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Contracts Which Became Impossible in Hungarian Construction

In construction industry contracts cannot be performed according to the intentions of the parties in each case. It means that the parties cannot fulfil their duties. In the practice of our Legal Partnership we usually meet cases in which the performance of the contracts became impossible or one of the parties referred to it. We can talk about the impossibility of the performance if the reason of the impossibility has been originated after the conclusion of the contract.

According to Hungarian law and Hungarian judicial practice, the impossibility of performance can be physical impossibility, legal impossibility or impossibility of the interests. The latter type of impossibility of performance is accepted only in very special cases by Hungarian courts.

If performance has become impossible for a reason attributable to one of the parties, the other party shall be relieved from the obligation of contractual performance and may demand damages for the loss caused by non-performance of an obligation. If performance has become impossible for a reason attributable to both parties, the contract shall be terminated and the parties may demand damages from each other in the proportion of their interaction.

According to the general rule of the Hungarian Civil Code, if performance has become impossible for a reason that cannot be attributed to either of the parties, the monetary value of the services provided before the time when the contract was terminated shall be compensated. It is important to know that the last general rules cannot be applied in case of contracts for professional services.

In case of contracts for professional services special rules shall be applied and in this case also other circumstances shall be respected in connection with the application of the legal consequences of impossibility of contractual performance.

According to these special rules, if performance has become impossible for a reason that cannot be attributed to either party and the cause of impossibility has occurred within the control of the contractor, he shall not be entitled to demand remuneration. If the cause of impossibility has occurred within the control of customer, the contractor shall be entitled to remuneration, but the customer shall be entitled to deduct the amount that the contractor had saved or could, without great difficulty, have earned elsewhere in the time gained. If the cause of impossibility has occurred within or beyond the control of both parties, the contractor shall be entitled to a proportionate amount of the remuneration for the work done and for his expenses.

According to our experience, if we meet an impossibility of performance in a construction contract which cannot be attributed to either of the parties, we have to consider circumspectly within which party’s control the impossibility of performance has occurred. Finally, I would like to remark that the category “within the control of the party” and legal consequences of the impossibility of performance were known and applied also by Roman Law.

Dr. Tamás BALÁZS
Attorney at law
Managing Partner

Resolving Construction Disputes in Hungary

In Hungary basically we can differentiate three different forms of settling legal disputes in connection with construction and design contracts. These possible claim enforcements are as follows: out of court dispute settlements, in front of an ordinary state court via civil lawsuit, or in front of Hungarian or international arbitration courts.

From the above mentioned opportunities the possibility of claim enforcement in front of ordinary courts is open in all cases, whereas the contract is signed upon Hungarian law. Currently in Hungary there is one Arbitration Court attached to the Hungarian Chamber of Commerce.

In so far as the contracting parties would like to use this or the international arbitration court in the settling of their dispute based upon a contract signed, according to Hungarian law, in a way that they put down this intention of theirs either in the contract or at latest in a written agreement at the development of their legal dispute. One of the greatest advantages of the Arbitration Court functioning beside the Hungarian Chamber of Commerce is that each of the parties can delegate an arbitrator from the list of arbitrators to the board of arbitrators and the two delegated arbitrators will choose the third member of the board of arbitrators who is also the President.

An additional advantage is that the procedure of the arbitration court is quicker than the procedure of the ordinary state court, as cases usually finish within a few months in front of these arbitration courts, whereas in front of state courts – where the procedure is in two instances – in certain cases the procedure can last for years and sometimes the revision of the Supreme Court may be requested.

In case of the constraint of the arbitration court according to Hungarian law, there is a possibility of the procedure in front of ordinary state courts, only the statement of invalidation of the verdict of the arbitration court can be required, as long as the verdict of the arbitration court.

In Hungary most of the construction lawsuits can last up to several years in front of ordinary courts, as long as the parties receive the final and definitive sentence. With regard to this fact in certain nominated cases there is an opportunity to turn to the Completion Validation Expert Organisation attached to the Hungarian Chamber of Commerce since 2013, which can issue an expert opinion within 60 days upon request.

As long as any of the parties do not agree with the expert report, there is a possibility to turn to court within 60 days following receipt of the expert report, and the court should have an accelerated procedure taken into consideration the report of the Completion Validation Expert Organisation in a way as it would have been made by a forensic expert delegated by the court. These legal procedures last definitely shorter than other legal procedures in construction cases.

