Cheng Kin Ching v. Ching Lin Chuen and Others

HCA 1645/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1645 OF 2013

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HCCW 387/2003

COMPANIES WINDING-UP PROCEEDINGS

NO 387 OF 2003

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(Heard Together)

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D E C I S I O N

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Introduction

1.These proceedings were instituted in September 2013.  The plaintiff is Cheng Kin Ching (“Cheng”), who together with his wife (“Lam”) own half of the shares of Pegasus View Investment Limited (“Pegasus”).  Cheng applies to join Pegasus as 2^nd plaintiff in the action.

2.The claims made against the defendants in these proceedings are on the basis of various agreements:

(1) a Chinese agreement dated 5 July 1994 (“Small House Agreement”), made between the 1^st defendant Ching Lin Chuen (“Ching”) and Mdm Tam Shui (“Tam”) on the one part and Pegasus on the other part;   

(2) a Shareholders Agreement in English dated 12 July 1994 (“Shareholders Agreement”) made between Ching and Tam on the one part and Pegasus on the other part; and

(3) a Settlement Agreement in Chinese dated 8 July 1999 (“Settlement Agreement”) made between Ching, Tam and Polyline Development Limited (“Polyline”) on the one part and Pegasus on the other part.

3.Cheng and Lam claim that Pegasus entered into the Small House Agreement, the Shareholders Agreement and the Settlement Agreement (collectively referred to as “Agreements”) on its own behalf, or as their agent.  The Agreements related to the contractual parties’ interests in the development and construction of small houses in Lots Nos 382, 383 and 390 in DD 26 in Sha Lan Village in the New Territories (“Development”).

4.There were in fact other proceedings involving the parties in this action.  The first is HCA 9502 of 1999 (“the 1999 Action”), instituted by Pegasus, Lam and Cheng against Ching and Tam, whereby the plaintiffs claimed breach of the Shareholders Agreement and refund of monies paid under the Shareholders Agreement.  It was as a result of, and for the settlement of, the 1999 Action that the Settlement Agreement was entered into.

5.The second set of proceedings is HCA 2203 of 2006 (“2006 Action”), instituted by Pegasus, Lam and Cheng against Ching, the personal representatives of Tam (who had died by then) and the company in which Ching and Tam held shares, Wai Hang Cheong Co Ltd (“WHC”).  In the 2006 Action, the plaintiffs claimed breach of the Agreements and sought damages, represented by the monies paid by the plaintiffs under the Agreements to acquire the small houses to be constructed in the Development and the construction expenses paid therefor.

6.In the present proceedings, Cheng seeks to claim that by virtue of the Agreements, and the judgment and evidence of Ching in the 2006 Action, the defendants in this action hold 3 blocks of the small houses, Block 12 on Lot 382X, Block 3 on Lot 382N and Block 27 on Lot 382G, and 9 car parking spaces (“Properties”) as constructive trustees for the benefit of Cheng, Lam and Pegasus. 

7.In November 2013 and June 2014, the defendants in the present proceedings (with the exception of the 9^th defendant) applied to strike out the plaintiffs’ claims against them.  The substance of the defendants’ applications to strike out is that the present proceedings are an abuse of the process of the Court, since the claims made against the defendants in these proceedings were either determined in the 2006 Action, or otherwise could and should have been raised in the 2006 Action, such that it constitutes an abuse to attempt to reopen the issues in these proceedings.  The defendants further rely on the fact that the pleaded claims made against them in these proceedings fail to disclose any reasonable cause of action and are embarrassing, frivolous and vexatious.

8.Subsequent to the making of the striking out applications in November 2013, Cheng applied in 2014 for leave to join Pegasus as a plaintiff, to join Polyline as a defendant, and to amend the Statement of Claim.

The claims in the 2006 Action

9.The pleadings in the 2006 Action have to be considered since both the plaintiffs and the defendants in these proceedings rely on the 2006 Action.  Cheng and Pegasus rely on the judgment in the 2006 Action as giving rise to what they assert as a claim of constructive trust against the defendants in these proceedings. On their part, the defendants claim that in the 2006 Action, the Court had determined the trust issue against Cheng and Pegasus, and that all the claims raised in these proceedings had already been raised and determined against Cheng and Pegasus, and to the extent that they had not been raised, such claims should have been raised in the 2006 Action and it is an abuse to try and re-litigate them.

