A year has passed since a counterparty entered into an agreement with a third party preventing actual performance of a contract previously entered into with the counterparty. Thus the one-year time limit under Art. 59 of the Polish Civil Code has already expired. Is there still any chance to eliminate from legal circulation a fraudulent transaction that harms the creditor?
On our website, we have already discussed the institution of a creditor’s legal protection allowing setting aside of a later agreement (between the debtor and a third party) which prevented real performance of a contract previously concluded between the creditor and the debtor.
The question that must now be answered is whether Civil Code Art. 59 offers the only legal remedy to eliminate from circulation a fraudulent agreement that interferes with actual performance of a contract previously entered into by the creditor with the debtor.
There are grounds for nullifying the creditor’s claim based on Art. 59. Among other things, these include further disposal of the asset to a “fourth party” or the lapse of one year from conclusion of the disputed agreement. In such a situation, does the creditor have any chance to enforce implementation of the contract the creditor entered into with the dishonest debtor?
An alternative to Civil Code Art. 59 exists
In our opinion, as an alternative to the legal instrument of Civil Code Art. 59, one should always consider the invalidity of the fraudulent transaction under Civil Code Art. 58 in conjunction with Art. 189 of the Civil Procedure Code (the legal basis for obtaining a declaratory judgment).
Here, let us immediately point out that the above view is not novel, and is in line with the established position of the Supreme Court of Poland. According to this view, the existence of a claim to render a fraudulent agreement ineffective under Civil Code Art. 59 does not automatically exclude the undermining (invalidation) of such an agreement under Art. 58 (e.g. Supreme Court judgment of 16 March 1993, case no. II CRN 94/92).
A crisis of debtors’ integrity that needs to be addressed
However, it remains a continuous source of controversy and divergent practice in the courts to determine when a fraudulent transaction so deeply violates the legal order or public policy (“principles of social coexistence,” Civil Code Art. 58 §2) that it should be not merely held ineffective against the specific creditor, but completely eliminated from legal circulation as void.
Therefore, we assert that an evolution in the practice of interpreting and applying the law is needed so that creditors are effectively protected in the era of a growing crisis of integrity among debtors. And it is necessary to recognise a serious crisis in this area, attributable among other things to a breakdown of social norms and a sense of impunity, as we are aware not only from personal experience and observation. It is also evident from scholarly studies finding that in Poland, over the past few years, there has been a progressive breakdown of basic legal and social institutions designed to protect creditors (see Jacek Gołaczyński and Elżbieta Mączyńska (eds.), Protection of creditors’ rights in Poland: Economic dimension, transaction costs, legal forms of security, digitalisation of the judiciary (Warsaw: PTE, 2017), pp. 19–25).
Therefore, we would like to draw attention to two important issues related to the possibility of negative evaluation of a fraudulent transaction, leading to a finding that the transaction is void.
An agreement entered into for the purpose of committing an act prohibited by law should be declared null and void
Under Civil Code Art. 58 §1, a transaction contrary to the law or intended to circumvent the law is invalid, unless the relevant law provides for a different result, in particular that the invalid provisions of the transaction are replaced by relevant provisions of law.
In its case law, the Supreme Court of Poland has held that the function of Civil Code Art. 58 §1 is to prevent the emergence of legal relations prohibited by the legal system (e.g. judgment of 23 February 2006, case no. II CSK 101/05). According to this view, bans or orders can arise from rules of statutory rank from any branch of law, including public law (such as criminal law). If the purpose of a particular public-law norm is to prevent the formation of a civil relationship contrary to that norm, then it must be assumed that Civil Code Art. 58 §1 is applicable, as actions banned by public-law norms cannot be the subject of valid obligations undertaken in civil transactions. However, norms of public law applying to transactions not aimed at preventing the emergence of given civil relations only trigger the sanctions set forth in the public-law provisions relevant to them (including criminal law).
Applying this view, it should be assumed that to successfully challenge a specific fraudulent agreement under Civil Code Art. 58 §1, the creditor must be able to show that its conclusion was prohibited by law (e.g. criminal law), and not only that it produced effects for which certain sanctions (including criminal ones) may be incurred.
But at the same time, the Supreme Court has held that a legal act undertaken for a criminal purpose is invalid under Art. 58 §1 (e.g. judgments of 28 October 2005, case no. II CK 174/05; 30 March 2012, case no. III CSK 204/11; and 19 January 2011, case no. V CSK 189/10). This view is followed by the case law of some courts of appeal, holding that civil protection cannot be granted to an act that fulfilled the elements of a crime or was undertaken for the purpose of committing a criminal offence, as this would not only create inconsistency in the legal system, but would contradict its basic principles (e.g. judgments of the Warsaw Court of Appeal of 27 March 2019, case no. I ACa 1832/17, and 11 January 2022, case no. V ACa 780/21).
This view accepts the sanction of invalidity under Civil Code Art. 58 §1 not only for acts expressly prohibited by law (including criminal law), but also for transactions (including contracts) undertaken for the purpose of creating conditions for committing an act prohibited by law. According to this view, a fraudulent agreement frustrating performance of a prior agreement could also be considered invalid at the time, if it was concluded for the purpose of committing (or preparing to commit) an act prohibited by law. An example would be a fraudulent agreement leading to preferential treatment by the debtor of a given entity at the expense of a prior creditor/counterparty, which was conditioned on giving a managerial bribe (Criminal Code Art. 296a) to a person acting on behalf of the debtor.
