Limitations of Fraud and Default

Legal Literacy - Often, many questions arise regarding whether it is possible to report someone who does not fulfill their obligations? To answer this, we need to understand the distinction between Fraud and Default. Let's examine the discussion.

In social relationships that are interdependent, cooperation is often carried out and outlined in a contract. This is done to provide certainty and limitations for the parties in performing.[1]

Contracts, or agreements, are regulated in Article 1313 Burgerlijke Wetbook (hereinafter referred to as “BW”) which indicates the characteristics of a unilateral agreement, while the types of agreements contained in Book III of the BW are reciprocal agreements. Therefore, various modern contract definitions arise. Salim H S[2] argues that a contract is a set of legal rules that govern legal relationships between two or more parties based on mutual agreement to create legal consequences.

The creation of a contract certainly relies on Article 1338 paragraph (1) of the BW, which contains the principle of freedom of contract.[3] In addition, the contract must also meet the legal requirements of a contract as regulated in Article 1320 of the BW, including:

Agreement is the coherence of the expression of will of the parties in a contract.[4] The indicator for assessing this coherence is the statement given because it is almost impossible to assess the will of the parties when the agreement is made.[5]

According to J H Niewenhuis[6], agreement in a contract is formed on two elements, namely the existence of an offer (aanbod, offer) and acceptance (aanvarding, acceptance). In addition, an agreement can be conveyed through several media, such as oral, written, signs, symbols, and tacitly.[7]

To determine when an agreement occurs, giving rise to an obligatory agreement, several theories are known, including:[8]

1. Utterance theory (uitilingstheorie)
2. Delivery theory (verzendtheorie)
3. Knowledge theory (vernemingstheorie)
4. Acceptance theory (ontvangstheorie)

Still related to the element of agreement, when a will expressed in an agreement turns out to be flawed, it can be canceled. Defect of will is a defect in the formation of the agreement[9] so that there is actually no meeting of minds between the parties (consensus ad idem). Article 1321 of the Civil Code recognizes three forms of defects of will with the following descriptions:

1. Coercion (dwang)

Coercion is an unfair act or a threat that affects the freedom of will of the parties. The threat is aimed at granting rights, authorities, or privileges.

Forms of coercion can include crimes or threats of crimes, imprisonment or threats of imprisonment, unlawful seizure and possession, or threats of unlawful seizure and possession. Threats may also take the form of any other unlawful act, such as economic pressure, physical and mental suffering, placing another party in a state of fear, and the like.[10]

1. Fraud (bedrog)

Fraud is regulated in Article 1238 of the Civil Code, which constitutes deception and can be a reason for canceling an agreement. In this condition, the defrauded party has indeed expressed the will to enter into a contract with all its legal consequences, but the expression of will is caused by deception intentionally directed to deceive the defrauded party. The element of fraud is not only a false statement, but there must be a series of lies, a series of untrue stories, and any deceptive actions/attitudes.[11]

According to Sudargo Gautama[12], fraud consists of four elements, namely an act with malicious intent, except for negligence in conveying hidden defects in an object, committed before the agreement is made, intended with the intention or purpose of having the other party sign the agreement, and other actions solely performed with malicious intent. A contract with an element of fraud can be revoked before the court.

1. Error (dwaling)

Error is a condition in which one party has a false perception of the subject or object of the agreement. Dwaling is divided into two, namely error in persona and error in substansia. Error in persona is an error regarding the person, for example, when A makes an agreement with B, a famous chicken seller in the village. When the agreement has been signed, it is revealed that the one who signed was C, B's son who is trying to take over his father's business. Thus, A can file for cancellation of the agreement in court.

On the other hand, error in substantia is an error regarding the characteristics of the object of the agreement, for example, A intends to buy a Monalisa painting, but it turns out that the painting is only a replica whose value is far below the original Monalisa painting.

In addition to the three defects of consent above, along with the development of the contract law regime, another defect of consent is also known, namely abuse of circumstances or misbruik van omstandigheden. Although not regulated in the Civil Code, various court decisions have repeatedly used this doctrine as the basis for canceling agreements, such as Decision Number 1904 K/Sip/1982, Decision Number 1329 K/Pdt/2001, Decision Number 3956 K/Pdt/2000, and so on.

Legal competence is the ability of a legal subject to perform legal acts.[13] Legal subjects themselves are divided into two, namely natuurlijk persoon and rechts persoon. Competence natuurlijk persoon can be assessed from their age, as regulated in Article 47 in conjunction with Article 50 of the Marriage Law. On the other hand, for rechts persoon, competence is the authority to represent, for example, Article 98 paragraph (1) of the Limited Liability Company Law which stipulates that the Board of Directors is authorized to represent the company.

Basically, a specific matter is the object and content of the agreement.[14] The object of the agreement is regulated in Articles 1332 to 1334 of the Civil Code. According to Hardijan Rusli[15], the term ‘zaak’ in Article 1333 of the Civil Code must be interpreted as the main issue because the object of the agreement is not always an object, but can also be a service.