10.Cheng, Lam and Pegasus are plaintiffs in the 2006 Action.  The defendants are Ching, the personal representative of Tam and WHC.  The terms of the Small House Agreement, the Shareholders Agreement and the Settlement Agreement are all set out in the Statement of Claim and in the various amended versions thereof (for convenience referred to hereafter simply as “2006 Statement of Claim”).  Cheng, Lam and Pegasus claim that Ching and Tam held 66% of the shares in WHC, and that application had been made to the Government for the construction of 33 small houses on Lots Nos 382, 383 and 390 (“Lots”).  They pleaded that Ching and Tam had agreed to transfer to Pegasus 27.54% of the 66% shareholding held by Ching and Tam in WHC, which shareholding “represented the entire indigenous rights and property rights to 6 blocks of small houses and 18 car parking spaces”.  The price payable by Pegasus for the rights acquired under the Small House Agreement was HK$13,200,000.   Cheng, Lam and Pegasus claim in the 2006 Statement of Claim that it was an implied term of the Small House Agreement that Ching and Tam “undertook to procure the conveyance and granting of 6 blocks of small houses and 18 car parking spaces on (the Lots) to (Pegasus)”.

11.Cheng, Lam and Pegasus plead, in the 2006 Statement of Claim, that Pegasus entered into a Shares Transfer Agreement with Ching and Tam on 12 July 1994 (“Shares Transfer Agreement”) for the transfer of shares in WHC.  Under the Shares Transfer Agreement, Ching and Tam agreed to sell to Pegasus their 27.54 % shareholding in WHC.  The Shareholders Agreement was also entered into on 12 July 1994, whereby the parties acknowledged that the shares acquired by Pegasus represented 6 blocks of small houses to be erected and 18 car parking spaces on the Lots.  It was pleaded that it was an implied term of the Shareholders Agreement that the transfer of shares to Pegasus represented the 6 blocks of small houses and 18 car parking spaces to be conveyed to Pegasus.

12.According to the 2006 Statement of Claim, Pegasus, Cheng and Lam had paid HK$8,400,000 of the price under the Small House Agreement, and construction expenses of $368,145.

13.The 2006 Statement of Claim referred to the Settlement Agreement, which was entered into between Pegasus, Lam and Cheng on the one part (“Cheng Group”), and Ching, Tam and Polyline on the other part (“Ching Group”) after the commencement of the 1999 Action, in which proceedings the Cheng Group claimed that the Ching Group were in breach of the Shareholders Agreement.  Under the Settlement Agreement,  the Ching Group agreed to buy back half of the interests of the Cheng Group in the Development under the Small House Agreement, with the rights and interests of Pegasus, Cheng and Lam in the remaining half share of the Development (“Remaining Half Interest”) unaffected.

14.In essence, the Cheng Group claimed in the 2006 Action that they retained interests in the Properties (as defined in para 6 above), which they claimed were equivalent in value to $4,200,000.  They claimed that Ching, Tam and WHC were in repudiatory breach of the Small House Agreement, the Shareholders Agreement and the Settlement Agreement, when Ching informed Pegasus in September 2006 that it was no longer possible to procure the conveyance of the Properties to the Cheng Group.  Pegasus further claimed that it discovered that Ching and Tam had failed to carry out the Shareholders Agreement to transfer and register the shares of WHC in favor of Pegasus.  The Cheng Group accordingly claimed, in the 2006 Action, damages for breach of contract, and repayment of the monies they had paid under the Agreements for total failure of consideration.

15.There was an initial claim made in the Re-Re-Re-Amended version of the 2006 Statement of Claim that the Remaining Half Interest was held by Ching, Tam and WHC on trust for the Cheng Group.

16.In their Defence, Ching, Tam and WHC referred to the Agreements, and claimed that by the Small House Agreement, Cheng and Tam had agreed to transfer 1,818 shares in WHC to Pegasus, representing 6 blocks of small houses to be erected on the Lots and the right of the owners to use 18 car parking spaces, for a consideration of $13,200,000.  They claimed that it was an express term of the Small House Agreement that building licences for constructing small houses would be issued by the Government within 2 to 3 years of the date of the Small House Agreement.  The Defence of Ching and WHC filed in the 2006 Action (“2006 Defence”) pleaded that the Shareholders Agreement contained express terms, that Pegasus was to pay $13,200,000 as consideration of the agreement by Ching and Tam to transfer the 1,818 shares in WHC to Pegasus, and that the transferred shares represented 6 blocks of small houses to be erected on the Lots and the right to use 18 car parking spaces.

17.According to the 2006 Defence, no building licences had ever been issued by the Government for building any small houses on the Lots, and no small houses had ever been built pursuant to the Small House Agreement.  Ching and WHC claimed they were not the registered owners of Lots 382 and 383, that the Properties had not been built and had not come under the control of Ching and WHC.

