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08 August 2007
On July 5 2007, in Finaval SpA v Scorpio Ship Management SAM, Justice Tonio Mallia, sitting in the First Hall of the Civil Court, awarded Italian-registered company Finaval SPA over LM7 million in damages.
On February 5 2004 Finaval filed a writ against Scorpio Ship Management SAM, Ferentino Shipping Co Ltd, Ilario Shipping Co Ltd, Arthur George Ltd and Victoria International Ltd. For some time Finaval had been engaged in negotiations with Scorpio regarding the construction and sale of an Aframax tanker. The parties had reached an agreement, which was set out in a letter sent by Scorpio to Finaval on December 24 2002.
The arrangement stated that Scorpio, acting through a nominated Maltese shipping company, would enter into a shipbuilding contract with Samsung Heavy Industries of Korea to acquire a newly built ship. Prior to taking delivery, Scorpio would transfer the shares in its Maltese company, referred to in the letter of December 24 2002 as Ship Co B, to Finaval. In this manner, Finaval would become the owner of the vessel.
In fact, Scorpio registered two Maltese companies, Ferentino Shipping Co Ltd and Ilario Shipping Co Ltd. The shareholders were two Liberian companies, Arthur George Ltd and Victoria International Ltd.
Differences subsequently arose between the parties, leading to a refusal by Scorpio to transfer to Finaval the shares in either company. Therefore, Finaval filed a writ demanding full performance of Scorpio's obligations as assumed by the letter of December 24 2002 and claiming that Scorpio had defaulted in its obligations towards Finaval when it failed to transfer the shares in the Maltese company to Finaval. Finaval further requested the court to liquidate the damages sustained by it in the event that the Maltese company was no longer the owner of the vessel.
Scorpio held that negotiations between the parties were still at a very early stage and that no agreement had been reached. It further argued that the agreement regarding the transfer of the vessel was subject to the parties entering into a joint venture agreement and that, since the parties had not entered into such an agreement, it was not obliged to carry out the transfer of shares. The parties exchanged detailed submissions on all points raised.
Among the preliminary defences raised by Scorpio was the lack of jurisdiction of the Maltese courts to hear the case. In fact, in a landmark preliminary judgment delivered on December 2 2004 the court ruled that shares in a Maltese company deemed movable assets and thus property existing in Malta under Article 742 of the Code of Organization and Civil Procedure. The court therefore ruled that it had jurisdiction to hear the case.
In its judgment of July 5 2007 the court rejected Finaval's argument that Maltese law was not the applicable law in the case and held that the issue was to be decided under Maltese law, which was the proper law of the contract. The court held that although the agreement had been reached between two foreign companies, the execution of the agreement was to take place in Malta. It further ruled that an agreement had been reached between Finaval and Scorpio by means of the letter of December 24 2002.
In terms of Maltese law, company shares were considered to be movable items, and therefore no formalities were required for a promise of sale agreement in respect of such shares. The court added that the documents exhibited proved that an agreement had been reached that the shares were to be sold.
The court ruled that it could not uphold Finaval's request for the share transfer to take place because the shares had been sold before the court's ruling. The court stated that this effectively meant that Finaval would not receive the ship it had been promised. However, it also meant that the damages suffered by Finaval were substantially increased (ie, the difference between the cost of the vessel at the time of the promise of sale agreement and the market value of the vessel at the time of the ruling).
Therefore, the court found in favour of Finaval and liquidated the damages
that Finaval had suffered for the sum of $22.2 million. Scorpio was ordered
to pay Finaval LM7,093,785, equivalent to $22.2 million and the largest-ever
damages award by the Maltese courts.
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