Richard Schmidt March 23 2021 Excessive res judicata effect – are test cases in danger? SMARTLEGAL Schmidt & Partners | Litigation - Hungary Richard Schmidt Litigation IntroductionFactsLower court decisionsSupreme Court decisionLegal analysis – erroneous application of res judicataTheoretical issuePractical issueCommentIntroductionThe Supreme Court recently concluded that the res judicata effect of a final judgment precludes the claimant from starting new litigation on the same legal grounds for a part of the claim which was not sought in the preceding lawsuit. This article answers the following questions:Is this judgment reconcilable with case law?How will this judgment affect party autonomy in civil litigation?How will this judgment affect test cases in Hungary?FactsIn 2008 the claimants concluded a foreign currency-based bank loan agreement with a commercial bank. However, shortly after the conclusion of the contract, the exchange rate changed to the detriment of the claimants, causing the monthly repayment instalments to increase significantly.A legal provision, which entered into force in 2012, allowed the claimants to repay all of their debts arising out of the loan agreement at a fixed exchange rate in one instalment.(1) The claimants intended to take advantage of this opportunity. However, the bank infringed its information and cooperation obligation and the claimants could not repay the debt at the fixed rate. Had the bank duly informed the claimants, they would have saved HUF4.4 million.In the ensuing lawsuit, the claimants sued the bank for only HUF1.1 million, as part of their actual damages. The court's final judgment ordered the bank to pay this amount as damages to the claimants.Later, the claimants sued the bank again, claiming HUF3.3 million – the remainder of the damages. The bank, in asking the court to terminate the proceedings, invoked the final judgment and referred to the doctrine of res judicata.Lower court decisionsThe first-instance court held that in accordance with the Civil Procedure Code,(2) the final and binding force of the judgment rendered in the previous lawsuit did not extend to the claim in the new litigation. Even if the claimants invoked the same right, the facts underlying the new claim were not the same since the claimants sought payment of an amount that was not the subject of the preceding lawsuit.The second-instance court, acting upon the bank's appeal, shared the first-instance court's view and highlighted the fact that when a claimant enforces only part of their claim, the remaining part which is unaffected by the judgment's res judicata effect. This is because even if the right invoked is the same, the relief sought and the facts underlying the claim are different.Supreme Court decisionThe bank submitted a request for review against the second-instance judgment to the Supreme Court, stressing that the claimants had had full knowledge of the amount that could be sought in the preceding lawsuit. In the bank's opinion, this method of enforcing rights contravened legal security.The Supreme Court accepted the bank's argument in the review procedure.(3)The Supreme Court established that based on the doctrine of res judicata, the final and binding force of a judgment prevents the same parties from:bringing a new action against each other regarding the same right arising from the same facts; ordisputing in any other way the judgment's assessment of that right.Based on the Supreme Court's view, the res judicata effect considers the identity of:the parties;the facts; andthe right.The Supreme Court established that the preceding and the new lawsuit involved the same parties and the same legal relationship (identity of facts). However, the first and second-instance courts had erred in concluding that the rights at issue were not the same.In the first litigation, the claimants referred to the bank's actionable conduct, which had precluded them from repaying the loan at a fixed exchange rate, causing them to incur damages. Part of those damages was enforced in the first litigation. After winning that case, the claimants wanted to claim the remaining damages by relying on the same right against the bank.In the Supreme Court's view, the final and binding effect of the earlier judgment prevented the claimants from initiating a new lawsuit against the bank. The Supreme Court stated that the claimants' argument ran counter to the economy of the procedure, which is a basic principle of civil procedure.Legal analysis – erroneous application of res judicata When it comes to the final and binding force of a judgment, the Hungarian legal doctrine is clear that the res judicata principle precludes new litigation involving the same parties, the same facts and the same rights.However, according to the legal doctrine, if a claimant decides to enforce only part of the claim, the judgment's res judicata effect does not extend to the unenforced part of the claim which was not the subject of the lawsuit.(4)The case law supports this view. Previously, the Supreme Court has held that if a claimant enforces only part of the claim in arbitral proceedings and then starts a new procedure for the remaining part only after receiving a successful arbitral award, the res judicata effect of the earlier arbitral award will not extend to the subsequent claim.(5)Thus, the Supreme Court's judgment in the present case is a departure from not only the legal literature, but also case law.When analysing the justification for the Supreme Court's judgment, it could be argued that it interpreted the lower court decisions incorrectly. These courts were of the view that although the same right was invoked, the facts and the claim sought were different and, as such, the earlier judgment did not prevent the claimants from pursuing the remaining part of the claim.At the same time, this Supreme Court judgment gives rise to one theoretical and one practical issue concerning not only the litigants in this case, but also future litigants.Theoretical issueThe message of the Supreme Court decision is clear: claimants which have full knowledge of their claim must pursue that claim in one lawsuit. Clearly, this approach prioritises the economy of the procedure over party autonomy.However, party autonomy is a basic legal principle in civil litigation, enshrined in the Civil Procedure Code as the principle of free disposition, according to which the court gives legal protection to a party to the extent to which it seeks said legal protection. As the ancient adage of Roman law puts it: "ne eat judex ultra petita partium" (ie, the court may not decide on more than is requested of it).It is doubtful whether the economy of the procedure can take precedent over the free disposition principle because the Supreme Court judgment holds that an earlier judgment determines the enforceability of part of a claim which was not the subject of the earlier procedure.Such an overly extensive interpretation of res judicata threatens legal security.Practical issueIn addition to this theoretical issue, this judgment endangers so-called 'test cases', which are an efficient strategy for claimants which do not have limitless financial resources.Initiating test cases is a well-known litigation strategy; if a claimant has serious doubts that they can win their case, instead of litigating the full amount, they can start litigation for a minor, sometimes symbolic, amount. If they are successful in that claim, they can use the verdict as a precedent. However, if they are unsuccessful, they can minimise the costs incurred.In other words, test cases have a dual functionality: they create precedents and minimise costs.The Supreme Court judgment clearly undermines the precedent-creating function of test cases in situations where the claimant has full knowledge of their claim when starting the test case. In these circumstances, even if the claimant wins the test case, they will not be able to invoke the judicial precedent in subsequent litigation regarding the part of the claim which was not the subject of the test case.CommentIn this judgment, the Supreme Court interpreted the res judicata effect too broadly, prioritising the economy of the procedure over party autonomy in civil litigation on the one hand and reducing the rationale of test case litigation on the other.It is hoped that this judgment is only a temporary departure from the standard procedure and that the Supreme Court will return to the practices of the well-established case law regarding the res judicata doctrine.For further information on this topic please contact Richard Schmidt at SMARTLEGAL Schmidt & Partners by telephone (+36 1 490 09 49) or email ([email protected]). The SMARTLEGAL Schmidt & Partners website can be accessed at smartlegal.hu.Endnotes (1) Section 200/B of Act 112/1996 on credit institutions and financial enterprises.(2) Act 3/1952 on the Civil Procedure Code.(3) Supreme Court, Decision 2020.11.335.(4) Farkas József, "A jogerő a magyar polgári peres eljárásban", Akadémia Kiadó, Budapest, 1976. 77; Ébner Vilmos, "A polgári perrendtartás és a kapcsolódó joganyagok kommentrárja", Szerk: Varga István, HVG-ORAC Budapest, 2018 p715.(5) BH 2015.8.230, Kúria Gfv 7. 30.185/2014.