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A. LEGISLATION AND RULES

A.1       Legislation

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 applies to procedures initiated following this date. The 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. The above Act is mostly unaltered compared to the year 2020.

A.2       Institutions, rules and infrastructure

Members of the Presidency Council of the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry (“Commercial Arbitration Court“) may no longer be appointed as arbitrators by the parties as of 1 January 2022.

In addition, a new specialized arbitration court, the Permanent Arbitration Court for Concession Matters was set up at the end of 2021 as part of the overall review of the concession-related legal framework, ahead of the expected wave of major new concession tenders.

B. CASES

B.1       Award No. 1/4/2020.

The dispute concerned a unilateral price increase in an electricity sale and purchase agreement mandated by the general terms of the seller.

The arbitration tribunal found that the worldwide market price of electricity is subject to significant and unpredictable changes, so fixing the price for a fixed period of time would lead to economically unmanageable risks. Accordingly, despite the possibility of a unilateral price increase, the parties’ positions in the contract remained balanced, because if the customer does not accept the increase, they might terminate the contract.

The award is relevant because, due to the very significant increase in the price of electricity in 2021, a number of price-related disputes are arising.

B.2       Award No. 2/4/2020.

The dispute concerned spot and future foreign exchange trading by a private person and the loss that that private person suffered on such trading.

The arbitral tribunal found that a person who regularly engages in investment for the purpose of income cannot be considered a consumer. On the basis of the investment instruments and types of transactions, the legal relationship of the parties did not constitute a temporary investment of free funds for the respondent but was directed towards the respondent’s business operations and the purpose of earning income, taking into account the commercial activity and the large number of transactions. On the basis of the above, the arbitral tribunal did not consider the respondent to be a consumer and therefore rejected the respondent’s jurisdictional objection.

The award is relevant because consumer contracts are not arbitrable in Hungary and the decision provides important guidance as to the circumstances under which a private person does not qualify as a consumer.

B.3       Award No. 4/11/2020.

The dispute concerned the defective performance of a construction contract.

The arbitral tribunal established that damage caused by defective performance, which is a defect in the contractual service, occurs at the time of performance, so a damages claim related to that also becomes due at the time of performance. This is also the case if the defect is hidden. The hidden nature of the defect may only result in the staying of the limitation period, but not its starting date.

The award is relevant because it clarifies the starting point of the limitation period for damages claims arising from hidden defects.

B.4       Award No. 2/2/2021.

The dispute concerned late performance of a construction contract. The arbitral tribunal established that a professional construction company should undertake the deadline in the knowledge that it might not be able to carry out the work for a certain period of time due to weather conditions. The client rightly submits that a contractor must take account of delays due to weather factors when setting the deadline for performance. The Civil Code provides that, in order to be exempted from liability for liquidated damages, one shall prove that the breach of contract was caused by a circumstance beyond its control, unforeseeable at the time of the conclusion of the contract and which could not reasonably have been expected to avoid. Weather conditions generally do not satisfy these criteria.

The award is relevant because it provides an assessment of a reference to adverse weather conditions by the contractor, a ground often referred to relive liability for delayed performance.

B.5       Award No. 1/3/2021.

The dispute concerns statutory delay interest payable on EUR amounts under Hungarian law.

With regard to the determination of the amount of the loss of profit, the arbitral tribunal agreed with the respondent that it was against the full consideration of the fixed period, that the loss of profit could be influenced by market factors, micro and macroeconomic effects independent of the damage, and that the acceptance of such a long period would have led to an unrealistic result. Therefore, until the end of the fixed contractual period, the arbitral tribunal saw no legal basis for the calculation of the loss of profit as claimed, and therefore, taking into account the amount deducted in the claim for the coverage of the turnover realized during the period, reduced the value of the loss of profit, as determined by experts, by half.

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. 1/3/2021.

The dispute concerned a loss of profit claim in connection with the non-performance of long-term supply obligations arising from a complex contractual set-up involving a number of services.

