Breach of contract or fraud? Peruvian and Spanish Jurisprudence

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In the common daily life of people and since ancient times, there have always been barters, contracts, promises and any type of action that requires a type of agreement. Such as the simple fact of buying something in a bodega, a bus ticket or agreeing on a service, etc. Specifically, everyone at some point [...]

In the common daily life of people and since ancient times, there have always been barters, contracts, promises and any type of action that requires a type of agreement. Like the simple fact of buying something in a store, a bus ticket or agreeing on a service, etc.

Specifically, we have all at some point entered into contracts in writing or orally with the agreement of the parties or also with the acceptance of the terms that may be generated by one of the parties (contract with financial institutions, contract with department stores, etc.). Consequently, we can conclude that the conclusion of legal business is something of everyday life and it is important to know its implications and what to do in the event of a breach of contract or a contractual fraud. Are they the same?

There are several types of scams in the country: pyramid schemes, juicy interests, purchase of vehicles at low prices, purchase of kits, deposits to applications (apps) that generate interest, among others. In that sense, it is important to delimit when we are talking about a scam or a breach of contract.

The crime of swindling is one of the most common crimes in the Peruvian legal system, and it is regulated in article 196 of the Penal Code. We can identify this crime when a person deceives another person in order to obtain an unfair economic benefit. In the case of contract fraud, the figure of deceit is particularly relevant. In this type of fraud, the deception occurs through the execution of a contract, in which the fraudster uses trickery and trickery to make the victim believe that he is contracting a service or acquiring a good of a certain quality, when in fact it is not so.

The Peruvian Supreme Court has issued several rulings on this type of fraud:

    • Appeal for Annulment No. 937-2021, FJ FIFTH: "(...) It should be pointed out that a typical type of deceit is configured in the conduct of the person who, within a contractual relationship, without expressing anything exactly false, BUT HIDING HIS INITIAL INTENTION OF NOT ACTING AS THE RELATIONSHIP DEMANDS - AS CONTRACTOR - AND DEFRAUDING, DEFINITIVELY, ANOTHER (IMPLIED OR PRAGMATIC DECEIT). The dividing line between fraud and breach of contract is given at the moment of the appearance of the will to breach the agreed performance: if the will to breach existed "ab initio" there will be fraud; if it arises subsequently, there will be no fraud...".. (...)"
    • Nullity Action No. 1073-2019, FJ DUODECIMOIn this way, it is evident that the system used by the appellants not only meant a lack of contractual compliance, but also that the conditions precedent under which the commitments and contracts were entered into with the victims were not clear and even appeared to be circumstances that were alien to them, since the conditions precedent under which the commitments and contracts with the victims were entered into were not clear and even appeared to be circumstances that were alien to reality.which led to the voluntary voluntary release of money by the aggrieved parties was vitiated was vitiated, which (moreover) was maintained for a prolonged period of time until it was the subject of the complaint (...)".
    • Cassation No. 795-2021, in its sixteenth ground: "On the other hand, although it is true that the appellants allege that the same facts would have been ventilated in civil proceedings, it should be recalled that the deceit used on the victim was so that she would part with her assets with the intention of making her believe that they would comply with the agreed contract, knowing that this would not happen, but it is not a breach of contract for supervening cause, which is why both appellants are criminally liable even when the breach of contract coexists with criminal liability.Therefore, the proposed cassation appeal is unfounded.

As can be seen, the Supreme Court has developed a jurisprudence on the crime of fraud by means of contracts -also known as "contractual fraud", "criminalized contract" or "criminalized civil business"-, where the majority of pronouncements have established that the difference between fraud and breach of contract is manifested in the subjective aspect, that is, in the moment of the appearance of the will to breach the agreed performance. If this will appears before, it is considered fraud, and if it appears after, it is considered breach of contract. 

However, this position is not unanimous. The other -which is in the minority- points out that the difference is in the typicity and not in the subjective aspect (Nullity Action N°2504-2015). This last position is the one adopted by the Spanish jurisprudence and we understand that it is the correct one. The elements of this kind of swindles according to Spanish case law, are: i) Deception in the contract, ii) Inducing the victim to enter into a contract against his interests, iii) Economic loss, iv) Causal link and v) Dolo [Supreme Court Ruling 61/2019, 370/2015, 706/2014, 465/2015, 199/2018 and 1317/2018]; therefore, the difference is in the typicity and not in the subjective aspect.

Two points must be remembered: The crime of Swindle by contract is usually a breach of contract (Cassation 795-2021), but not every breach of contract is usually a crime of Swindle (STS 69/2017). What is essential to differentiate one from the other is the deception that can be presented, either actively (ultimation of ruses to hide the true nature of the contract, falsification of documents, etc) or passively (the concealment of relevant information).

In this situation, the question arises: Why is this differentiation important? It is important because many scams occur under the element "deception in the contract", for example: A person A, offers a business to person B, tells him to invest in cryptocurrencies and that he will have a profitability of 20 to 30% per month. This person B, invests USD 200,000.00 (dollars) and receives two or three months of profitability (dollars) and then receives nothing. The question is: Default or swindle? If we take the doctrine of the subjective aspect "intention or spirit", we could say that the intention to breach arose after having entered into the contract; consequently, it would be a breach of contract.

There are a great number of these cases in the police and the Public Prosecutor's Office. If we were to correctly apply the difference in typicity specifically in the element "deceit", we could state that this last element was manifested when person A deceived agent B by means of benefits to keep him in error and to get rid of money. Thus, in the event of a possible complaint, it would be a criminal and not a civil offense.

On this issue there is a well-known case in Spain where the Supreme Court had this type of problem. It is the Malaya case where the Supreme Court of Spain, pointed out that the performance of services by the swindler does not exempt the existence of the typical deception necessary to configure the crime of swindling. Furthermore, it stated that, in this particular case, although the businessman had delivered some construction materials, he had generated an appearance of normality and confidence in the business to obtain an advance payment without the intention of fulfilling the entire contract. In summary, the Supreme Court considered that the crime of swindling by means of contracts can be committed even if some of the contractual obligations have been fulfilledThe Supreme Court considered that the crime of fraud through contracts can be committed even if some contractual obligations have been fulfilled, as long as the deceit persists and a damage has been generated in the victim.

In conclusion, the difference between breach of contract and the crime of fraud is mainly manifested in the deception. This type of deception can be active or passive. This type of fraud by means of contract is a crime that requires the existence of a previous deception that has induced the victim to enter into the contract, and that has produced an economic damage as a result of the deception and the maintenance in error by the agent of the crime. In addition, it is required that the perpetrator of the crime acts with malice, and that there is a causal link between the deception and the economic damage suffered by the victim. Likewise, it must be taken into account that the subjective aspect cannot be analyzed before the objective aspect, since to analyze the subjective aspect one must be based on evidential aspects and raise inferences of the behavior of an agent (Cassation 714-2021); therefore, the differentiation between breach of contract and fraud must be based on the objective aspect taking "deceit" as the main element.

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Author

  • Ricardo Mellarez

    Associate Lawyer at Benites, Vargas & Ugaz Abogados, graduated from Universidad San Martin de Porres, with a Master's Degree in Justice System and Rationality at the University of Girona, Spain, and with Advanced Specialization Studies in Criminal Law and Criminal Procedure at the Catholic University of Peru. In addition, he has a specialization course in Bases of Probative Reasoning at the University of Girona, Spain and a Higher Course in Investigation and Evidence in Complex Crimes at the University of Salamanca, Spain. He is the author of several articles on criminal law and criminal procedure.

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