King Mountain Investments Ltd and Another v. Tang Yuk Ling Dobe and Another
Read the full judgment text of HCA 257/2023 on BabelCite. This High Court CFI judgment was delivered on 1 March 2024.
1. By notice of appeal of 5 th October 2023 (“ the Notice of Appeal ”), the Plaintiffs appeal against the Master’s decision of 22 nd September 2023 giving unconditional leave to the 2 nd Defendant to defend the Plaintiffs’ claim for restitution.
Cites 10 cases
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HCA 257/2023 [2024] HKCFI 606 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 257 OF 2023 ____________
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_______________ D E C I S I O N _______________ A. INTRODUCTION 1.By notice of appeal of 5th October 2023 (“the Notice of Appeal”), the Plaintiffs appeal against the Master’s decision of 22nd September 2023 giving unconditional leave to the 2nd Defendant to defend the Plaintiffs’ claim for restitution. B. THE BACKGROUND 2.The following is essentially undisputed.[1] 3.The 1st Plaintiff is a Hong Kong company, wholly owned by a Mr Chen. The 2nd Plaintiff is a friend of Mr Chen; both were at all material times resident in mainland PRC. 4.The 2nd Defendant is a Hong Kong company, of which the 1st Defendant was at all material times a director and 50% shareholder. The 1st Defendant acted on behalf of the 2nd Defendant in its dealings with the Plaintiffs. 5.In early 2019, the 2nd Plaintiff and Mr Chen were looking to emigrate to Hong Kong and to acquire property in Hong Kong for their own use. They were introduced to the Defendants through an acquaintance of Mr Chen. 6.The 1st Defendant told Mr Chen that the 2nd Defendant held various plots of village lands, some of which had been developed with village houses and some which had not; both types were available for sale. The 1st Defendant provided the Plaintiffs with a plan identifying the plots of land in Demarcation District 100 in Tsiu Keng Village which were available for purchase, and a price list identifying the development status and price of each plot of land. 7.On 28th August 2019, the 1st Plaintiff and 2nd Plaintiff each entered into an “Agreement for Transfer of Development Rights” with the 2nd Defendant (“the Agreements”), relating to Lot 601 SA of DD 100 (“Lot 601”) for a consideration of $6,380,000 (in the case of the 1st Plaintiff) and relating to Lot 598 SB ss.2 of DD 100 (“Lot 598”; together with Lot 601, “the Lots”) for a consideration of $5,830,000 (in the case of the 2nd Plaintiff). The Agreements were not professionally drafted. The 2nd Defendant describes the Agreements as being for the Plaintiffs’ purchase of the 2nd Defendant’s rights to develop “Ding” (village) houses with “Ding” villagers on the two lots. As described by the Plaintiffs, the transactions were structured by way of an arrangement whereby each of the Lots would first be transferred to a “Ding” villager for them to apply for a building licence from the Government, the “Ding” villagers would then construct village houses thereon, and finally the Lots would be transferred to the Plaintiffs upon the “Ding” villagers obtaining a certificate of compliance and payment of the relevant fees for removal of restrictions on the disposal of the land. It is relevant to note for present purposes that the Agreements were not for the sale and purchase of the Lots. 8.In the case of the agreement with the 2nd Plaintiff, the 2nd Defendant owned Lot 598 and was planning to transfer the land to an indigenous inhabitant; in the case of the agreement with the 1st Plaintiff, an indigenous inhabitant of the New Territories owned Lot 601 (the indigenous inhabitants will collectively be referred to as “the Villagers”). Both of the Agreements recited that the 2nd Defendant was authorised to deal with the development of the lot in question, and that after completion of construction, the original plan was that the village house and land rights would be sold or transferred to someone designated by the 2nd Defendant. The Agreements went on to state that 2nd Defendant had agreed that the 1st Plaintiff (and 2nd Plaintiff, respectively) could continue to apply, through the respective indigenous inhabitant, for a building licence for the construction of a village house in place of the 2nd Defendant, and that upon completion of construction, obtaining of a certificate of compliance and removal of sales restrictions upon payment of land premia, the village house and land would be sold to the 1st Plaintiff (and 2nd Plaintiff, respectively). 9.The agreement with the 1st Plaintiff went on to provide that the 1st Plaintiff agreed to pay $6,380,000 to reimburse the 2nd Defendant for its cost of purchasing the land, for obtaining the cooperation of the indigenous villager and the relevant rural committee, and for the 2nd Defendant’s consent to surrender the development. 