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 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. There have been no legislative amendments to the Hungarian Arbitration Act since 1 January 2022.
A.2 Institutions, rules and infrastructure
The Rules of the Proceedings of the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry (Commercial Arbitration Court) have been revised as of 31 December 2022. The amendments do the following:
- Regulate the abeyance of the proceedings in case of legal succession on the side of either party, unavoidable disturbance to the operation of the Arbitration Court, staying of the proceedings until the resolution of a preliminary question in another proceeding or suspension of the proceedings at the request of the parties (e.g., for settlement negotiations, subject to a maximum of six months)
- Regulate the handling of dissenting opinions, which must be attached to the file in a closed envelope and may only be inspected upon the permission of the President of the Arbitration Court
- Provide for the possibility of reduction of the arbitrator’s fee in case the award is not handed down within 45 days from the closing of the proceedings, unless an extension has been sought
- Provide for a number of technical or smaller amendments, such as the alteration of the deadline for holding the case management conference in order to allow waiting for the statement of defense, the possibility to hold the main hearing(s) online, rules on obtaining comments of the opposing party to requests for the correction or interpretation of the award, the panel’s ability to request data and information from legal and nonlegal persons, and a number of amendments to the rules of the expedited procedure and mediation rules, including a new limitation of liability provision applicable to mediation
B. CASES
B.1 Award No. 5/4/2021
The case concerns rent payment during the COVID-19 pandemic.
A lease contract was concluded between the parties. Due to the fact that the claimant did not pay the rent fee during the pandemic caused by the COVID-19 virus, the respondent used the security deposit. The claimant requested the return of the security deposit, claiming that the performance of the lease contract was impossible for legal and economic reasons. The respondent contested this and claimed the rent fee in excess of the deposit as a counterclaim and also submitted a claim for severance payment. The arbitral tribunal found that the claimant’s claim was unfounded, as the performance of the lease contract had not become impossible during the COVID-19 pandemic in Hungary. A reduction in the income of a legal person does not make it impossible to perform the civil law contract it has entered into, if its capital (assets) provide cover for the performance undertaken in the contract.
The relevance of this case is that the COVID-19 pandemic related economic crisis does not qualify as force majeure and therefore does not render the performance of a lease contract impossible. The interest in fulfilling the obligations contained in the contract is an interest and goal that can be expressed not only as a demand of the contracting parties, but also as a demand of society based on the belief in legal certainty. A unilateral claim is not capable of weakening the principle of pacta sunt servanda.
B.2 Award No. 7/1/2021
The case concerns the reduction of excessive liquidated damages.
The claimant wished to set up photovoltaic power plants and therefore entered into a public procurement contract with the respondents. The respondents were late in performing their obligations and the claimant sought an order to pay liquidated damages. The respondents contested the calculation method of the claimant and considered the amount of the liquidated damages to be excessive and disproportionate. In its award, the arbitral tribunal found that neither party disputed the obligation to pay liquidated damages, nor that the defendants were in default and did not excuse themselves from the default. However, in assessing the amount of the liquidated damages, the extent of the damage actually suffered by the claimant must be taken into account. On this basis, the claimant’s claim would be excessive in relation to the harm caused by the respondents.
The significance of the case is that it confirms that in addition to its function of providing for compensatory damages, liquidated damages also have the function of a performance incentive. In determining the amount of the liquidated damages, the agreement to pay liquidated damages, the value of the service and the seriousness of the breach of contract must all be taken into account. Liquidated damages may be reduced if they are subsequently considered excessive because of circumstances which arose during the performance.
B.3 Award No. 5/2/2021
The case concerns interruption of the statute of limitations in a resting period after the expiry of the statute of limitations.
The dispute arose from a contract for railway track reconstruction works. The claimant requested damages with reference to faulty performance, while the respondent claimed that the claimant’s claim was time-barred. The arbitral tribunal found that the limitation defense was well founded. The limitation period of the claim begins when the claim becomes due. If the claimant is unable to assert their claim for a justifiable reason, the claim may be enforced within one year from the end of the obstacle, even if the statute of limitations has already expired. Although the claimant sent a demand for payment to the respondent during this period, it is only possible to interrupt the limitation period before the limitation period has expired.
The significance of the decision is that there is no possibility to interrupt the statute of limitations in a resting period after the statute of limitations has expired. The statute of limitations does not extend the limitation period, but rather provides an additional time for asserting a claim in the event of obstruction by the entitled party, within which the claim can still be asserted.
B.4 Award No. 2/2/2021
The case concerns the relieving of liability for payment of liquidated damages in the case of a construction contract based on weather conditions.
The claimant claimed liquidated damages for delay in relation to a construction contract. The respondent’s defense was that they were not liable for the delay due to weather conditions. In its award the arbitration court found that the respondent was in delay with performance. Although the weather conditions during the performance of the contract were not ideal, the respondent agreed to the performance deadline knowing that they might not be able to perform work for a certain period of time due to weather reasons. Therefore, the respondent cannot claim that they are not liable for the delay due to weather conditions. On the other hand, the claimant’s obstruction further hindered the respondent’s work, which is a suitable excuse for the delay.
The importance of the case is that in case of delayed performance, it is possible to avoid liability for liquidated damages, but all circumstances must be taken into account. It is not enough that the obligee is not liable for the breach of contract, but it must also be beyond their control, and must result from circumstances unforeseeable at the time of the conclusion of the contract which they cannot be expected to avoid.
B.5 Award No. 6/6/2021
The dispute concerns the extent to which a party has to inform the other contracting party of COVID- 19 pandemic related measures to be able to invoke a force majeure defense.