18.Ching and WHC deny that there was any trust as alleged by the Cheng Group, that there was any breach of the Agreements as alleged, or that they were liable for any payment or damages as sought by the Cheng Group.

19.The trial of the 2006 Action took place in March and April 2012 before Recorder A Ho, SC.  Judgment was handed down on 26 April 2013 (“Judgment”).

20.Before trial, the claims made against WHC in the 2006 Action for alleged breach of the Agreements were struck out by the Master, since WHC was never a party to any of the Agreements.

21.As for the claims of alleged trust and breach of trust, these were also struck out by the learned Recorder.  The reasons were given in his Judgment of 26 April 2013, on his construction of the Agreements and upon his review of the 2006 Statement of Claim.  As these are relevant for the purposes of the striking out applications before me, I will go into the Judgment with more details.

The Judgment in the 2006 Action

22.Essential features of the 2006 Action are that, firstly, the Cheng Group relied only on what they claimed to be an implied term of the Small House Agreement and of the Shareholders Agreement: that Ching and Tam impliedly undertook to procure the conveyance of 6 small houses and the right to use 18 car parking spaces to Pegasus.  The only breach of contract complained of, as pleaded, is the breach of such an implied term.  Secondly, the Cheng Group claimed that they had retained the Remaining Half Interest under the Small House Agreement, and that Ching, Tam and WHC held the Remaining Half Interest on trust for the Cheng Group.  (Such a claim can only be ascertained from paragraph 15 of the Judgment, as the papers put before this court did not include the struck out claim.)

23.The claim relating to the trust in the 2006 Action was struck out by the Recorder, as he found that the 2006 Statement of Claim failed to identify the nature of the interest over which the trust was alleged to have arisen, the manner in which the trust was created, and the nature of the alleged trust itself.  The Recorder considered that the pleading of the Small House Agreement as made in the 2006 Statement of Claim shed no light on the subject matter of the transaction under the Small House Agreement, and hence the nature of the Remaining Half Interest under the Small House Agreement remained obscure, such that it was impossible to know how a trust over the Remaining Half Interest was or could be created.  The Recorder accepted the complaint made by the Ching Group, that the pleading of the trust over the Remaining Half Interest was defective and embarrassing.  It was accordingly struck out.

24.In the determination of the residual contractual claim made by the Cheng Group in the 2006 Action, the learned Recorder construed the Small House Agreement and the Settlement Agreement, in order to identify the subject matter of the interests which were agreed to be sold and transferred to Pegasus and the Cheng Group (which is also relevant to the identification of the Remaining Half Interest).  He observed that the Small House Agreement did not expressly provide that it was a sale and purchase of the Lots (paragraph 26 of the Judgment), and concluded that the Cheng Group were wrong to regard the Small House Agreement as having an express term that the proprietary rights of the 6 small houses and 18 car parking spaces had been sold to Pegasus.  The Recorder found (in paragraph 29 of the Judgment) that there was no such term, and that what was agreed to be sold and transferred under the Small House Agreement was in fact 27.54% of the 66% shareholding in WHC (paragraph 30 of the Judgment).  According to the Recorder, the intention of the parties to the Small House Agreement, as also reflected in the Shareholders Agreement, was to jointly develop the Development, and the Cheng Group by Pegasus had invested in the Development by taking shares in WHC.  The Recorder found that the consideration for the payment expressed in the Shareholders Agreement was the shares in WHC, as so stated in clause 4 of the Shareholders Agreement.  The Recorder therefore rejected the claim that there was any implied term or obligation imposed on Ching and Tam under the Small House Agreement or the Shareholders Agreement that they would procure the conveyance of the Properties and the right to use the car parking spaces to the Cheng Group.

25.The Recorder found that the Settlement Agreement did not independently create any rights or interests in relation to the Remaining Half Interest (paragraph 36 of the Judgment).  The Settlement Agreement merely provided for the rights and obligations of the parties under the Agreements to continue to apply, subject to a reduction in the number of houses and car parking spaces concerned.  Accordingly, the Recorder found that there was no implied undertaking under the Settlement Agreement to support the claims made by the Cheng Group. 

26.By virtue of his findings made as to the effect of the Small House Agreement and Shareholders Agreement, and the subject matter of the sale and purchase or transfer contemplated under these agreements (i.e.  the 27.54% of the 66% shareholding in WHC), it is also clear from the Judgment that the Remaining Half Interest is the 50% of the 27.54% shareholding in WHC, and not any particular Lots or the Properties in question.

