When the other party seeks to prevent performance of a contract | In Principle

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When the other party seeks to prevent performance of a contract

After conclusion of a preliminary agreement for sale or long-term tenancy of real estate, the owner refuses to conclude the final agreement, instead selling the property to another buyer or delivering the property to another tenant. Or imagine a contract for future delivery of rare, hard-to-find components essential for manufacturing, where the seller then enters into another contract promising to supply a direct competitor, preventing the supply to the original buyer. In such situations, does the original buyer have a claim other than for monetary damages for breach of contract, or can it enforce performance of the original contract?

Yes, the buyer does have such a claim. It can demand invalidation of the later contract (between the seller and a third party) which has prevented actual performance of the original contract. Here we will examine more closely the legal instrument enabling enforcement of such a claim. Often it is only performance of the original contract that can fully secure the interests of the buyer affected by this form of disloyal—or outright dishonest—behaviour by the other party.

Civil Code Art. 59: protection of a creditor seeking real performance of a contract

Art. 59 of the Polish Civil Code provides: “In the event of conclusion of a contract whose performance would wholly or partially prevent satisfaction of a claim of a third person, that person may demand that the contract be held ineffective against that person, if the parties knew of the person’s claim or if the contract was without consideration. A finding of the ineffectiveness of a contract cannot be sought more than one year after the contract is concluded.”

Civil Code Art. 59 provides protection for real enforcement of an obligation. The subject of protection is a claim under which the holder of an existing obligation (whom we may refer to as the “creditor”) may demand from the other party to that obligation (whom we may refer to as the “debtor”) specific behaviour favourable to the creditor, even though the debtor has concluded another contract with a third party posing a barrier to actual realisation of the previous obligation to the creditor.

This provision is similar to the Polish regulations governing a fraudulent transfer claim against a third party (Pauline action), designed to protect the creditor against the insolvency of the debtor (Civil Code Art. 527 and following).  

But there are major differences here, which should be discussed briefly to give a better understanding of the significance and aim of Art. 59. The main distinction is that Art. 59 protects only non-monetary claims, while Art. 527 protects only monetary claims.

In other words, in a claim under Civil Code Art. 59, the creditor should seek to obtain (or recover) strictly defined, individualised property or intangibles in which the creditor has an interest—thus stressing the specific performance of the obligation. By contrast, in a fraudulent transfer claim against a third party, the point is not the property or intangibles as such, but the ability to seize and sell them in execution, generating enough proceeds to satisfy the creditor’s claim.

If a claim under Civil Code Art. 59 is granted, it will mean that the creditor has the right to enforce its claim as if the later contract had not been concluded. Each party to the contract held to be ineffective against the creditor must endure the actions arising out of the prior contract with the creditor.

Grounds for applying Civil Code Art. 59

The grounds for protection of the claimant under Civil Code Art. 59 are:

  • Conclusion of a contract between two persons resulting in total or partial inability to perform an earlier obligation involving one of those parties and the claimant under Art. 59
  • The awareness of both parties to the new contract that the creditor holds a claim under the earlier obligation which cannot be satisfied because of the new contract (or else the new contract was made without consideration)
  • The existence of a sufficiently precise claim on the part of the creditor at the time of the transaction preventing its performance, as well as at the time a judgment is issued under Art. 59.

Addressing each of these grounds in turn:

  • Inability to perform an earlier obligation due to a later contract

There must be close connection between performance of the challenged new contract with a third party and the inability to satisfy the claim for performance of the earlier obligation with the creditor. This has to with a situation similar to where someone has become unjustly enriched at the cost of another (who for the same reason has been impoverished). But the degree to which satisfaction of the creditor’s claim has been prevented is irrelevant. It is no defence that the claim is disproportionate, as even a minimal limitation on performance of the creditor’s claim is sufficient.

  • Parties’ awareness that the new contract prevents performance of earlier obligation

Knowledge of the creditor’s claim on the part of the parties to the challenged contract is a rigorous requirement, which cannot be replaced by a mere assertion that they could or should have known of the claim, or a finding that the parties could easily have obtained such knowledge if they had only acted with due diligence. It must be affirmative knowledge, which the creditor must prove. It is insufficient if only one of the parties to the contract challenged under Art. 59 was aware of the creditor’s claim.

  • Creditor’s specific claim

The claim subject to protection under Civil Code Art. 59 must be real and concrete, and not merely hypothetical. The protection sought by the creditor always extends to a specific claim, not some vague right of the creditor against the debtor.