10.The agreement with the 2nd Plaintiff went on to provide that the 2nd Plaintiff agreed to pay $5,830,000 as consideration for the purchase of the land, for obtaining the cooperation of the indigenous villager and the relevant rural committee, and for the 2nd Defendant’s consent to surrender the development. 11.Pursuant to the Agreements, the Plaintiffs have paid a total of $10,989,000 to the 2nd Defendant (“the Payments”). The Plaintiffs have not received the Lots from the Villagers. 12.The Plaintiffs now seek restitution of the Payments from the 2nd Defendant. In their Statement of Claim, the Plaintiffs also make other claims against the Defendants, including for deceit, as they allege that the 1st Defendant (mis)represented to them that the Agreements were proper, legal and widely adopted in the market. However, these other claims do not arise for present purposes, as the Plaintiffs’ application for summary judgment is only for their claim in restitution. 13.It is common ground that the Agreements are illegal and unenforceable. The Defendants have admitted that the Agreements were for the sale and purchase of “an illegal subject matter”. It was common ground at the hearing that the illegality of the Agreements lies in the offence of fraud, and tort of misrepresentation (to the Government), which would need to be committed by the indigenous villager in his representations made during the application for a building licence under the Government’s Small House Policy to erect a village house (see Chung Mui Teck and others v Hang Tak Buddhist Hall Association Ltd & another [2001] 2 HKLRD 471 at 476H to 479B (Le Pichon JA)). The 2nd Defendant added that apart from the indigenous villager, the Plaintiffs as developers of the land would also be involved in the illegality, conspiring with the villager in the fraud and misrepresentation. C. THE PARTIES’ CASES 14.The Plaintiffs’ pleaded case in restitution is that there has been a total failure of consideration.
15.The Defendants plead that there has been no failure of consideration.
16.The Defendants further aver that the Agreements were illegal and unenforceable and that the Plaintiffs are barred by illegality from recovering any money from the Defendants. See Defence paragraphs 23, 26. 17.At the hearing, the Plaintiffs focussed on the second of the defences advanced. They say that the defence of illegality is unsustainable in the light of Monat Investment Ltd v All Person(s) in Occupation of Part of No 16 Ma Po Tsuen [2023] 2 HKLRD 1311, in which the Court of Appeal held that the common law on the defence of illegality is that as expounded by the Supreme Court of the United Kingdom (“UKSC”) in Patel v Mirza [2017] AC 467. 18.In Patel, the claimant paid a sum of money to the defendant pursuant to an agreement that he would use it to bet on the movement of shares on the basis of inside information. The agreement contravened a statutory prohibition on insider dealing. The agreement ultimately could not be carried out as the insider information was not forthcoming. The claimant brought a claim to recover his payment. The issue was whether the claim was barred by illegality. 19.By a majority of six to three, the UKSC held that the “range of factors” approach based on a “trio of necessary considerations” should be adopted in considering whether to allow a claim involving an illegal act (rather than the “reliance approach” in Tinsley v Milligan [1994] 1 AC 340 that a person should not be granted a remedy where he has to rely directly on unlawful conduct to succeed). Lord Toulson JSC (who gave the main judgment and with whom Baroness Hale DPSC, Lord Kerr, Lord Wilson and Lord Hodge JJSC agreed) summarised the “range of factors” approach at [120]. Whilst not all members of the UKSC were in agreement with the “range of factors” approach, they were unanimous in their view that the illegality of the activity under the contract was not a bar to the claimant’s recovery of the sum paid. D. FAILURE OF CONSIDERATION 20.As mentioned, the Plaintiffs focused on the defence of illegality. It seems to me, however, that before one gets to the question of whether illegality bars the Plaintiffs’ claim, there is a prior issue of whether the Plaintiffs’ claim in restitution for total failure of consideration is made out, and whether there is anything in the 2nd Defendant’s defence that there was, in fact, no failure of consideration. In Patel, for example, the discussion of the defence of illegality took place in the context of the claimant having first established his claim to restitution on the ground of total failure of consideration, the agreement having remained unexecuted (see for example Lord Toulson at [121], Lord Neuberger PSC at [145], [154]). 21.In the present case, the 2nd Defendant’s defence that there has been no failure of consideration was set out in the Defence and in its evidence, and was also the subject of oral submissions by Ms Sezen Chong, counsel for the 2nd Defendant, although the point was not addressed in Ms Chong’s skeleton. 