Stipulations made for the benefit of third parties in contractual agreements

In its decision delivered on 3 October 2019 in the names of ‘Alf Mizzi & Sons (Marketing Limited (C8692) vs Erom Trading Ltd et’, the First Hall of the Civil Court, presided over by Mr Justice Grazio Mercieca, considered, inter alia, the general rule that contracts shall only be operative as between the contracting parties, and the exception thereto, i.e. that subject to certain conditions, stipulations may be made for the benefit of third parties.

In brief, the pertinent facts are as follows. The plaintiff company, Alf Mizzi & Sons (Marketing) Limited had originally entered into a contractual relationship with Cassar & Schembri (Marketing) Limited for the supply of goods. This contractual relationship came to an abrupt halt in 2014, when the plaintiff company was informed that the defendant company, Erom Trading Limited, would be assuming any and all debts owed to the plaintiff company by Cassar & Schembri (Marketing) Limited. The plaintiff company was initially wary of this sudden change, and demanded that a personal guarantee for payment of the debts owed be provided to it by the defendant company’s director Darren Casha. To this end, Darren

Casha entered into a ‘Credit Application Form’ with the plaintiff company on 13 June 2014.

As the debts started mounting, the plaintiff company eventually started to push for the payment of an increasing number of invoices, at which stage Casha informed its representatives that the defendant company had gone bust, and that various creditors were circling over what was left of its assets. At no stage, however, did Casha inform the plaintiff company that it would not be paid the amounts owed to it, nor did he deny acting as its surety in accordance with the ‘Credit Application Form’. In fact, Casha had asked the plaintiff company to provide them with some more time to honour payment of the debts. Regardless, the defendant company, and Casha for that matter, remained in default, and the plaintiff company proceeded to file a lawsuit before the First Hall of the Civil Court.

In his defence, Casha argued that the plaintiff company lacked juridical interest in instituting the lawsuit, and this due to the fact that the unpaid invoices at issue were in fact issued by a different entity, Derfla Limited. The plaintiff company countered by stating that this was merely an administrative matter, and the invoices, albeit issued by Derfla Limited, clearly stated that payment was to be made to the plaintiff company Alf Mizzi & Sons (Marketing) Limited. In its considerations, the Court considered this scenario to be a typical case of stipulations made for the benefit of third parties – this being an exception to the general rule of contract law, i.e. that contracts shall only be effective as between the contracting parties and should not give rise to rights and obligations affecting third parties. In this vein, Article 1000 of the Civil Code (Cap. 16 of the Laws of Malta) states the following:

1000. It shall also be lawful for a person to stipulate for the benefit of a third party, when such stipulation constitutes the mode or condition of a stipulation made by him for his own benefit, or of a donation or grant made by him to others; and the person who has made any such stipulation may not revoke it, if the third party has signified his intention to avail himself thereof.

In view of the specific wording of the law, the Court considered that: (i) payment to the plaintiff company constituted the “mode or condition” by which the underlying merchandise was to be supplied to the defendant company, and (ii) the plaintiff company had expressly “signified [its] intention” to avail of this arrangement. Provided that these cumulative elements are adhered to, this article of the law affords the third party beneficiary a direct action against the debtor – as was stated in Millard vs Said (Court of Appeal – 14/09/1988). Hence, in this sense, Alf Mizzi & Sons (Marketing) Limited enjoyed the requisite juridical interest in the lawsuit.

In terms of his personal liability under the ‘Credit Application Form’, Casha pleaded that his consent had been vitiated – in that he had not been informed that by signing the document in question he would become personally liable for any and all debts owed to the plaintiff company by Erom Trading Limited. In this respect, the Court considered that Casha had ample opportunity to review and consider the contents of the ‘Credit Application Form’, and by no means had the plaintiff company coerced Casha into signing the document. The Court further considered that, as a seasoned, literate businessman, Casha should have been fully aware of what he was agreeing to. It further elaborated that in order for consent to be fraudulently obtained, the following conditions must subsist: (i) the execution of fraudulent means and/or acts, (ii) which are inherently grave, (iii) in such a manner that they are crucial in the context of the business transacted between the parties, and (iv) are committed by the other contracting party. Moreover, in order for the fraud to be grave, it must be such that the reasonable man would not have realised that he had been misled. This does not include instances whereby the other party to an agreement exaggerates the quality of the object forming part of the transaction for the purposes of affecting a sale. In view of all this, the Court determined that fraud cannot be alleged where the facts at issue can be established without difficulty, as otherwise any contracting party would allege fraud as a convenient excuse to release himself/herself from the agreed contractual bind.

On the basis of the foregoing, the Court proceeded to ignore the pleas raised in defence by Darren Casha, and ordered him to pay, in his capacity as surety of Erom Trading Limited, the amount of €275,704.32 including additional interest to be calculated from the date of issuance of the relevant invoices, to the plaintiff company Alf Mizzi & Sons (Marketing) Limited.

Luke Hili is an Advocate at Ganado ANADO Advocates