Archive for the ‘unlawful agreements’ Category

Recovery of land transferred pursuant to an unlawful contract

December 31, 2016

In Li (or Lei) Ting Kit Tso v Cheung Tin Wah ([2016] HKEC 2720) the managers of a Tso entered into an oral agreement with D1. Under the terms of the agreement, the Tso would transfer land to D1 or a party nominated by him. Thirteen houses would be built on the land and the Tso would receive three of these and a cash payment.

D1 had one year from the date of the agreement (in October 1996) to obtain the necessary approval for the development from the Lands Department in accordance with the Small House Policy; otherwise, P 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.

D1 nominated a company, D2, as the party that would enter into the 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 D2 had provided consideration).

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.

D2 had already divided the legal title to the land into thirteen sections and assigned some of them to third parties. After receiving D2’s letter it assigned the remaining sections to third parties.

It was accepted by the Tso that its agreement with D2 was unlawful since it would inevitably involve indigenous villagers making false declarations to the Lands Department. As a result, the Tso could not sue for breach of the agreement.

The Tso was able to rely on the presumption of resulting trust as against D2. The unlawful agreement was not consideration for the assignment to D2. Nor was the Tso estopped by the deed 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 Tso had no claim against them.

Instead, D2 was ordered to pay equitable compensation to the Tso (the market value of the land as at the date of the writ).

Michael Lower

Contracts and illegality: Patel v Mirza

August 25, 2016

In Patel v Mirza ([2016] UKSC 42) the UK Supreme Court considered the law concerning the recovery of money paid under a contract to carry out an illegal activity where the illegal act is not performed. If the activity were not illegal, the party who has paid the money would be entitled to recover the sum paid as a claim in unjust enrichment. The question is whether the illegality should prevent the claimant from recovering the money or other property transferred to the other party to the failed contract. In the context of Hong Kong’s property law, these principles are relevant, for example, where ding rights are sold to developers and false declarations are made to the Government as part of the overall performance of the contract. Can property transferred to developers in pursuance of the illegality-tainted contract be recovered?

Until now, English law in this area has been based on the House of Lords decision in Tinsley v Milligan and Hong Kong’s courts have applied this framework. Under the Tinsley approach, the question is dealt with as a procedural matter. The plaintiff is treated as having substantive legal rights and the question of illegality is dealt with as a procedural issue. The plaintiff can succeed if he has no need to plead his own illegality. If the plaintiff has to plead his own illegality (to rebut a presumption of advancement for example) then the claim will fail. This is subject to the possibility of a locus poenitentiae; the plaintiff who has to plead his own illegality might still be able to succeed if he can show that he withdrew from the transaction before implementation. This approach to the treatment of sums paid under illegal contracts that are not performed has come in for severe criticism. The  judgments of the nine members of the UK Supreme Court in this case are a collective attempt to create a new framework for dealing with cases of this sort. While there was unanimity as to the outcome on the facts of the case, there was disagreement within the Supreme Court on some of the fundamentals of the approach to be taken in this area.

In Patel, P paid GBP620,000 to M. M was to use the money to bet on shares in RBS relying on M’s insider information concerning an anticipated UK Government announcement. The announcement was never made. P sought to recover the GBP 620,000 on the basis that M would be unjustly enriched if he were permitted to keep it once the contract had failed. The question was whether the courts would help P given the illegality of the contract which amounted to a conspiracy to commit the offence of insider dealing. The UK Supreme Court were unanimous in deciding that P was entitled to recover the money despite the illegality of the contract and despite the fact that he would need to explain the nature of the agreement in order to establish his claim.

 

Lord Toulson and the majority: enforce the contract where to do so would be appropriate as a matter of policy (the ‘range of factors’ test)

The majority of the Supreme Court expressed agreement with the ‘range of factors’ approach articulated by Lord Toulson. Under this approach, the court would carry out a balancing act when deciding on whether or not to enforce a contract where there was unlawful conduct in its formation, purpose or performance. In broad terms, the court would:

a) consider the underlying purpose of the prohibition which has been transgressed, b) consider conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and c) keep in mind the possibility of overkill unless the law is applied with a due sense of proportionality.’ ([101] Lord Toulson).

Lord Toulson did not think any greater detail than that would help but suggested that relevant factors to be borne in mind when reaching a judgment would include: ‘the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties’ respective culpability.’ (107) The reliance approach in Tinsley should no longer be followed ([110] Lord Toulson).

 

Lord Neuberger’s Rule

Lord Neuberger takes a much simpler approach. He begins by saying that the appeal concerns, ‘a claim for the return of money paid by the claimant to the defendant pursuant to a contract to carry out an illegal activity, and the illegal activity is not in the event proceeded with owing to matters beyond the control of either party.’ ([145]). He contends for a very simple rule to the effect that the plaintiff is entitled to the money paid under such a contract (‘the Rule’) ([146]). This would apply ‘in appropriate cases’ even if the contract has been wholly or partly performed ([167]) though credit might have to be given for any benefit that the plaintiff has received ([168]). Lord Toulson’s balancing approach could be useful in deciding whether or not the case was an appropriate case for the application of the Rule ([174).

 

Do not enforce illegal contracts but order restitution of benefits conferred under contracts that fail on the grounds of illegality

The approach of the remaining judges is that the illegal contract is not enforced but is unravelled. Lord Mance disagreed with the majority’s suggestion that there needed to be a significant revision of the law in this area. His approach is that the unlawful contract could be rescinded and the parties put into the position that they would have been in had the contract never been entered into ([197]). Rescission would be available even if the contract had been partially performed, but the court would make adjustments to reflect any benefits that the plaintiff had received ([198]).