27.The Recorder went on in the Judgment to consider the claims of breach of the Agreements as made by the Cheng Group: although it was not necessary so to do, since he had found that there was no implied term in the Agreements as alleged by the Cheng Group.  He indicated that if he had found for the Cheng Group on the issue of the implied terms, he would have found that Ching had repudiated the Agreements in 2006.  However, the Recorder found that there was no acceptance of Ching’s repudiation, and it was further unclear whether the repudiation by Cheng bound Tam.

28.Significantly, the Recorder did not accept that there was a breach of the Shareholders Agreement, or that Cheng and Tam had failed to transfer and register the shares of WHC to or in favor of Pegasus (paragraph 57 of the Judgment).  The Recorder referred to the recitals of the Shareholders Agreement which suggested that the 1,818 shares in WHC had been transferred to Pegasus.  The claims made by the Cheng Group on the basis of the alleged failure to transfer the shares of WHC, and for total failure of consideration for the payment made under the Shareholders Agreement and Small House Agreement, were rejected by the Recorder (paragraphs 51 to 58 of the Judgment).

29.There has been no appeal against the Judgment, which remains final, and binding on the parties to the 2009 Action, including Cheng and Pegasus.

The claims made in the present action

30.The claims made in these proceedings are essentially the same as those made in the 2006 Action.  This action was originally brought by Cheng, but he now seeks to join Pegasus as an additional plaintiff.  The claims are made against Ching, the personal representative of Tam and WHC, on the basis of the very same Agreements.  Cheng and Pegasus now allege that the Properties are held by Ching, Tam, WHC, and by the other defendants to whom the relevant lots of the Properties had been allegedly transferred, as constructive trustees for Cheng, Lam and Pegasus, on the basis of their “knowing receipt” of the Properties (“the Constructive Trustee Claim”).  There is no pleading of any facts in support of the defendants’ alleged knowledge of the circumstances of the transfer of the Properties or any of the Lots, in breach of trust, or breach of duties, or that the Properties or relevant lots are trust properties.

31.Cheng and Pegasus also seek to claim (in paragraph 26 of the proposed Amended Statement of Claim) that it was an implied term of the Agreements that Ching and the personal representative of Tam are contractually bound to complete the development of the Properties within a reasonable time, but that they have failed so to do despite the lapse of 14 years, and have refused to complete the Development (“the Failure to Develop Claim”). 

32.It is further claimed that the Agreements were entered into for an illegal purpose, to deceive or defraud the District Lands Office by false declarations that the applicants for building licences were the only beneficial owners of the Lots, when they were not, and that the Agreements are therefore illegal, void and unenforceable (“the Illegality Claim”). 

33.Finally, Cheng and Pegasus claim that Ching and Tam had conspired together to defraud the Cheng Group, by making false representations that the Properties would be developed, allocated and held for the benefit of the Cheng Group (“Conspiracy and False Representation Claim”).  The alleged false representations were pleaded to have become terms of the Agreements.

34.As against the 6^th defendant (a clerk in a solicitors’ firm), it is alleged that he had released the title deeds and documents in relation to the Properties to Cheng and 2 other defendants for the purpose of preparing assignments of the Properties.  It is claimed that the 6^th defendant had acted dishonestly in assisting the breaches of trust by Ching and the 3^rd and 5^th defendants, by assigning the Properties to these defendants, with knowledge that Cheng, Pegasus and Lam had the title to and proprietary interest in the Properties.  However, there is no pleading of the material facts, such as any facts to support the claim of the 6^th defendant’s knowledge of the alleged breach of trust by the other defendants, or his alleged knowledge that the Cheng Group had the title to the Properties. 

Relevant legal principles

35.It is of course to be borne in mind that only in plain and obvious cases should the court exercise its summary powers to strike out any pleading.

36.On the question of abuse of court process, which is relied on by the defendants, the essence of the doctrine is that a party is generally not to be permitted to raise in subsequent proceedings matters which that party could and should have raised in earlier proceedings.  The Henderson v Henderson abuse is derived from the case of that name and has been explained and developed in Johnson v Gore Wood & Co [2002] 2 AC 1,Yat Tung Investment Co Ltd v Dao Heng Bank Ltd & Anor [1975] AC 581, Ngai Few Fung v Cheung Kwai Heung [2008] 2 HKC 111 and Chiang Lily v Secretary for Justice [2009] 6 HKC 234.

