Posts Tagged ‘unjust enrichment’

Recovering pre-payment of purchase price where the agreement was never completed

September 11, 2021

In Hui Tze Ha v Ho Yuet Lin ([2021] HKCFI 1901) D and P entered into a written agreement on 18 September 1992 under which D agreed to sell property in Kowloon to P for HK$1.2 million. P paid a ‘deposit’ of HK$1 million. The agreement was never completed. Time for completion was of the essence.

P died in 2001. In March 2016, P’s estate brought proceedings to recover the deposit of HK$1million. In October 2016, D counterclaimed that she was entitled to forfeit the deposit and a declaration that the agreement was terminated by virtue of P’s repudiatory breach in failing to take the steps necessary to complete.

Deputy Judge MK Liu said that when neither party took the necessary steps to complete on the contractual completion date, the effect was that each party then had a reasonable time to complete (Camberra Investment Ltd v Chan Wai Tak, Chong Kai Tai Ringo v Lee Gee Kee).

Deputy Judge ML Liu held that D elected to treat the agreement as at an end when she brought her counterclaim for a declaration to this effect in October 2016 (drawing on the principles set out in Chao Keh Lung v Don Xia).

The payment of HK$1 million out of a total agreed consideration could not be treated as a deposit (Polyset Ltd v Panhandat Ltd). It was a payment in advance ([33]).

P’s estate’s unjust enrichment claim arose when the contract was terminated in October 2016 ([37]).

D was ordered to repay the HK$1 million ([46]).

Michael Lower


Purchaser pays owner who enters into a second contract to sell to a third party

December 14, 2019


In Mui So Bing v Wan Chi Sing ([2019] HKCA 1341) D1 and D2 orally agreed to sell property to P. The parties later entered into signed written agreements; these were not registered at the Land Registry.

P paid the entire purchase price in stages to D1 and D2. D1 and D2 then entered into signed written agreements to sell the same property to D3 and D4. D3 and D4 registered their agreements at the Land Registry.

At first instance, P’s claim to be entitled to the property as against D3 and D4 based on a presumed resulting trust failed. The facts did not bring the case within any category of resulting trust. There was no voluntary transfer by P nor did P provide any part of the purchase price at the time of D1 and D2’s acquisition.

P’s claim against D1 and D2 in unjust enrichment succeeded.

P appealed against the first instance decision seeking to rely instead on the common intention constructive trust or the vendor and purchaser constructive trust.

The common intention constructive trust

While a common intention constructive trust can arise in the commercial context, there was no such trust here. There was no basis for finding that D1 and D2 had agreed to hold the property on trust for P. They had agreed to sell the property to P ([25] Yuen JA).

Vendor and purchaser trust

The vendor and purchaser resulting trust only arises if specific performance is available ([27.3]). Since P had not argued for the existence of such a trust at trial, a number of facts relevant to whether specific performance would be awarded were not explored ([27.4]). It was too late for P to raise this argument on appeal.


In any event, the contract with D3 and D4 had priority over the contract with P. P had not registered and so D3 and D4 could rely on section 3(2) of the Land Registration Ordinance. Notice was irrelevant because D3 1nd D4 had duly registered ([28.4]).

Any unwritten equity that P may have had (though the Court of Appeal was clearly sceptical as to whether there was any) was subsumed by the written agreement between P and D1 / D2 ([28.3])

Importance of pleading the relevant legal consequence

The Court of Appeal was severely critical of P’s attempt to plead legal consequences (common intention constructive trust and vendor and purchaser constructive trust) for the first time on appeal:

 ‘As the court’s primary aim in exercising its powers is to secure the just resolution of disputes in accordance with the substantive rights of the parties, and to further these objectives by actively managing cases 35 , it seems to me to be high time that consideration should be given to requiring legal representatives to plead not only material facts, but also all the legal consequences to which those facts validly lead 36 , with the effect that the parties would be barred from contending different legal consequences on appeal.’ ([23.3] per Yuen JA).

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


Subrogation to the unpaid vendor’s lien

November 26, 2015

In Bank of Cyprus UK Ltd v Menelaou ([2015] UKSC 66) PM and DM sold property which was subject to a charge in favour of Bank of Cyprus UK Ltd (‘the Bank’). They contracted to purchase a new house using the proceeds of sale. The Bank agreed to this on condition that they obtained a first charge over the new house. The purchase of the new house was in the name of PM and DM’s daughter (‘the daughter’). She knew nothing of the arrangement with the Bank or of its involvement. The purchase was completed without the creation of a valid charge in favour of the Bank. The Bank claimed to be entitled to be subrogated to the unpaid vendor’s lien in respect of the new house. The obstacle that it faced was that it could be argued that it was not the source of the funds used to pay for the purchase (the proceeds of sale of the old house had been used).