Lord Sumption spoke in favour of the illegality defence and the reliance principle as the appropriate guide as to when the defence was available (while accepting that its formulation in Tinsley was open to criticism). Where a contract fails then benefits conferred by one party on the other are recoverable ([247]). Equally, where the contract fails on the grounds of its illegality then the parties should be put into the position that they would have been had it never been entered into ([250]). The contract in this case was affected by the illegality principle ([267]) but restitution of the money that P paid to M in accordance with it should be ordered ([268]).

Michael Lower

 

No equitable interest where the claimant would need to rely on an unlawful agreement

August 17, 2012

In Barrett v Barrett ([2008] EWHC 1061) T and J were brothers. T owned the freehold of a house. T was declared bankrupt. J acquired the house from the trustee in bankruptcy and some years later he sold it. T claimed that J held the title to the house in trust for him. He alleged that he and J had agreed that J would be the ‘paper’ owner, holding the property on trust for T who would meet all of the outgoings (which would be chanelled through J). The aim was to avoid T’s trustee in bankruptcy having any claim to T’s beneficial interest.

The judge thought that this could not be a resulting trust case since T had not directly contributed to the mortgage payments or purchase price. He paid J and J made the payments ([24]). There were alternative explanations for the payments made by J to T (J alleged that they were rent payments). So there was a need to show that the payments were referable to the unlawful agreement (unlawful because it was entered into to avoid s333(2) of the Insolvency Act 1986). The common intention constructive trust claim failed because of the unlawful purpose. The same problem would be fatal to claims based on the agreement to found a claim of an express trust, proprietary estoppel or a Pallant v Morgan equity.

As David Richards J. explained:

‘Without that [unlawful] purpose the agreement or arrangement has no rational explanation. Thomas needs to allege and prove it in order to establish the agreement, but in doing so he relies on his own illegal purpose and thereby renders his interest unenforceable.’ [25]

Nor was the unlawful purpose too remote from the creation of the alleged beneficial interest. The whole purpose of the alleged agreement was to deprive the trustee in bankruptcy of the opportunity to acquire T’s beneficial interest in the property.

Michael Lower

Resulting / constructive trust of Ting house

June 8, 2012

In Lau Kwai Kiu v Bian Xintian ([2012] 2 HKLRD 954) O applied for land by way of private treaty grant in Lok Lo Ha Village near Shatin under the Small House Policy. He was successful. He paid the premium and a grant of land in the village was made to him. At that time, the Lands Department did not require applicants to sign a declaration to the effect that they had not entered into an agreement to sell the land, hold the property on trust or sell it (the Department later did insist on such declarations).

O had agreed to sell the land to P before making the application. P had supplied the funds for the premium. Once the grant was made, she supplied the funds for the construction of the house and she and her family lived in it from the time of the issue of the certificate of compliance. O had written letters to P confirming that he would give the property to her and would transfer the title to her after five years. This would require a further application to the Government and payment of a premium to lift the restriction on alienation in the grant to O. This application was never made because P could not afford the additional premium. O died and the question of P’s interest in the land had to be decided.

O’s wife argued that P had no interest in the land and that any resulting or constructive trust there might have been was unenforceable on the grounds that the arrangement was illegal or contrary to public policy.

It was held that P had an interest under either a resulting and / or a common intention constructive trust because of the payments and the agreement set out in the letters (signed by the parties and, in the case of one letter, witnessed). There was no illegality on the facts of this case. Even if there were, P had no need to plead it since she could rely on the payments she had made to establish her beneficial interest; she did not need to rely on the letters at all (see Tinsley v Milligan). Nor was the arrangement contrary to public policy since there had been no false declaration. The express agreement envisaged that the necessary application to the Government would be made and the additional premium for the lifting of the restriction of alienation would be made.

The Court of Appeal held that the land was held on a resulting and / or a common intention constructive trust (but expressly subject to the Government’s rights).

Michael Lower

The meaning of ‘alienation’

November 30, 2011

(Overturned by the CFA). An agreement giving rise to a common intention constructive trust is an alienation (eg for the purposes of section 17B(1) of the Housing Ordinance) even if entered into before the relevant property had been acquired.

In Ling Wing Fai Billy v Ling Shui Fai ([2010] 6 HKC 434, CA) the defendants were a married couple. They agreed with the husband’s mother (and brother and sister-in-law) that if their application for a flat from the Hong Kong Housing Authority were successful then they would all contribute to the mortgage installments and the mother would provide the deposit. In return, the beneficial ownership of the flat would be shared between them. The principal question was whether this was an unlawful ‘alienation’ for the purposes of section 17B(1) of the Housing Ordinance.

It was argued that an alienation requires a positive act while the beneficial interests here arose by operation of law. This was rejected. The defendants had engaged in positive acts (the agreement itself, using the money received to make the relevant payments and allowing the other family members to live in the flat and make contributions as agreed). The fact that the interests had arisen by operation of law did not mean that they were not the result of these positive acts (para. 26). The Court of Appeal referred to the description of ‘alienation’ in Re A Solicitor ([2000] HKCU 1003, CA): an alienation was described as the creation and grant of rights over property impinging upon the most important features of ownership.

This was an alienation. It did not matter that the arrangement was entered into before the flat had been acquired (para. 30). The fact that the arrangement was one made between family members was irrelevant (para. 32).