Identifying and responding to economic fraud | In Principle

During a crisis, the risk of running a business increases, and not just for “natural” reasons. There is also a growing number of unlawful behaviours by businesses, from incurring obligations they cannot honour to evading their existing liabilities. Too many businesses treat hard times as a great opportunity to shift the risk of their operations to counterparties who aren’t as “clever.”

This is accompanied by the belief that if their business comes up short, everything can be blamed on the crisis, and they can hide behind the corporate veil, and seek protection in restructuring or bankruptcy, leaving “naïve” creditors with nothing.

So this is a good occasion to remind companies—both creditors and debtors—that disloyal conduct in negotiating a contract or in establishing and executing payments for consideration may be assessed in the light of Art. 286 §1 of the Polish Criminal Code, which sets forth the elements of the offence of economic fraud. Behaviour that fulfils the elements of this offence also constitutes a prohibited act under Art. 415 of the Civil Code. Thus, it constitutes grounds for imposing liability for damages on a person who fraudulently causes damage to a counterparty (as well as on a person who encourages or assists the perpetrator in causing damage, or a person who knowingly benefits from injury to another, as provided for in Art. 422 of the Civil Code).

Thus a debtor who, when agreeing to pay a certain amount at a later date, does not really intend ever to perform the contractual obligation, should not expect any indulgence. Placing an order with a deferred payment date is misleading (fraudulent) for purposes of Art. 286 §1 of the Criminal Code if, at the time of placing the order (or receiving the goods) the buyer intends to miss the agreed payment date and postpone payment indefinitely.

A debtor cannot secretly and unilaterally assume that he will fulfil his obligation only if his business goes well. Without informing the other party, a party entering into an agreement cannot make timely completion dependent on the success of future transactions. Such behaviour also constitutes misrepresentation within the meaning of Art. 286 §1 of the Criminal Code. A debtor may not be relieved of responsibility for an act defined in this section of the code simply because subsequent lack of payment was to some extent attributable to the failure of an enterprise pursued by the debtor, for reasons at least partly beyond his control. The debtor cannot make payment dependent on future, uncertain events without making appropriate arrangements with the other party.

Concealment from a counterparty of relevant information about one’s own economic condition or asset position is assessed analogously. In a bilateral transaction, a counterparty is not required to disclose its financial situation. Nevertheless, this will not be misleading within the meaning Art. 286 §1 only when the entity, observing commercial principles which the other party to the contract has a right to rely on, has the actual capability of performing the contractually assumed obligation on the date it arises, without knowingly injuring the creditor. Otherwise, silence on the actual standing of the enterprise may be regarded as generating a mistaken impression of the ability to repay the debt by the agreed time, inducing the other business to make an unfavourable disposition of its property. This constitutes the offence of fraud and, for purposes of the civil law, tortious incurrence of a debt.

It should be stressed that to find an act criminal under Art. 286 §1 it is irrelevant that the wronged economic entity did not properly check the financial condition of the other party. Even extreme irresponsibility of the aggrieved party does not defeat the elements of fraud. The fact that by exercising due diligence the victim might have detected the misrepresentation should not affect how the misrepresentation by the perpetrator is viewed by the criminal law. What is relevant for an offence to be committed under Art. 286 §1 is not the subtlety of the perpetrator’s methods, but that he misled the victim.

Therefore, any creditor affected by a debtor’s concealment of its financial situation, or the debtor’s attempt to shift to the creditor the consequences of the debtor’s business failure, should remember about Art. 286 §1, as it can be an alternative legal basis for recovery of the creditor’s outstanding claims.

Moreover, the fact of commission of a crime under Art. 286 §1 of the Criminal Code may also be established independently by a civil court hearing a claim against the perpetrator of an economic fraud who caused the damage (or against a person who encouraged or assisted in causing the damage, or knowingly benefitted from the injury to another party).

Adam Studziński, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners