Collateral Oral Agreements: When an Oral Assurance Prevails over the Written Contract

Collateral Oral Agreements: When an Oral Assurance Prevails over the Written Contract

Muskita Aluminium Industries Ltd and Others v. Alsako Aluminium Ltd and Others (2009) 1 C.L.R. 1481 — Civil Appeal No. 381/2006, judgment dated 23/11/2009

Introduction

In Muskita v. Alsako, the Supreme Court of Cyprus (Nikolaides, Fotiou, Erotokritou, JJ.) upheld a first-instance judgment awarding the plaintiffs £1,391,045 on the basis of a collateral oral agreement guaranteeing the value of shares, notwithstanding the existence of two written agreements between the parties. The judgment stands as one of the leading authorities in Cypriot case law on the collateral agreement mechanism and the exceptions to the parol evidence rule, while also addressing critical questions of the law of evidence, most notably the treatment of statements made by persons since deceased, following the amendment of the Evidence Law, Cap. 9, by Law 32(I)/2004.

The Facts

The plaintiff companies of the Alsako group traded in and distributed aluminium products in Nicosia, Larnaca and Limassol, with plaintiffs 4 – 8 being their shareholders and directors. By a written agreement dated 26.5.2000, it was agreed that Muskita Aluminium Company Ltd would acquire the plaintiffs' clientele, goodwill, stock and part of their equipment. The consideration was to take the form of the transfer of 597,015 shares in the public company Muskita Aluminium Industries Ltd, at a price of £0.67 per share (£400,000 in total), to a trustee for the vendors, while the value of the goodwill was agreed at £1,400,000. A second written agreement followed, dated 27.7.2000, fixing the consideration at a mere £20,000 in cash.

The plaintiffs alleged that during the negotiations, Georgios Mouskis, a principal shareholder and the representative of the Muskita group, who passed away in 2002, gave them an oral guarantee that the value of the share, upon its listing on the Cyprus Stock Exchange, would be at least £3 per share; a guarantee which, as the court accepted, could not be recorded in the written agreements "for CSE purposes". The difference between the guaranteed value (£3) and the stated price (£0.67), multiplied by the 597,015 shares, corresponded precisely to the amount claimed of £1,391,045.

The trial court (District Court of Nicosia) held that the principal agreement was that of 26.5.2000 and that the second agreement was an after-the-fact construct made for Stock Exchange purposes only. It accepted the existence of the collateral oral agreement as binding both on Georgios Mouskis and on the two companies, and gave judgment for £1,391,045 with interest at 8% from 12.7.2001, dismissing the causes of action based on fraud and misrepresentation.

The Key Legal Points

1. The collateral agreement mechanism. The Supreme Court confirmed that the collateral agreement mechanism "is frequently employed by the courts so that justice may be done", applying the principles of Marketventures Ltd v. Dikomitis (2009) 1 C.L.R. 383 and the English authority J. Evans & Son (Portsmouth) Ltd v. Andrea Merzario Ltd. An oral assurance given with the intention of inducing the other party to contract may amount to an independent contractual promise, capable of prevailing even over inconsistent terms of the written contract. A critical element in the present case was that the two written agreements were mutually contradictory as to the consideration, a fact which reinforced the conclusion that the oral agreement existed.
2. Assessment of witness credibility — the limits of appellate intervention. The evaluation of evidence is pre-eminently the function of the trial court, which observes the witnesses in the live atmosphere of the trial. The Court of Appeal intervenes only where the findings are not justified by the evidence, offend common sense, or are objectively unreasonable or arbitrary. Minor contradictions do not undermine a witness's credibility; only contradictions which "create a breach in the case" and strike at the heart of credibility are material (R.K.B. Leathergoods Ltd v. Angelides (2004) 1 C.L.R. 1071). In the present case, the divergences in the evidence concerned whether the guarantee would be in writing or not, not whether it had been given at all.
3. Expert evidence. The court is not bound by expert evidence; such evidence merely assists it in reaching its own independent conclusions. The trial court rightly preferred the valuation of the plaintiffs' expert, who worked with two independent valuation methods (a sales-related and an earnings-related valuation), over the report of the defendants' expert, which contradicted Muskita's own public announcements describing the acquisition as "highly advantageous".
4. Hearsay — statements of deceased persons. Of particular importance is the holding that the Evidence Law, Cap. 9, as amended by Law 32(I)/2004, does not cover statements made by persons who have since died, since section 26 presupposes that the maker of the statement can be summoned for cross-examination. The former section 4 of Cap. 9, which permitted the production of documents made by deceased persons, was repealed by the amending law. A handwritten note attributed to the late Georgios Mouskis was therefore rightly excluded; nor did it fall within the dying-declaration exception.
5. Pleadings — the exclusive means of defining the issues. A general and unexplained allegation of "illegality" of the collateral agreement in the defence, without any particulars, could not be examined either at first instance or on appeal. Similarly, the contention that the guarantee bound only the deceased personally and not the companies had not been raised at first instance and could not be advanced for the first time before the Court of Appeal. The judgment emphatically reaffirms that the court will not stray beyond the issues defined by the pleadings.
6. Amendment of pleadings following the death of a party. The Court of Appeal upheld the interim ruling permitting the addition of the administrator of the deceased's estate as a defendant, noting that the allegation of a guarantee on his part was already contained in the original statement of claim, which had been prepared before his death, it was therefore no afterthought.

The Outcome

The appeal was dismissed in its entirety, with costs of €5,000 plus VAT against the appellants. The first-instance judgment for £1,391,045 (a figure corresponding to the 597,015 shares multiplied by the £2.33 difference between the guaranteed and the stated value) with interest at 8% from 12.7.2001 remained in force, binding jointly and severally both the companies and the estate of the deceased.

Why the Judgment Matters

Muskita v. Alsako remains a reference authority in Cypriot contract law for three (3) principal reasons.

First, it demonstrates that the parol evidence rule is not an absolute bar: where it is proved that an oral assurance was the inducement for signing the written contract, that assurance may be recognised as an independent, binding collateral agreement, even where its content was deliberately left out of the written text for regulatory reasons (here, "for CSE purposes"). The message to the business community is twofold: oral assurances given during negotiations may carry full contractual force, and the careful, complete recording of everything agreed in the written instrument is critical to avoiding subsequent disputes.

Secondly, the judgment clarified the status of hearsay evidence following the 2004 reform, holding that statements of deceased persons are not covered by the amended Cap. 9, a ruling with significant practical consequences in any dispute where a central protagonist of the events has died before trial.

Thirdly, the case is a model application of the principles governing pleadings and the limits of the appellate court's jurisdiction to review findings of credibility, serving as a reminder that contentions which are neither pleaded nor pursued at first instance cannot be resurrected on appeal.

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