The Supreme Court was unanimous in finding that the Bank was subrogated to the unpaid vendor’s lien. The majority did so on the basis of unjust enrichment with equitable subrogation as the remedy. Lord Carnwath reached the conclusion on the more straightforward basis that the Bank was beneficially entitled to the proceeds of sale of the old house under a Quistclose trust and so was entitled to step into the shoes of the unpaid vendor. Lord Neuberger relied on unjust enrichment but expressed agreement with Lord Carnwath’s views.

An unjust enrichment claim requires four questions to be answered:

  1. has the defendant been enriched?
  2. was the enrichment at the claimant’s expense?
  3. was the enrichment unjust?
  4. are there any defences available to the defendant?

(Benedetti v Sawiris [2013] UKSC 50).

The daughter had been unjustly enriched at the bank’s expense. This was because ‘the value of the property to [the daughter] was considerably greater than it would have been but for the avoidance of the charge and the Bank was left without the security which was central to the whole arrangement.’ ([24] Lord Clarke). There was a sufficient causal link between the benefit to the daughter and the loss to the Bank ([27] Lord Clarke). Lord Neuberger commented that the daughter’s enrichment was unjust because she had received the house as a gift from her parents and that if she had been a bona fide purchaser for value without notice of the Bank’s rights then it may not have been possible to say that her enrichment was unjust ([70]). Lord Clarke thought that the fact that the daughter was a donee was relevant when considering whether any defences were available to the daughter.

Subrogation to the unpaid vendor’s lien was available as a remedy to reverse the daughter’s unjust enrichment ([49] Lord Clarke). Lord Neuberger thought that it would be ‘hard to identify a more appropriate remedy’ since subrogation would give the Bank a right similar to that which it should have had under the anticipated charge ([79]). Lord Neuberger stressed that the conclusion that the Bank should be subrogated to the unpaid Vendor’s lien needed to be supported by principle ([94]). He thought that the facts that the house could only have been acquired using funds that the Bank could have demanded, that the failure to grant a Charge was the result of the solicitors acting for the Bank and the daughter and that the use of the funds with the Bank’s agreement discharged the unpaid vendor’s lien ([95]).

Lord Neuberger pointed out that the subrogation claim would have been uncontroversial had the Bank insisted on receiving the proceeds of sale of the original house and then making a fresh loan. The fact that they agreed to allow the proceeds of sale to be retained by the solicitors and re-used for the acquisition by the daughter was ‘a small and practical change’. It would be pure formalism if this change were to defeat the Bank’s claim ([99]).

Lord Carnwath thought that the Bank’s subrogation claim could succeed ‘by a strict application of the traditional rules of subrogation, without any need to extend them beyond their traditional limits.’ ([107]). He thought that this was a case where equitable subrogation was available without any need for recourse to the law of unjust enrichment and that there was a distinction to be made between a claim to a property right (subrogation to a vendor’s lien) and one based on unjust enrichment ([108]). He was prepared to accept that subrogation might be an available remedy in an unjust enrichment case but he did not decide the case on the basis of unjust enrichment ([109] – [110]).

In Lord Carnwath’s view, the Bank had to establish that its money had been used towards the purchase price to allow it to be subrogated to the unpaid vendor’s lien ([128]). It must be possible to trace money belonging to the Bank into the money used to pay the purchase price; ‘a sufficient link could not be found in a looser test based on economic reality or simple causation’ ([132]). The Bank did have a sufficient interest in the funds used to pay the purchase price. The Quistclose principle could be applied; the solicitors acting for the daughter and the Bank held the proceeds of sale of the original property for the Bank but had the power to apply it to the purchase of the property on behalf of the daughter ([134] – [139]).  There was no difficulty ‘in finding the necessary “tracing link” between the Bank and the money used to purchase the new property.’

Michael Lower



Equitable subrogation

December 29, 2014

In Kingsway Finance Ltd v Wang Qingyi ([2014] HKEC 1969, CA) W owned property and had entered into the following transactions:

19/8/2010 – Granted all moneys charge to Oi Wah

30/5/2011 – Granted second all moneys charge to Kingsway (as security for ‘the Kingsway first loan’)

3/8/2011 – Granted third charge to Wing Wei

9/8/2011 – Took out ‘the Kingsway second loan’ to discharge the Oi Wah mortgage

16/11/2011 – Took out ‘the Kingsway third loan’ to discharge the Kingsway first and second loans.

