16.05.2019

Should a fraudulent debtor be equally responsible to the negligent debtor?

Should a fraudulent debtor be equally responsible to the negligent debtor? What differentiates them? How do you establish causation to damages that to be compensated?

First of all, we must know that there are many ways of breaching an obligation. There are cases in which the breaching is imputable to the debtor, while others no. The Spanish Civil Code tells us that the debtor is not liable by act of God or Force Majeure. And in all other cases, they are liable to the lack of compliance by fraud, negligence or default.

Nonetheless, it is necessary to make a distinction between negligence and fraud in cases where the debtors are liable to non-compliance. The Civil Code, in its Article 1.107 provides:

The damages that debtors in good faith shall be liable are those which are foreseen, or which could have been foreseen at the time of signing of contract the obligation and which are a “necessary consequence (explained later)” of his/her failure to perform.
In the event of willful misconduct, the debtor shall be liable for all damages which are known to have arisen from the failure to perform the obligation.

Therefore, the debtor in good faith will be liable only for the damages that are deemed as “necessary consequences.” While the ones that breached it in bad faith (fraudulent debtor), will be liable for all consequences. This refers to both to the foreseeable and the unforeseeable damages that derived from the breach of the debtor’s obligation. From precedents, we see that fraud includes, both by direct acts, and through omission or inadvertence to the other party.

With that in mind, we will analyze what the limit is to establish causation of the damages that are subject to compensation by the Superior Court. As well as the distinction made between debtors in good faith and fraudulent debtors.

ESTABLISHING CAUSATION (Cause, Motive, Grounds) OF COMPENSATABLE DAMAGES AND DISTINCTION BETWEEN GOOD FAITH DEBTOR AND FRAUDULENT DEBTOR BY THE SUPREME COURT.

As we anticipated, the liability for non-compliance varies depending on the concurrence of fraud or negligence.

For these purposes, the recent Supreme Court Judgment no. 484/2018 of September 11. One of the analyses is about negligence in the keeping and destruction of documents that should have been destroyed by contract. The issue was if the negligence was intentional, making it a misdemeanor, or indeed culpable as negligence. Hence, if the concerning responsibility covers only the direct damages or their totality according to article 1107 CC.

The Supreme Court marked,

“When referring to art. 1107 CC which concerns if damage is a “necessary consequence,” the doctrine and precedents traditionally distinguish between direct damages and indirect damages depending on whether the consequence has been found as direct or not of the non-compliance.
From this point of view, the damages assessed by the Provincial Court are only direct (necessary consequence), limited by the amount of travel vouchers were being circulated which was unduly recorded, or by the exchanging some of the same series between clients, or because they were intervened by the police. ‘Necessary consequence’ should not be interpreted as meaning the damage inevitably resulted from non-compliance in abstract, but in a sense that the specific non-compliance produced given the circumstances. And it should be considered that it was a necessary consequence of the failure to put into circulation all the vouchers of the same series. (…)”
“When defining the fault or negligence, art. 1104 CC is based on a due diligence in compliance, which requires appropriate conduct for the effectiveness of the benefit. [In this case, as we have seen, the provision of the waste management company contains aspects of the deposit agreement and the work lease contract [1].]”
“From the point of view of the leasing of work, it is the obligation of the contractor to carry it out as agreed and it cannot be excused in what has been done or omitted by its employees, since art. 1596 CC makes the contractor responsible for the execution of his dependents. (…) “

CONCLUSIONS

Here are some points to take away from what’s been said above;

The breaches by act of God or force majeure exempt the debtor from liability.
In all other cases, one is always be liable for non-compliance when he/her has committed fraud, gross negligence, or default on payment.
The scope of liability varies depending on whether the debtor acts in a wrongful way or if it does so fraudulently.
The debtor in good faith will be liable only for the damages that are “necessary consequence” of its non-compliance. While the one that does it in bad faith (fraudulent debtor), will be liable for all.
The Supreme Court holds that the amount of compensation for harm to reach the level of all the economic damage suffered by the injured party. And is to be consistent in the difference between the situation of the assets that has suffered the offense and the one that would have not should the incident not have occurred.
Furthermore, a “necessary consequence” should not be interpreted as to mean the damage coming inevitably from non-compliance in the abstract, but in the sense that the specific non-compliance produces such consequence under the circumstances.
Gross negligence occurs when the person, who fails to comply, is an expert who has the duty to know the legal scope of the obligations that he had previously contracted.