by ÁDÁM ILLÉS, Partner and Director for Hungary, Peterka & Partners
After more than fifty years, Civil Law in Hungary will be completely rewritten by the New Civil Code that will come into effect this year on the 15th of March.
Several areas of law that have formerly been regulated in separate acts will now be incorporated into the new Code. These areas of law include family law, company law, as well as the law regarding civic organizations. Critics say that the new law sacrifices too much for dogmatic integrity and disassembles the unity of corporate law by extending current provisions for companies to all legal entities which will result, in many cases, in incomplete, inconsequent or redundant regulation.
On the other hand, the concept of the new law is to provide more freedom to contracting parties. The present article seeks to summarize the ten most important matters that will have the largest influence on businesses.
1. Compliance of statutes and by-laws of companies with the new law; higher minimum equity capital for limited liability companies
The shareholders of a company are obliged to bring their statutes and by-laws in line with the new Civil Code at the first Shareholders' Meeting following the commencement day on 15 March 2014 but within one year at the latest. In fact, such compliance checks may have to be pursued very early on, as the closure of the previous business year requires a resolution of the shareholders. The corresponding registration procedure is free of charge unless other changes in data are also registered.
Limited liability companies: higher minimum capital
The new Civil Code raises the minimum equity capital from the current HUF 500,000 to HUF 3,000,000. Existing companies will decide on the raising of their equity capital by 15 March 2016, from which date companies with lower equity capital will not be entitled to distribute dividends. The equity capital may be raised also on account of the operating reserves.
Limited companies
Upon the commencement of the New Civil Code, public limited companies may no longer be established directly. This means that company owners who intend to collect capital from the stock market will have to establish a private limited company, which then may be introduced to the stock exchange.
2. Liability of executive officers for damages caused to third persons
In the last decade, there has been an uptick in the liability of executive officers. The New Civil Code brings with it a significant change in this area.
According to the current Act on Business Associations, a company is responsible for the damage that was caused by the executive officer to third persons. With the exception of some special cases, e.g., in special situations connected with insolvency, executive officers had only supplementary liability towards the company.
The New Civil Code declares, as a general rule, that executive officers have joint and severe liability with business associations towards third persons for damages caused by executives in connection with their offices.
3. Less mandatory approach, more latitude in company law
In lieu of predominantly cogent regulations set forth currently in the Act of Business Associations, the New Civil Code will allow a broader latitude for shareholders to define the rules and by-laws of their company; they will be entitled to decide on its organization and the rules of its operation at their own discretion. Constraints to this contractual freedom are either set forth in concrete statutory provisions or expressed by abstract terms, such as the public interest to protect creditors, employees and minority shareholders of the company or to secure public control over them.
4. Offer of Contract
According to the present Civil Code the offer is deemed accepted only if the statement of acceptance is corresponding to the offer.
Pursuant to the new regulation, quotes will be considered as accepted even if the statement of acceptance differs from the quote itself in an issue that is not regarded as substantial. Consequently, if the statement of acceptance is in line with the quote as to its substantial terms, the contract will come into effect between the parties, including additional or differing but not significant terms of the statement of acceptance, unless the other party objects in due time. Similarly, drafting the terms of a verbal agreement and including additional but insubstantial terms thereto will be deemed as accepted by the other party.
5. Conflict of general terms and conditions
The New Civil Code contains provisions for cases when both contractual parties apply their own general terms and conditions. If these terms are not contrary to each other, both general terms will become part of the contract. However, if these are in conflict with each other, such conflict will lead to the exclusion of the applicability of all terms only if the differing terms are deemed to be substantial, otherwise only the differing terms will be excluded from applicability.
6. Extended warranty rights for customers
Customers will be able to claim repairs or exchange defective products directly from the manufacturer. This new form of liability is a quasi-extension of the existing product liability prescribed in EC directive No. 85/374 and in the executive Hungarian Act with similarly narrow exemptions: The manufacturer may only be exempt from liability if the goods were not produced within its scope of business; the defect was not perceptible at the time of distribution; or the defect may result from statutory provisions. This strict liability is applicable only in B2C contractual relations and for the sale of chattels.
7. Damages may not be claimed on grounds of failing to conclude a contract
The parties are obliged to co-operate and inform each other with respect to the conclusion of a contract. This obligation persists already during contract negotiations and failing to fulfill these obligations shall result – depending on whether or not a contract has been concluded – in either the contractual or tort liability of the breaching party.
On the other hand, neither negotiating party is obliged to conclude a contract, even if he or she has already expressed his or her will to do so. The New Civil Code acknowledges the standard jurisdiction that failing to conclude a contract does not substantiate any tort claims. Thus, a letter of intent shall remain a gentleman's agreement without any legal relevance.
8. Premature delivery must be accepted
According to the present Civil Code any premature delivery requires the prior consent of the obligee and he or she decides on the acceptance of such delivery solely at his or her discretion.
In contrast, the New Civil Code declares that the obligee shall accept the premature delivery unless this acceptance violates the obligee's substantial interests or the obligor does not bear all the additional costs incurred by this premature delivery. On the other hand, the obligee will not be obliged to pay for the goods/services earlier than the original due date.
This change is practical and useful particularly for transactions where perishable goods are involved, or the timing of the performance does not depend solely on the obligor.
9. New concept in contractual liability
The New Civil Code determines stricter exemptions from the liability of the party in breach. The current regulation imposes the same liability on contracting parties as on persons causing tort. The jurisdiction recognized in the past decades that the free-market economy shall rely on voluntary and conscious acts of people and created a distinction – especially in B2B relations – between tort and contractual liability, acknowledging that the parties exercise much more than due diligence.
As the next stage of evolution, the New Civil Code will allow contracting parties to be exempt from their liability only if the circumstance causing the damage occurred beyond the field of control of the breaching party; the circumstance was not foreseeable at the time of concluding the contract; and it was not reasonable for the party to prevent the circumstance or its consequences. The concept of foreseeability is applied also for determining the limitation of liability for damages.
On the other hand, the new law allows for the exclusion of liability for gross negligence in a contract and the provision of any benefit to the other party will no longer be a prerequisite for such limitation of liability.
10. New contract types
The New Civil Code introduces the Anglo-American legal institution of 'trust' into Hungarian Law. This enables property to be held for the benefit of one or more beneficiaries and the transfer of ownership and other property rights to the trustee.
It also acknowledges further contract types, e.g., distribution contracts, franchise agreements, factoring, intermediation contracts as well as financial lease agreements. These contract types have already existed in the economy, but are not specified in the present Civil Code.
Conclusion
It may be anticipated that foregrounding the parties' will and contractual freedom will put an increased responsibility on the jurisdiction for interpreting the boundaries of this freedom, which are defined in abstract terms. This new concept will also require a more complex assessment and an increased awareness from lawyers who will have to decide how to represent the client's interests when drafting into a contract provisions that have never existed and never been used before but will become legal to use. Lawyers will also have to leave out provisions that have been used; still, the prevailing provisions will be more in favour of the client.
All in all, the new Civil Code will bring with it many opportunities for entrepreneurs and challenges to judges, as well as lawyers, and will require additional monitoring and compliance efforts.