37.In Ngai Few Fung v Cheung Kwai Heung [2008] 2 HKC 111, Cheung JA summarized the principles of estoppel, abuse of process and re judicata , at paragraphs 11 to 13 of his judgment:

“11. This principle of estoppel can be found in the well-known case of Henderson v Henderson (1843) 3 Hare 100, where Wigram VC at 115 held that:

‘ ... where a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the court requires the parties to the litigation to bring forward the whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time.’

12. The principle was approved by the Privy Council in an appeal from Hong Kong in the case of Yat Tung Investment Co Ltd v Dao Heng Bank Ltd & Anor [1975] AC 581. Lord Kilbrandon at p 590 held that:

‘but there is a wider sense in which the doctrine may be appealed to, so that it becomes an abuse of process to raise in subsequent proceedings matters which could and therefore should have been litigated in earlier proceedings.’

13. After referring to Henderson Lord Kilbrandon further held that:

‘The shutting out of a ‘subject of litigation’ - a power which no court should exercise but after a scrupulous examination of all the circumstances - is limited to cases where reasonable diligence would have caused a matter to be earlier raised; moreover, although negligence, inadvertence or even accident will not suffice to excuse, nevertheless ‘special circumstances’ are reserved in case justice should be found to require the non-application of the rule.’ ”

38.The relevant principles were further clarified and explained by Ma CJHC (as the Chief Justice then was) in Chiang Lily v Secretary for Justice [2009] 6 HKC 234, at paragraph 57 of his judgment:

“It is unnecessary to dwell on these issues that arise on a consideration of the various facets of the doctrine of res judicata if one keeps firmly in mind the real issue that, in my view, has to be addressed, namely, the question of abuse arising from matters that ought properly have been litigated in previous proceedings. I emphasize here the existence of 2 elements that have to be demonstrated by the party alleging abuse: that there exist matters that could and should have been litigated in earlier proceedings. I am aware that in Yat Tung..., Lord Kilbrandon did refer to ‘matters which could and therefore should have been litigated in earlier proceedings’ (my emphasis). However, ... I think it is now clear that just because a point could have been raised in earlier proceedings did not of itself mean that it should have been...”

39.The Chief Justice proceeded in paragraph 58 to explain:

“58. The starting point is a statement of general principle that the court must possess an inherent power to prevent abuse in situations that could be manifestly unfair or unjust to a party before it or would otherwise bring the administration of justice into disrepute. In Hunter v Chief Constable of the West Midlands Police [1982] AC 529, Lord Diplock said in a well-known passage at 536B-D:

‘My Lords, this is a case about abuse of the process of the High Court. It concerns the inherent power which any court of justice must possess to prevent misuse of its procedure in a way which, although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party to litigation before it, or would otherwise bring the administration of justice into disrepute among right-thinking people. The circumstances in which abuse of process can arise are very varied.’

This inherent power existed in Hong Kong well before the innovations brought about by the Civil Justice Reform but it is all the more underlined by that Reform. The Underlying Objectives stated in RHC Order 1A rule 1 (b) and (d) refer to the desirability of expedition and the necessity of ensuring fairness.

59. Apart from any question of res judicata (whether in the narrow or wider sense), abuse can arise in attempting to relitigate matters decided in previous rulings that were not strictly speaking binding on the parties seeking to raise them in later proceedings: see, for example, Ashmore v British Coal Corporation [1990] 2 QB 338.

60.    It is important to bear in mind that the roots of the doctrine of res judicata lie in the more general principle that the court’s process must not be abused...”

40.At para 61 of his judgment in Chiang Lily, the Chief Justice summarized the correct approach, as follows:

“Much therefore depends in any given case on the precise circumstances as to whether or not the attempt to raise an issue for determination in proceedings will constitute an abuse were such an issue could have been raised in previous proceedings. Where an issue should have been raised, it is likely that an abuse has occurred.”

41.In the more recent decision of the Court of Final Appeal in Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72, the Chief Justice further elaborated on the facets of the doctrine of the Henderson v Henderson abuse, as follows:

“(1) The starting point is to recognize that the doctrine is founded on an abuse of process. As Lord Wilberforce said in Brisbane City Council v AG for Queensland, ‘it ought only to be applied when the facts are such as to amount to an abuse: otherwise, there is a danger of a party being shut out from bringing forward a genuine subject of litigation’: (p 425).

(2) This concern (that a party or not lightly to be deprived of the right to have serious matters litigated) was echoed by Lord Millet in Johnson v Gore Wood & Co: (p 59D-G).

