Artúr Tamási and Daniella Karacs
A. LEGISLATION AND RULES
Arbitration in Hungary continues to be governed by the Act LX of 2017 on Arbitration (“Hungarian Arbitration Act”) which entered into force on 1 January 2018 and is applicable to procedures initiated following this date. The Hungarian Arbitration Act is based on the amended UNCITRAL Model Law of 2006; hence it follows international standards creating an attractive arbitration environment for foreign investors with enhanced reliability and flexibility of procedures. It is mostly unaltered compared to the year of 2019.
A.2 Institutions, Rules and Infrastructure
Members of the Presidency Council of the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry (“Arbitration Court”) may also be appointed as arbitrators by the parties as of 1 January 2021. In addition, consumer disputes concerning trust agreements became arbitrable as of 1 January 2021. There were no other significant developments concerning Hungarian arbitration institutions, rules, and infrastructure.
B.1 Award No. 3/2/2019
The dispute concerned reclaiming a grant for a film production. The claimant awarded and paid a grant for a film production, and the defendant undertook to produce the documents needed for the preferable tax handling of the grant by a specific deadline. The defendant had not obtained the necessary documents by the deadline. The claimant thus reclaimed the grant and also claimed damages. The defendant, among others, pleaded that obtaining the necessary documents by the deadline was legally impossible, the contract was thus null and void, and it had no repayment obligation.
The arbitration tribunal found that the chance that the documents may not be obtained within the deadline does not amount to legal impossibility. If it did, it would undermine the principle of pacta sunt servanda. Instead, legal impossibility may be found only if the performance of the contract were unlawful.
The award is relevant because due to the COVID-19 pandemic, references to impossibility of the contracted service (similar to frustration in common law systems) became more frequent.
B.2 Award No. 3/2/2019
The dispute concerned reclaiming of sales commissions. The claimant reclaimed sales commissions from its former agent, the defendant, due to that, the underlying contracts were canceled. The claimant had not submitted any evidence concerning the grounds for its claim but pleaded that the list of reclaimed commissions was properly notified to the defendant, who failed to contest it by the contractual deadline; hence, they can no longer contest it.
The arbitration tribunal found that the burden of proof lied with the claimant concerning that the commission’s list was properly notified to the defendant. Making the commission list available to the defendant via a computer system did not amount to proper notification, even if the defendant has not contested that they received the list via the computer system. A proper notification would require a notification sent according to the Notices section of the contract. Stipulating a deadline for contesting the commission lists is a waiver of the right to contest the same following the deadline, and therefore this provision needs to be interpreted strictly.
The award is relevant for drafting commercial agreements as it provides guidance on how can a deadline following which a party loses a certain right be drafted.
B.3 Order No. 2/7/2019
The dispute concerned a claim brought simultaneously against a branch office and its foreign mother company. The contract underlying the dispute was entered into by the branch office. The claimant, however, brought the claim both against the branch office and its foreign mother company based on the latter’s liability for the branch office. The branch office was closed during the proceedings. In its termination order, the arbitration tribunal clarified that an arbitration clause entered into by a branch office would not extend to its foreign mother company even if the foreign mother company is jointly and severally liable for the branch office and may be sued in Hungarian courts for that purpose.
The order is relevant because it draws attention to important limitations to arbitration clauses.
B.4 Award No. 1/12/2019
The dispute concerns assessment of the amount of compensation payable to a commercial agent. The arbitral tribunal clarified that the burden of proof concerning circumstances relevant for the specification of the amount of the compensation lies with the agent, but the standard of proof is that of probability.
The arbitral tribunal further clarified that the amount of the compensation must be based on estimates into the future, and the arbitral tribunal must assess the future sales of the principal to clients acquired via the agent, as well as the profits the agent would realize from such sales. The fact that the agent receives the compensation in advance shall also be taken into account, as well as if the agent leaves for the concurrence and has the potential to solicit its former clients. The assessment may be subject to expert evidence. The compensation is limited to the average annual amount of the commissions received in the past five years or, if the agency existed through a shorter period, that period.
The award is relevant for commercial agency disputes as it sheds light on the most disputed element of these agency contracts.
B.5 Award No. 2/6/2019
The dispute concerns statutory delay interest payable on Euro amounts under Hungarian law. The arbitral tribunal clarified that in respect of Euro amounts, the “central banks’ base rate” shall be interpreted in a way that it refers to the interest rate of the European Central Bank for its main refinancing operations rather than the base rate of the Hungarian Central Bank. The decision is based on interpretation of Hungarian law in the light of Directive No. 2000/35/EC.
The award is relevant as it clarifies an often disputed question of Hungarian law. The fact that the decision of the arbitral tribunal is based on the interpretation of EU law adds further interest.
B.6 Award No. 1/6/2019
The dispute concerned a claim for liquidated damages and damages in excess of the liquidated damages in connection with delay and resulting termination of the contract in relation to the supply of rail vehicles. An interesting aspect of the defense was that the defendant claimed vis maior in connection with the rejection of the Hungarian market permission for the rail vehicles at hand.
