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CEELM Covid-19 Comparative Legal Guide: Contracts in Hungary

CEELM Covid-19 Comparative Legal Guide: Contracts in Hungary

Covid-19 and Contracts in Hungary
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Contributed by Nagy es Trocsanyi

The pneumonia epidemic, which originally broke out in the Chinese city of Vuhan at the end of 2019, reached the borders of Europe by early 2020. The Government of Hungary declared a state of danger in Governmental Decree No. 40/2020. (III. 11.), legal ground of which is Article 53 of the Fundamental Law, which contains additional rules on the special legal order. Pursuant to this, the Government may issue a decree authorized by provisions of cardinal laws by which it may suspend the application of certain laws, deviate from the provisions of the law, and take other extraordinary measures. As a general rule, decrees enacted in this manner shall be effective for 15 days, which may be extended by the Government, subject to the authorization of the Parliament. Such decrees, however, cease to be effective once the state of emergency has ceased. To the decrees enacted in this manner the usual rules of promulgation shall be applicable, but the provisions of Act CXXVIII of 2011 on Disaster Management and Amendments to Related Laws (hereinafter: Disaster Management Act) provide the possibility of extraordinary promulgation, when the decree is published by public service broadcasting, communicated word by word (publication in the Official Journal of Hungary is also required in this case).

The following summary provides a general overview of the potential legal effects of the virus outbreak in Hungary, with particular reference to its effects on the operation of businesses and contractual legal regulations.

How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

Hungarian businesses are affected by the coronavirus on many different levels, but these effects might be categorized into three main topics. These topics are: (i) labor law effects on businesses as employers; (ii) effects regarding the operation of the supreme body of the company; and finally (iii) measures to be taken by the Hungarian Government in relation to companies after the declaration of the state of emergency.

Labour Law

The general obligations of the employer and the employee

Under Section 2 (3) of Act XCIII of 1993 on Occupational Safety, the employer is responsible for ensuring safe and healthy labor conditions. This also includes appropriate measures to be taken by the employer to protect employees’ health in the event of an epidemic. Employers have this responsibility when employees are working from home as well.

The employee cannot, solely as a precaution, refuse to perform his or her obligation to work, but if the employer obliges the employee to work after the increased risk of infection present in the workplace, the employer must also consider that the illness of an employee originating from such conditions may be classified as a workplace accident. The employee may refuse to carry out the instructions of the employer where those instructions would result in direct and grave risk to his or her life, physical integrity, or health. It should be noted that in the event of such refusal to carry out an instruction issued by the employer, the employee shall be available for work nonetheless.

During an epidemic, the employer may request information from the employee regarding his non-workplace activity, especially information regarding traveling abroad. For example, the employer may request that the employee report the date of the employee’s trip to or date of return from a region affected by the epidemic. The employee is obliged to answer these questions on the basis of his general legal obligation to cooperate with the employer. Such information obtained by the employer is considered personal data and shall be handled in accordance with the relevant data protection rules.

Labor measures applicable by the employer

If the employer orders, for the sole purpose of prevention, that certain employees shall 'stay at home” without the employees being unfit for work, the employer is obliged to pay the wages which the employees would normally receive for their work (including basic salary, bonuses, cafeteria, etc.).

The employer may also unilaterally grant leave, since under Section 122 (1) of Act I of 2012 of the Labor Code the employer is entitled to grant leave after the employee has been heard. The date of leave must be communicated to the employee no later than fifteen days before the start of the leave-period. As a limit to this – except for the first three months of the employment relationship – the employer is required to grant up to seven working days a year, in a maximum of two installments, at a time in accordance with the employee’s request. The leave shall be granted in such a way that the worker is exempted from his duty to work and be available for work at least for fourteen consecutive days per calendar year.

It is also possible for an employee to be released from his or her work obligation with the employer's consent. In this case, the employee shall be entitled to remuneration for the lost work-time as agreed by the parties.

In addition, the employer may enter into an agreement with the employee whereby the employee, with the consent of the employer, will later make up for his or her unemployed period so that the wages paid for the time spent at home will be calculated for actual work performed by the employee at a later point in time. The employer may also order "home-office" if the employee has a job that can also be performed at home.

Employees that become ill or subject to an epidemiological measure will be considered unfit for work and will be entitled to sickness benefit for the period of time concerned. In the light of the social security regulations, if employees are prevented from appearing in their workplaces due to an epidemiological measure and cannot be employed at another workplace or job, they are considered to be unfit for work, even without showing any symptoms of the infection, and are entitled to sickness benefits. If the employees are unfit for work due to illness, they are entitled to sick leave for the first fifteen working days of each calendar year, during which time they should receive seventy percent of absence fee from the employer under Section 146 (5) of the Labor Code. There is no sick leave during the time period during which the employee is unfit for work due to an epidemiological measure, thus the seventy percent of the absence fee is not paid by the employer either.

