Group Seven Ltd & Anor v Allied Investment Corporation Ltd & Ors

Fraudulent misrepresentations inducing a contract may justify annulment and rescission under the Maltese Civil Code where the fraud involved sufficiently serious artifices, materially induced the contract and was perpetrated by the contracting party. A claimant’s failure to investigate does not necessarily defeat relief where the fraud was sufficiently persuasive to overbear reasonable diligence. A participant who materially helps build up and implement a fraudulent investment scheme may be liable in damages, even if he did not make every representation or complete the final transfer. Contributory negligence is potentially available under Maltese law even to a fraudster, but its application is discretionary and will rarely reduce damages. Subsequent negligence by a third party does not necessarily break the causal chain where the original fraud was the overwhelmingly effective cause of the loss.

Group Seven Limited claimed that it had been induced to transfer €100 million through a fraudulent investment scheme involving discounted medium-term notes, alleged approval by the Federal Reserve, and supposed authorised traders. The money was transferred under loan agreements to Allied Investment Corporation Ltd and subsequently to Larn Limited and a solicitors’ client account.

The claims were governed by Maltese law. Allied Investment Corporation Ltd and Marek Rejniak did not participate in the trial. Claims against Larn Limited and Luis Nobre were compromised. Paul Sultana was the only active defendant and contended that he had himself been deceived. The central issues were whether the representations were fraudulent, whether they justified rescission and damages under Maltese law, whether the claimants’ lack of diligence reduced recovery, and whether the solicitors’ subsequent handling of the funds broke causation.

1. Fraud and rescission. The court found that the proposed investment was a fraudulent scheme. The representations concerning discounted MTNs, the Federal Reserve, authorised traders and the need to transfer control of the funds were false. Rejniak, Allied Investment Corporation Ltd and Sultana were complicit. Under article 981 of the Maltese Civil Code, annulment required bad faith, sufficiently serious fraudulent artifices, participation by the contracting party and a significant inducement. Those requirements were satisfied.
2. The fraudulent artifices included repeated references to the United Nations, the Vatican and the Federal Reserve, prolonged meetings, secrecy, unexplained technical language and the introduction of supposed traders. Although Group Seven’s representatives acted with marked incompetence, the fraud was sufficiently impressive and persuasive that a reasonable person could have been overborne. The loan agreement was therefore declared void and rescinded. Restitution, interest and credit for sums recovered followed under articles 1209 and 1210.
3. Liability in damages. Article 1031 imposed liability for damage caused through fault, and article 1032(1) applied the standard of a bonus paterfamilias. The agreed elements were fault or fraud, an unjust act or omission, damage and causal connection. Sultana’s sustained role in bringing Group Seven into the scheme was sufficient, even though he was not a party to the loan agreement and did not perform every act in the fraud.
4. Contributory negligence. Article 1051 potentially permitted reduction of damages for the claimant’s imprudence even where the defendant acted fraudulently. The discretion would, however, rarely be exercised in favour of a fraudster. On these facts no reduction was appropriate.
5. Causation. The solicitors’ alleged breach of the Solicitors’ Account Rules 2011 did not break the chain of causation. The fraud was the overwhelmingly effective cause of the loss, and the alleged negligence was not actionable at the instance of the parties relying on it. The claims succeeded against Allied Investment Corporation Ltd, Rejniak and Sultana.