Illegality and adverse possession in Hong Kong after Patel

Introduction

Monat v All person(s) in occupation of part of the remaining portion of Lot No 591 in Mui Wo DD 4 No 16 Ma Po Tsuen, Mui Wo ([2023] HKCA 479) is an important case in several respects. First, it considers whether a squatter’s illegality has any possible impact on an adverse possession claim. Having decided that illegality can have an impact on the claim, the question is whether Hong Kong should follow England in moving from the Tinsley ‘reliance’ test to the Patel ‘range of factors’ approach. More fundamentally, the judgment addresses the status of judgments of the UK Supreme Court in Hong Kong.

The facts

The case concerned an adverse possession claim concerning land on which a squatter (the defendant’s father) built a house without obtaining the approval and consent for building works required by section 14 of the Buildings Ordinance.

The defendant’s adverse possession claim succeeded in the Court of First Instance (as explained in a previous post on Hong Kong Land Law). In the first instance judgment, Deputy Judge To said that illegality was generally not a factor to be considered in adverse possession claims unless the possession, or the manner of possession, was a breach of a statutory provision.

Adverse possession and illegality

Yuen JA (with whom the other members of the Court of Appeal agreed, referred to the statement in Les Laboratoires Servier and anor v Apotex Inc  that the ex turpi causa maxim should apply only to criminal acts, quasicriminal acts, non-criminal acts which engaged the public interest (eg dishonesty in the context of civil disputes), and infringements of rules enacted for the protection of the public ([23.5]).

Thus, the fact that the squatter’s use of the land contravened the Government lease restriction on uses other than agricultural use was irrelevant. Breach of section 14 of the Buildings Ordinance, however, was a criminal offence under section 40 of the Ordinance.

Tinsley or Patel?

Yuen JA decided that the effect of this illegality on the adverse possession claim should be assessed using the range of factors approach adopted in Patel v Mirza (again covered in an earlier Hong Kong Land Law post).

This approach requires the court:

‘(a) consider the underlying purpose of the prohibition which has been transgressed [e.g. in our case, s.14 BO];

(b) consider conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim [e.g. in our case, the justification of adverse possession in the use of land as a natural resource, and in discouraging stale claims];

(c) keep in mind the possibility of overkill unless the law is applied with a due sense of proportionality.’ ([101 in Patel and [36.4] in Yuen JA’s judgment].

At first instance, Deputy Judge To said that even if the Patel approach were applied, the adverse possession claim would succeed. Yuen JA agreed. The squatter’s possession itself did not contravene the Buildings Ordinance and the Ordinance did not seek to penalize squatters ([62.2] Yuan JA).

Deputy Judge To identified the policies underlying the doctrine of adverse possession: ‘The interest of the squatter who has been enjoying uninterrupted peaceful possession and putting idling land to good use is the public interest which the Limitation Ordinance seeks to protect. Discouraging the paper owner sleeping on his right and allowing his land to go idle is the public policy reasons behind the Limitation Ordinance’. ([62] in the CFI judgment. Yuen JA agreed with this ([62.2]).

Outcome

Although the breach of the Buildings Ordinance meant that the ex turpi causa principle was engaged, the squatter’s claim survived the application of the Patel approach and succeeded. The formal owner’s appeal failed.

The status of UK Supreme Court judgments in Hong Kong

Until now, the assumption has been that the Hong Kong approach to illegality is the reliance approach in Tinsley v Milligan (outlined in this blog post). Yuen JA argued that the CFA had not tied itself to the Tinsley ‘reliance’approach, not having had the opportunity to consider whether the Patel range of factors approach should be adopted. This was, therefore, an open question ([50.2]).

In A Solicitor v Law Society of Hong Kong ([2008] HKCFA 15) Li CJ explained the respect due to decisions of the House of Lords (and now the UK Supreme Court) (at [15]).

Yuen JA explained that it was, accordingly, appropriate to adopt Patel in the absence of any local Hong Kong factors making this inappropriate ([52.2]).

She continued:

‘In my view, it would be surprising if the common law as expounded by the highest authority in the UK (which the CFA has said should be accorded the greatest respect) is not to be regarded as the common law in Hong Kong simply because randomly, there may or may not happen to be a case involving the point being processed through the Hong Kong courts, which may or may not happen to reach the CFA.’ ([52.4]).

The CFA would, of course, be free to depart from the UK Supreme Court position ([52.5]).

This is potentially very significant. Even in the Land Law area, it is easy to think of UK Supreme Court decisions that might be treated as part of the common law of Hong Kong on this approach. The decision in Manchester Ship Canal Company Limited v Vauxhall Motors Limited ([2019] UKSC 46) (see this blog post) is probably an example.

Michael Lower

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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

 

 

 

Contracts and illegality: Patel v Mirza

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