Pursuant to Section 146 (1) of the Labor Code, employees are paid a basic salary if the employer does not fulfill its obligation to provide work, except if this is a result of unavoidable external circumstances. Thus, if the employer (including the employer’s headquarters, premises, office, plant) is affected by epidemiological measures and therefore cannot fulfill its obligation to provide work, the employer is not obliged to pay wages to the employee, even if the employee is considered unfit for work and is entitled to sick benefit.

Operation of the supreme body of the company

Concerning the organizational bodies of companies, the operation of the supreme body might be affected by special measures taken with respect to the coronavirus. In order to prevent the spread of the virus, the Hungarian Government ordered several restrictive measures which may seriously affect the operation of businesses. For example, from March 11, 2020 any indoor event hosting more than one hundred people and any outdoor event hosting more than five hundred people are banned for an indefinite period of time. Therefore, participating at the meetings of the supreme body of a company - if the company has a significant number of members – may be performed by way of a representative or by means of electronic communications or as another alternative, and resolutions may be adopted out of sessions. The rules of these special means of participation are established by Act V of 2013 of the Civil Code.

Participation through a representative

Generally, one representative shall be allowed to represent more than one member of the company, so the number of participants can be reduced. The power of attorney for representation shall be fixed in an authentic instrument or in a private document with full probative force. In case of limited companies, special rules apply regarding the proxies, since the names of proxies shall be entered into the register of shareholders before the general meeting. The latest date of registration is different for private limited companies and for public limited companies. In private limited companies, if the articles of association contains provisions to specify the time by which the proxies shall be registered, it may not be earlier than the second working day before the general meeting. However, if the articles of association do not contain any special timing for registration, the proxies may be registered at any time until the beginning of the general meeting. In public limited companies, the names of proxies wishing to participate in the general meeting shall be entered into the register of shareholders at the latest by the second working day preceding the beginning of the general meeting.

Participation by means of electronic communications

Members of companies may exercise their rights in meetings by means of electronic communications if the articles of association defines the type of such electronic communications equipment that can be used and the condition for their use to contain facilities for the identification of members and for mutual and unrestricted communication between the members. If the articles of association do not regulate the participation via electronic communications, the members shall attend a general meeting in person or they shall appoint a proxy.

For private limited-liability companies and also for limited companies, if the general meeting is held by means of electronic communications, the discussions and adopted resolutions shall be recorded so they can be retrieved at any time in the future.

For limited companies, the shareholders shall have the right to decide whether they wish to participate in person or via electronic means at the shareholders’ meeting. The articles of association, or a resolution adopted by the general meeting, shall define the procedure for checking the identification of shareholders participating through a telecommunications connection, along with the voting procedure and the authentic conclusion of the results, and should also define the procedure for the election of general meeting officers and the requirements for shareholders to make their opinions known and to make proposals. The costs arising from using means of electronic communications shall be borne by the company and not its shareholders.

Adopting resolutions without holding a supreme body meeting

If the articles of association establishes it, resolutions may be adopted out of general meeting sessions, so the members of the company do not have to participate in general meetings or send a representative to participate in their place. In this case, the management of the company shall send the draft of the resolution to the members and the members shall send their votes to the management. The members shall have at least eight days after the time of receipt to do so.

Measures to be taken in relation to companies after the declaration of the state of emergency

The Covid-19 pandemic might affect the decision-making process of certain business associations on a higher level than the special provisions for the operation of the supreme body, elaborated in the previous point. According to Section 48 of Act CXXVIII of 2011 on Disaster Management, in the event of an imminent danger of aggravation of the state of emergency, the operation of a business organization to prevent such aggravation might be subject to regulation by the Hungarian State. On behalf of the State, the Minister responsible for public finances or a government commissioner proceeds and it reviews the financial state of the entity and approves and countersigns the financial commitments of the entity and makes the most significant decisions to directly address or mitigate the consequences of imposing an emergency measure in matters within its powers acting instead of the supreme body of the legal entity. It shall immediately inform the executive officers and the members of the supervisory board of those decisions.

In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

Effects of the coronavirus on the economy

The rapid spread of the coronavirus in Europe and around the world has put market participants under significant pressure to keep their contractual obligations. The relevant provisions of the Civil Code shall be examined in order to determine what the legal consequences may be of non-performance due to the epidemic.

Many businesses may be in a situation where either they or their contractual partner will be unable to fulfill their obligations (whether late or partial performance), leading to breach of contract. The question arises who shall bear the responsibility for non-contractual performance and who shall be liable for the resulting damages.

Invoking force majeure

The Civil Code places the liability for breach of contract on an objective basis, as opposed to tort, where the culpability of a party has significant influence on the allocation of liability. The act defines three conjunctive conditions for the breaching party to be exempted from the consequences of non-performance or default. First, there must be a cause for the breach of contract which was beyond its control; second, this cause was not foreseeable at the time of the conclusion of the contract; and third, it could not be expected to avoid the cause or to prevent the damage. (Section 6:142 of the Civil Code).

