ACT V OF 2013 ON THE CIVIL CODE – Law of obligations in the new Civil Code –

ACT V OF 2013 ON THE CIVIL CODE – Law of obligations in the new Civil Code –

I. Preliminary observations

The multilevel regulation of law of obligations

One of the most important innovations affects the method of regulation of the law of obligations. The new Civil Code regulates the law of obligations on 3 levels. The first level involves the general provisions relating to the law of obligations, the second level contains the rules about the contracts in general, and the third level deals with the particular types of contracts

II. Conclusion and amendment of contracts

Obligation to co-operate

The new Civil Code unequivocally declares that the parties have the obligation to co-operate during the negotiation, the conclusion, the term and the termination of the contract, and the parties shall also inform each other about any relevant circumstances in connection with the contract. If the parties enter into the contract, the offender party shall reimburse all damages for the offended party if it breached its cooperation or information obligation.

In the case when the contract fails to be concluded, the neither of the party has liability for damages, except if either of the parties breached his cooperation and information obligation during the negotiation, and thereby causes damages to the other party. This, for instance may occur, if one of the parties has no intention to conclude the contract, and despite he continues the negotiations, and as a result the other party absorbs its capacities, and thereby loses other orders.

Contracting in tendering procedures

The new Civil Code sets forth the rules of contracting after tendering procedures. From among such provisions we highlight the rule pursuant to which the party who published the call for tenders has an obligation to make a contract with the tenderer whose tender, besides meeting the criteria set forth in the call for tender, is the most favorable economically. The party publishing the call for tender may be released from the contracting obligation, if he stipulated in advance the right to refuse to conclude the contract in the call for tenders.

Refusal to conclude the final contract on the basis of a preliminary contract 

Compared to the old Civil Code’s unclear provisions, the new Civil Code defines significantly stricter rules on the possibilities of refusing to conclude the final contract by a party who entered into a preliminary contract. According to the new regulations, the party can refuse to conclude the final contract, if

  1. a circumstance appeared after the conclusion of the preliminary contract, was not foreseeable; and
  2. the  performance of the contract with unchanged conditions would harm an essential legal interest of the party concerned;
  3. the change was not inducted by the party; and
  4. the change in circumstances does not belong to ordinary business risks.

Unilateral amendment of the contract

The new Civil Code explicitly stipulates that the contract can be amended unilaterally by either of the parties, if it was stipulated by the parties in the contract, or the party concerned is authorized by law to do so.

Modification of contract by the court for the reason of changes in circumstances

The new Civil Code clarifies the conditions of amendment of contract by the court because of significant changes arisen in circumstances.  The conditions are the following:

  1. the contract between the parties establishes a long-term legal relation;
  2. the performance of the contract with unchanged conditions would harm the essential legal interests of any of the parties;
  3. the possibility of change in circumstances was not foreseeable when the contract had been made;
  4. the change in circumstances was not inducted by the party, who requested the amendment of  the contract from the court; and
  5. the change in circumstances does not belong to ordinary business risks.

III. Performance of the contract

Additional services

The issue of the additional services has been added to the new Civil Code as a new provision. According to that, if the obligor party offers to provide a quantity that exceeds what is stipulated in the contract, the obligee party may refuse the acceptance thereof reject that; or is obliged to provide a consideration raised proportionately to what has been added to the service originally stipulated  in the contract.

Notification obligation regarding hindrance to performance 

The new Civil code stipulates as a new rule that if either of the parties’ performance is foreseeably hindered, then the party being aware of such hindrance shall notify the other party, unless the other party be aware of that without a notification. The old Civil Code did not contain such provision as a general rule, it only appeared among the provisions pertaining to specific contracts.

Performance of payment obligations

In accordance with the regulations of the European Union, the new Civil Code declares that if the parties did not determine the time of the performance of the payment obligation in the contract, then “the payment obligation must be performed within 30 days of the receipt of the payment demand or the invoice of the other party.”

Late payment penalty interest concerning contracts between business undertakings

Concerning contracts between business undertakings, if any of the parties fell in delay, the obligee  may demand late payment penalty interest from the delayed obligor party. Based on the new Civil Code, the late payment penalty interest rate is equal to the central bank’s base rate prevailing on the first day of the calendar half year affected by the delay.

If the payment obligation specified in the contract is determined in other not Hungarian currency „then the base rate determined by the central bank issuing the currency concerned or, in the absence of such, the money market rate – plus 8% shall be applied.

