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The Price to be paid for breaching a promise of sale

Malta Independent Wednesday, 26 October 2005, 00:00 Last update: about 11 years ago


Chief Justice Vincent Degaetano

Joseph D. Camilleri

Joseph A. Filletti

Court of Appeal

7 October, 2005

This Court of Appeal judgement examined the promise of sale mechanism (konvenju) that has been used consistently in Malta and relied upon as a tool in ensuring that both parties to a konvenju perform their reciprocal obligations to appear on the actual sale and purchase, the failure of which would lead to legal consequences.

It is vital to bear in mind the crucial difference between the konvenju and the contract of sale. Our Civil Code emphasises such distinction in establishing that a promise to sell a thing for a fixed price shall not be equivalent to a sale. This distinction is based on the fact that while a promise of sale is a unilateral contract, a sale is purely bilateral. Therefore, in a konvenju, two unilateral contracts, one promising to buy and one promising to sell, are brought in unison and once drawn up and accepted, a reciprocal obligation is created on each promisor to carry out the sale and purchase or, if the sale can no longer be carried out, there is an obligation to make good the damages to the aggrieved party.

There is no legal requirement that money be paid upon drawing up a konvenju, yet there lies a distinction vis à vis legal consequences when a sum is in fact paid.

When a sum is paid in earnest (kapparra), none of the parties is legally obliged to appear on the final contract of sale. However, this is subject to a penalty clause with certain consequences, namely:

(a) if the promisee withdraws, he automatically forfeits the sum which he had paid in earnest and it is retained by the promisor.

(b) if the promisor withdraws, he must give the promisee double the sum which the latter had paid in earnest.

The parties in a konvenju may, instead of a payment in earnest (kapparra) agree to pay a deposit (depozitu) – a sum on account of the final price (akkont tal-prezz), in which cases if it is clear that such a sum will be forfeited in the case of failure to appear on the final contract, then it will be deemed to be a sum paid in earnest and have the effect of a penalty clause. In cases of a lack of clarity without specification of forfeiture, the sum paid as a deposit/on account of the price would have to be returned if there is a failure to appear with specific performance.

The facts

(i) On 16 March 1989, the defendant and plaintiff company bound themselves via a konvenju before a notary public for the sale and purchase of a plot of land in Mellieha for Lm2,500.

(ii)The defendant paid the company Lm500 in earnest (depozitu akkont tal-prezz) which, according to the konvenju, he would forfeit should he for any valid reason at law, fail to appear on the final contract.

(iii) The final contract had to be drawn up within three months of this konvenju.

(iv) When the end of the three-month period was approaching, both plaintiff company and defendant sent each other a judicial

letter for specific performance, yet the defendant did not purchase.

(vi) The plaintiff company sued for the Lm500 by way of damages and the First Hall ruled in favour of the defendant.

(vii) The plaintiff appealed and the Court of Appeal revoked the First Hall Judgement and ruled in its favour.

First Hall, Civil Court

The plaintiff company requested that:

(viii) the defendant failed to appear and therefore, by virtue of the clause agreed upon in their konvenju, he had to pay the Lm500 by way of damages as well as all other expenses suffered by the plaintiff (judicial letters etc.) from the day the contract was meant to be signed.

The defendant raised a plea in defence that:

the plaintiff company was in fact called upon by him by virtue of a judicial letter to appear on the final contract and it was the company that failed to appear to sell.

When submitting evidence, the defendant said he actually did not want to appear on the contract of sale because he claimed that there was an agreement in the konvenju that he was bound to buy the

stated plot subject to a building permit being issued. In the meantime, the plot fell outside the

limits of the building scheme. Hence, for this reason, since he was buying the land under the condition that a building permit to develop the land would be issued, he was legally entitled to withdraw from the konvenju.

The Court

(ix) It had to be examined whether the non-issue of the building permit could be described as a valid reason for the defendant not appearing on the final contract.

(x) Although no proof or witnesses were brought forward to confirm that the plot was excluded from the building scheme after the konvenju was drawn up but during its time of validity, the plaintiff company seemed to accept such facts as truth.

