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.
With this newsletter we would like to outline certain rules of the new Civil Code, i.e. Act V of 2013 (hereinafter: “New Civil Code”) regarding the law of obligations which affects, among others, the rules pertaining to contracts.
- The rules concerning contractual legal declarations in general
1.1 Formal requirements
Under the new Civil Code a legal declaration may be made either in writing or verbally or by implied conduct. If the legal declaration is made by electronic means, then it is equivalent to the written declaration if the electronic document is supported by electronic signature of at least increased security and time stamp. The rule stating that the contractual legal declaration made by electronic means becomes effective at the time when it becomes accessible to the other party calls for regular inspection of electronic correspondence. It is also relevant that silence or abstaining from certain conduct may only qualify as a legal declaration upon the express disposition of the parties. An important new rule regarding declarations in writing is that if the signatory does not understand the language in which the document was made, it is required for the validity of the declaration that it is made apparent within the document itself that its content was explained to the party making the declaration by one of the witnesses or the certifying person.
1.2 Correction of formal defects
Situations where a contract (or its modification, termination) does not meet the formal requirements are governed somewhat differently by the new Civil Code compared to the earlier regulation. In such cases the contract becomes valid in the performed part by the acceptance of performance; furthermore, the modification, termination or cancellation of the contract without the required formalities is also valid if the actual situation in conformity with it was created in accordance with the will of the parties. However if a law requires the agreement to be made in the form of a public document or private document with full probative force, or when the contract is aimed at the conveyance of real property, the formal deficiencies may not be cured in such a way.
1.3 Certain new rules of representation
The new Civil Code regulates the so-called presumed representation and representation based on appearance in the course of the conclusion of a contract in more detail. Accordingly, a person must be considered to be a representative in business premises or in other rooms open to clients if it may be presumed that he/she is entitled to make legal declarations that are customary at that place. A person with regard to whom it may well be presumed (based on his/her actions and the conduct of the represented person) that he/she has the entitlement to make legal declarations on behalf of the represented person is to be considered a representative as well. For enterprises with a greater number of employees it may be reasonable to produce an internal regulation in this respect, which sets out the competence of persons, for example in the course of negotiations.
- Important rules concerning the conclusion of contract
2.1 Pre-contractual negotiations
The new Civil Code still prescribes the obligation of cooperation and notification as a general rule, which applies to the parties during negotiations before the conclusion of the contract as well. Increased diligence is expected by the new Civil Code when it prescribes that neither of the parties may refer to violation of the obligation of notification in relation to such rights, facts and data which were known or should have been known by him from an authentic register or other source. If the contract is concluded, the party in violation of his obligation of cooperation and notification is obliged to compensate the other party for damages arising from such conduct. Under the new Civil Code parties are not liable for damages for the failure to conclude the contract. It is important, however, that the party who violated his obligation of cooperation and notification in the course of pre-contractual negotiations is obliged to compensate the other party for damages arising from such conduct.
2.2 Contract proposal, the acceptance of the offer
The rules for contract proposal are set out in greater detail and with greater precision in the new Civil Code than under the earlier regulation. It is a new rule that the legal declaration expressing agreement with the offer qualifies as acceptance even if it contains a supplementary or deviating term provided that such term does not qualify as a fundamental issue. It is important that the supplementary or deviating terms become part of the contract unless the offer expressly limited the option of acceptance to the terms included in the offer or the offer or objects against the supplementary or deviating terms without delay. It is also an important new provision that if the parties did not conclude the contract in writing and, after conclusion of the contract, one of the parties sets it down in writing and immediately sends it to the other party with modifications or extended with terms that are not fundamental, such terms become part of the contract if the other party does not object without delay.
2.3 Final contents of the contract
The new Civil Code regulates the formation of the contract’s contents in greater detail than was in place previously. An important new rule is that every custom on the application of which the parties agreed upon in their earlier business relations and every practice they developed between themselves, furthermore, as a general rule, customs widely known and generally applied in the particular business sector for conclusion of contracts becomes part of the contract even without the expressed disposition of the parties. The new Civil Code prescribes the observance of further rules (partly outside legal regulations) when it sets forth among the provisions concerning the quality of the service that the quality prescriptions must also be considered in relation to the suitability of the service for its intended purpose. The parties may include a provision in their written contract, according to which it contains all terms of the agreement between the parties. In this case all previous agreements not included in the written contract lose their effect. Nevertheless, earlier legal declarations of the parties may be considered for the interpretation of the contract. The new Civil Code seeks to limit the earlier uncertainty by stating that the contents of the contract may only be unilaterally modified by the party if this possibility was stipulated in the contract or if the party is entitled to do so by law.
The new Civil Code restructured the regulation regarding pre-contracts; the regulations also became stricter compared to the earlier regulations. The cases when the party may refuse to conclude the final contract are reduced in number. Such refusal is possible if, due to circumstances that arise after the conclusion of the pre-contract, the performance of the pre-contract under unchanged conditions would be against the essential legal interest of the party; the change of circumstances was not foreseeable at the time of the pre-contract’s conclusion; the change of circumstances was not caused by the party referring to it; and the change of circumstances does not fall within the usual business risk of that party. In case the contract is not concluded, the court is still entitled to create the contract, but it does not have the option to define its final contents.
2.5 Invitation to tender
The new Civil Code expressly specifies the invitation to tender as a method of contract conclusion that was previously applied in business life as well. Players of the business sphere may apply this procedure in the course of procurement or sourcing (either in the form of tenders or auctions) with freely formed conditions. In case of a classic invitation to tender, the tender announcer party may only refuse the conclusion of contract in relation to the offer or submitting the most beneficial offer conforming to the contents of the invitation if he expressly stipulated this right in the invitation. In case of price competition (auction) the contract is concluded at the price reached upon the announcement of the winner.
2.6 Conclusion of contract by electronic means
The new Civil Code introduces the regulation of conclusion of contract by electronic means as a new element, which was previously governed by the Act on Certain Issues of Electronic Commercial Services and Services Concerning Information Society. It is important to emphasize that these provisions must be applied only in case of contract conclusions by electronic means which are not made by electronic correspondence (e-mail) or equivalent individual communication devices. The new Civil Code contains the particular obligations of the party providing the electronic method in order to ensure protection of the other party (obligation of notification, accessibility of general contract terms, possibility to correct data input mistakes, etc.). The party providing the electronic method must electronically confirm the receipt of the other party’s contractual legal declaration without delay. Failure to do so leads to the other party being released from being bound by the offer and cannot be obliged to perform the contract.
- Certain rules of the performance of contract
Unlike the earlier regulation, the new Civil Code expressly states that the consideration stipulated in the contract contains the costs usually entailed with the performance of the contract. As a consequence, the obligor must proceed with increased diligence in respect of the estimation of costs arising in relation to the performance in the course of pre-contractual price calculation.
- Certain rules concerning limitation
The limitation period for claims basically remains at five years. However, the new Civil Code allows the parties to define the limitation period more freely in their contract: the limitation period may be shortened or extended by written agreement (it may not be excluded though). It is important that a written notice is insufficient for the interruption of the limitation period; the claim must be asserted by litigation (or payment order). The assignment of the claim does not interrupt the limitation period either.