A condition that will defeat the claim under Art. 59 is further transfer (or loss) by the third party of the property or intangibles obtained from the debtor based on the challenged new contract. Protection can be sought under Art. 59 only when property or intangibles acquired under the challenged fraudulent contract are still held by a party to the challenged contract, even if only in the form of a claim. Further transfer to another person will mean that the defendant can no longer be sued, and the claim must be dismissed. The acquirer in that situation does not assume separate grounds for being sued, due to the lack of a specific law expanding the set of entities who can be sued, such as Civil Code Art. 531 §2, which addresses fraudulent transfer claims against third parties.

The exceptional nature of a claim under Art. 59 prevents an expansive interpretation of this provision. It is recognised in the case law that there is no basis for making a leap in construction allowing Civil Code Art. 531 §2 to be applied by analogy.

Another condition defeating the claim is the passage of a year since conclusion of the contract challenged by the creditor under Art. 59.

Formulating the claim under Art. 59

There is necessary joinder of parties between the parties to the contract which the creditor is seeking to set aside under Art. 59. This means that the suit must be directed against all the parties to the disputed contract.

The proper court to consider the claim seeking to hold a contract ineffective under Art. 59 should be determined based on the amount in dispute and the domicile or registered office of one of the defendants.

It is vital in these cases to precisely formulate the relief sought. It should be stressed once more that the claim protected under Art. 59 must be real and sufficiently concrete. In this respect, the creditor seeking protection under Art. 59 must precisely define the claim in terms of both the subject matter and the entities—what relief is being sought and against whom. The claim described in the suit does not have to be mature or already reduced to an enforcement title. However, the claim, the parties, and the amount must be adequately identified in the statement of claim. Without first determining based on the statement of the claim the parties, the basis, and the amount of the claim subject to protection, it would not be possible to determine that conclusion of the fraudulent contract (unlawfully infringing the creditor’s legitimate interests) would wholly or partially prevent satisfaction of the claim.

When drafting the statement of claim, it cannot be assumed that because the challenged contract is inaccessible to the creditor (or there are other objective difficulties in determining what the debtor has been done with a third party, and in what circumstances), any doubts associated with the challenged contract should be resolved against those parties. If through the statement of claim—and in particular the properly framed requests for admission of evidence—the creditor cannot bring the court to a clear and precise determination of the subject matter and the entities involved in the challenged contract, the negative impact of the contract on the creditor’s rights, the awareness of this on the part of the debtor and the third party concluding the challenged contract, and the date when the contract was concluded, any denials or objections in this respect asserted by the defendants will most likely result in rejection of the claim.

This leads to the practical conclusion that a properly framed statement of claim seeking to hold a contract ineffective under Civil Code Art. 59 is a difficult task, requiring the assistance of experts specialising in creditor protection cases.

Interim relief to secure claims under Civil Code Art. 59

As mentioned above, legal protection can be effectively pursued under Civil Code Art. 59 only when the property or intangibles acquired on the basis of the challenged fraudulent contract are still held by a party to the challenged contract, even if only in the form of a claim. Thus when planning to pursue a claim under Art. 59, the creditor should always consider obtaining interim relief to secure the claim as quickly as possible.

As cases of this type involve non-monetary claims, there is an open-ended catalogue of “security measures” available under Civil Procedure Code Art. 755. In our view, the most relevant security measures in these cases are:

  • An injunction against transfer or encumbrance of the property or intangibles
  • Appointment of an involuntary administrator of the property or intangibles, or even the entire enterprise.

It is also worthwhile to disseminate information about the case in which the creditor is pursuing its rights under Civil Code Art. 59 as broadly as possible among participants in legal dealings, although this must be done lawfully (for example pursuant to an order granting interim relief).

Court filing fee and length of litigation

In a case under Civil Code Art. 59, if the amount in dispute does not exceed PLN 20,000, the court filing fee must be paid pursuant to Art. 13(1) of the Act on Court Fees in Civil Cases, which indicates the specific amount of the fee depending on the amount in dispute (e.g. if the amount in dispute is between PLN 15,000 and PLN 20,000, the fee for the claim is a flat PLN 1,000). Under Art. 13(2) of that act, if the amount in dispute exceeds PLN 20,000, the court fee is 5% of the amount in dispute, but no more than PLN 200,000.

It generally takes two to five years for a case seeking to set aside a contract under Civil Code Art. 59 to be decided by a Polish court (depending on the location of the court and the complexity of the case).

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