On 15 March 2014 the new Civil Code entered into force as the most important legislation governing the financial and personal relations of companies and persons. The new code has an increased commercial emphasis incorporating the results of legal developments of the past decades by adapting to the economic needs of our times. The new code takes into account the rules crystallized in the Hungarian trade of property and has regard to European legislation as well. The new act came with several new and completely or substantially reformed legal institutions. The changes concern the activity of enterprises widely, thus familiarization and appropriate preparation by business participants is fundamental. With our newsletters, we would like to provide support for your preparation.
Herein we would like to outline certain rules of the new Civil Code, i.e. Act V of 2013 (hereinafter: “New Civil Code”) regarding title-transfer contracts, contracts for professional services and engagement-type contracts.
1. Title-transfer contracts
The New Civil Code clearly states that the rules on sale and purchase shall apply to the transfer of rights and receivables for consideration as well.
According to the New Civil Code retention of title may be stipulated not only at the conclusion of the contract. Furthermore, the New Civil Code requires the registration of the retention of title: (i) in case of real property in the land registry, (ii) in case of registered movable property, rights and receivables in the authentic registry proving the ownership thereof (e.g. in case of vessels or aircrafts), (iii) in case of other movable property in the credit collateral registry. However, in the absence of registration, third parties acquiring for consideration and in good faith may become the owner of the asset.
In accordance with the requirements of European Union law, the New Civil Code introduces special rules with respect to consumer sales contracts, i.e. in case the seller is an undertaking and the purchaser is a consumer. In such cases, the risk for damages passes over only when the consumer receives the object of sale and purchase and the undertaking is obligated to perform the contract within 30 days at the latest following the consumer’s performance. The consumer is entitled to provide for an additional deadline; however, he may also cancel the contract without providing for an additional deadline if the undertaking has refused to perform the contract or the undertaking should have performed the contract at an expressly specified time (and not at another time) and the contract was not performed at that specific time.
The New Civil Code regulates pre-emption rights, repurchase rights and call / put option rights in more detail with respect to the established judicial practice. If more persons acquire a pre-emption right over the same asset, they may exercise their rights in the sequence of establishment, and if more persons having a pre-emption right with the same ranking make a declaration of acceptance, joint ownership is created in proportion to their interests among each other. According to the New Civil Code, claims in connection with the infringement of pre-emption rights may be enforced only within 30 days with a simultaneous declaration of acceptance and the verification of the ability to perform. If the parties failed to determine the repurchase price at the establishment of the repurchase right, the market value of the asset at the time of repurchase shall apply. Apart from call option rights, the New Civil Code also regulates put options rights, on the basis of which the right-holder is entitled to sell the asset with its unilateral declaration to the specified person. The duration of the repurchase and call / put option rightmay be determined freely by the parties, i.e. the five-year limitation previously in force is abolished.
The New Civil Code regulates as a type of sales contracts (i) the forward sale and purchase of assets determined by type and quantity, the rules of which replace the rules on supply contracts previously in force, (ii) sale and purchase contract for agricultural goods from own production, the rules of which replace the rules on sales contracts for agricultural products previously in force, and (iii) sale and purchase contract for agricultural goods produced with the contribution of the purchaser, which corresponds to the case of sales contracts for agricultural products, when the purchaser provided services to the seller facilitating performance.
The new provision on donation contracts must be noted according to which the beneficiary is not obligated to return the gift in case the livelihood of the donor is jeopardized if the beneficiary can provide for the livelihood of the donor by paying allowance or providing support in kind.
2. Contracts for professional services
The New Civil Code amends the rules on services contracts in several aspects. It expressly states that unless the parties agree otherwise the material necessary for the completion of the works shall be obtained by the contractor. Apart from the definition of additional works, the New Civil Code also provides for the definition of extra works in accordance with judicial practice and sector-specific regulation: works ordered subsequently, prompted in particular by changes in the plan, if performing these works does not impose an unreasonable burden upon the contractor. The New Civil Code also sets forth that in case of a fixed fee the contractor may claim remuneration for extra works, however, not for additional works, unless costs have arisen in connection with the additional works which were not foreseeable at the conclusion of the contract. The New Civil Code extends the statutory lien of the contractor beyond securing the contractor’s fee to securing the costs arising out of the contract.
Under the rules on design contracts, the New Civil Code regulates in detail the general requirements of design documentation. The new act prescribes that the design documentation shall be technically executable, it shall contain feasible and reasonable solutions and it shall be capable of satisfying the needs of the principal apparent and serving the purpose of use. The New Civil Code also sets forth that claims in connection with defective design may be enforced until the claims in connection with the (defective) works completed on the basis of the design may be enforced.
The New Civil Code regulates construction contracts overall in general. This, inter alia, includes the rules on building and installation contracts previously in force, which are not regulated as a separate type of contract by the New Civil Code.
