ILO – Contributed by Fenech & Fenech Advocates

In 2010 the Maltese courts issued their highest-ever damages award in a case involving a failure to transfer shares in a company that was the owner of a new Aframax tanker.

Facts
Italian company Finaval filed an action against Monegasque company Scorpio Ship Management and others for breach of a promise to sell shares in a Maltese registered company which had been formed for the purposes of entering into a shipbuilding contract with shipbuilder Samsung. Finaval claimed that Scorpio had promised Finaval that before delivery of the Aframax tanker to the Maltese company, Scorpio would give Finaval the option to purchase shares in the Maltese company equivalent to the contract price of the vessel plus the pre-delivery costs, calculated at $37.8 million.

Scorpio failed to offer the shares as promised to Finaval, with the result that Finaval lost the opportunity to purchase shares in a company which would own a brand-new Aframax tanker at the price of $37.8 million at a time when the price of Aframax tankers was rising considerably.

Finaval requested the court to:
• declare that Scorpio had breached its obligation to transfer the shares;
• order the transfer of the shares to Finaval; and
• in the eventuality that the ship had already been transferred by the company,
order the defendants to pay damages.

Scorpio defended the claim by stating primarily that the Maltese courts did not have jurisdiction over the matter, given that neither Finaval nor Scorpio was Maltese. Scorpio further claimed that it should be declared non-suited since it did not own the shares in the Maltese company and had no control over the disposal of shares belonging to other entities. Finally, it claimed that in any event, there was never a promise of sale.

First instance decision
On December 2 2004 the first court delivered its judgment on jurisdiction. It held that the jurisdiction of the Maltese court was founded on Section 742(c) of the Code of Organisation and Civil Procedure, which states that the courts of Malta have jurisdiction over “any person in matters relating to property situated or existing in Malta”. Thus, it was irrelevant that neither Finaval nor Scorpio was Maltese. The court further held that, as established by previous case law, shares in a Maltese company very much constitute “property situated in Malta”, and that the very nature of the claim put forward by Finaval was for the transfer of shares in the company. With respect to Scorpio being non-suited on the basis that it had no control over disposal of the shares, the court rejected this argument completely. The court held that:

“Scorpio had obliged itself to transfer to Finaval the shares which it had registered in someone else’s name. Scorpio has to see for itself how it was going to fulfil the obligation it assumed. A debtor of an obligation cannot escape from its execution when he himself would have led to its impossibility.”

On July 5 2007 the same court gave its judgment on the merits and, on the basis of the evidence produced, accepted Finaval’s claim that there had been a promise of sale of the shares contained in a letter sent from Scorpio to Finaval dated December 24 2002, and that the promise had been broken when the shares were not transferred. The court confirmed that all of the requirements stipulated by Article 1357 of the Civil Code had been satisfied because:

• the object of the sale had been identified as the shares in the company;
• the price of the shares had been determined or was determinable; and
• the promise had been accepted by the plaintiffs, as reflected by the events that
  took place subsequent to the promise.

Since the Maltese company which had entered into the shipbuilding contract with Samsung was subsequently struck off, the court ordered Scorpio to pay Finaval $22.2 million – the difference in price between what Finaval would have paid had the shares been transferred and what it would have paid for the same type of vessel on the open market at the time when the vessel would have been delivered (estimated at $60 million).

The court also ordered Scorpio to pay all of the court costs and interest from the date of commencement of the action up until the date of payment. Scorpio appealed.

Appellate decision
The Court of Appeal rejected Scorpio’s defence of lack of jurisdiction, since the merits related to shares in a company registered in Malta and the shares were to be considered as “property situated in Malta” and thus to be covered by Article 742(c) of the Code of Organisation and Civil Procedure. The court held that the fact that the shares in the company could no longer be transferred because the Maltese company had been struck off during the running of the case – meaning that all that remained was a claim requesting damages for an alleged breach of a promise to sell the shares – had no bearing on jurisdiction, because the jurisdiction of the courts was established at the time when the action was instituted, which was when the company was still registered and had not yet been struck off.

The court also confirmed the first instance judgment on the merits, stating that Scorpio had indeed promised Finaval the option to purchase shares in a company destined to own an Aframax tanker. The court confirmed the view of the first court that once it had been established that the letter of December 24 2002 amounted to a promise, it had to assess whether that promise satisfied all of the requirements stipulated by Article 1357 of the Civil Code, which it did.

The court rejected Scorpio’s additional submission that since the document did not contain a jurisdiction clause, it could not have been intended as a binding document. The court underlined the fact that a promise to sell a moveable object, such as the shares in question, need not even be in writing, and that consequently the promise of sale was valid irrespective of whether the letter contained a jurisdiction clause. Thus, the court concluded that since,
by virtue of the letter of December 24 2002, the object of the promise had been the shares in the company which had to be transferred to Finaval any time before delivery of the vessel, by means of a sale against payment to Scorpio of the equity and predelivery costs, all of the requirements stipulated in Article 1357 of the Civil Code had been satisfied and the pre-contractual stage had long passed.

The court also rejected Scorpio’s position that Finaval had not accepted Scorpio’s offer because the substantial evidence that was brought forward during the running of the case, including Finaval’s full participation in the discussions and negotiations over the specifications and delivery of the new building, proved the opposite. The court
rejected Scorpio’s position that it had nothing to do with the matter and should not be held liable. The court added to the findings of the first instance court and stated that:

• the promise to Finaval had been made by Scorpio;
• consequently, the obligation was on Scorpio to transfer and sell the shares to Finaval;
• Scorpio had terminated the agreement;
• the discussions and negotiations had been between Scorpio and Finaval, and
  the other companies did not feature;
• the letter of December 24 2002 made it clear that everything was going to be
  actuated by Scorpio; and
• Scorpio was controlling everything and had the controlling interest in the
  vessel.

According to the letter, Scorpio had to order the vessel and provide the equity, and when the shares were transferred to Finaval, Finaval had to pay Scorpio and no one else. The court held that “this Court agrees with the first Court when it decided that Scorpio should be declared as solely responsible”.

The court also confirmed the first instance decision on the damages awarded, which was the difference between the price which Finaval would have paid for the shares had they been transferred as promised and what it would have cost to purchase a vessel on the open market at the time when the vessel was meant to have been delivered, which the court estimated at $22.2 million, based on the expert evidence of a shipbroker. However, the court ordered that interest be paid by Scorpio from the date of the judgment, rather than the date on which the action was filed. It also
confirmed the first instance order on costs, obliging Scorpio to bear the costs.

For further information on this topic please contact Ann Fenech at Fenech & Fenech Advocates by telephone (+356 2124 1232), fax (+356 2599 0645) or email <a href=”mailto:ann.fenech@fenlex.com”>ann.fenech@fenlex.com</a>.