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.
- Change of the rules concerning breach of contract
1.1 The nature of breach of contract and its consequences in general
Failure to perform any duty in conformity with the contract constitutes a breach of contract. In this case the aggrieved party may demand the performance of the service. The obligee may withhold the proportionate part of his own due service until the performance of the obligor or the provision of adequate security. In case of breach of contract by one of the parties, the other party may rescind the contract if his interest in its performance ceases or, if the conditions before the conclusion of the contract may not be restored in kind, he may terminate it. Furthermore, it is an important rule that the obligee—in case of his rescission or termination—may conclude a hedging contract and may demand from the obligor the difference between the considerations stipulated in the original and the hedging contract with the costs arising from the conclusion of the hedging contract.
1.2 Stricter rules of the liability for breach of contract
One of the consequences of breach of contract is that the breaching party is liable for damages to the other party. Under the new Civil Code the breaching party may be released from liability only upon far stricter conditions than earlier: the only possibility he has is to prove the breach of contract was caused by circumstances that were beyond his sphere of control, unforeseeable at the time of the conclusion of contract and that it could not have been expected from him to avoid or prevent such circumstances. The damages in the object of the service must be compensated as well as—to the extent the obligee proves that the damage as a possible consequence of the breach of contract was foreseeable at the time of the contract’s conclusion—other damages that arose in the assets of the obligee and lost profits. In case of intentional breach of contract, the full damage must be compensated.
1.3 Exclusion of liability for breach of contract
Like the previous legislation, the new Civil Code allows the parties to exclude or restrict liability for breach of contract. However, while under rules currently in effect the exclusion or restriction of liability for breach of contract was only possible if the resulting detriment is compensated by an adequate decrease of the consideration or some other benefit, the new Civil Code contains no such restriction. The rule that a contractual term limiting or excluding liability for breach of contract that is intentional or damages human life, bodily integrity or health is null and void still remains in effect.
1.4 Liability for defective performance
Defective performance means that the service does not conform to the quality requirements set out in the contract or in legal regulations at the time of performance. In this case the obligee may assert so-called warranty claims (repair, replacement, price decrease, payment of repair costs, rescission). In comparison to the previous regulation, these claims may be enforced within a year from the time of performance (instead of the previous six months) and if the object of the contract is real property, the deadline is five years. In case of Business-to-Consumer contracts the claims are still enforceable within two years.
1.5 Product warranty
The new Civil Code introduces the rules of product warranty as a new legal institution. The aim of the new regulation is to create direct liability against the producer (i.e. the manufacturer and distributor of the product) to the benefit of the consumer in case of the defect of movables sold by an enterprise to the consumer (the products). In the course of product warranty the consumer may demand repair or replacement from the producer directly. The producer must immediately be notified of the defect after discovery. The producer is subject to product warranty for two years after the distribution of the product in question. If the consumer transfers ownership of the product, the new owner may enforce the product warranty rights against the producer.
- New rules of changes in contractual positions
2.1 Assignment, transfer of rights
The rules of assignment in the new Civil Code are somewhat different from the rules currently in effect. For the acquisition of the claim by assignment, a contract to this effect or other legal ground as well as the actual transfer of the claim is necessary. The new Civil Code still contains the requirement to notify the obligor in relation to the assignment, but also introduces the term “performance order.” A performance order is a legal statement that determines the person and its business location (head office, place of residence, place of stay and account number) of the assignee as well. After its receipt the obligor may only perform in conformity with the performance order, provided that the order originates from the assignor or if the assignee credibly certifies that the claim was assigned to him. Furthermore, it is an important new rule that a contractual provision excluding the assignment of the claim is ineffective in relation to third parties (this, however, does not affect the liability of the assignor for the breach of the provision excluding assignment). However, a contractual term that provides for the right of termination or a contractual penalty in case of such breach of contract is null and void.
The new Civil Code expressly specifies the possibility and contains the rules for the transfer of rights. This is possible by an agreement that allows the obligee to transfer any of his marketable rights. The rules for transferring rights are basically the same as the rules of assignment.
2.2 Assumption of debt
The new Civil Code regulates assumption of debt in line with the previous regulations. The legislation also specifies two other, similar legal institutions: assumption of performance and acceptance of debt. Under the former, the third party enters into an agreement with the obligor on the assumption of the obligor’s debt and will be obliged to perform the debt of the obligor or to put the obligor in a position that he can perform when the debt becomes due; however, the obligee may not demand the debt from the third party. Pursuant to the new rules, an acceptance of debt is where the parties notify the obligee of their agreement and thereby create joint and several liability, i.e. thereafter, the obligee may demand performance from both of them.
2.3 Transfer of contract
The new Civil Code expressly specifies the possibility (that has also existed until now), namely, that the parties to a contract may enter into an agreement according to which a different person will take the place of one of the contracting parties (for instance as lessor or lessee). It is a trilateral agreement in which the party exiting, the party entering and the party staying in the contract agree on the transfer of all the rights and duties of the party exiting the contract to the party entering the contract. An important rule is that in this case the securities of the contract are terminated. With the approval of the pledgor, however, the new pledge will come into existence at the rank of the original pledge.