Richard Schmidt Anita Vereb October 25 2022 What are the limits of judicial gap-filling in cases involving atypical contracts? SMARTLEGAL Schmidt & Partners | Litigation - Hungary Richard Schmidt, Anita Vereb Litigation IntroductionFactsFirst-instance courtGyőr Regional Court of AppealCommentIntroductionBusiness life involves a variety of contracts that are not regulated by the civil codes in continental jurisdictions. In cases where the parties conclude a so-called "atypical contract", it is for the judge to decide whether the default rules of a nominated contract regulated by the Civil Code can be applied in a gap-filling function. The recent decision of a Hungarian appellate court, which was also published in the Hungarian Collection of Court Decisions, analysed whether a workforce supplier could invoke the rules applicable to agency contracts to support their damage claim under Hungarian law.FactsThe claimant, a workforce supplier, provided temporary work agency services to the defendant to support the operation of the defendant's factory. The last time the parties regulated their legal relationship was in 2019 via a temporary work framework agreement (the agreement).The agreement was concluded for an indefinite period. However, the parties defined the temporal scope of the annex to the agreement, which governed the service fees from 1 October 2019 to 30 September 2021. According to the agreement, the defendant could terminate the agreement in writing at any time, with or without justification, with a notice period of one month.The agreement contained no provisions that entitled the claimant to any damages or fees in the event of the defendant's termination. In fact, the claimant undertook measures to ensure, upon the termination of the agreement, the continued employment of temporary employees at the defendant's factory and, based on the agreement, to ensure that the claimant was not entitled to any additional fees or expenses relating to their above obligations.In August 2020, the defendant terminated the agreement, without justification, providing a notice period of one month. The claimant acknowledged the termination and, in accordance with his contractual obligations, provided 70 employees to the defendant's new temporary agency partner.Claimant's claimThe claimant started a lawsuit and claimed compensation of 191 million forints and late interest.He based his claim on section 6:278a(2) of the Civil Code (CC)(1) governing agency contracts, which sets forth that, if the agency contract is unilaterally terminated by the principal, it will compensate the agent for the damage caused by the unilateral termination, unless the contract has been terminated due to a breach of contract by the agent.Therefore, the claimant argued that the agreement had to be considered as an agency contract, which was the most similar contract governed by the CC.According to the claimant, considering that the parties had defined the scope of the annex on the remuneration until 30 September 2021, he could reasonably expect that the defendant would use his services at least until this date. Given that the agreement was terminated by the defendant, the claimant lost his expected revenue from September 2020. Based on this, the claimant wanted to enforce his lost income resulting from the lost fees.Defence of defendantThe defendant presented a multi-directional defence,(2) with its cornerstone being that the rules of the CC governed only agency contracts. Thus, section 6:278 (2) of the CC could not be applicable for the parties' agreement.According to the defendant, the rules applicable to agency contracts could not be applied because the agreement was not a mixed contract; instead, it was atypical. Therefore, there was no need for gap-filling and the application of further contractual background rules.If gap-filling was still necessary, instead of the absorption theory(3) invoked by the claimant, based on the analogical theory,(4) only the rules on obligations and the general rules on contracts of the CC could apply, but the application of the rules governing nominated contracts (eg, agency contracts) would be excluded.Further, in the defendant's view, the agreement contained heterogeneous services, not only services that were typical of an agency contract, which was why it was not possible to apply the rules on agency contracts. Moreover, the parties had neither explicitly nor tacitly referred to the rules on agency contract as background rules.The defendant also claimed that if the termination was based on a contractual provision, section 6:278 of the CC was not applicable.First-instance courtThe first-instance court rejected the claimant's claim. The main legal reason for its decision was that the defendant's termination was based on a contractual provision, in an express term of the agreement and not on the law, thus the termination based on the law as provided in section 6:278 of the CC is not an option.According to the first-instance court, the provision of the agreement – which set forth that the claimant undertook, without any renumeration or reimbursement, to take measures to ensure that upon the termination of the agreement the