However, the arbitral tribunal found that the defendant may not refer to vis maior in the arbitration proceedings, if, following the termination of the contract, it had not referred to that during the performance and before the termination of the contract. The arbitral tribunal added that it has not identified a vis maior situation in connection with the rejection of the Hungarian market permission.
The award is relevant as it clarifies when can a party refer to a vis maior situation, an issue being very much in focus during the COVD-19 pandemic.
B.7 Award No. 1/1/2020
The claimant and the defendant concluded a service agreement in 2008, based on which the claimant provided continuous mobile purchasing services to the defendant through systems, software, interfaces, and devices.
The claimant was obliged to arrange, register and support the mobile purchase services of the defendant’s clients by connecting the systems of the defendant and the merchants. In 2014, the defendant ordered a new software function from the claimant, which made it available to the defendant to set certain limits for those mobile payments. However, a malfunction occurred after the system update, certain limits did not work, which caused damages (in the form of unsettled transactions and consequences of increased credit risk and termination of certain customer contracts) for the defendant. After several attempts to get the claimant to compensate the damages, the defendant terminated the agreement. The claimant initiated arbitration proceedings for the compensation of its unpaid invoices. The defendant set-off its damages claim.
In its award, the Arbitration Court established that the set-off amounted to the acknowledgment of the claim. Furthermore, the Arbitration Court concluded that there was no causal link between the breach of contract and those elements of the damages claim that were not directly related to the purchases above the limit during the period of the malfunction, including damages from increased credit risk and fraudulent transactions.
The award is relevant as it addresses the much disputed issue of causality of damages caused by a breach of contract.
B.8 Award No. 1/2/2020
The claimant contractor and the defendant client concluded a service agreement for the preparation of applications. Pursuant to the agreement, the claimant could fulfill its task by sending the complete tender documentation to the principal. The preparation and sending were accomplished, and the grant applied for was awarded to the defendant. According to the agreement, the claimant was entitled to a contingency fee from the defendant, which was due on the receipt of the official notice of the positive decision. The defendant contested the legal basis of the contingency fee and refused to pay it to the claimant.
In the arbitration proceedings, several important decisions were made by the Arbitration Court. First, the Arbitration Court established, that including the arbitration clause to the general agreement or a separate agreement is purely formal. If such clause was validly constituted in any form, its scope is extended to the disputes arising from the particular agreement without temporal limit and even if the agreement was terminated in the meantime. It is also expected from a non-customer client who has significant sales as a professional company and uses high volume of non-repayable state grants to read the agreement, admittedly missing to do so is such company’s liability. The contractor’s due care is supported by the fact that the draft agreement prepared by him was sent to the client with the explicit notion to the fact that the contents of the agreement were negotiated one by one (and therefore proved by documentary evidence). Therefore it does not constitute standard contractual terms.
About business practices, the Arbitration Court held that even though the provision on business practices qualifying as a contractual term was not explicitly included in the Hungarian Civil Code at the time when the agreement was concluded, it can be applied, as the Hungarian courts applied such a clause in their judgments at the time. For the same reason, the Civil Code does not contain a temporal limit on the application of this provision. References to qualification as contractual terms and usual business practices are not the instruments of the tacit amendment of explicitly established primary obligations as essential contractual terms, but the perpetuation of such practices regularly and persistently demonstrated in the procedures the business solutions, terms, and usances of the legal relationship, to which the Parties only refer at the time of the conclusion of the agreement, or which they follow consistently, repeatedly and recurringly.
Lastly, the Arbitration Court stated that the presumption of remuneration for the services is only established in respect of contractual services. It is only if it is not provided otherwise based on the agreement or the circumstances. Based on the interruption of the homogeneous performance practice in respect of tasks performed periodically, voluntarily, and for free, the obligation of the contractor is only extended to the notification of the client of the fact and reason of the legitimate change of such practice on his side in such time, that is suitable for prevention of the undue damages of the client.
B.9 Award No. 2/3/2020
In 2005, a bank, as creditor and the predecessor of one of the claimants, as the original debtor concluded a credit agreement with each other, mortgaging several properties of the predecessor. Several mortgage agreements were concluded with the other claimants as well. Based on the credit agreement, the bank was obliged to grant loans and bank guarantees for the debtors. In the meantime, the original debtor and its former real estate branch were liquidated.
In 2016, the bank concluded an assignment agreement with the defendant in respect of the bank’s claims against the original debtor. The defendant was registered on the title deed as the proprietor of the mortgages. The claimants were sent a written notice of the assignment and were called to pay their outstanding debt. The claimants stated that the claim against them expired, and therefore the mortgage ceased and initiated arbitration proceedings for the deletion of the mortgage.
After the claimants failed to pay the arbitration costs, the Arbitration Court terminated the proceedings. However, the defendant submitted a counterclaim asking the Arbitration Court to oblige the claimants to let the defendant satisfy its claims based on the mortgage. In its judgment, the Arbitration Court established that the defendant’s claim did not expire and therefore approved the defendant’s claim against the claimants. The Arbitration Court held that if otherwise not provided by law, the mortgage ceases if the claim ceases or is transferred without the transfer of the mortgage. The liquidation of the primary debtor does not constitute an obstacle for enforcing the claims against the ancillary debtors.