(3) It must therefore be essential when striking out a claim on this basis (and thus preventing a litigation of that claim) that an abuse is found to exist in seeking to raise in subsequent proceedings claims or issues which could and should have been raised in earlier proceedings. This abuse will usually take the form of the other party being ‘vexed’(or in some cases, the terms ‘oppressed’, ‘unjustly harassed ‘ or ‘unjustly hounded’ are used) by the subsequent set of proceedings Johnson v Gore Wood & Co, 31A-B.

(4) The abuse can also take the form of the administration of justice being brought into disrepute: see Chiang Lily, 256D-G ([58]) referring to Hunter v Chief Constable of the West Midlands Police [1982] AC 529. With the procedural reforms introduced by the Civil Justice Reform in 2009, the courts in Hong Kong must now, when exercising their procedural powers, increasingly bear in mind not just the parties before them in any particular litigation but also the position of other litigants in the court process. RSC O 1A r1(f) states as one of the underlying objectives of the court’s procedural powers under the Rules to be ‘to ensure that the resources of the court are distributed fairly’.

(5) In examining aspects such as abuse, the court is concerned with balancing interests: not just those of the litigants before it, but also taking into account the other interests involved in the administration of justice. It is important therefore here to emphasize that when the court is dealing with the Henderson v Henderson type of abuse, it is not looking at an absolute bar to litigation such as issue estoppel or cause of action estoppel. On the contrary, in considering this type of abuse, the court is required to assess a number of factors and balance competing interests. See here, Bradford and Bingley Building Society, 1490F-H. It is also worth making the following observations at this juncture:

(a) There is conceptually an important distinction between absolute bars such as issue estoppel and the type of abuse with which we are concerned. In the former situation, the party who seeks to relitigate an issue or cause of action has already had his day in court, whereas in the latter situation, that party has not: cf Johnson v Gore Wood, 59D (‘It is one thing to refuse to allow a party to re-litigate a question which already has been decided; it is quite another to deny him the opportunity of litigating for the first time a question which is not previously being adjudicated upon’ (Lord Millet)).

(b)  The assessment of different factors and balancing competing interests can be said to be an exercise of a discretion...”

42.Finally, it is worth noting that in Lai Ying On v Secretary of Justice CACV 175/2012, CACV 200/2012, CACV 228/2012 and CACV 229/2012, unreported, 26 May 2014, when Lam VP referred to Henderson v Henderson and Johnson v Gore Wood [2002] 2 AC 1 at paragraph 14 of his judgment, he had this to say:

“The approach of Lord Bingham again places emphasis on flexibility and focuses on whether in all circumstances a party is misusing or abusing the court process. It has to be a broad merits-based assessment having regard to the relevant private and public interest. This is now firmly established to be the proper approach by a line of authorities in Hong Kong ...”

Does the prosecution of the present action constitute an abuse?

43.The claims made in these proceedings have been summarized in paragraphs 30 to 34 above. 

44.The material and unavoidable conclusion to be drawn after a review of the pleadings in the 2006 Action is that the Cheng Group made the deliberate choice, under legal advice, to rely only on a claim of breach of the implied terms of the Small House Agreement and the Shareholders Agreement, that the Ching Group were in breach of the implied covenant to procure the conveyance of 6 small houses and 18 car parking spaces in the Development on the Lots to Pegasus.  This was so notwithstanding the pleading of the background facts and relevant factual matrix of the Agreements: that the Development was for the construction of small houses, that there were indigenous rights in the 6 blocks of small houses to be sold to Pegasus, and that there were applications made to the Government for building licenses for the construction of the small houses on the Lots - as evidenced by the different references to such facts in the original and amended versions of the pleadings in the 2006 Action.

45.At all material times up to the trial of the 2006 Action, it was open to the Cheng Group to claim for breach of any relevant express terms (or any other relevant implied terms) of the Small House Agreement and the Shareholders Agreement, but this was not the course which the Cheng Group chose to take in the 2006 Action.

46.In relation to the Failure to Develop Claim, now alleged in this action to be an implied term of the Agreements, there is no good reason or special circumstance which can explain why such a claim was not made in the 2006 Action. Needless to say, the fact that the Cheng Group were not aware, and not advised, that it was open to them to make such a claim of implied term, and that they have only now been enlightened by a new team of lawyers, is no answer.  The change of lawyers, the shift in legal advice, or the lack of legal advice have never been accepted as an excuse to re-open the same subject of litigation.  It would be totally abusive, and would bring the administration of justice into disrepute, to permit the Cheng Group now to put forward this claim, of breach of yet another implied term of the Agreements, when they had been given the full opportunity in the 2006 Action to put forward their entire case on the effect of the Agreements.  To permit them to run a new case of breach of any other express or implied terms of the Agreements already made the subject matter of the 2006 Action, and determined by the Court, would be scandalous and an abuse of process in the fullest sense.  In the terms of Lord Millet in Johnson v Gore Wood, the Cheng Group had their day in court in the 2006 Action, and with reasonable diligence, the implied term sought to be relied on in the Failure to Develop Claim was a matter which could have been, and ought properly to have been, raised for litigation in the 2006 Action.