Under the rules on research contracts, the New Civil Code regulates the intellectual and industry property rights, as well as business secrets in connection with research: on the basis of the research contract, the researcher is obligated to transfer the financial intellectual and industry property rights to the principal or grant the broadest possible license for use to the principal. Furthermore, the New Civil Code states that the right-holder of business secrets shall be the principal.
In accordance with the requirements of European Union law, under the rules on travel services contracts, the New Civil Code prescribes conclusion of the contract in written form and it enables the principal to transfer its contractual position under the travel services contract before the commencement of the journey. In this case, the principal and the person to whom he has transferred his contractual position shall bear joint and several liability for the compensation of additional costs arising in connection with the transfer.
The New Civil Code regulates the case when the contractor undertakes to keep the principal’s livestock and grow crops on the principal’s land as a new type of contract, as an agricultural services contract. The New Civil Code expressly states that the contractor shall not be liable for the performance of the contract to become impossible due to a disease of the livestock or the crops if the disease was caused by unavoidable circumstances beyond the control of the contractor.
The amended rules on transport contracts, previously regulated among the engagement-type contracts, is among the rules applicable to professional services in the New Civil Code, and taking into consideration the international models of carriage of goods. According to the New Civil Code the consignment note proves the apparent good condition of the consignment and its packaging as well as the quantity thereof. The New Civil Code expands those obligations of the consignor, which — if not performed — the carrier may refuse to accept the consignment or cancel the contract, or after acceptance of the consignment may require collateral from the consignor or terminate the contract. The New Civil Code also amends the instruction rights of the consignor: the consignor may dispose over the consignment until its delivery; however, the carrier may require collateral from the consignor, if the disposal increases the burden of carriage and the carrier may sell the consignment in accordance with reasonable commercial practices if the consignor fails to provide collateral. In case a carriage obstacle arises, or in case of partial or complete loss or destruction of the consignment, the New Civil Code explicitly sets forth that the carrier is entitled to the freight charge or its proportional part, unless he can prove that loss or destruction of the consignment was caused by circumstance unavoidable circumstances beyond the control of the carrier, and he could not be expected to avoid the circumstance or prevent the damages. According to the New Civil Code the statutory lien of the carrier covers all due and uncontested claims of the carrier from any transport contract concluded with the same consignor. In case of a foreign consignor, the liability of the carrier may not exceed the amount of compensation for damages to be paid under the law of the consignor’s home state.
3. Engagement-type contracts
The New Civil Code introduces several significant changes with respect to engagement contracts. The New Civil Code enables the agent to cancel or terminate the contract if the principal gives unreasonable or unprofessional instructions. The agent may also make the execution of the instruction dependent on the provision of appropriate collateral. According to the New Civil Code, the agent is obligated to advance the costs usually associated with carrying out the engagement.
With respect to consignment contracts, the New Civil Code sets forth that a contract for the acquisition of the title of a real property by the consignee is null and void. The New Civil Code does not burden the consignee with the risk of the seller’s or the purchaser’s insolvency or unwillingness to pay. The new act clearly states that the consignee is only liable for obligations of the party to the contract concluded by the consignee, in case of an explicit undertaking from the consignee. Thereby the New Civil Code deviates from previous regulation, which stipulated the liability of the consignee as a general rule. Under the New Civil Code, the consignee may conclude the sale and purchase contract himself with the principal, if the market value of the object of the contract may be clearly determined on the basis of publicly available information. However, the consignee is obligated to conclude the contract under the terms considered best for the principal, even in this case.
The New Civil Code regulates agency contracts and long-term agency contracts as new types of contracts. The rules on this new type of contract replace the rules on commercial agency contracts. Under agency contracts the agent undertakes activities in order to facilitate the conclusion of a contract between the principal and a third party, which does not include the right to conclude the contract. The agent acting within the framework of a long-term agency contract is entitled to conclude the contract. An agency relationship qualifies as long-term if it relates to the conclusion of several contracts or the conclusion of one contract and the maintenance or renewal of the contractual relationship. An agent qualifies as independent if it carries out his activities not within the framework of an employment or management relationship. In accordance with the requirements of European Union law, using its terminology, the New Civil Code regulates the indemnification (thus not called settlement under the New Civil Code) to which the long-term agent is entitled, if the agent is deprived from his commission due to the termination of the agency contract, but the principal enjoys substantial benefits from the agency activities after the termination of the agency contract. Indemnification is excluded if the agent terminated the contract (unless the fulfilment of its obligation could no longer be expected) or the agent transferred its contractual position. The New Civil Code regulates the agreement restricting the agent in carrying out business activities after the termination of the contract (non-compete), which shall be in writing, it shall not exceed 2 years, and it may only relate to the geographical area or scope of customers and products to which the agency contract originally pertained.