Background

In Li (or Lei) Ting Kit Tso v Cheung Tin Wah [2016] HKEC 2720, the Plaintiff was a “Tso” under Chinese customary law. It was the owner of certain land (“the Land”) in the New Territories. The managers of the Tso entered into an oral agreement with the first Defendant (“D1”) in October 1996. Under the oral agreement, the Tso would transfer the Land to D1 or a party nominated by him, to build fifteen houses on the Land and the Tso would receive three of these, some carparks and a cash payment.

D1 had one year from the date of the oral agreement to obtain the necessary approval for the development from the Lands Department in accordance with the Small House Policy; otherwise, Plaintiff could call for the re-assignment of the Land to it. D1 agreed that he would not transfer the Land to third parties nor allow any nominee of his to do so. For the ease of handling the procedures, D1 nominated a company, the second Defendant (“D2”), as the party that would enter into a written agreement in line with the oral agreement with D1. The Tso entered into the written agreement with D2 and transferred the Land to it. No consideration was paid by D2 to the Tso although the assignment to D2 stated that consideration had been provided by D2.

No development had taken place by 2011 and the Tso wrote to D2 purporting to accept its repudiatory breach in delaying the carrying out of the development and calling on D2 to transfer the Land back to it. At that time, D2 had already divided the Land into thirteen sections and assigned some of them to third parties. After receiving the Tso’s letter, D2 assigned the remaining sections to other third parties.

The Plaintiff was able to secure oral agreements from the current owners of 5 of the sections to assign the title back to it. Thus, 8 sections were “lost” to the Plaintiff.

The plaintiff’s case

The Plaintiff argued that the written agreement was signed by D2 for and on behalf of D1 as a corporate vehicle and/or an agent. Alternatively, it was argued that D2 was liable under the written agreement, while D1 remains personally liable under the oral agreement or alternatively he is personally liable due to his guarantee of the due performance of the written agreement.

Breach of the agreements

Since both the oral and written agreements (collectively called “the Agreements”) would inevitably involve indigenous villagers making false declarations to the Lands Department, the Plaintiff accepted that it was unlawful and thus it could not sue for breach of the Agreements because an illegal contract will not be enforced by the Court.

Locus poenitentiae

Under Common Law, it is a doctrine that allows a party to an illegal contract which has not been wholly or partly performed to recover his property and is based on the restitution of property only. The Plaintiff could not rely on this as D2 no longer had the sections.

Whether the defendants had provided
consideration for the assignment

In order to show that consideration has been paid, the Defendants had to rely on the performance under the illegal agreements. Thus, this defence is not sustainable.

Whether the plaintiff is estopped by deed
from denying receipt of the consideration

Estoppel by deed is a rule of evidence founded on the principle that a solemn and unambiguous statement or engagement in a deed must be taken as binding between the parties and privies and therefore the court will not admit any contradictory proof. Since the Plaintiff was not suing on the assignment for the unpaid consideration, but merely providing the basis of its claim to proprietary rights, the Plaintiff was not estopped by deed from denying receipt of the consideration.

Resulting trust

A resulting trust is the creation of an implied trust by operation of law, where it is implied that a person is holding the property for the benefit of the transferor if the property is transferred to that person who pays nothing for it.

The judge found that no payment was made by the Defendants to the Plaintiff for the assignment of the Land to D2 and the judge also found that the actual intention was not for an outright transfer of the land. Instead, the transfer was for a specific development purpose so that the plaintiff was to receive the houses with the car park spaces and the money. If the application procedure of small house development with the Lands Department failed, the Land had to be returned to the Plaintiff.

In any case, since the Defendants had to rely on the illegal agreement to establish its defence, the court would not assist them.

Conclusion

The Tso was able to rely on the presumption of resulting trust as against D2. The unlawful Agreements were not consideration for the assignment of the Land to D2. Nor was the Tso estopped by the deed of assignment from showing that no consideration had been paid to it.

The problem was that D2 no longer had the Land, title to which was in the hands of the various assignees. Since there was nothing to show that the assignees were anything other than good faith purchasers, the Plaintiff had no tracing claim against them. Instead, D2 was ordered to pay equitable compensation to the Plaintiff, being the market value of the Land as at the date of the writ.

Implications

The small-house policy is under the public spotlight again after 11 villagers and a property developer were jailed for defrauding the government in a housing scam in connection with the policy in HKSAR v 李欽培 David [2015] CHKEC 1516. While indigenous villagers use their rights to make money, they may risk committing criminal offence by making false declarations. Although this case allows the disgruntled Tso to get back its land under the failed arrangement, villagers and developers should not abuse this right. The verdict in HKSAR v 李欽培 David serves as a reminder that selling small house rights which involve illegal arrangement to defraud the Government would likely face criminal consequences.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.