with the connivance of the plaintiff to make false claims for social benefits.  The parties later fell out and the plaintiff asserted sole ownership of the property.  The defendant raised a counterclaim that the property was held by the plaintiff upon trust for them in equal shares.  The plaintiff’s claim was dismissed and the defendant’s counterclaim was allowed on the basis of the presumption of resulting trust.  This was the majority approach adopted by Lord Browne-Wilkinson, Lord Jauncey of Tullichettle and Lord Lowry.  It is sufficient for the purpose of this appeal to note that Lord Keith of Kinkel and Lord Goff of Chieveley adopted a different approach (‘the minority approach’) which does not call for a discussion at this stage.

3)  Application of the principles

7.6.The majority approach in Tinsley was adopted in Best Sheen Development Ltd and was expressly approved by the Court of Final Appeal in Lau Kam Ying at paragraph 20.  As Mr Chong had submitted, this was also the approach of this Court in cases such as Loyal Luck Trading Ltd v Tam Chun Wah [2008] 4 HLRD 681; Wong Kwok Learn Baldwin & Another v International Trading Co Ltd & Another [2010] 2 HKLRD 334, CA, at pp. 338-9, para. 15-18; Tang Wai Cho v Tang Wai Leung [2011] 1 HKLRD 1, CA; Lau Kwai Kiu v Bian Xintian & Another [2012] 2 HKLRD 954, CA, at p 967 para. 54-55; Ryder Industries Ltd (formerly Saitek Ltd)  v Chan Shui Woo, CACV 164 & 165/2013, unreported, 22 September 2014, at paragraph 22.

7.7.The Judge followed the Tinsley and Lau Kam Ying approachwhen he decided that the Developers are the legal and beneficial owners of the Land Lots on the basis of resulting trust. 

VII.  The plaintiffs’ arguments

1)  Yim Bo Ying v Chung Iu Warm

8.1.Mr Yip, however, contended that the Judge was wrong for three reasons.  First, this Court had adopted a different approach in Yim Bo-ying v Chung Iu-warm [1985] HKLR 354.  The plaintiff there was the registered owner of certain premises, claimed possession and mesne profits from her son-in-law, the defendant.  The defendant counterclaimed for a declaration that the plaintiff held the suit premises upon resulting trust for his benefit, and an order directing the plaintiff to convey title to the premises to him.  

8.2.The defendant, who had purchased the entire building in which the suit premises were situate, alleged that he had directed the suit premises to be conveyed into the name of the plaintiff merely in order to effect a stamp duty saving and it was the common intention of both parties that the plaintiff should hold the premises on trust for the benefit of the defendant.  The plaintiff disputed his claim on the basis that she had provided the money to purchase the suit premises.

8.3.This Court held against the defendant and relied on the broad statement of principle adopted from Snell’s Principles of Equity (28^th Ed.) 182:―

‘ There is no resulting trust where it would be against public policy to permit the presumption.’

8.4.Yim Bo-ying was decided well before Tinsley.  In view of the consistent application of Tinsley in the subsequent decisions of this Court, Yim Bo-ying is not an authority which will call for a re-examination of the correctness of the Tinsley approach.  In view of the approval of the Court of Final Appeal of the Tinsley majority approach, my view is that Yim Bo-ying is plainly wrong and should not be followed. It was also not followed by Rogers VP in Wu Wai Sum Stella v Man Ting Chu [2010] 5 HKLRD 125 at paragraphs 19 to 21.

2)  Nelson v Nelson

8.5.Mr Yip then argued for the Australian approach as decided in the case of Nelson and Another v Nelson and Others (1995) 132 ALR 133.  The facts set out in the headnote read as follows: Mrs N and her husband (now deceased) had a daughter and a son.  Mrs N provided the purchase money for a house which was transferred into the names of the children, both of whom were adults.  The purpose of this arrangement was to enable Mrs N, should she subsequently wish to purchase another house for herself, to obtain a subsidized advance upon favourable terms under the Government.  Under the relevant legislation, Mrs N would not have been eligible for the subsidized advance if she were the owner of another house.  Some time later Mrs N did purchase another house for herself.  She applied for and received a subsidized advance from the Government, falsely declaring that she did not own or have a financial interest in a house other than the one for which the advance was sought.  The declaration was false because Mrs N claimed that she was the beneficial owner of the house for which she had previously provided the purchase money.  The house was sold and Mrs N claimed to be entitled to the proceeds.  The son conceded this entitlement but the daughter claimed half the proceeds. 

8.6.The High Court of Australia allowed the appeal by Mrs N that the property was held upon trust for her but with the condition that she must repay the benefits that she had obtained from the governments.  The judges there gave four separate judgments but what is clear is that they chose not to adopt Tinsley and they preferred to consider the question of illegality in the context of the underlying policy of the legislation.  As this case was not fully analysed by the parties, I will just refer to the judgment of Deane and Gummow JJ at pages 148–149 to illustrate this point.  They rejected both the majority and minority approach in Tinsley :

‘ We turn to consider these propositions as the first respondent [i.e. the daughter] would have them apply to this appeal, commencing with that dealing with reliance upon illegality.

There are several difficulties with the acceptance of such a principle as determinative of a case such as the present.  First, it has been held in England that the outcome turns upon whether what immediately is in issue is the rebuttal of a resulting trust by demonstrating that what was intended was a gift, or the rebuttal of a presumption of advancement by demonstrating that a gift was not intended.  The distinction may be considered by an example where Blackacre is purchased with the money of A but transferred by the vendor on completion to B, who is the child of A.  Authority in England, provided by Tinsley v Milligan, is that A cannot rely on evidence of his own illegality to rebut the presumption that a gift in favour of B was intended.  On the other hand, if A purchases Blackacre in the name of B, the relationship between them being such that there is no presumption of advancement, A may enforce the resulting trust in A’s favour because there is no necessity to prove the reason for the conveyance into the name of B and thus no need to rely on A’s illegality.

