All contracts must be drawn up in good faith and shall be binding not only with regard to the written conditions but also any consequence which, by custom or law, is incidental to the obligation. Anyone failing to discharge a contractual obligation shall be liable for damages in respect of the losses suffered by the injured party as well as loss of earnings.  

Even when a party to a contract is found not to have acted in bad faith, he can still be held liable for damages both for the non-performance of the obligation as well as for any delay in such performance unless he proves that the non-performance or delay was due to an extraneous cause. 

Good faith and honouring contract terms were at the heart of a decision by the Court of Appeal (Civil, Superior) on May 25, in the names  Wildy David Bruce et. versus Sunshine Biscuits Company Limited (C19657).

The case referred to a public deed between the parties concerning the purchase of a shop from the company. The shop had a basement and access to the roof of the overlying block.

The company guaranteed the peaceful possession and enjoyment of the premises and that it was built according to the plans approved by the planning authorities. It also declared that 'a trading permit already exists to cover the activity carried out in the premises'. The property was previously used as a food and beverage shop on two levels with the basement level used as a kitchen.

Following the signing of the public deed, the new owners found that, contrary to what was declared and guaranteed by the sellers in the contract of sale, the property did not come with trading permits.  

The new owners filed a lawsuit claiming that because of the contractual default by the sellers they had suffered a major reduction in the enjoyment of the premises as well as significant damages.

Additionally, they pleaded that according to their architect, in order for the premises to be compliant with building laws and policies, they had to carry out a radical change. The kitchen, which was previously located at basement level, had to be installed at ground level,  thus limiting seating space for customers. There was no further use of the basement except for storage, reducing the commercial value of the premises. Furthermore, the appliances installed in the basement could not be used any more. 

Since the premises were being used for an activity without authorisation from the authorities, the selling company was in default since on the contract it guaranteed that the premises were covered by a trading licence, the buyers further pleaded. 

Misleading and incorrect contract guarantees

The First Hall Civil Court found that the guarantees made on the contract were incorrect and misleading and not given in good faith by the company or its representatives. Contrary to what they had claimed on the witness stand, it was evident that the representatives of the company acted in bad faith because they knowingly deceived the purchasers. The company was therefore liable for damages of €154,521.02.

This line of reasoning was confirmed by the Court of Appeal (Civil, Superior).

The Court of Appeal held that it could not fault the purchasers given that during their inspections before buying the shop, they could see that there was a kitchen in the basement. They were led to believe that food could be prepared at the basement level kitchen.

In confirming the sentence of the First Hall Civil Court, the Court of Appeal reiterated the legal principle emerging from Article 993 of the Maltese Civil Code, which provides that contracts must be executed in good faith.

The Court of Appeal only varied the judgment limitedly by reducing the amount of damages awarded from €154,521.02 to €141,342.38, this because the purchasers also had the obligation to reduce damages, the court said. They knew that the company was ready to sign the relevant corrective documents and thus the court considered it fair to calculate the loss of earnings over 25 months instead of 29.

Clive Gerada is senior associate at Azzopardi Borg and Associates Advocates.