employment of the temporary employees at the defendant' factory continued – confirmed that the parties did not want to entitle the claimant to claim any cost or compensation in relation to the termination of the agreement.In the first-instance court's view, section 6:278 of the CC also could not be applicable because the rules on termination of the agency contract were not relevant. Given that the services of the atypical innominate agreement were complex and contained elements similar to agency contracts, it was possible that the provisions on agency contracts could be invoked by analogy. However, a whole legal relationship, which contains a different kind of service elements, could not be terminated fully based on the rules on agency contracts.Both parties filed an appeal against the first-instance judgment. The claimant primarily requested the modification of the judgment, claiming that the agreement was an agency agreement. Thus, in relation to its termination, the provision of the CC, based on which the principal shall compensate the agent for the damage caused by the principal's termination, shall apply.The defendant attacked the justification of the judgment, among other things, and contended the judgment which found that the provisions of the CC on agency contracts could be applicable to those elements of the agreement that had agency characteristics.Győr Regional Court of Appeal According to the Győr Regional Court of Appeal, acting as second-instance court, the first-instance court had rightly ruled on the merits. Therefore, the second-instance court upheld the first-instance court's judgment, but modified the justification of the decision.The second-instance court stated that, based on its main character, the agreement was designed to enable the claimant to provide an appropriate workforce for the defendant to carry out the work needed. The objective of the agreement was to establish employment with the workers. Undoubtedly, the parties had secondary obligations similar to those of parties to agency contracts, so similar elements could be identified.In the case of an agency contract (section 6:272 of CC), the service of the agent is to carry out the task assigned to them by the principal, usually a personal task, which does not necessarily lead to a given result. In contrast, in the present case, the substantive obligation of the claimant was to let his own employees carry out work for the defendant, meaning that, the aim of the legal relationship was not for the agent to carry out personal activities.In the second-instance court's opinion, the agreement was an innominate atypical contract that seamlessly regulated the rights and obligations of the parties in relation to the defendant's termination without justification based on the agreement. Thus, the claimant could not establish rights under section 6:278(2) of the CC.According to the correct interpretation of the agreement, the parties did not want to give the right to the claimant to enforce claims for loss of revenue (loss of income) and so they did not.This was confirmed by the fact that the parties had regulated their legal relationship in detail and set forth that the claimant was not entitled to additional fees or expenses in relation to the performance of his obligations in case of the termination of the agreement.It did not follow from the fact that the agreement was silent on the issue of loss of profit that its enforceability was allowed. On the contrary, the fact that the claimant could not claim actual damage for the kind of costs incurred in the property suggested that they did not want to give rights to the claimant for further damages, such as loss of profit.Thus, the second-instance court found that the claimant's claim was unfounded because he had concluded that an innominate atypical contract with the defendant, in which the right to compensation was not expressly provided to him. In the absence of an explicit provision, section 6:278(2) of the CC could not be applicable as "background law".CommentThe decision of the Győr Regional Court of Appeal(5) is a significant milestone in Hungary, and was published in the Hungarian Collection of Court Decisions. In prior domestic judicial practice there has been uncertainty regarding the classification of atypical contracts.This uncertainty stems from the fact that in the Hungarian legal doctrine, there is a common lack of understanding regarding the basic issues of atypical contracts. While certain authors consider mixed and innominate contracts to be a subcategory of atypical contracts,(6) others classify neither mixed nor innominate contracts as atypical contracts.