The First Hall of the Civil Court, presided over by Mr Justice Joseph Azzopardi, in the case ‘Four X Ltd v Mediterranean Flower Products Ltd and Flower Power (Sales) Ltd’, considerably reduced the penalty imposed under a contract between two companies. The court considered, among other things, that the damages suffered by claimant were not equivalent to €4 million and that it was virtually impossible for Mediterranean Flower Products to perform its obligations.

Four X Ltd and Mediterranean Flower Products Ltd were co-owners of a property in Ta’ Qali, each owning half an undivided share. Flower Power (Sales) Ltd occupied the land as tenant.

Mediterranean Flower Products Ltd (MFPL) and Flower Power (Sales) Ltd (FPSL) were obliged to vacate the land within one year from the date of the preliminary contract (konvenju) for the sale of the land. It was stated in the konvenju that, if the companies failed to vacate, they would incur a penalty of Lm1,000 each day.

By virtue of the konvenju dated December 18, 2007, Four X Ltd and MFPL promised to sell the land to a third party, the Maltese Clipper Ltd.

The defendant companies were requested to vacate by the judicial letter dated January 11, 2008, but they remained inactive and Four X Ltd proceeded to file the legal proceedings.

Four X Ltd requested the court to order the two companies to vacate the property, as over one year had lapsed from the signing of the konvenju and to declare that they were obliged to pay a penalty of €2,333 per day from December 18, 2008, and to condemn them to pay this amount.

In reply, FPSL claimed that the legal action was null as no court authorisation was obtained in accordance with article 234(2) of the Companies Act. This was necessary once a provisional administrator had been appointed in terms of Chapter 386.

In addition, it said that the konvenju did not satisfy the conditions between the parties and that its claims were unfounded.

MFPL also stated that a provisional administrator had been appointed, and that court authorisation was necessary to sanction these proceedings, which authorisation had not been granted.

It also pleaded that:

• Four X Ltd’s claims were not justified as there was no request for its liquidation.

• There was no reference to an amount which should be considered to be due.

• The land was occupied by the other defendant company FPSL and it could not,therefore, be condemned to vacate or to pay a penalty for failing to vacate.

• It did everything in its power to compel the other defendant, FPSL, to observe its contractual obligations and to vacate the land.

• Its provisional administrator should be called into the proceedings; and finally that

• The penalty of €2,333 per day, as established under the contract of June 10, 1998, was exaggerated and excessive and not due.

The court considered that in 1998 the parties entered a public deed. There was an agreement to transfer the property for over €2 million and that this property had to be vacated within one year from the date of the konvenju and, if not vacated, there was a penalty of Lm1,000 per day.

The cardinal rule was that contracts had to be respected; the intention of the parties had to prevail and had to be observed

Court authorisation: The court said that a decree was obtained in ‘Sammut v Conti’ and the sale of jus superveniens applied in accordance with case law, to avoid a multiplicity of cases. (‘Vella v Dr Galea’ Vol. XXXIII-1-254).

It was true that there was no request for the liquidation of the amount but this did not render null the legal action. The court was contrary to rigid formalism and was in favour of the economy of lawsuits (‘Gatt v Zaffarese’ dated March 26, 2014).

FPSL did not prove that the conditions in the konvenju had not been satisfied. Legally, contracts had to be performed in good faith. A party was obliged by the terms of the agreement and all its consequences – ‘Cefalu et v Gauci nomine’ (LXXX-IV-1359). The court did not find that Four X Ltd acted in bad faith.

In this case, the agreement was clear, and Four X Ltd invoked obligations which did exist in the agreement itself.

When an agreement was clear, there was no room for interpretation (‘General Cleaners Ltd v Attorney General’ dated November 29, 2001). The cardinal rule was that contracts had to be respected; the intention of the parties had to prevail and had to be observed – pacta sunt servanda.

The court noted that the property was not vacated. MFPL filed proceedings against the other defendant in 2008 and the case was decided in 2012 when the eviction was ordered. MFPL had not requested a warrant of eviction, as allegedly the property was left unused.

The court also considered that the defendant companies were two different legal entities. There was no doubt that MFPL was obliged jointly and severally with the other defendant. It was obliged to pay the penalty if the land was not vacated within the stated time and this even if the permits were not issued. MFPL was jointly responsible and it could not avoid its responsibility.

Reduction of penalty: The court referred to article 1122 of the Civil Code, which provides that:

(1) It shall not be lawful for the court to abate or mitigate the penalty except in the following cases:

(a) if the debtor has performed the obligation in part and the creditor has expressly accepted the part so performed;

(b) if the debtor has performed the obligation in part, and the part so performed, having regard to the particular circumstances of the creditor, is manifestly useful to the latter. In any such case, however, an abatement cannot be made if the debtor, in undertaking to pay the penalty, has expressly waived his right to any abatement or if the penalty has been stipulated in consideration of mere delay.

(2) Where an abatement is to be made under this article, the penalty shall be reduced in proportion to the unperformed part of the obligation.

The court felt that para (b) was applicable in the circumstances. The penalty was a form of pre-liquidated damages. Four X Ltd certainly did not suffer damages of €4,000,000. In addition, MFPL tried to evict the other defendant from the property. It also had an interest to be paid its share of the price. The court noted that it was very difficult for MFPL to perform its obligations which it remained liable to perform. It felt, however, that it should reduce the penalty considerably to €65,000.

For these reasons, on April 29, 2015, the First Hall of the Civil Court gave judgment by accepting the claims of Four X Ltd limitedly. It jointly condemned the defendant companies to pay Four X Ltd €65,000 save for any applicable right si et quatenus between them.

Karl Grech Orr is a partner at Ganado Advocates.