As discussed above, there is clearly a growing debtor integrity crisis in Poland. Therefore, it is necessary to interpret and apply the law in a way that helps halt this crisis, i.e. to support the protection of fair legal transactions and restore sufficient protection to creditors harmed by dishonest debtors. In this regard, the legal view that would recognise the invalidity of a fraudulent agreement also when it was concluded for the purpose of preparation for commission of an act prohibited by law deserves strong support. It is relatively rare for provisions to contain a sufficiently precise and sanctioned ban on entering into certain agreements. Thus, if the practice of the courts were dominated by the view that the invalidity of fraudulent agreements is limited to situations where such acts were performed in contravention of a ban expressed, for example, in the provisions of criminal law, dishonest debtors and their allies could assume with even greater certainty that they would not suffer negative consequences in connection with the conclusion of such agreements.
An agreement knowingly entered into for the purpose of harming a creditor should also be considered null and void as contrary to public policy
Civil Code Art. 58 §2 provides that a transaction contrary to “principles of social coexistence” is invalid. Principles of social coexistence should be understood as basic principles of fair and ethical conduct (e.g. Supreme Court judgment of 8 May 2014, case no. V CSK 322/13).
In Polish case law, it has been sufficiently confirmed that a fraudulent agreement referred to in Civil Code Art. 59 may be subject to the consequences of Art. 58 §2. However, for the agreement to be declared absolutely void, it is necessary to demonstrate further circumstances in addition to the parties’ knowledge of the existence of the third party’s claim, that is, circumstances proving that the agreement violates principles of social coexistence. As a rule, it is not enough to establish that the parties were also aware that performance of the contract would make it impossible to satisfy that person’s claim, although the awareness of such a state of affairs should not escape the court’s attention when assessing whether the agreement complies with principles of social coexistence, against the background of the totality of the circumstances. Thus, in short, it is not permissible to hold an agreement concluded under the terms of Art. 59 to be void under Art. 58 §2, solely on the basis that the parties knew of the existence of a third-party claim. In order to recognise this absolute invalidity, it is necessary to demonstrate further circumstances proving that the agreement is contrary to principles of social coexistence (e.g. Supreme Court judgment of 16 March 1993, case no. II CRN 94/92).
The view that an agreement concluded by its parties with the intention of harming a third party (here, a creditor) may be deemed to violate public policy should be considered sufficiently well-established in Polish case law. Additionally, assessment of a transaction under Civil Code Art. 58 §2 is determined not only by its content, but also by the parties’ intended purpose and the effects of the act anticipated by the parties. In other words, it may be that the substance of a transaction does not conflict with principles of social coexistence, but due to the circumstances surrounding its performance, including in particular the motives of the parties, it may nonetheless be held to violate those principles. In dealings between businesses, the principles of social coexistence should be understood to mean principles of fair dealing, fair practice, loyalty and trust in contractual partners. Each party should refrain from behaviour demonstrating a lack of respect for the interests of the partner or causing damage to them (e.g. Supreme Court judgments of 16 March 1993, case no. II CRN 94/92; 22 June 2010, case no. IV CSK 555/09; and 18 April 2013, case no. II CSK 557/12).
In light of these remarks, it seems that to establish the invalidity of a fraudulent contract based on Civil Code Art. 58 §2, it may be of key importance to be able to prove that not only the debtor, but also its counterparty, knew that the agreement would cause harm to the creditor, and that this effect was intended by the parties. In practice, proving such affirmative awareness on the part of a person entering into an agreement with a dishonest debtor can be very difficult.
Awareness of the counterparty not always necessary
But it is not always necessary to demonstrate affirmative knowledge of the counterparty of a dishonest debtor.
The holding by the Kraków Court of Appeal in the judgment of 1 March 2016 (case no. I ACa 1586/15) deserves special attention. Recognition that conditioning the application of Civil Code Art. 58 §2 on whether the fraudulent purpose of the transaction was common and known to both parties to the transactions cannot be absolute. When assessing the impact of the awareness and conduct of the other party to the transaction and whether the transaction should be considered contrary to principles of social coexistence, the circumstances of the specific case must be taken into account. In the circumstances of a particular case, it is possible to assume that a given act was contrary to principles of social coexistence, even though the third party was not aware that the purpose of the debtor’s act was contrary to these principles.
This will be justified, for example, when the debtor’s method of operation was suspicious, creating conditions conducive to fraudulent practices of others, e.g. extortion. If in such a situation the debtor’s counterparty neglected to investigate the actual situation regarding the subject matter of the agreement and to verify the debtor’s honesty, it cannot successfully claim ignorance of the fraudulent purpose of the transaction. This will be particularly justified when the counterparty of a dishonest debtor is a business entity whose business purpose requires it to have specific knowledge of the economic and legal phenomena governing these activities.
Jan Ciećwierz, adwokat, Adam Studziński, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners