Recovering property transferred pursuant to an agreement tainted with illegality: Patel v Mirza in Hong Kong

In Chung Tin Pui v Li Pak Sau ([2017] HKEC 2103) P was the manager of a tso that owned two lots of land in the New Territories. The Tso entered into two contracts with D1. D1 was to build several houses on each of the two lots.

The tso would have the right to select three of these for itself and D1 would assign these to the tso. D1 would also rebuild the tso‘s ancestral hall. The tso and D1 entered into two deeds of development in pursuance of the two agreements.

The tso assigned its land to D1 and D2 for no consideration pursuant to the two contracts and deeds; the land was held on trust for the tso. D1 and D2 divided the land into smaller lots which were assigned to D3 – D13 who all had knowledge of the trust.

D1 and D2, in breach of contract and their duty as trustees, sold four of the sub-lots, failed to complete the development on time and failed to rebuild the ancestral hall.

P sought to re-amend its statement of claim to plead that:

  1. D3 – D13 were all subject to the trust since they knew of it;
  2. P should be allowed to set the contacts and deeds of development aside on the grounds that they were contrary to law and public policy (given that part of the scheme relied on D3 – D13 making false declarations to the government that they would be beneficial owners of the property) (‘the illegality point’);
  3. so that upon P’s withdrawal from the development the Ds would hold the land on resulting trust for P.

In considering the illegality point, the court (Louis Chan J) placed the UK Supreme Court decision in Patel v Mirza at the centre of his analysis; this was said to be ‘of very high persuasive authority’ ([51]).

Louis Chan J summarised the effect of Patel v Mirza thus:

’53. It is not necessary to discuss the question of locus poenitentiae (§116). A person who satisfies the ordinary requirements for a claim in unjust enrichment should be entitled to the return of his property; he should not be debarred from enforcing his claim
only because the property which he seeks to recover was transferred to the defendant for an unlawful purpose (§§116 and 121). There may be a particular reason for the court to refuse to assist an owner to enforce his title to property, but such cases are likely to be rare (§116).

54. In considering such a claim, the Court should consider whether the public interest like the integrity of the legal system (or certain aspects of public morality) would be harmed by the enforcement of the claim by taking into account:

  • the underlying purpose of the prohibition which has been transgressed, and whether the purpose would be enhanced by the denial of the claim;
  • any other relevant public policy on which the denial of the claim may have an impact; and
  • whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts (§120).’

It no longer mattered whether or not the illegal development had been wholly or substantially performed ([58]). Nor did it matter whether or not P’s manager had known of the illegality ([60]).

Rather, ‘[t]he question now is whether by allowing the 2nd defendant and her nominees to keep the rest of the lots is a proportionate response to the illegality that the plaintiff has hitherto subscribed’ ([59]).

P was given leave to re-amend the statement of claim and to consider whether he wanted to make any further re-amendments in the light of Patel v Mirza.

Michael Lower

 

 

 

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