The concept of 'causa' in Article 1320 of the Civil Code must be linked to Articles 1335 and 1337 of the Civil Code, namely the causa finalis which is the goal of the parties when the contract is about to be closed.[16] The intended causa is not a cause-and-effect relationship. As for 'permissible' it is not only about the content of the agreement, but the existence of the agreement itself, whether it is permitted or not by law, for example nominee agreement in the purchase of shares by foreign parties.

Regarding the first and second conditions, if they are not met, they can be canceled (voidable), while for the second and third conditions it is null and void. The concept of voidable is that the agreement is not void, but must be submitted to the court. On the other hand, null and void means that the agreement is considered invalid from the start.

Even though a contract has been created in such a way, the potential for disputes always exists for various reasons, including default. According to Yahman[17], default occurs when the debtor does not fulfill their obligations which are not affected by circumstances (force majeure).

Default can occur for two reasons, including the element of intent, whether truly intentional or negligent, and due to overmacht.[18] The forms of default can generally be divided into three, including not fulfilling the performance at all, delayed fulfillment of the performance, or fulfillment of the performance that does not comply with the contract clauses.[19]

The default committed by the debtor automatically gives the creditor the opportunity to enforce their contractual rights, including:[20]

1. Fulfillment;
2. Compensation;
3. Dissolution, termination, or cancellation;
4. Fulfillment plus complementary compensation; or
5. Dissolution plus complementary compensation.

Fraud is a crime contained in the Second Book of the Criminal Code Criminal Code (hereinafter referred to as “KUHP”). According to Dudung Mulyadi[21] who quoted Prof. Moeljatno, the elements in the article a quo are as follows.

1. Someone is persuaded or moved to hand over an item or create a debt or eliminate a receivable. The item is handed over by the owner by means of deception. The item handed over does not always have to be their own, but also belongs to someone else.
2. The fraudster intends to benefit themselves or another person without rights. From that intention, it turns out that the goal is to harm the person who handed over the item.
3. The victim of the fraud must be moved to hand over the item by:
4. The handover of the item must be a result of deceptive actions.
5. The fraudster must deceive the victim with a trick regulated in Article 378 of the Criminal Code.

According to Yahman[22]Fraud in the realm of civil law usually begins with a legal contractual relationship. The formulation of Article 1238 of the Civil Code regarding fraud does not clearly elaborate on its elements, so it can borrow elements from Article 378 of the Criminal Code.

When one party in a contract fails to perform its obligations, either absolutely or relatively, a default has occurred. This situation is the right time to assess whether the inability remains within the scope of civil law or rather the defaulting debtor did not intend not to perform from the beginning.

Heri Purwanto[23] argues that there are several conditions for fraud in a contract to be used as a reason for cancellation and to meet the provisions of Article 1238 of the Civil Code, including:

This is the case if a motorcycle seller second hand says that the motorcycle he sells is in good condition, but in fact, after being purchased by a buyer, the motorcycle is not as expected, then this reason is not sufficient to be a reason for cancellation. It is different if a seller says that what he sells is foreign goods complete with falsified documents because the goods are actually domestic goods, then this reason can be used as a reason for contract cancellation.

The nature of the fraud nondisclosure is to keep a substantial fact or information secret, for example, a seller knows that the buyer is looking for new goods but the seller remains silent when he gives the buyer a half-used item.

This fraud is carried out by not providing some substantial information while some is provided so that providing information like this can be misleading.

Someone sells a used taxi car before the car is sold, the seller first makes adjustments both from the documents and modifications as if the car is not a used taxi car, if in a normal situation the buyer would not want to buy a used taxi car.

This is evident in Decision Number 1071 K/Pid/2015 with the following chronological description.

1. The Defendant Kim Sam Youn as President Director of PT Ever Pioneer entered into a coal sale and purchase agreement with PT Prima Jaya Indah represented by Anton Mustika.
2. The Defendant determines the specifications of the coal to be purchased at a price of 66 US dollars/MT for a total of 62,754 MT and the delivery due date is May 6, 2011, which will be paid using Letter of Credit from Shinhan Korea Bank worth 3,912,000 US dollars.
3. PT Prima Jaya Indah took coal from PT Dewi Putri Asian which was checked by surveyor independent, namely PT Geoservices so it was immediately sent to Korea on May 7, 2011.
4. Anton Mustika contacted the Defendant and conveyed that the coal did not match the specifications while giving options, namely the goods were canceled or still sent. Upon this notification, the Defendant did not provide certainty so the coal was still sent.
5. Upon arrival in Korea, the carrier ship was unloaded and immediately sold to Konsep (PLN) Korea without the knowledge and permission of PT Prima Jaya Indah.
6. Until the coal was sold to another party, PT Prima Jaya Indah had not received payment because the LC provided could not be disbursed on the grounds that the coal did not match the specifications based on the contract.
7. The Defendant's confession as President Director of PT Ever Pioneer is contrary to the fact that in the implementation of the agreement, the Defendant is Ever Pioneer Co Ltd which is located in Korea and does not have a power of attorney to represent.