22.Ms Chong’s submission was that the Agreements had already been executed, with the Plaintiffs having paid for and obtained the rights to step into the shoes of the 2nd Defendant to continue with the development of the Lots in conjunction with the Villagers. There remained nothing further for the 2nd Defendant to do; the 2nd Defendant was not the one responsible for developing the Lots, nor did it have the obligation to ensure that the Villagers remained alive or stayed out of bankruptcy; it was for the Plaintiffs to follow up the building licence and construction with the Villagers. The Plaintiffs therefore obtained what they wanted in return for the Payments. All of this also meant that the case was also distinguishable from Patel, as the agreement in that case was for something to be done in the future, which event did not materialise. 23.In response, counsel for the Plaintiffs, Mr Bernard Man SC (appearing with Mr Jonathan Fung) referred to Goff & Jones on Unjust Enrichment, 10th ed., paragraphs 13-26 and 13-27, where the learned authors stated that where parties have transferred benefits under arrangements which turn out to be legally ineffective, a claim in unjust enrichment for the return of the benefits is recognised. However, insofar as it is being suggested that this provides a basis for a restitutionary claim on the ground of “ineffective arrangement” which is distinct from the ground of total failure of consideration, the two authorities discussed in those paragraphs do not appear to support such a proposition.
24.I do not propose to go into any further analysis of these authorities as they were not the subject of argument. I would simply note that in Patel, Lord Sumption JSC observed at [246] that:
25.In the present case, the category in which the Plaintiffs have mounted their claim in restitution, as shown by the pleadings, is that of failure of consideration, and not one of the Agreements being ineffective (insofar as this is said to be a distinct ground).[2] In this regard, the applicable authority is Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79. A claim for restitution based upon principles of unjust enrichment predicated on the total failure of consideration involves asking four questions: (a) was the defendant enriched? (b) was the enrichment at the plaintiff’s expense? (c) was the enrichment unjust? (d) were there any applicable defences applicable? (see [66], [67]). It is crucial to correctly identify and characterise the transaction providing the basis for the defendant’s enrichment; only then can one identify the relevant anticipated performance and ascertain whether it has totally failed (see [77] to [81]). 26.As referred to above, the Plaintiffs plead that the 2nd Defendant had implied obligations to procure the Villagers to apply for a building licence, obtain a certificate of construction, pay the relevant fees and premia and transfer the Lots to them. The 2nd Defendant pleads that it had no such obligations under the Agreements. 27.I remind myself that this is an application for summary judgment. The 2nd Defendant’s burden is to show a real or bona fide defence. It seems to me that it is indeed arguable that there has not been a total failure of consideration. The failures of performance which the Plaintiffs rely on are based on alleged implied terms, rather than any express obligation to be found in the Agreements. It is a matter of construction of the Agreements, in the light of the factual matrix at the time, as to what the 2nd Defendant was to perform in return for the Payments. Whilst the Plaintiffs have submitted that they have not received the Lots under the Agreements,[3] under the express terms of the Agreements, it was indeed not for the 2nd Defendant to transfer the Lots to the Plaintiffs – what was contemplated in the preamble of the home-made Agreements was that the Villagers would be doing this upon completion of development of the Lots. What the Agreements did expressly provide was that it was the Plaintiffs who were to bear the risk of death or bankruptcy of the Villagers, and the risk that the building licences might be revoked; and that it was the 2nd Defendant who was to follow up with construction and the obligation and fees associated with the transfer of the Lots – all of which support the 2nd Defendant’s case that it had nothing further to perform under the Agreements and that the Plaintiffs obtained what they paid for (or at least that there was not a total failure of consideration). 28.In this regard, there are also triable issues of fact between the parties. Ms Chong submitted that there were factual issues as to whether the 1st Defendant made a fraudulent representation about the legality of the Agreements, and whether the Plaintiffs knew of the illegality of the proposed arrangements. It seems to me that these matters are part and parcel of the factual matrix to be considered when construing the Agreements to ascertain the scope of the 2nd Defendant’s obligations, for example, whether it was for the 2nd Defendant to procure the Villagers to carry out the construction, or for the Plaintiffs to liaise with the Villagers to do so. The 2nd Defendant’s evidence is that the Plaintiffs knew of the illegality but were confident that they could overcome the risks and get the Lots developed for profit; Mr Chen of the 1st Plaintiff selected Lot 601 as it was more advanced in the process as the land had already been transferred to a “Ding” villager. (Ultimately, however, the Plaintiffs were ultimately unable to procure any “Ding” villagers to cooperate with them to develop the Lots.)