Here is an example on the calculation of the aforesaid:

The base rate applied by the Central Bank of Hungary was 3, 00% on January 1, 2014, thus, a business undertaking falling in delay on  March 16, 2014 shall be obliged to pay a late payment interest in the rate of 11, 00%.

The EUR 40 rule

Based on the newly introduced so-called “EUR 40 rule”, in the case of contracts between business undertakings if one of the parties falls in delay, the obligor shall pay an amount in HUF corresponding to EUR 40 as a lump sum for the costs of the recovery. The nominative rate of exchanges to be applied for the conversion is the mid exchange rate issued by the central bank prevailing on the day when the late payment penalty interest occurred.. The payment of such lump sum does not grant relief from other legal consequences of the delay.

IV. Invalidity

Reasons for nullity and contesting

Some of the reasons for contesting or declaring the nullity of a contract have been amended and some new reasons have been introduced in the new Civil Code. The following table summarizes the most significant new or amended contesting and nullity causes:

Reasons for nullity:    fiduciary credit collaterals; conditions impairing consumers rights;   consumers’ waivers; unfair general contractual terms in a consumers contract; unfeasible services stipulated.

Reasons for contesting: excessive disproportion between the value of the service and the consideration thereof; unfair general terms and conditions.

Nullity of the fiduciary credit collaterals

It was a prevailing bank practice that the loan agreements contained certain terms that entitled the banks to gain for instance ownership or option right over the debtor’s assets specified in the contract.

This practice becomes terminated by the new Civil Code, since in cases of insuring payment obligations it stipulates the nullity of the fiduciary credit collateral contract terms

  1. transferring ownership, other rights or vindications; or
  2. founding right to buy (so called fiduciary credit collaterals)

Contest in the case of excessive disproportion

According to the new Civil Code, the party who could recognize the excessive disproportion between the value and the consideration thereof, or undertook the risk of excessive disproportion when the contract had been concluded cannot exercise his right to contest the contract. The parties may also exclude their right to contest for reasons of excessive disproportion save for consumers’ contracts.

Legal consequences of invalidity

One of the most important innovations affects the legal consequences of invalidity. If the parties remedy the reason of invalidity or the invalidity reason ceases for other reasons, the invalid contract becomes valid if the parties confirm their contractual will. The invalid contract may become valid with retroactive effect from the date of conclusion of the contract. The invalid contract becomes valid for the future, if the parties remedy subsequently the reason of invalidity, and agree that the contract becomes valid with a respect to a future date.

V. Breach of contract

The definition of breach of contract

The conducts of breach of contract exhaustively listed in the old Civil Code are the same in the new Civil Code, but the new Civil Code also stipulates a general definition of breach of contract,, which is the following: ”Failure to fulfil an obligation in accordance with the contract constitutes a breach of contract.”

Contracts providing security coverage

The provisions on contracts providing security coverage had been added as new rules to the new Civil Code. By way of a contract providing security coverage, in case of cancellation or termination of a contract due to the other party’s breach, the obligee may conclude another contract suitable for the realization of the goal intended to be achieved by the original contract, and demand, in accordance with the rules of compensation for damages, that the obligor

  1. reimburse the difference between the value of consideration determined in the failed contract and in the contract  providing security coverage; and
  2. reimburse the expenses arising due to the conclusion of the contract providing security coverage.

Liability for breach of contract

According to the old Civil Code, the party causing damage by breach of contract was not held liable if he proved that he proceeded in a way that is generally expected in the given situation. In contrast with that, based on the new rules, the party causing damage will not be  held liable, if he proves the existence of the following conditions:

  1. the breach of contract arose due to a circumstance beyond his control unforeseeable at the time of the conclusion of the contract; and
  2. it could not be expected from him to avoid the circumstance or prevent the damage.

VI. Limitation time

Changing the term of the statutory of limitation time

In the old Civil Code, the parties also had the possibility to change the term of the statutory limitation time, because they could stipulate a term shorter than the statutory 5-year-limitation time. Extending the term of the statutory limitation time was only possible in case of 1-year- limitation time, and the parties could extend it only by 1 additional year.

According to the new regulation the parties may agree in writing on a limitation term either shorter or longer than the statutory time.

Interruption of the limitation time

A significant innovation of the new Civil Code that the written statement demanding the obligor to perform will not interrupt the term of limitation anymore.  For that reason, those claims which approximate to of the end of the limitation time should be enforced in judicial procedure in the future if the parties cannot reach an agreement on the settlement.-



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