(7)Further to this categorisation, the most important question for the practice is whether the provisions of the CC apply to an atypical contract in gap-filling function, and if so, to what extent.In relation to the above question, various views have showed up in Hungarian legal theory and case law:According to the absorption theory, for matters not regulated by an atypical contract, the provisions of the express and designated contract of the CC that is most similar to the atypical contract can be applicable as background rules.The combination theory allows the application of the provisions of more contracts regulated in the CC to atypical contracts.Based on the analogical theory, only the common provisions on obligations and the general rules on contracts of the CC may apply to atypical contracts.The claimant basically proposed the application of the absorption theory because, in his opinion, the agreement was most similar to the agency contract regulated by the CC.In Hungarian judicial practice, there are more examples of the application of the absorption theory, which may be considered incorrect. For example, in one case, the court applied the provisions applicable to an escrow contract to a mixed atypical agency contract that also contained elements of escrow.(8) In another case, the court ruled in relation to a contract for catering services based on the rules of sale and purchase, which, in the court's opinion, was the most similar contract.(9)While rejecting the absorption theory, the first-instance court in fact applied the combination theory. In applying this theory, the judge fragmented the contract and applied the rules of the agency contract to its agency-like elements. This attitude was rightly criticised by legal doctrine.(10)The second-instance court followed the progressive analogical theory, excluding the application of the provisions of the CC on agency contracts to the agreement as a gap-filling measure and the possibility for the claimant to claim compensation based on these rules.The decision of the second-instance court is welcomed as the private autonomy of the parties and contractual freedom is best served by an attitude where the parties to an atypical contract are not artificially "brought" by the judge under legal norms that the parties did not expressly or implicitly intend to apply to their legal relationship.It is also worth mentioning that the decision of the second-instance court is in line with judicial practice in the sense that, in relation to the classification of atypical contracts, the dominant factors are the presumed will of the contracting parties and the nature of the contractual service.(11)In fact, the second-instance court analysed the heterogenous services of the claimant in detail and concluded that personal activity, which is typical in the case of agency contracts, was not the main point of the agreement, thus the provisions of the agency contract could not be applied to it.Further, the second-instance court also attached particular importance to the fact that the parties had explicitly excluded in the agreement the right of the claimant to claim any cost or expense in relation to his obligations upon the termination of the defendant.The second-instance court concluded that the parties' intent was to prevent the claimant from bringing a claim for damages in connection with the defendant's termination. The application of the provisions of the CC on agency contracts would therefore be contrary to the presumed will of the parties.It is clear from the final judgment that, under Hungarian law, if parties enter into an atypical contract and wish to grant themselves an additional right (eg, right of termination or claim for damages), they must explicitly regulate this in their contract.For atypical contracts governed by Hungarian law, the judge will not automatically apply the default rules of the Hungarian CC in a gap-filling function in order to establish a right that is not expressly regulated by the parties.For this reason, in case the parties enter into an atypical contract under Hungarian law and wish to grant themselves an additional right (eg, right of termination or claim for damages), the best is to explicitly regulate this in the contract itself.For further information on this topic please contact Richard Schmidt or Anita Vereb at SMARTLEGAL Schmidt & Partners by telephone (+36 1 490 09 49) or email ([email protected] or [email protected]). The SMARTLEGAL Schmidt & Partners website can be accessed at smartlegal.hu.Endnotes(1) Act V of 2013 on the CC.(2) For brevity's sake, only the parts of the defendant's defence that are relevant to the final judgment and the interpretation of the law in the final judgment in relation to the innominate contracts are presented.(3) According to the absorption theory, the provisions of the express and designated contract of the CC which is most similar to the atypical contract shall be applicable as background rules.(4) According to the analogical theory, the atypical contracts are a qualitatively new type of contract compared to certain nominated contracts, so that the special rules applicable to typical contracts do not apply, but only the provisions on obligations and the general contract rules.(5) Decision No. BDT2022. 4510.(6) Tőkey Balázs in Fuglinszky Ádám –Szerződési Jog – Különös rész, Eötvös, Budapest, 2018, 37-38.(7) Papp Tekla: A közbeszerzési szerződés tipizálása, forrás.(8) Decision No. Gf.20079/2014/4, of the Győr Regional Court of Appeal.(9) Decision No. G.40117/2012/7, of the Szeged Regional Court.(10) Papp Tekla: Atipikus szerződések; HVG-ORAC Lap- és Könyvkiadó Kft, 2019.(11) Papp Tekla: Atipikus szerződések; HVG-ORAC Lap- és Könyvkiadó Kft, 2019.