47.The Recorder clearly found in the 2006 Action that what was agreed under the Small House Agreement and the Shareholders Agreement was the sale and purchase of 27.54% of the 66% shareholding in WHC.  The stated intention of the parties to the Agreements, to jointly develop the Lots, was by way of investment in the Development by Pegasus taking up the shares in WHC.  That is the decided effect of the 2 Agreements, and the Recorder found that the Settlement Agreement created no independent rights or interests and added nothing to the Small House Agreement and the Shareholders Agreement.  There has been no appeal against the Judgment: which is final and conclusive, and binding on Cheng and Pegasus.

48.Significantly, having found that the consideration expressed in the Shareholders Agreement was for payment of the shares in WHC, the Recorder also found that there was no evidence to substantiate the claim that the shares in WHC had not been transferred or registered to Pegasus.  It follows from the Recorder’s findings that if there should be any claim for failure or delay in the Development, such claim should be made by WHC, and not Pegasus or anyone in the Cheng Group.  The argument, that the Agreements have not been terminated in view of the Recorder’s finding that there was no acceptance of repudiation, therefore does not assist the Cheng Group.

49.In view of the Recorder’s finding on the effect of the Agreements, I cannot agree, and reject the argument, that the Recorder’s Judgment in any way gave rise to any finding that Pegasus or the Cheng Group had any proprietary interests in the Properties or the Lots, to support the Constructive Trust Claim.  This is apart from the fact that the claims of knowing receipt and dishonest assistance made against the defendants are totally lacking in particulars, which is relevant in the assessment of the overall merits of the claims made by Cheng and Pegasus and which are sought to be raised in these proceedings notwithstanding the determination of the 2006 Action.

50.The agreement dated 4 July 1997 referred to in paragraph 6B of the proposed Amended Statement of Claim, whereby it was alleged that the Lots, as well as Lot 382H, 382D and 382E, of the Development would belong to and be allocated to the Cheng Group, is simply part and parcel of the claim made in the 2006 Action, that the Cheng Group had interests in the Development and under the Agreements.  It was the evidence that their interests in the Properties had been allocated and were sufficiently identified and clear.  The Settlement Agreement referred to the Properties and the other lots thus allocated, and provided for the Ching Group to purchase back half of the interests of the Cheng Group.  The 4 July 1997 agreement is referred to in paragraph 7 of the Judgment.  It is not a new claim, nor a separate and distinct cause of action, which has not been litigated upon to have justified its being raised in this action.  In all the circumstances of this case, right thinking people would not consider that the Cheng Group had been deprived of their right to have the 4 July 1997 agreement litigated, in view of the matters which were in fact raised in the 2006 Action.

51.Cheng and Pegasus sought to argue that they did not have knowledge that the Properties had been transferred to the 7^th, 8^th and 12^th defendants, in their attempt to explain why the claims made against them as constructive trustees were not put forward for adjudication in the 2006 Action.  This is rejected.

52.It is clear from the land search records that the transfers of the Properties to the relevant defendants, including the transfers to the 7^th defendant, 8^th defendant, 10^th defendant, 11^th defendant and 12^th defendant, and the transfers from the proposed 13^th defendant Polyline, were all registered at the Land Office at the material and relevant times in February 2007, November 2011, and February 2012, before the trial of the 2006 Action in March and April 2012.  The Cheng Group and those  advising them could easily, with reasonable diligence, have ascertained the information concerning the dates of the transfer and the transferees of the relevant Properties, for appropriate claims to be made in the 2006 Action.  Again, I fail to see how the inadvertence, negligence or neglect of the Cheng Group and their advisers can excuse the omission of the claims which could and ought properly to have been made against the present defendants, including the claim against Polyline, on the basis of the alleged wrongful transfers to them.

53.It is further pertinent to note that the Cheng Group did in fact claim (in paragraph 16 of the Re-amended Reply in the 2006 Action) that Cheng and WHC had transferred the Remaining Half Interest, and that Lot 382X at least had been transferred.  Yet, the Cheng Group decided not to make any claim against the transferee, as constructive trustee or otherwise, in respect of such transfer.