The defendant ordered press advertisements from the claimant. The advertisements were planned to be placed in connection with an event also organized by the claimant. The claimant published the advertisements, but the event organized by the claimant was not held (was delayed) due to the COVID- 19 pandemic. The claimant sought an award obliging the defendant to pay the advertisement costs. The defendant sought the rejection of the claim in the first place, arguing that the performance was defective due to the fact that the event was not held and that the claimant failed to inform them of its inability to perform the contract as a result of the COVID-19 pandemic. The defendant also invoked their statutory warranty rights and claimed reduction of the fee due to defective performance. In its award, the arbitration panel ordered the defendant to pay the advertisement fees, but at the same time reduced such fees due to defective performance resulting from not holding the event. The arbitration panel found that the defendant should have known about the COVID-19 pandemic and therefore, it was not necessary for the claimant to inform the defendant about the same, however, the defendant should have informed the claimant about not holding (delaying) the event at hand, as that was their decision separate from the COVID-19 pandemic itself.
The award is relevant as it clarifies an important aspect of the COVID-19 related legal questions, namely, the obligation to inform the other contracting parties of measures taken as result of the pandemic where such measures affect the performance of the contract.
B.6 Award No. 5/6/2021
The dispute primarily concerns interpretation of contractual force majeure clauses, and also whether the COVID-19 pandemic constitutes force majeure in relation to a lease contract entered into for tourism purposes.
The defendant entered into a lease contract as lessee with the claimant as lessor for the lease of an office and 121 parking spaces at the end of January 2020. The parking spaces were leased for the purposes of providing a car rental service and other tourism related services. The defendant terminated the contract with short notice at the end of March 2020, arguing that due to the force majeure clause of the lease contract the claimant should not have a rent claim during the COVID-19 pandemic, and also alleging defective performance due to a leak in the ceiling of the parking space. At the time of the termination date stated in the defendant’s notice, a number of parking spaces were still used by the defendant. The claimant did not accept the termination by short notice, but accepted termination by the end of the 90 days’ notice period agreed in the contract. The claimant sought payment of the rent and payment of usage fee for continued use of (some of) the parking spaces even following the expiry of the 90 days’ notice period. The defendant sought rejection of the claim on grounds described above, and asserted that it has not used the parking area since April 2020, the cars that were still parked remained there because the owners were unable to collect them due to travel restrictions. In its award, the arbitration panel awarded the claim. It found that the COVID-19 pandemic and the related restrictions did not render the performance of the lease impossible, because use of the parking spaces and payment of the rent remained possible. Based on jurisprudence and judicial practice, the arbitration panel accepted an interpretation according to which the force majeure clause relieves a party only from the consequences of breach of contract, such as a damages claim (it follows from the award that it does not relieve a party from the performance agreed under the contract). In view of the 90 days’ ordinary notice period agreed in the lease contract, the arbitration panel was of the view that the risks resulting from the pandemic and the related measures shall be borne by the defendant, who could manage their risks through the ordinary 90 days’ termination possibility. The arbitration panel added that the defendant was responsible for the cars left at the parking area by its customers regardless of the travel restrictions. Finally, the arbitration panel did not accept that the leaks constituted defective performance, among others because they were known to the defendant from the parties’ previous contract.
The award makes an important distinction between liability for breach of contract and performance of the contract with respect to force majeure clauses, and joins a growing list of decisions supporting that the COVID-19 pandemic does not render performance of lease contracts impossible.
B.7 Award No. 1/11/2021
The dispute concerns the relevance of a performance certificate issued for the purposes of invoicing and of the payment of the final invoice with respect to liquidated damages claimed under a FIDIC based construction contract.
The claimant brought a claim for liquidated damages for late performance against the defendant in a FIDIC based construction arbitration. The defendant argued, among others, that the claimant issued the performance certificate, paid the final invoice of the defendant, and therefore, their performance should be deemed accepted. The arbitration panel found that issuing the performance certificate was a purely administrative action of the claimant that enabled the defendant to issue its invoice, and neither this, nor the bona fidei payment of the final invoice constitutes acceptance. The arbitration panel took into account that the performance certificate was not issued by the engineer and the contents thereof did not match the contents of a certificate of acceptance. In contrast, liquidated damages are payable until the date of the certificate of acceptance under the FIDIC rules. As the other defenses also failed, the arbitration panel awarded the claim.
The case confirms that payment of an invoice does not constitute acceptance and does not exclude claiming (liquidated) damages for delay (or defective performance for that matter).
B.8 Award No. 4/9/2021
The case concerns jurisdiction of the arbitration forum in case of assignment and the validity of the power of attorney given by a statutory representative following the ceasing of their right of representation.
The claimant brought a claim against the defendant for the payment of outstanding purchase price debts. Following that, the claimant assigned its claim to a third party. The arbitration panel outlined that according to the practice of the Commercial Arbitration Court the assignment does not affect the jurisdiction of the arbitration court. The arbitration panel added that the defendant did not contest the jurisdiction of the arbitration court. The arbitration panel also confirmed that the ceasing of the representation right of a party’s statutory representative following the issuing of a power of attorney for legal representation does not terminate the power of attorney given.
The award is relevant for disputes based on arbitration clauses entered into before 1 January 2018 and confirms the controversial practice that an assignee may enforce assigned rights or claims based on the arbitration clause entered into by the assignor. It also confirms the well-established practice that a power of attorney remains valid until withdrawal even if the person giving the power of attorney is no longer a representative (note that this does not apply if liquidation proceedings are brought against a party).
