Abandonment of a Contract of Works

On 18 March 2021, the First Hall Civil Court (the “Court”), presided over by Mr Justice Joseph Zammit McKeon considered the conditions for abandonment of a contract of works. The case in the names of Unique Turnkey Limited (C 37841) vs Antoine Borg concerned two contracts of work or locatio operis.

The parties had entered two separate but similar contracts of works in October 2017 and November 2017 regarding the construction of two properties. Unique Turnkey Limited (the “Plaintiff”) alleged that after a few months from the commencement of works, Mr. Borg (the “Defendant”) abandoned the construction sites and the said contracts of works, incorrectly retained possession of tools, machinery and vehicles which the Plaintiff had provided and retained possession of the advance payment or deposit which was the Plaintiff had paid to him in advance of the commencement of works, under the terms of the said contracts of works.

The Plaintiff alleged that as a result of the Defendant’s abandonment of the contracts of works, it suffered multiple expenses including payment for another sub-contractor to complete the construction, settlement of penalties owed to the developers for delayed completion of works, wages owed to the employees who the Defendant employed and failed to pay. The Plaintiff also alleged that the Defendant was negligent and reckless in his use of the vehicles which he incorrectly retained possession of, and accumulated a number of traffic infringements, resulting in the suspension of the driving licence of the managing director of the Plaintiff company, being the person in whose name the vehicles were registered.

The Court considered the manner in which to dissolve a contract of works and referred to previous case law on the subject. The basic principle of a contract is pacta sunt servanda, which prescribes that contracts legally entered into shall have the force of law for the contracting parties. In accordance with Article 992(2) of the Civil Code (Cap. 16 of the Laws of Malta) (the “Civil Code”), a contract may only be revoked by mutual consent of the parties, or on grounds allowed by law. Furthermore, contracts must be carried out in good faith (with bona fide) and shall be binding not only in regard to the matter therein expressed, but also in regard to any consequence which, by equity, custom, or law, is incidental to the obligation, according to its nature.

Indeed, article 1640 of the Civil Code stipulates that the employer in a contract of works (or locatio operis) may unilaterally dissolve the contract, even when the work had commenced, and such a termination may be communicated to the contractor by any means whatsoever, including by word of mouth. However, the reason for dissolution of the contract of works is important. If the employer has no valid reason for the dissolution, he is to compensate the contractor for all his expenses and work and to pay him a sum to be fixed by the court, according to circumstances, but not exceeding the profits which the contractor could have made by the contract. If, on the other hand, the employer has a valid reason for the dissolution, he is to pay the contractor only such sum which shall not exceed the expenses and work of the contractor, after taking into account the usefulness of such expenses and work to the employer as well as any damages which he may have suffered. The Civil Code also effectively distinguishes between obligations to give or to do which are restricted by a time frame stipulated in the agreement, and obligations where no such time frame has been fixed. The law also imposes liability for damages if the thing which a debtor undertook to give or the obligation which the debtor undertook to do could only be given or done within a certain time, and such debtor has suffered such time to expire.

Contracting parties may expressly agree on penalties and damages, as compensation for the non-performance of the principal obligation. A creditor may sue for the performance of the principal obligation instead of demanding the penalty incurred by the debtor, however, a creditor may not demand both the principal thing and the penalty, unless the penalty shall have been stipulated in consideration of mere delay. The Civil Code also provides that it shall not be lawful for the court to abate or mitigate the penalty except if the debtor has performed the obligation in part, and the creditor has expressly accepted the part so performed, or if the debtor has performed the obligation in part, and the part so performed, having regard to the particular circumstances of the creditor, is manifestly useful to the latter – however, in such case, an abatement cannot be made if the debtor, in undertaking to pay the penalty, has expressly waived his right to any abatement or if the penalty has been stipulated in consideration of mere delay. Where an abatement is so made, the penalty shall be reduced in proportion to the unperformed part of the obligation.

Taking into consideration the facts of the case, the Court noted that although the Plaintiff did not exercise its right to terminate the contract, this was due to the fact that the Defendant had abandoned the construction and was unreachable. The Court determined that the penalties due should be calculated until the date of submission by the Plaintiff of the sworn application to Court, therefore the 8 October 2019, and confirmed that in terms of the two contracts of works, such penalties would amount to €343,000. The Court further observed that although the two agreements presented to Court were not original copies and were not authenticated or certified, these remained admissible evidence in terms of law since they had been confirmed under oath by the managing director of the Plaintiff company, during his testimony.

Following due consideration, the Court concluded that the Defendant was responsible for the damages caused to the Plaintiff company resulting from his abandonment of the two contracts of works. The Court ordered the Defendant to compensate the Plaintiff for the expenses incurred, to return the advance payment or deposit which the Plaintiff had paid to him in advance of the commencement of works, and to return the tools, machinery and vehicles which the Defendant had incorrectly retained possession of.