Judge recognises defendant’s right to abandon business after plaintiff’s default

Once a plaintiff defaulted on his obligations contracted with a defendant, the same defendant had every right to abandon the business set up with the plaintiff. This was held in a court case decided on 28 September 2023 by Judge Francesco Depasquale in the names of Luke Desira vs Rachael Vella Spiteri.

The parties had set up a company together with a view of operating a cafeteria. The defendant was also the sole director of the company and company secretary. Subsequently, the parties entered into a shareholder’s loan wherein the parties set out the commercial responsibilities as well as the personal obligations between themselves.

The plaintiff in this case held a lease of the premises from which the cafeteria was to be operated. The premises were already furnished and tailored to be used as a cafeteria. The said premises were owned by a third party extraneous to the business in question and therefore the lease agreement was between the plaintiff and a third party. By virtue of the abovementioned shareholder’s loan, the plaintiff agreed that he would transfer the lease of the property as well as the movables within the same property onto the company that was being setup rather than onto his personal name. In return, the defendant was to pay the plaintiff a sum of €28,000 by way of monthly instalments. It was also agreed that the defendant was to operate the day to day running of the cafeteria.

The cafeteria in question opened its doors in March of 2019 but operations halted around two months later after several disagreements between the parties. The defendant stopped opening the cafeteria and soon after officially resigned from her position as Director of the company running the cafeteria. Simultaneously and as a result of her resignation, the defendant stopped paying the shareholder’s loan.

The plaintiff resorted to legal action against his business partner and demanded that the defendant pays him the balance on the €28,000 agreed upon in the shareholder’s loan whilst also asked the Court to liquidate damages payable by the defendant to the plaintiff for damages caused to him as a result of the defendant’s decision to abandon the business and for the way in which she ran the business throughout its operations.

The defendant countered back firstly by arguing that she ran the business in accordance with the expected standards and diligence.

Secondly, she argued that her actions did not cause any damage to the plaintiff. However, crucially, the defendant argued that she cannot be held responsible for the non-fulfilment of her obligations to pay the shareholder’s loan and this on the basis that the plaintiff failed to fulfil his part of his obligations of the same agreement, namely to transfer the leased property and its movables onto the name of the company set up between the parties.

After hearing several witnesses and considering all the evidence presented to it, the Court established a number of important points. The Court remarked that the plaintiff’s obligation to transfer the lease of the property from which the cafeteria was being operated, and its movables, unto the company was a precursor to the rest of the terms of the loan agreement. The evidence showed that this obligation was never fulfilled.

The defendant therefore argued that since the plaintiff had failed to carry out his obligation to transfer the lease and its movables unto the company, she was not obliged to pay the sum of €28,000 by way of consideration for such transfer.

The Court declared that that since the plaintiff had failed in his obligations, it was only natural that he could not take legal action against the defendant to honour her part of the agreement.

In its legal considerations, the Court delved into several doctrines dealing with the elements of a contract. Quoting from other judgements, the Court stated that one such element is that contracts should be executed in ‘good faith’.

Throughout the case the plaintiff also alleged that the defendant did not run the cafeteria as was expected of her, namely by complaining about opening and operating hours, the defendant’s lack of obtaining a ‘food handling certificate’ and the failure to open a bank account. However, the Court deemed all of these allegations as irrelevant in the circumstances because the crux of the issue was whether the transfer of the lease agreement was executed or otherwise. Hence, the Court held that any alleged failures by the defendant are secondary to the primary failure of the plaintiff.

The plaintiff had also requested the liquidation of damages by way of loss of profit, damages for loss of earnings and reputational damage to the cafeteria.

The Court however noted that the cafeteria had been closed for a number of months before it was reopened by the defendant. Therefore, one could not argue that there was a ‘goodwill’ or a reputation that was already established and hence there could not have been any damages. Moreover, the Court noted that the plaintiff failed to bring any sort of evidence to substantiate the loss of any sort of damages suffered by him or the company.

On the basis of all of the above, the Court concluded the case by throwing out the case brought by the plaintiff and upholding the defendant’s line of defence.

The defendant was represented by Dr Gianluca Cappitta.