The Malta Independent 5 August 2021, Thursday

Law report: Court of Appeal looks into the legal relationship between two business parties

Ganado Advocates Wednesday, 23 June 2021, 07:35 Last update: about 2 months ago

In the case of Charles Scerri v Anton Busuttil Dougall decided on the 25 February, 2021, the Court of Appeal decided on a dispute relating to the common ownership of a local business between the parties.

The plaintiff, an auditor, provided the defendant with audit services in relation to a number of companies which remain outstanding over time. By way of settlement, the parties had agreed to enter into a partnership by virtue of which the parties would own a local business. It was agreed that the plaintiff’s contribution to the business would amount to his unpaid professional fees and that the defendant would continue to take care of the day-to-day management of the business placed in common between the two.

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The defendant eventually sold the business to third parties and plaintiff instituted action against the defendant, arguing that the two had entered into a partnership and that he was therefore owed a stake in the sale. The plaintiff asked the defendant to provide him with the details of the day-to-day management of the business and to provide him with the details of the sale of the said business.

The plaintiff claimed that he was owed compensation on account of the professional services that had been rendered to the defendant, which services had been the plaintiff’s contribution to the partnership.

He also claimed that by failing to provide him with details of the management and the sale of the business, the defendant had been negligent, or even fraudulent, in his administration of the business, and that therefore, he was also owed damages in an amount to be determined by the Court. The defendant refuted these claims and, inter alia, argued that the parties had never actually set up a partnership.

Before coming to any form of decision on the merits of the case, the Court needed to identify the legal relationship governing the affairs of the two parties. It was noted at the outset that in terms of the Civil Code, partnership is a contract whereby “two or more persons agree to place a thing in common, with a view to sharing the benefit which may derive therefrom”. The plaintiff’s claim was that the parties had entered into a civil partnership, however the Court noted at the outset that, in terms of Article 1233 of the Civil Code, a civil partnership shall, on pain of nullity, only be constituted by means of a public deed or a private writing. Neither party produced or claimed that the parties had entered into any deed of partnership or other form of written agreement in order to establish the partnership, thus leading the Court to exclude the existence of any form of civil partnership between the two. According to the Court, in the absence of the essential requirement of form, the institute of civil partnership could not be deemed to exist.

The First Hall also argued that the relationship between the two parties was also clearly not one of employment and to this end, the Court determined that the relationship between the two could be characterised as being that of a joint venture, “fejn il- ftehim jidher li kien ta’ contribution and division of profits”. Having established this, the Court noted that in accordance with existing jurisprudence on the matter: “Il-massa ta’ qliegh igib stat ta’ komunjoni pro tanto bejn l-assocjati u ghalhekk huma applikabbli r-regoli tal-komunjoni. Huwa ukoll necessarju li ssir il-likwidazzjoni, jew inkella dak is-socju illi jkollu l-kotba f’idejh jaghti kont regolari tal-attivita’ ta’ dik is-socjeta’ ghall-imghoddi ghaliex mhux gust illi dak is-socju jibqa’ sejjer b’kollox a dannu ta’ haddiehor.” Having therefore established that the defendant failed to update the plaintiff on this matter, the First Hall agreed that the defendant was correct to ask for a liquidation of his stake in the partnership. 

The First Court argued that the plaintiff was owed back his contribution to the community in full and despite the fact that the parties did not have a partnership in the commercial sense of the term, the First Hall delivered judgment in favour of the plaintiff. At the same time, however, the First Hall denied the plaintiff’s additional claim for damages, arguing that the plaintiff did not sufficiently prove that the defendant was negligent in the management of the common business.

The defendant appealed this decision arguing, inter alia, that there was no partnership between the two parties, but if this were in fact the case, to the extent that the partnership had been terminated, plaintiff could not claim back the entirety of his contribution to the partnership. The defendant claimed that plaintiff was only owed whatever was left from the business that was placed in common, which, on account of the sale, was considerably less than the plaintiff’s original share. This claim, together with the defendant’s other claims that the First Hall was wrong in its assessment of what was due to the plaintiff, were dismissed in their entirety by the Court of Appeal which upheld the First Court’s judgment in full.

The First Hall then turned its attention to the cross-appeal filed by the plaintiff, who argued that damages were also due.

The plaintiff held that it was inconsistent for the First Hall to find that the defendant failed to provide him with details of the activities of the joint venture during the course of its lifetime, but to then fail to liquidate damages in his favour because the defendant had been negligent. The Court saw the evidence and testimony that was brought before the first Court and found that there were sufficient grounds to substantiate the decision of the First Court: it was not unreasonable for the First Court to determine that the failure alone to provide the plaintiff with sufficient information on the management of the business did not automatically give rise to fraudulent or negligent behaviour.

The Court of Appeal upheld the First Court’s decision in full, arguing that the plaintiff did not produce sufficient evidence to back his claim that the defendant has been negligent or fraudulent in the management of the business.

 

Vanessa Gatt is an Associate at Ganado Advocates.

 

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