These results depend on the form in which a particular legal proceeding is cast and, unusually for equity, are achieved at the expense of substance.  Further, they may operate indiscriminately and thus lead to harsh consequences as between particular parties.  It is true, as Lord Mansfield pointed out in Holman v Johnson that:

if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it.

But that consideration only heightens the lack of attraction of such a proposition in the court of equity.  Furthermore, it in turn encourages a quest for mitigation by the drawing of further fine distinctions and exceptions whereby recovery will be permitted.

A second approach to the matter is to let the loss lie where it falls, the policy being one to encourage observance of the law by threat of a sharp and broad sword.  This view commended itself to the minority in Tinsley v Milligan.  It was said, again with reference to Lord Mansfield in Holman v Johnson, that:

[i]t is important to observe that, as Lord Mansfield made clear, the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other.

Reliance also was placed by the minority upon what was seen as the authoritative source of principle in equity provided by the decision of Lord Eldon LC in Muckleston v Brown.  It will be necessary further to consider this case, together with Cottington v Fletcher.

The outcome in Tinsley v Milligan indicates that adoption of one approach rather than the other may lead to opposite results. As we have indicated, on this appeal the first respondent relies upon both as operating in her favour.  She submits (and the Court of Appeal so decided) that Mrs Nelson can only rebut the presumption of advancement by revealing her purpose of obtaining a subsidised loan by concealment and, further, that the loss should be left to fall upon Mrs Nelson.

In our view, neither of these approaches is to be adopted in the present case.  Two factors are of paramount importance.  First, as the appellants submit and we would accept, the question of illegality is bound up with the view taken of the underlying policy of the Act.  To quote a United States scholar, ‘if illegality consists in the violation of a statute, courts will give or refuse relief depending upon the fundamental purpose of the statute’.  Secondly, what is sought are equitable remedies in aid of an alleged trust and equity is equipped to attain a result which eschews harsh extremes.

The range and flexibility of equitable remedies assist in achieving an appropriate result in the particular case; this means, in the words of one commentator, ‘[t]he old common law idea of all or nothing will no longer have to apply’.  Accordingly, unlike the common law, equity may impose terms upon a party seeking administration of equitable remedies.  Further, equity has not subscribed to any absolute proposition that the consequence of illegality, particularly where what is involved is contravention of public policy manifested by statute, is that neither side may obtain any relief, so that the matter lies where it falls.  Rather, in various instances equity has taken the view that it may intervene, albeit with the attachment of conditions, lest there be ‘no redress at all against the fraud nor any body to ask it’.”

8.7.In terms of the application of precedents, this Court is bound by the decision of the Court of Final Appeal which adopted the majority view of Tinsley.  As Tang VP (as he then was) observed in Loyal Luck Trading Limited at paragraph 48 :

‘ The potential conflict between Tinsley v Milligan and Nelson and Anor v Nelson and Anor can only be resolved by the Court of Final Appeal.’

8.8.Nelson is therefore not an authority which would preclude the Judge or this Court from not following Tinsley. In any event, Mr Yip had simply referred to Nelson without analysing how the policy behind the New Territories Small House Policy would cause a different result in the finding of the Developers having the beneficial interest in this case.  Thus his reliance on Nelson is academic.

3)  Merger of interest

8.9.Thirdly, Mr Yip argued that the plaintiffs had beneficial interest in the small houses.  Each of the plaintiffs as an indigenous villager, was entitled to and did apply for a concessionary building licence to erect a small house under the Small House Policy.  The small houses could only be built pursuant to the grant of building licence to the plaintiffs.  Their ding rights had been exercised and exhausted and could not be revived.  The ding rights of the plaintiffs, once exercised, have subsumed into the Land Lots and formed part of the land of the Land Lots. The Land Lots are permanently enhanced by the ding rights of the plaintiffs in terms of land values, reflected in the ability of legally building small houses thereon as a permanent improvement to the land.  By this reason the plaintiffs had beneficial interest in the small houses.

8.10.This argument was not raised before the Judge, nor raised as a ground of appeal.  It formed part of the submission under the second ground of appeal, namely, that the Judge was wrong to find that the Developers had retained a beneficial interest by reason of resulting trust.

8.11.In my view, this argument will not assist the plaintiffs.  It falls foul of the illegality principle because the plaintiffs would have to rely on the Co-operation Agreements in order to establish their claim for beneficial ownership.  

VIII.  Conclusion

9.Accordingly the appeal was dismissed.

Decision on Costs

10.As the plaintiffs had failed in their appeal, they accepted that they have to pay the costs of the other parties of this appeal.  I would so order and would grant a certificate for two counsel for the 1^st to 4^th defendants.

11.Mr Chong and Mr Koo for the 5^th defendant applied for indemnity costs against the plaintiffs on the basis that this appeal was wholly unmeritorious.  In my view the appropriate order is party to party taxation and I would so order.

Hon Kwan JA :

12.I agree with the reason for judgment and decision on costs of Cheung JA.

Mr Francis Yip, instructed by Fung, Wong, Ng & Lam LLP, for the 1^st to 5^th plaintiffs

Mr K M Chong and Ms Emma Wong, instructed by Ho, Tse, Wai & Partners, for the 1^st to 4^th defendants

Mr Ernest Koo, instructed by Y. S. Lau & Partners, for the 5^th defendant

Mr Lawrence Cheung, instructed by Kam & Fan, for the 1^st and 2^nd third parties