Of the causes that are typically viewed as causes outside the control of the contracting party, we now highlight only those that could potentially be considered in relation to the coronavirus: the epidemic itself and events affecting certain political communities (such as roadblocks, potential border control, etc.). State measures can also have a restrictive effect on economic life, which is generally beyond the control of the contracting parties: import-export bans, foreign exchange restrictions, embargoes, boycotts and so on.

The coronavirus, which was officially recognized by the World Health Organization as a pandemic on March 11, 2020, can be considered with certainty to be outside the control of the party, since it has little influence on the spread, severity, and other aspects of the epidemic.

The parties should assess, at the time of the conclusion of the contract, the risk factors that may hinder their performance. If the actual cause that leads to the breach of contract could not have been foreseen at that time, the second condition for exoneration is fulfilled. In assessing this, one shall consider the extent to which the breach of contract resulting from the coronavirus can be considered unpredictable in contracts that were concluded in the beginning of 2020, where several news portals and press agencies published articles on the spread of the coronavirus.

The last condition is that the breaching party should not be expected to avoid the circumstance or to prevent the damage. In contrast to the above, this factor becomes relevant at the time of the breach of contract. It must be considered in light of particular the circumstances of the case: For example, in case of a roadblock, whether the supplier could have been able to deliver the goods to the buyer on another route or if he could have obtained the goods from another supplier. In the event that an alternative solution was available, the invocation of force majeure could fail.

Breach of contract due to impossibility

A potential consequence of force majeure may be the impossibility of performance. Obviously, this goes beyond late or partial performance, as it becomes fundamentally impossible to fulfill the obligation undertaken. In such cases, the role of the parties in the impossibility must be examined, and the liability for damages will depend on this. There are three options, depending on whether the parties can exempt themselves based on the criteria outlined above (Section 6:180 of the Civil Code). If both parties are exempted, it is called objective impossibility, and the parties shall settle their claims based on the services performed so far. If only one party is unable to exempt itself, the other party may claim compensation for the damage caused. Lastly, if both parties are responsible for the impossibility, they must bear the damage in proportion to their contribution. It is also important to mention the obligation of the party who is aware of the impossibility to inform the other party without delay, otherwise it will be liable for the damage caused by the omission (Section 6:179 of the Civil Code).

In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

Partial performance may also constitute a breach of contract under Hungarian law, thus the same provisions apply to such circumstances as to breach of contract due to complete non-performance.

If the obligee is able to perform his contractual obligations in part – even against the odds of force majeure – the obligee, with respect to partial non-performance, may invoke the provisions of force majeure of the Civil Code to seek relief from his obligations.

Nevertheless, in the case of non-performance of an obligation concerning a part of a divisible service (res divisibiles), the consequences of non-performance shall stand only in respect of that part, unless such limited use of legal consequences is likely to harm the relevant lawful interests of the obligee.

If yes, what considerations should be borne in mind by such parties, in particular in relation to:

Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

Pursuant to Section 6:126 (1) of the Civil Code, where any impediments are likely to occur in the performance of any contractual obligation, the parties shall notify one another thereof, unless the other party should have been aware of the impediment even without notification. In the event of failure to communicate an impediment, the negligent party shall be held liable for damages in accordance with the provisions on liability for non-performance of an obligation.

As the epidemic has been spreading throughout the world for the past few months, the impeding effects of the coronavirus with respect to the economy shall be well known by the public by now. Nevertheless, such impediments are ought to be communicated by the obligee in order to ensure to exclude his liability for late notification.

The notification shall be issued as soon as the obligee becomes aware of the impediment due to which his future non-compliance may arise; no general time limit is set by the Civil Code, the timing of the notification shall be assessed on a case-by-case basis.

The obligee shall be liable for any damage that may be caused in relation to the failure to comply with the obligation to communicate any impediments, even if he is otherwise exempt from liability for non-performance. In other words, even if the obligee succeeds in exempting himself from his liability for breach of contract, he must compensate for the amount by which the injured party could have reduced his damage sustained.

Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

The obligee – in the event of failure to fully perform his contractual obligations – shall present the causal link between the force majeure and the failure to comply with his obligations.
Furthermore, the obligee shall also present that this cause of con-compliance was not foreseeable at the time of the conclusion of the contract and that he could not be expected to avoid the cause or to prevent the damage.

Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

As an underlying principle, the contracting parties shall cooperate during the lifespan of the contract, and shall communicate every information to one another on circumstances relevant to the contract. This also includes the obligee’s obligation to mitigate any possible future damage which may affect the other contracting party.

Changing circumstances in long-term legal relations

Another legal institution, which takes changing circumstances into account, and may be relevant in the context of the epidemic, is the clausula rebus sic stantibus principle. The doctrine allows the court to modify a long-term legal relation if the party requests it due to significant changes in its circumstances following the conclusion of the contract. The court examines the following conditions: (i) the unmodified performance would adversely affect the legal interest of the party requesting the modification; (ii) the possibility of the change in the circumstances was not foreseeable at the time when the contract was concluded; (iii) the change in circumstances was not caused by the party requesting the modification and (iv) the change in circumstances falls outside his normal business risk (Section 6:192 of the Civil Code).

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