54.I also reject the assertion made, that it was only when Ching gave evidence in the 2006 Action that the Cheng Group discovered the illegality involved in the arrangements for the construction of the small houses on the Lots under the Agreements.  The legal issues concerning small houses in the New Territories are common.  The pleadings in the 2006 Action referred to the common features of indigenous rights in the small houses to be constructed, and building licences applied for from the Government.  I find it incredible that the team of lawyers advising the Cheng Group in the 2006 Action would not have advised them on the legal issues concerning the legality or otherwise of the Development, the transfers of the small houses involved, and the Agreements.

55.As for the Conspiracy and False Representation Claim, the alleged false representation is that the Properties would be developed, allocated and held for the benefit of the Cheng Group.  In my view, this is clearly related to if not part and parcel of the claims made in the 2006 Action, for alleged breach of the Agreements and of the implied covenant to procure the transfer of the Properties to the Cheng Group.  The alleged false representation is claimed (in paragraph 34 of the proposed Amended Statement of Claim) to have been incorporated as terms of the Agreements, but the Cheng Group chose not to make any claim in the 2006 Action for the breach of such express terms.  I repeat the observations made in paragraph 46 above.

56.To the extent that there is any new element of any claim not directly put forward for determination in the 2006 Action, I take into account on the one hand the interests of the Ching Group and Polyline, not to be vexed and unjustly harassed by another set of proceedings on matters of fact which had been raised in the 2006 Action, and which relate back to 1999, when there has been a final Judgment entered in their favor.  On the other hand, there are these claims of Cheng and Pegasus, relating to alleged illegality, constructive trust, and alleged false representations which (on their case) were not directly raised or determined in the Judgment, and which they seek now to raise in these proceedings.  Bearing in mind the extremely close relationship between these “new” claims and those claims which were in fact raised in the 2006 Action, the public interest in the finality of litigation and to avoid abuse of the resources of the court, I come to the clear conclusion that on balance, it will be an abuse to permit these claims to be reformulated and be raised again in this action.  In my view, the Cheng Group had their day in court, when they had the full opportunity to present their case on the facts and on the Agreements which applied to the facts, and it would be manifestly unfair and unjust to subject the Ching Group to a new set of proceedings on the same matters, and to re-open issues covered by and dealt with in a final Judgment of the Court.

57.So far as the 6^th defendant is concerned, the claim of alleged dishonest assistance in alleged breaches of trust is totally unparticularised.  Since I find that there is no sustainable cause of action for breach of trust, the claim of the 6^th defendant’s alleged knowledge of any proprietary interest of the Cheng Group, and the 6^th defendant’s alleged dishonest assistance of breach of trust, must likewise fail.

The application to join Polyline as defendant

58.Polyline was named in the 2006 Statement of Claim as the initial owner of Lot 382X.  Cheng and Pegasus now seek to join the liquidators of Polyline, wound up by order of the Court on 25 June 2003, as a defendant in this action on the basis of Polyline’s transfer of Lot 382X in November 1992, and its alleged conspiracy with Ching and Tam in the Conspiracy and False Representation Claim.

59.As the facts relating to Polyline and its role were known to the Cheng Group, there is no good reason why Polyline was not included as a defendant in the 2006 Action, and why Cheng and Pegasus should now be given leave, 11 years after Polyline had been wound up, to make claims which could and should have been raised in the 2006 Action, for all the same reasons referred to in the preceding paragraphs.

Conclusion and orders

60.For all the above reasons, I accede to the defendants’ application to strike out the claims made against them in the Statement of Claim, and refuse the applications to amend the Statement of Claim and to join Pegasus, on the grounds that the claims and proposed amended claims disclose no reasonable cause of action, are frivolous and vexatious and is an abuse of the process of the court.  I make an order nisi that the costs of all these applications are to be paid by the plaintiff to the defendants, which order includes the costs of the Official Receiver as occasioned by and incidental to the application by summons made under s 186 of the Companies Ordinance.

HCA 1645/2013

Mr Jerry Jim, of Raymond Chan, Kenneth Yuen & Co, for the plaintiff

Mr Francis Yip, instructed by Ko & Chow, for 1^st, 3^rd to 5^th, 7^th & 8^th, and  10^th to 12^th defendants

Mr Bok Tin Yuen, instructed by Fung Wong Ng & Lam, for the 2^nd defendant

Mr Domminick Chung, instructed by Tam & Partners, for the 6^th  defendant

HCCW 387/2003

Mr Jerry Jim, of Raymond Chan, Kenneth Yuen & Co., for the applicants (Cheng Kin Ching and Pegasus View Investment Limited)

Attendance of the Official Receiver was excused