On the New Hungarian Civil Code

On March 15, 2014, the new Civil Code will enter into force as the most important law governing the financial and personal relations of companies and persons. The new code, with an increased commercial emphasis, incorporates the results of legal developments of the past decades and adapts to the economic needs of our times. The new code takes into account the rules that have crystallized in trading in Hungary and it has European legislation in its sights as well. The new act comes with several new, and completely or substantially reformed legal structures. The changes will broadly concern the activities of enterprises, thus familarization with and appropriate preparation by market players for the new rules will be fundamental. With our newsletters, we would like to provide support for such preparation.

With this introductory newsletter, we would like to draw to the reader’s attention the importance of the new Civil Code, viz. the Act V of 2013, through a general description.

The creation of the new, modern Civil Code, which is founded on Hungarian and European legal traditions, and also aspires to meet the challenge set by the development of the global economy, is the result of the comprehensive work of experts based on the practical experience of the past two decades.

With the exception of a few specialized areas of the law, the new Civil Code incorporates Hungarian private law into a unified framework, thus, for instance, the previous separation of company law and family law into self-standing acts will be eliminated. Several legal solutions that have been developed by market players and acknowledged by judicial practice as well as in academic viewpoints are integrated in the new Civil Code. As a result of the unified legislation, the most important rules of Hungarian private law are embedded in one, unified (more consistent than the current one) conceptual system, which makes the application of the law easier. The new legislative structure involves numerous substantial reforms and changes.

The new Civil Code re-regulates the trade of goods and services and the financial and personal relations at several points for more enhanced compliance with the requirements of the market economy. Without striving for completeness, the most important changes are as follows:

The rules concerning the formation and operation of companies will now be found in the new Civil Code. The shareholders and founders of companies may determine the rules of internal operation more freely, and consequently the freedom of company formation and the autonomy of legal entities will increase. The current rules do not allow deviation from the rules as opposed to the permissive rules which are dominant in the new legislation. The new, dispositive rules of corporate law may encourage enterprises to rethink their corporate structures.

Certain rules on the content and the protection of ownership will change as well. The legislator offers a solution to a long-unresolved problem for instance when it allows the ownership of land and building to be separated, essentially without restrictions, similarly when it allows easements to be created on one’s own real estate.
The new rules of ownership and possession are also incorporated in the new Civil Code, which enhances the importance of the Real Estate Register and its consistency with other legal regulations.

The rules of liens are fully revised. The code puts forward a radical paradigm shift when it declares several securities that are widespread in practice to be null and void (e.g. security assignment or transfer of ownership as security). Instead, within the framework of the mostly revised law of pledges and mortgages the legislation provides solutions which have more balanced approach to considering the interests of the parties and the security of trade.

The rules of contract law will be transformed on multiple points as well; the private autonomy of parties and the relevance of contractual relations will be increasingly recognized. The new Civil Code strengthens the parties’ rights to freely determine the content of their contract by restraining the courts’ options in making and modifying contracts. On the other hand, the new Civil Code implements the principle that practices and customs which the parties have established among themselves are also part of the contract. The new Civil Code declares that commonly applied commercial practices of the trade concerned are part of the contract, regardless of explicit terms included in the contract. The rules regarding contract formation will change as well; the regulation on the formation of electronic contracts will appear on the legislative level. For these reasons, several enterprises may be advised to reconsider the details of their contracting and commercial practices.

The new code puts forward the public interest regarding adherence to contracts by implementing more strict rules concerning the breach of contracts. The rules of warranty will become stricter as well, with longer deadlines and new types of liability being introduced. Familiarity with these rules will be essential following the entry into force of the new Civil Code.

With regards to certain types of contracts, several, more or less substantial changes will enter into force as well, and these must be in the focus of enterprises affected by them.

Nevertheless, the most important change might be that the new Civil Code implements express and detailed provisions on certain types of contract which have already been constructed by market players, such as factoring, franchise (or as the new Civil Code names it: contract on the lease of rights) or the confidential asset management contract (following the example of ’trusts’ in the common law). The legislation satisfies a long-required demand when it regulates the transfer of contracts and dissolves what were uncertainties previously.

The new Civil Code is thus the code of opportunities and challenges at the same time. Successful pursuit of business may depend upon the ability of the given enterprise to properly adapt to the new legislative environment. The purpose of our new series of newsletters is to draw to the attention of our actual and potential clients the upcoming changes, which we will further specify in our upcoming newsletters.*