There is an opportunity to settle disputes out of court. It can be an agreement between the contracting parties, a written agreement, but in case of the consent of the contracting parties, even third parties, organisations dealing with out of court legal disputes or persons can be involved. In the latter case for instance a mediator can facilitate the settlement between the parties, or the conciliatory body beside the Hungarian Chamber of Commerce, but the decision of the latter can only be mandatory for the parties if they assumed it in writing at the beginning of the procedure to subject themselves to the decision of the conciliatory body.

In connection with out of court dispute procedure it should be mentioned that as far as the parties accepted the application of one of the FIDIC-contract samples as they are to proceed according to the dispute settling rules included in it. In this regard we are only referring to the role of Dispute Adjudication Board.

An order for payment in front of a notary public has a special temporary character between out of court and litigation dispute. Except for certain cases, this procedure shall start in cases where the claim does not exceed HUF 3,000,000. This procedure cannot be started if the amount of the claim is over HUF 30,000,000.

You can initiate this procedure electronically in which the formal but not the substantive checking of the claim, the notary public releases a payment notice for the person indicated as the debtor in order to accomplish his payment obligation within 15 days, or if he does not agree with the claim to initiate a protest within 15 days at the notary public.

In the case of the protest of the debtor, the creditor can initiate a civil law suit within 15 days in front of the competent court, thus the out of court procedure will be transferred to court procedure.

Navigating Construction Legal Disputes in Hungary: A Comprehensive Guide

Construction projects are vital components of economic growth and infrastructure development in Hungary. However, the intricate nature of such projects often leads to disputes that can impede progress and strain relationships. Understanding the legal landscape surrounding construction disputes in Hungary is crucial for stakeholders to effectively navigate these challenges. In this article, we delve into the key aspects of construction legal disputes in Hungary, offering insights into resolution mechanisms and legal considerations.

Common Causes of Construction Disputes in Hungary

Before delving into the legalities, it’s essential to recognise the common triggers for construction disputes in Hungary. These disputes often arise due to issues such as delays, cost overruns, defects in workmanship, and disagreements over contract terms. Inaccurate project specifications, design flaws, and payment disputes are also significant contributors.

Construction Contracts and Their Significance

Clear and comprehensive construction contracts are the cornerstone of dispute prevention. Hungarian law recognises various contract types, including fixed-price contracts, cost-plus contracts, and unit-price contracts. To ensure enforceability and reduce the risk of disputes, parties should specify project scope, timelines, payment terms, quality standards, and dispute resolution mechanisms within the contract.

Dispute Resolution Mechanisms

A. Negotiation and Mediation: Initially, parties often attempt negotiation or mediation to resolve disputes amicably. These processes can save time and costs while preserving relationships. Mediation is particularly encouraged by Hungarian courts, and in some cases, it’s mandatory before proceeding to litigation.

B. Adjudication: Adjudication is a quick interim dispute resolution process that is binding until a formal resolution is achieved. While not widely used in Hungary, it can be an effective method for resolving urgent disputes.

C. Arbitration: Arbitration is a popular method for construction dispute resolution in Hungary. It provides privacy, flexibility in selecting arbitrators, and the ability to choose procedural rules. The awards are final and enforceable under the New York Convention.

D. Litigation: If other methods fail, litigation through the Hungarian court system becomes necessary. However, litigation can be time-consuming and expensive, often causing further strain on relationships between parties.

Relevant Legal Framework

Hungarian construction disputes are primarily governed by the Civil Code, Act V of 2013, and the Public Procurement Act. The Civil Code outlines general contractual principles, while the Public Procurement Act applies to public construction projects. Familiarity with these laws is essential for understanding rights and obligations during construction disputes.

Expert Witnesses and Evidence

In construction disputes, expert witnesses play a vital role in presenting technical and professional opinions. Hungarian courts place significant weight on expert testimony when assessing complex construction matters. Gathering robust evidence and engaging qualified experts can greatly influence the outcome of a dispute.

Payment Issues and Mechanics Lien

Payment disputes are a common concern in construction projects. Hungarian law provides a “mechanics lien” mechanism, allowing contractors, subcontractors, and suppliers to secure their claims against the property until payment is received. This legal remedy incentivises timely payments and protects the interests of those involved in the project.

Conclusion

In Hungary, construction legal disputes are an inevitable aspect of the industry. However, with a sound understanding of the legal framework, proactive contract management, and effective dispute resolution strategies, stakeholders can minimise the impact of disputes on project timelines and budgets. Navigating construction disputes requires a collaborative approach, emphasising negotiation, mediation, and alternative dispute resolution mechanisms before resorting to litigation. By prioritising clear contracts, compliance with relevant laws, and expert testimony, parties can work towards successful project completion while preserving relationships and avoiding protracted legal battles.