Court does not accept clauses that hide an elevated interest rate on loan

The court found that any loan agreement which hides the fact that more than 8% interest is being charged is not to be accepted

Any loan agreement which hides the fact that more than 8% interest is being charged is not to be accepted. This was held in a judgement delivered by Madame Justice Anna Felice on 5 February 2019 in Av. Graziella Attard, mandatory in the name of Lara Rose Goulding and Tom Macmillan, William Spiteri, Christa Deguara and David Zarb Jenkins.

In their application, the plaintiffs explained that they had transferred €33,903 to the defendants, on condition that the sum would be returned to them. The money was to be used to purchase a property. The amount was sent to Zarb Jenkins and Deguara, because Spiteri lived in the UK and had no Maltese bank account. When Spiteri returned to Malta, he entered into a written agreement with the plaintiff Goulding, where it was established that if the sum was not paid by December 2014, he was to pay a penalty of €6,830. The plaintiff registered a total claim of €40,733 with interest and costs.

Zarb Jenkins and Deguara had filed a statement of defence, wherein they claimed that they were not parties to the agreement and therefore, they had been wrongly sued. In fact, the Court had delivered a preliminary judgement, which held they there were not responsible for the claims.

William Spiteri also filed a statement of defence stating that he does not have any judicial relationship with Ian Macmillan, however, the private agreement does not state for what he is paying £5,000. The plaintiff merely held that that is a penalty for late payment. This, in fact, is not legal and amounts to usury and attempt for the plaintiff to earn a ‘quick buck”.

From the evidence produced, Goulding and Spiteri had a romantic relationship, but Spiteri had financial difficulties. Christa Deguara paid Spiteri’s bank loan on condition he pay it back. The bank loan was used to purchase property in Mosta. Spiteri agreed to pay back €15,000 and then pay in monthly payments.

Ian Macmillan is Goulding’s step father, who lent Spiteri another €15,000 to pay off Deguara. The payment was sent to Zarb Jenkins’s account. Goulding and Spiteri signed an agreement in February 2012, wherein it was agreed that Goulding had lent Spiteri £15,000 to purchase the property in Mosta and the latter had agreed to pay her back by March 2013 and also he agreed to pay an additional £5,000 by March 2014.

The plaintiff argued that the £5,000 was a penalty, but this was disputed. A second loan of £7,000 was made and it was used to pay the notary’s expenses on the purchase deed. The plaintiff is asking for a refund of €12,052. These payments were made because Goulding was under the impression that she was going to purchase half of the Mosta property, but before entering the notary’s office, Spiteri told her that he was purchasing the property on his own.

Spiteri argued that all he borrowed from Macmillan was €15,000 and that Goulding never contributed to the monthly payments made to Zarb Jenkins.

With regard to the plea that the defendant had no judicial relationship, Madame Justice Felice had quoted from a Court of Appeal, citing Justice Frankie Refalo -v- Jason Azzopardi and decided on 5 October 2001. The court in that judgement held that for a court to establish whether a party for the legitimate party, it had to verify whether he or she were parties to a negotiation. In this case the plaintiff lent money to the defendant and therefore, there is a judicial connection between the two. The plea was turned down.

The defendant pleaded that the £5,000 mentioned in the June 2012 agreement was not a penalty but interest and therefore, this was illegal.  Article 986(2) of the Civil Code states:

“(2) Saving the provisions of article 1852 and of any other provision of this Code or of any other law, any obligation to pay a rate of interest exceeding eight per cent per annum is also void in regard to the excess.”

Article 1852 states that if more than 8% interest is charged then only that rate will be enforced and if any additional interest is paid, then it will be reduced from the capital.

On usury, the Court quoted from Joseph Mary Farrugia -v- Gontran Borg decided on 15 November 1985, wherein it stated that any contract contracted by fraud is subject to rescission. At the same time the law stipulates that interest on interest is not permitted. In Maria Dolores Montebello et -v- Saviour Chetcuti pro et noe decided by the Court of Appeal on 27 January 2017 held that usury does not annul the contract, but reduces the interest to 8%.

In this case the Court held that the so-called penalty was, in fact, interest which exceeded 8% and therefore this obligation was rendered null.
The Court then moved to order William Spiteri to pay Ian Macmillan €15,000 with interest from January 2012.

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