The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Albert J. Magri and Mr Justice Tonio Mallia, on June 24, 2011, in the case “Falcon 2000 Limited vs Dr Vincent Galea and PL Luisa Tufigno, as deputy curators of Net2phone Inc. of the US”, held, among other things, that an exchange of e-mails between the parties and the payment of a deposit was not evidence of the conclusion of a contract.

The facts in this case were as follows.

The Maltese company Falcon 2000 Limited was in negotiation with the foreign company Net2Phone Inc. of the US to obtain an exclusive distribution contract for the services and products of Net2Phone in Malta.

Net2Phone provided VOIP services worldwide, by appointing re-sellers and distributors in several countries.

There was a lot of exchange of e-mails and correspondence between the parties but no formal contract had been signed.

Though Net2Phone was reluctant to grant Falcon 2000 exclusivity in Malta, Falcon 2000 insisted persistently that it was interested to be appointed Net2phone’s exclusive distributor in Malta.

Subsequently, a dispute arose between the parties as to whether a contract had been concluded.

On the one side, Falcon 2000 claimed that a form of agreement had been reached and, on the other, Net2Phone denied the existence of any contract.

Falcon 2000 maintained that they had agreed on the essential aspects of the contract, and that it would be in a position to commence its operations as soon as the telecommunications market was liberalised in Malta.

It stated that, in consideration, it paid a $10,000 deposit to Net2phone, which deposit was accepted without reservation and qualifications.

The telecommunications market in Malta was later liberalized on January 1, 2003. Falcon 2000 felt aggrieved, however, as Net2Phone still refused to grant it exclusive rights of distribution, despite having paid a $10,000 deposit.

It claimed to have suffered both material damages (damnum emergens) and loss of earnings (lucrum cessans).

Faced with this situation, it proceeded by filing legal proceedings against Net2Phone before the First Hall of the Civil Court.

It requested the First Hall of the Civil Court in Malta:

1. To declare that Net2Phone violated its contractual obligations by refusing to grant it effective rights of exclusive distribution as allegedly agreed;

2. To declare Net2Phone to be responsible for damages as a result of a breach of contract and negligence; and finally

3. To liquidate the damages and to condemn Net2Phone to pay damages.

On November 28, 2008, the First Hall of the Civil Court declared that Net2Phone was not liable for breach of contract, in absence of any binding agreement between the parties.

It, however, ordered Net2Phone to refund Falcon 2000, the sum of $3,500, (€2,705) which amount was paid in advance for several objects and services, and which had not yet been provided.

The court noted that Falcon 2000 was desirous of being appointed as the exclusive distributors in Malta of Net2Phone, as soon as the telecommunications market in Malta was liberalised.

Net2Phone, however, refused to grant exclusivity and was only prepared to grant Falcon 2000 a re-sellers’ agreement, subject to the same favourable terms and conditions offered to other Net2phone’s re-sellers and distributors.

A representative of Net2Phone testified in court that the company adopted the following procedure to appoint distributors. He reported that:

“Once the terms are negotiated, the salesperson will forward a standard Net2Phone contract. After it is signed by the partner, it is returned to the salesperson who provides it to our legal department for review. The legal department will ascertain that no changes to the contract have been made or, if changes have been made, they are acceptable to Net2Phone. They will then stamp it as approved by the legal department and signed, passed along for the signature by senior management at Net2Phone.’’

In this case, the parties were still in negotiation and no agreement had been signed by the parties. There was no proof of any binding agreement between the parties. There was only an exchange of correspondence and e-mails. It did not result that Net2Phone had assumed any contractual obligations to grant Falcon 2000 any rights of exclusive distribution, noted the Court.

Article 114 of the Commercial Code provides that “where the parties have agreed that the verbal agreement should be reduced to writing, it is presumed that they desire to subject the validity thereof to the observance of such formality”.

There was a legal presumption that, when a verbal agreement had to be reduced to writing, if the agreement in writing was not signed, no agreement was deemed to have been concluded, maintained the court.

This presumption was juris et de jure. Reference was made to Vella Gatt vs Darmanin (November 23, 1956) and J. Stellini noe vs S. Debono (December 14, 1942). As regards damages, it was legally possible to suffer pre-contractual damages if all essential aspects of the contract had been agreed upon and if negotiations were interrupted capriciously. Damages could consist in the re-imbursement of expenses and for these reasons the court of first instance felt that it was appropriate to order Net2phone to refund $3,500 to Falcon 2000.

Both parties filed an appeal. Falcon 2000 asked for a refund of its entire $10,000 deposit.

On June 24, 2011, the Court of Appeal gave judgment by dismissing Falcon 2000’s appeal and by reducing the refund to be paid to Falcon 2000 to €353.

The following reasons were given for its decision.

In the first place, the court pointed out that it should not disturb the appreciation of fact, made by the court of first instance, save for grave reasons.

Reference was made to case-law. It was an established principle that, for a contract to be concluded, the offer and acceptance had to be precise, complete and definite. If the terms of “acceptance” were different to the “offer”, there was no contract. Reference was made to Grech vs Borg et, dated January 16, 1931, and to Brands International Ltd vs Brigitte Gauci Borda School of Ballet, dated February 13, 2009.

In the circumstances, the court noted that no agreement had been concluded. Falcon 2000 kept on insisting on having exclusivity, while Net2phone refused to grant them exclusivity. An exchange of e-mails was not tantamount to an agreement. Even at the stage when Falcon 2000 paid the deposit, the agreement had not been reached, noted the court.

The first stage was the negotiation phase where the parties agreed to enter an agreement. In the second stage, the parties would sign the agreement, which would come into effect after the liberalisation of the telecommunication market in Malta.

It did not result that in this case the formal agreement had ever been signed. Nor were the essential aspects of the contract agreed upon by the parties.

It followed, therefore, that there could be no responsibility for contractual damages.

In addition, to be held liable for pre-contract damages, it had to result that an agreement was virtually agreed upon and was just about to be finalised.

Reference was made La Responsabiltà Pre-Contrattuale by de Mauro et (cedam Ediz 2002 pg 117).

In this case there was no certezza di raggiungere, un determinate risultato (no certainty on the terms of agreement) but only vague discussion on various options which had not yet been finalised. Net2phone had not acted capriciously or in bad faith. Net2phone never committed to granting Falcon 2000 exclusivity.

The court maintained that the parties were still in the negotiation phase. Though they had to act in good faith, they were still free to withdraw.

The court considered further that Falcon 2000 had received services and products up to the value of $9,500 and only had a right to be re-imbursed $500.

For these reasons the court accepted Net2Phone’s appeal. It varied the decision of the court of first instance and ordered that the amount to be refunded to Falcon 2000 should be €353 ($500) and not $3,500.

Dr Grech Orr is a partner at Ganado & Associates.

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