[4] 29.The Plaintiffs say that the claim that they knew of the illegality is incredible, when they were mainland residents unfamiliar with the sale and purchase of “Ding” land and relied on the 1st Defendant to advise them and handle the arrangements. They say that the 1st Defendant told them that the arrangements were legal. The 2nd Defendant says that Mr Chen had legal expertise and would no doubt have carried out due diligence regarding the Small House Policy and the legality of the proposed arrangements, that the 1st Defendant told the Plaintiffs about the illegality of the arrangements, that information about the illegality was readily available on the internet, that the difference between the pricing of undeveloped and developed “Ding” land as offered to the Plaintiffs could only be explained by the illegality, and that the fact that the Agreements were neither executed at lawyers’ offices nor registered or stamped suggests that the Plaintiffs were aware of the illegality. 30.Whether the 1st Defendant made a misrepresentation, and whether the Plaintiff knew of the illegality, are not issues that can be resolved on affidavit evidence. I cannot go so far as to hold, at this stage, that the 2nd Defendant’s case in this regard is incredible. E. ILLEGALITY 31.In the light of my views above, strictly speaking, it is not necessary for me to go on to consider the defence of illegality, but I will go set out my views about this briefly. 32.As referred to above, a majority of the UKSC in Patel were in agreement with the “range of factors” approach. Lord Toulson held (at [115] to [116], [120]) that a person who satisfied the ordinary requirements of a claim in unjust enrichment would not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration, or by reason of the fact that the money was paid for an unlawful purpose. Exceptions were likely to be rare, to be in cases where for some particular reason the enforcement of such a claim might be regarded as undermining the integrity of the justice system. He summarised the “range of factors” approach as follows.
33.Mr Man submitted that given that Monat Investments Ltd held that the common law on the defence of illegality is that as expounded in Patel, the approach in Patel should be applied in the present case as regards the 2nd Defendant’s reliance on illegality. He submitted that the illegality in the Agreements cannot be a defence to the Plaintiffs’ claims for restitution. The Plaintiffs are simply seeking to unwind a transaction which (they say) was not consummated,[5] so as to be put back into the position in which they were before they entered into the Agreements. Granting restitution of the Payments recognises the illegality of the Agreements; it would not amount to enforcement of the Agreements or result in the Plaintiffs profiting from them. There is no reason why the 2nd Defendant should end up with a windfall[6] and profit from the illegal transaction. 34.In her skeleton, Ms Chong argued that the law as to illegality as a defence was unsettled, as Monat Investment Limited was only decided in March 2023, and it was unknown whether there might be an appeal therefrom to the Court of Final Appeal. Furthermore, whether the Court of Final Appeal might overrule the approach in Tinsley v Milligan, adopt the “range of factors” approach or formulate some other test in relation to the defence of illegality in a future case had yet to be decided. However, the appeal before me should be decided on the basis of the law as it currently stands, and at the hearing before me, Ms Chong accepted that the applicable approach was that in Patel. 35.Ms Chong submitted that it should be left to the trial judge to decide whether the Plaintiffs’ claim was barred by illegality; alternatively, it was arguable that it was barred by an application of the approach in Patel. 36.When asked to identify the relevant considerations under the first factor in Patel (the underlying purpose of the prohibition which has been transgressed and whether that purpose would be enhanced by denial of the claim), Ms Chong pointed to the prevention of abuse of the Government’s Small House Policy, and submitted that denial of the Plaintiffs’ claim would assist in deterring future developers from engaging in such abuse – if the Plaintiffs could get back the Payments, future developers would feel that they could take the risk of attempting to build village houses, as they could always get their money back if they should be unsuccessful in their attempts to defraud the Government. Furthermore, to allow the return of the Payments would be inconsistent with the criminal sanctions imposed against “Ding” villagers and developers in cases such as DCCC 25/2015. 