(xi) In the konvenju, there was no mention that it was conditional upon the issue of a building permit as claimed by the defendant but merely that it is capable of being developed (fabbrikabbli). Once the plot fell outside the building scheme, this rendered it incapable of being developed. Therefore the plaintiff company could no longer sell what it promised in the konvenju.

(xii) Since the plot was incapable of being developed at the time when the contract of sale had to be drawn up, the defendant had a valid reason at law not to appear on the final contract of sale.

The plaintiff’s demands were therefore refused. The defendant had a valid reason not to execute the purchase if the plot to be bought and described as capable of being developed in the konvenju was excluded from the building scheme during the time period between the drawing up of the konvenju and the three-month expiry period.

Court of Appeal

(i) The above facts were examined and it was noted that the konvenju had other clauses stipulating that a major part of the plot was capable of being developed and that the plot was to be transferred and accepted tale quale.

(ii) In his statement of defence, the defendant made certain procedural mistakes. He claimed that it was in fact the plaintiff company who failed to appear on the final contract after the defendant had called upon the company by virtue of a judicial letter.

(iii) In its judgement, the First Hall, Civil Court also made a procedural error. It made reference to the defendant’s testimony claiming non-appearance on the final contract of sale due to the plot not being developable and disregarded the defendant’s statement of defence asserting the plaintiff’s non-appearance.

The Plaintiff Company

(i) The First Hall was wrong in disposing of its pleas on the basis of reasons that were not outlined in the defendant’s statement of defence.

The defendant never raised the plea that he did not appear for the final contract of sale due to a valid reason at law that impeded him from appearing on such contract. Since this plea was never brought up by the defendant in his statement of defence, the First Hall should not have taken cognisance of such information, which was the basis of its judgement.

(ii) In his sworn declaration annexed to his statement of defence, the defendant declared under oath that he had called upon the plaintiff company to appear. This was proof in itself that once the defendant wanted the contract to be executed, then he did not feel that he had a valid legal reason not to appear on the contract.

(iii) Once the First Hall had excluded the defendant’s pleas, it should not have considered other contestations and should have ruled in the plaintiff’s favour.

The Court of Appeal

(i) As the plaintiff rightly pointed out, the defendant never raised the plea that he had a valid legal reason justifying his failure to appear. On the contrary, in his statement of defence and declaration on oath, he stressed his judicial letter notifying the plaintiff to appear as a defence that the sale was never executed.

(ii) This was strongly indicative that the defendant did not, in fact, have any valid reason at law not to appear to execute the konvenju, otherwise, he would not have called upon the plaintiff to appear on the contract but would have alternatively alleged that he had a proper valid legal reason not to appear and demanded the refund of the Lm500 he had paid in earnest.

(iii) The First Hall was not justified in using the defendant’s allegations as a justification for not appearing and hence not forfeiting the Lm500 paid in earnest when no formal plea in this sense was raised in his statement of defence. It could also be argued that such an allegation was incompatible with the defendant’s other plea.

(iv) For such a defence to be accepted, the defendant had to:

(v) raise such allegation by means of a formal plea in defence;

(vi) back it up with the best evidence in accordance with law by proving to the Court that the plot was removed from the building scheme and rendered incapable of development before the contract of sale was due to be signed.

• The reasoning of the First Hall was that although no evidence was produced showing that the plot was removed from the building scheme after the konvenju was drawn up and before the executing contract, the plaintiffs did not contest such claims and accepted them as true.

• While agreeing with the fact that the plot was in fact removed from the building scheme, the Court of Appeal was of the opinion that this did not happen before the contract of sale was due (ie during the term of the konvenju). There were clear indications that this happened after the contract was meant to take place. For this reason, such a fact could not be put forward by the defendant as a legal valid reason for non appearance on the contract.

• The judgement of the First Hall, Civil Court was reversed and the appeal accepted.

The defendant was ordered to pay the plaintiff company the Lm500 he had paid in earnest by way of penalty, together with other expenses and legal interest with effect from the expiry date of the konvenju.

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