The Panel of Judges at the cassation level is of the opinion that the Defendant's actions constituted fraud due to the absence of a power of attorney to sign the contract. Furthermore, based on the testimony of witness Anton Mustika, who assigned his staff to go to Korea, it turned out that the Defendant was not a director, employee, or even affiliated with Ever Pioneer Co Ltd. In addition, Shinhan Bank, as the issuer of the LC, also did not recognize the Defendant.

Upon further analysis, the Defendant's actions constituted a series of lies to induce PT Prima Jaya Indah to hand over a sum of money, which fulfills the elements of Article 378 of the Criminal Code. This can be used as a basis for stating that there was bad faith from the outset of the contract's formation, followed by various lies in the contract's execution process.

A contract made on the basis of bad faith can be qualified as fraud. According to Article 1238 of the Civil Code, fraud can be used as a reason for canceling an agreement in court on the basis of unlawful acts. This is in accordance with Article 1265 of the Civil Code jo. Article 1266 paragraph (2) of the Civil Code.[24]

[1] Heksa Archie Putra, “Anticipatory Repudiation As a Reason for Unilateral Termination of Contract”, Thesis, Faculty of Law, Universitas Airlangga, Surabaya, 2023, p. 1.

[2] Salim H S, Contract Law: Theory & Techniques of Contract Drafting, Sinar Grafika, Jakarta, 2019 (hereinafter referred to as Salim H S I), p. 11.

[3] Rocky Marciano Ambar, Budi Santoso, and Hanif Nur Widhiyanti, Juridical Study on the Setting Aside of Article 1266 and Article 1267 of the Civil Code as Conditions for Cancellation in Banking Credit Agreements, Perspektif Hukum, Vol 17, No 1, 2017, p. 66.

[4] Salim H S, Development of Guarantee Law in Indonesia, Raja Grafindo Persada, 2004 (hereinafter referred to as Salim H S II), p. 33.

[5] Wawan Muhwan Hariri, Law of Obligations Equipped with Law of Obligations in Islam, Pustaka Setia, Bandung, 2011, p. 123.

[6] Muhammad Syaifuddin, Contract Law: Understanding Contracts in the Perspective of Philosophy, Theory, Dogmatics, and Legal Practice, Mandar Maju, Bandung, 2012, p. 113, quoted from J.H. Niewenhuis, Principles of the Law of Obligations, (translated by Djasadin Saragih), Surabaya, 1985, p. 2.

[7] RR Anggraeni, Business Contract Law, CV Iqralana, Jakarta, 2021, p. 19.

[8] Wawan Muhwan Hariri, Op.Cit.

[9] Ridwan Khairandy, Indonesian Contract Law in Comparative Perspective (Part One), Fakultas Hukum Universitas Islam Indonesia Press, Yogyakarta, 2013, p. 217.

[10] John D Calamari and Joseph M Perillo, Contracts: Second Edition, West Publishing Co., 1977, pp. 262-264.

[11] J Satrio, Law of Obligations Obligations Arising from Agreements: Book I, Citra Aditya Bakti, Bandung, 1955, p. 350.

[12] Sudargo Gautama, Indonesian Business Law, Citra Aditya Bakti, Bandung, 1995, p. 77.

[13] Salim H S II, Op.Cit., p. 33.

[14] Joni Emirzon and Muhamad Sadi, Contract Law: Theory and Practice, Prenana Media Group, Jakarta, 2021, p. 51.

[15] Hardijan Rusli, Indonesian Agreement Law and Common Law, Pustaka Sinar Harapan, Jakarta, 1992, p. 86.

[16] J H Niewenhuis, Op.Cit., p. 25.

[17] Yahman, An Easy Way to Understand Default & Fraud in Commercial Contractual Relations, Kencana Prenadamedia Group, Jakarta, 2016, p. 81.

[18] Moch Isnaeni, A Brief Overview of Contract Law (General Part), PT Revka Petra Media, Surabaya, 2017, p. 207.

[19] Ibid.

[20] Agus Yudha Hernoko, Op.Cit., p. 263.

[21] Dudung Mulyadi, “Elements of Fraud in Article 378 of the Criminal Code in Relation to Land Sales and Purchases”, Jurnal Ilmiah Galuh Justisi, Vol 5, No 2, 2017, pp. 206-223.

[22] Yahman, Op.Cit., p. 66.

[23] Heri Purwanto, “Fraud as a Reason for Cancellation of Agreement (Case Study of Bantul District Court Decision No. 19/Pdt.G/2009/PN.Btl”, Universitas Islam Indonesia, 2011, pp. 95-96.

[24] Rexy Mierkhahani, “Differences between Default and Fraud in Contract Dispute Resolutionk”, Thesis, Faculty of Law, Universitas Airlangga, Surabaya, 2023, p. 43.