37.However, the other side of the coin is that granting restitution of the Payments would deter persons in the position of the Defendants from entering into arrangements along the lines of the Agreements; and it is, after all, persons such as the Defendants who own the land which can potentially be developed in the first place, rather than persons in the position of the Plaintiffs. Furthermore, granting restitution of the Payments would be to recognise the illegality of the Agreements rather than to enforce them. 38.Ms Chong did not identify any policies relevant for consideration under the second factor in Patel. 39.As for the third factor in Patel, namely, that of proportionality, Ms Chong submitted that it was unclear whether the concept of locus poenitentiae remained a relevant consideration under the “range of factors” approach, particularly when it came to considering whether denial of the claim would be a proportionate response to the illegality. However, as explained in Grondona v Stoffel & Co [2021] AC 540 at [26] (Lord Lloyd-Jones JSC), there is no need to consider the issue of proportionality if it is clear from the first two considerations that the defence of illegality should be denied, because the claimant will not be suffering any harm arising from a refusal of relief. In the present case, therefore, there is no need to consider the issue of proportionality. 40.Ms Chong cited two authorities (Tiu Sum Fat v Shun Sing Development Ltd [2010] 1 HKLRD 553 and Chan Yau v Chan Calvin [2014] 5 HKLRD 304) in which restitution in similar circumstances was denied by reason of illegality. I agree with Mr Man that since they were decided before Patel and Monat Investments Ltd, they are of limited assistance as to whether the defence of illegality would now be allowed. The conclusions in those cases were reached after consideration of (inter alia) whether the parties were in pari delicto. As Lord Lloyd-Jones in Grondona explained (at [22]), the real consideration underlying this maxim (and that of ex turpi causa) was the question of whether to allow recovery for something that was illegal would produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system. These are considerations which are now dealt with under the “range of factors” approach. 41.Ms Chong also argued that there were authorities such as Best Sheen Development Ltd v Official Receiver [2001] 1 HKLRD 866 granting developers a declaration of trust in respect of land which had been assigned to “Ding” villagers pursuant to illegal arrangements to obtain building licences to develop the land in the “Ding” villagers’ names using their “Ding” rights, and that it was uncertain whether such authorities remained good law after Monat Investment Ltd. However, this is not an issue that arises in the present case. 42.Had it been necessary to decide, therefore, I would not have been persuaded that 2nd Defendant has established an arguable defence of illegality. F. DISPOSITION 43.I therefore dismiss the Notice of Appeal, and give the 2nd Defendant unconditional leave to defend the Plaintiffs’ claim. 44.I further make a costs order nisi that the Plaintiffs are to pay the costs of and occasioned by the Notice of Appeal to the 2nd Defendant, to be summarily assessed on the papers. The 2nd Defendant is to lodge and serve a statement of costs, limited to 2 pages, within 7 days; the Plaintiffs are to lodge and serve a list of objections in bullet point form, limited to 3 pages, within 7 days thereafter; the 2nd Defendant has leave to lodge and serve a reply in bullet point form, limited to 2 pages, within three days thereafter.
Mr Bernard Man SC leading Mr Jonathan Fung, instructed by Anthony Siu & Co., for the 1st and 2nd Plaintiffs Ms Sezen Chong, instructed by Jackson Ho & Co., for the 2nd Defendant [1] See Plaintiffs’ skeleton paragraphs 2, 4 to 14, 2nd Defendant’s skeleton paragraph 4, and the references given in those paragraphs. [2] Whilst the pleaded claim refers to the Agreements being illegal and unenforceable, these are pleas made as part and parcel of the claim that the Plaintiffs did not receive any consideration under the Agreements, rather than as a freestanding ground for restitution: see SOC paragraph 31, Reply paragraph 17.2. [3] Skeleton paragraph 2. [4] See 2nd Affirmation of Tang Yuk Ling Dobe, paragraphs 27 to 29. [5] This submission further demonstrated that before one considers the defence of illegality, the defence of failure of consideration arises for consideration; the Plaintiffs’ submissions as to illegality presuppose that there was a failure of consideration. [6] Again, this assumes that the 2nd Defendant did not provide performance for the Payments. | ||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 257/2023