The arbitral tribunal found that the loss of profit could be influenced by market factors, micro and macroeconomic effects independent of the damage, and therefore, it could not be calculated for the entire fixed contractual period as that would have led to an unrealistic result. Therefore, the arbitral tribunal saw no legal basis for the calculation of the loss of profit as claimed and reduced the value of the loss of profit determined by experts taking into account other elements of the claim as well.

The award is a reminder of the difficulties with evidencing loss of profits claims, as well as emphasizing the importance of expertise in formulating and bringing these claims.

B.7       Award No. 3/3/2021.

The dispute arose from an M&A transaction and concerned a warranty claim by the purchaser against the seller.

The first relevant finding of the arbitral tribunal was that no negative consequences could be applied against the defendant in connection with its right not to grant a release from the obligation to keep business secrets [to/from?] the lawyer preparing the M&A transaction documents with respect to an issue that could have been relevant in the proceedings.

The above finding demonstrates the difference between the mainstream Hungarian (and likely continental) approach and the approach of Anglo Saxon origin pre-dominant in international arbitration. Under this approach, a party is only prohibited from submitting false information in a dispute but is generally not obliged to submit the full truth and may withhold information that is detrimental to their position in the dispute (subject to certain exceptions). This is why document production (and litigation discovery) is generally not available in Hungary (and likely other continental jurisdictions).

B.8       Award No. 3/3/2021.

The dispute arose from an M&A transaction and concerned a warranty claim by the purchaser against the seller.

The other relevant finding of the arbitral tribunal was that the discretionary reduction of liquidated damages is an entirely open but exceptional possibility, which may be justified by exceptional circumstances. In principle, the arbitral tribunal accepted that the reduction of liquidated damages is possible in cases where the amount of the liquidated damages stipulated in the contract was not excessive at the outset, but the minor gravity of the breach of contract or the minor extent of the material damage caused justifies such reduction. However, the arbitral tribunal went on to state that the payment of the liquidated damages is not conditional on proof of a financial loss, therefore, the absence or insignificance of the financial loss suffered may be taken into account for the purposes of the reduction of the liquidated damages if it is established beyond doubt in the proceedings or can otherwise be established on the basis of the facts of the case. Accordingly, as the arbitral tribunal was unable to establish the minor nature of the financial loss suffered on the basis of the facts of the proceedings, it did not reduce the amount of the liquidated damages.

The relevance of the award is discussed together with case B.9

B.9       Award No. 2/9/2020.

The dispute concerned a claim for liquidated damages in connection with a breach of a non-compete obligation stipulated in a franchise contract.

The relevant finding of the arbitral tribunal concerned the defendant’s request for the reduction of the liquidated damages. The arbitral tribunal explained that besides providing compensation for damages suffered by breach of contract, another purpose of liquidation damages is the prevention of such a breach. Reduction of the liquidated damages given the actual amount of the damages would weaken this function of liquidated damages. Also taking into account that the claimant did not claim the entire amount of the liquidated damages, in view of the above, the arbitral tribunal saw no grounds to reduce the amount of the liquidated damages.

Examining in conjunction with the case under B.8 above, one can see that both arbitral tribunals arrived at the same decision (i.e., rejection of the defense requesting a reduction of the liquidated damages on grounds that the actual damage is likely much lower), albeit based on very different reasoning. In the case discussed in B.8, the arbitral tribunal held that the insignificant amount of the actual damage may serve as the basis of reduction of the liquidated damages, albeit only rarely. In the case discussed in this section (B.9), the arbitral tribunal leaned towards an opposite finding citing the purpose and functions of liquidated damages. This shows how framing the same question differently can lead to a different assessment by tribunals. At the same time, both decisions confirm that one should not rely on a possible reduction of the liquidated damages, as those requests are rejected in the majority of the cases.

Author

Artúr Tamási is a counsel and the co-head of the Dispute Resolution Department of Baker McKenzie's Budapest Office.

Author

Alexandra Krisztián is an associate in the Dispute Resolution Department of Baker McKenzie's Budapest Office.