W defaulted, the property was sold and the proceedings concerned the relative priorities of the interests of Kingsway and Wing Wei over the proceeds of sale. Kingsway argued that, so far as the Kingsway third loan was concerned, it was entitled to the same rights as those enjoyed by Oi Wah and those that it had enjoyed by virtue of the charge that it had been granted to it. Kingsway argued that it was entitled to equitable subrogation to those rights because it had supplied the funds to repay the loan provided by Oi Wah and to repay the Kingsway first and second loans. Kingsway was not entitled to tack the second and third loans to the charge granted at the time of the first loan because the conditions in section 45 of the Conveyancing and Property Ordinance were not satisfied. Was Kingsway entitled to equitable subrogation? This would determine the priority question. The Court of Appeal (Cheung CJHC giving the main judgment) held that Kingsway was entitled to equitable subrogation to the Oi Wah and Kingsway charges.

Equitable subrogation

This is ‘based on the doctrine of unjust enrichment, rather than the agreement or common intention of, the party enriched and the party deprived as such’ ([14]). Intention may be relevant to equitable subrogation but it is not central ([16]). In Filby v Mortgage Express (No 2) Ltd ([2004] EWCA Civ 759, [[62]) May LJ said:

‘Accordingly so far as is relevant to this appeal, the remedy of equitable subrogation is a restitutionary remedy available to reverse what would otherwise be unjust enrichment of a defendant at the expense of the claimant. The defendant is enriched if his financial position is materially improved, usually as here where the defendant is relieved of a financial burden – see Peter Birks, An Introduction to The Law of Restitution page 93. The enrichment will be at the expense of the claimant if in reality it was the claimant’s money which effected the improvement. Subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment will be unjust if the claimant did not get the security he bargained for when he advanced the money which in reality effected the improvement, and if the defendant’s financial improvement is properly seen as a windfall. The remedy does not extend to giving the claimant more than he bargained for. The remedy is not limited to cases where either or both the claimant and defendant intended that the money advanced should be used to effect the improvement. It is sufficient that it was in fact in reality so used. The remedy is flexible and adaptable to produce a just result.’

Did Kingsway get what it bargained for?

Wing Wei argued that Kingsway had got what it bargained for when it made the second and third loans, viz. the benefit of the security of the all moneys charge in favour of Kingsway; the fact that the inability to tack the advances to that charge meant that the later loans would not enjoy the priority conferred by the charge to Kingsway was, argued Wing Wei, irrelevant. This argument was dismissed:

‘[the argument adopted] a highly technical and unreal approach to determining Kingsway’s intention in requiring as a condition for the 3rd and 4th loans respectively a first mortgage over the property. When considered in the commercial context of the present case, there can be no doubt that what Kingsway intended to obtain, and what it actually bargained for, was first priority over the property as a secured creditor, just like Oi Wah under the Oi Wah mortgage, once that mortgage was discharged by means of the 3rd loan which Kingsway was advancing to Wang. ‘ ([28])

Even if Wing Wei were right on the question of intention, this would not be decisive. The ultimate question was whether, absent subrogation, Wing Wei would be unjustly enriched ([30]).

Unjust enrichment

On the facts, it was plain that Wing Wei would be unjustly enriched if its arguments succeeded ([34]). Even if the interest rate under the Kingsway third loan were higher than that payable under the Oi Wah and Kingsway charges, which had not been shown, this would be irrelevant. Equitable subrogation would not entitle Kingsway to a higher rate than that payable under the charges to which they were subrogated ([33]).

Subrogation upon subrogation?

The Kingsway third loan had been used partly to repay the Kingsway second loan and the latter had given Kingsway subrogated rights under the Oi Wah mortgage. Wing Wei argued that Kingsway’s third loan could not give rise to be subrogated to the rights enjoyed as a result of the Kingsway second loan. This argument failed, there was no rule that limited subrogation to a one-time application ([35]).

Contrary to public policy?

Allowing Kingsway to make use of equitable subrogation would not bypass the requirements of CPO, s. 45, ‘when there was, in reality, no additional money lent to the borrower, and the prior mortgage was not made to secure any additional indebtedness as such.’ ([43]).

Michael Lower