The nature of a deposit in a promise of sale agreement

On 31 September 1996, the plaintiff company entered a promise of sale agreement with the defendants who promised to sell and transfer to the plaintiff a share of a plot of land in Zejtun for Lm150,000. The plaintiff paid Lm10,000 as a deposit on the konvenju. The sale was subject to the issue of an outline permit and the contract of sale was to be signed within one month of the issuing of such permit.

The konvenju expired, was never renewed and the contract of sale never drawn up, since the outline permit was never issued and development of the land was forbidden.

Since the actual sale never took place, allegedly due to the non-performance of the defendants, the plaintiff sued for the amount paid on deposit.

First Hall, Civil Court – 30 May, 2002

The konvenju did not indicate that, in cases of default, the Lm10,000 would be lost. Plaintiff claimed that the amount was certain, liquid and due and defendants had no valid arguments to refuse reimbursement. The defendants felt that this request was unfounded because the deposit paid, once the konvenju expired, was non-refundable and lost in their favour.

The defendants stated that the agreement was that the sale would take place on condition that the issuing of the permit was plaintiff’s responsibility. Since such permit was not issued, the amount paid as a deposit was non-refundable. The court felt that the issue of responsibility was irrelevant since the konvenju had expired.

The defendants felt that plaintiff should pay a further Lm30,000 since the deposit was meant to be Lm40,000.

The konvenju stated that, of the Lm150,000 agreed upon, Lm10,000 had to be paid at konvenju stage as a deposit. As for the remaining Lm140,000, Lm30,000 had to be paid by 30 December 1996 and the balance was due up to one month after the granting of the outline permit. The konvenju was valid for six months. However, if the outline permit was issued, the sale had to take place within one month from such.

The terminology used in the konvenju left no doubt that the payment was made as a deposit on account of the price.

The Court referred to Article 1002 of the Civil Code: Where, by giving to the words of an agreement the meaning attached to them by usage at the time of the agreement, the terms of such agreement are clear, there shall be no room for interpretation.

In SN Properties Ltd vs Agius (2001), it was said that since a konvenju, on pain of nullity, must be drawn up in a private agreement, the konvenju alone must be considered and not any extraneous facts.

The defendants did nothing to keep the konvenju effective by taking legal action and did not take any action for the remaining Lm30,000 due by 30 December, 1996. In Mamo vs. Penza (2001) it was stated that, according to Article 1357(2) of the Civil Code, upon the expiration of the konvenju, the parties return to their positions before the konvenju – to their status quo ante contractum. In Sciberras et vs Muscat et (1999) the amount paid on deposit was ordered to be returned because it was a sum paid on account of the price.

Since the sale never took place and no price was ever paid, it was only obvious that such amount be returned. The First Hall upheld plaintiff’s pleas and condemned defendants to refund the Lm10,000.

The defendants felt aggrieved and appealed, stating that:

The First Hall contradicted itself by quoting Article 1002 and then interpreting the konvenju’s words. In the konvenju, “deposit” was used. At no point was it indicated that it was a payment made on account of the price. This interpretation was given by the Court unnecessarily. The First Hall gave the deposit the character of one on account of the price.

Many elements within the konvenju itself contradicted the First Hall’s interpretation

The defendants interpreted “deposit” as “kapparra” defined in Article 1359 of the Civil Code:

Where in any promise to sell, earnest has been given, each of the parties shall be at liberty to recede from the contract: the party giving the earnest forfeiting such earnest, and the party receiving the earnest returning double the amount thereof, saving any other usage in regard to the particular contract in respect of which earnest has been given.

The plaintiff conversely interpreted it as a payment on account of the price, refundable should the final contract of sale not take place. Nowhere in the konvenju were the words “kapparra” or “forfeitable deposit” mentioned. This could imply that the parties agreed that the deposit was on account of the price, a concept the law does not cater for. Case law has shown that, as a rule, an amount of money paid on deposit on account of the price has to be returned if the contract of sale remains unfulfilled.

The COA agreed that it could not give any other interpretation to the words in the konvenju. In Mifsud v. Mifsud (1991), the Court felt that although in the konvenju “deposit” and “akkont tal-prezz” (on account of the price) were used, the sum was a kapparra since it was stated that the amount would be forfeited upon non-fulfillment of the contract.

The COA agreed with the application of Article 1002 and stated that the parties’ intentions were clear in the konvenju leaving no need for a wide interpretation

The COA rejected the appeal and upheld the judgement of the First Hall, Civil Court.