Novation only takes place when obligation is extinguished to make room for a new obligation

A verbal agreement following a public deed is not novation if the terms and conditions were merely modified. This was held by Judge Miriam Hayman in John Whibley -v- Gabriella Vella and Jason Pace decided on 15 December 2021.

The plaintiff brought the lawsuit in the Court for it to order the defendants pay €16,942.81 representing a balance due on a loan given in May 2010 and to enforce a public deed the Parties signed and agreed to in November 2009.

The defendants filed a statement of defence stating that the transaction was illicit, because the Plaintiff could not have given a loan as he is not licenced by the Central Bank to give loans. Furthermore, they argued that the plaintiff did not call upon them to pay in terms of Article 256(2) of the Civil Code and that the action was timed barred by 5 years. They also held that the plaintiff accepted payments which were not in line with the public deed.

The First Hall of the Civil Courts dealt with the preliminary pleas. The first was that the transaction was illicit since the Plaintiff was not licenced in terms of Article 5 of the Banking Act which reads:

“No business of banking shall be transacted in or from Malta except by a company which is in possession of a licence granted under this Act by the competent authority.”

The Court held that the transaction was a commercial transaction with interest in terms of the Late Payment EU Directive 2000/35. The public deed was signed before a notary and all the legal formalities were observed. The business of banking is when lending of money is done regularly and in a habitual manner. The Court pointed out that this does not seem to be the case in the transaction carried out by both parties. The Court quoted from Paul Gauci et -v- Dominic Farrugia et decided on 30 March 2012, where the Financial Institutions Act was made reference to and the Court then held that lending activities which require a licence should be normal line of business of the party lending the money. This does not mean that a loan is null and void if it is a normal commercial transaction. The Court declared that this plea was being rejected.

As to whether the defendants should have been called upon prior to commencing the court action, Article 256(2) of the Civil Code stipulates:

“The enforcement of any other executive title may only take place after the lapse of at least two days from the service of an intimation for payment made by means of a judicial act.”

The Court mentions that the sworn application mentions that the judicial letter was sent, but it criticised the plaintiff for not presenting a copy. From the online court system this was found and was filed in court and served on the Defendants in April 2018. Irrespective of this the law does not sanction if the judicial letter was not presented. The Court quoted from a previous judgement Annemarie Zammit -v- Donald Zammit decided on 15 July 2002, which had an analogous situation, and found that the defendants did not suffer any prejudice. This plea was also rejected.

As to whether the action was time barred in terms of Article 2156(f) of the Civil Code, which states:

“2156. The following actions are barred by the lapse of five years: (.......)

(f) actions for the payment of any other debt arising from commercial transactions or other causes, unless such debt is, under this or any other law, barred by the lapse of a shorter period or unless it results from a public deed;”

The Court quoted from De Tigne Limited -v- Rada 99 Limited decided on 5 October 2015, wherein the Court held that the last payment would have interrupted prescription and therefore the five (5) years start from the last payment effected. The last payment made in this particular case took place a year before Whilbley filed his action. Therefore, the Court held that the action was not time barred.

As to the merits of the case, the Court held that the plaintiff testified that they entered into an agreement on 9 November 2009, where the amounts of repayments was established. Interest was charged if these dates were not respected. The defendants explained to the court that they had agreed verbally they would pay €500 per month. Payments were made and accepted. Gabriella Vella held that the amount borrowed was lower and therefore hinting that there was an element of usury.

This was not corroborated by Jason Pace. The defendants also hint that there was novation of the original agreement. Novation is the modification of the object of the agreement, which gives rise to a new obligation. Article 1181(1) of the Civil Code reads:

“Novation shall not take place if the former obligation is not extinguished, although it is modified.”

According to Francis Paris et -v- Maltacom plc decided on 7 July 2008, held that novation takes place when the debtor enters into a new debt which would be replacing the old debt. Article 1181 of the Civil Code stipulates:

“(1) Novation shall not take place if the former obligation is not extinguished, although it is modified.”

Therefore, novation is a mode how to extinguish an obligation, by creating a new obligation. There cannot be two obligations existing at the same time and neither is there, novation if the obligation is merely modified. In this case there is no novation. He agreement signed on 9 November 2009 established the amount due and the repayments.

With reference to the verbal agreement the defendants refer to this was a merely variation of the modality of repayment. The obligation was not extinguished.

The Court ordered the defendants to pay the balance due to the Plaintiff as per contract.