jtiblog

Blogsite of the Institute for Legal Studies

Remarks on the effects of the coronavirus pandemic on the Hungarian contract law

2020. April 29. 22:08
Ádám Boóc
KRE ÁJK

It can be asserted as a fact that the coronavirus (COVID-19) as a pandemic, namely a disease originated from an epidemic occurring worldwide, generated an entirely new type of danger for mankind probably not known before. At the time of writing there is no suitable remedy for this danger, neither medical, nor by any other means.

The fact is undeniable that beside the serious effects of the pandemic on health and economy it evidently impacts heavily the civil law, the contractual relations as well. In my short paper I will attempt to demonstrate, how shall the currently known form of the COVID-19 impact the contractual relations in the Hungarian civil law.

According to the information available at the time of writing the present article it can be established with certainty that the outbreak of the coronavirus pandemic and its effects theoretically cause a general force majeure event (‘vis maior’) in the field of civil law, but the actual legal qualification of the independent events (and labelling them as force majeure event) can vary in each particular case.

In respect of force majeure (‘vis maior’) primarily it is necessary and appropriate to refer to the Roman law. According to the Roman law doctrine the ‘vis maior’ (act of God, höhere Gewalt, θεοῦ βία) is an irresistible force, which human weakness can not prevent. In other words a force (‘casus maior’ or ‘vis maior’) is a damaging event, whose prevention is absolutely impossible or ineffective (‘casus cui resisti non potest’).[i] It is an important and significant doctrine of the Roman Law in respect of force majeure – which is remarkable in connection with our topic as well – that, who assumed it as a contractual obligation, he is liable for the force majeure.[ii]

Before the adoption of the former Hungarian Civil Code (Act IV of 1959 on the Civil Code of the Republic of Hungary) the concept of force majeure was lacking in Hungarian civil law, but it naturally occurred in the case law, and sometimes it was also referred. Our former civil law defined force majeure as an event which is unforeseeable and nobody can prevent it (natural disaster, earthquake, war, death etc.). In reference to this the court decision no. JHrl. XIII. 812. declared that human foresight and prevention shall take into consideration only the aspects of the normal needs known from practical experience and proportional to economic and financial possibilities.[iii]

Our civil law in force lacks the exact definition of force majeure as well, although it can be referred in specific cases. Thus, if we regard the coronavirus as a cause resulting in force majeure, we have to examine its possible consequences in the field of civil law.

According to the information available at the time of writing, although the coronavirus is theoretically can be considered with certainty a cause of force majeure, it cannot be generally established that in every single contract it will undoubtedly result in the historically developed (and in certain cases legally recognized) legal effect of the force majeure.

If we want to refer to force majeure in an individual contractual relationship (after the contract had been concluded) as a possible exculpation for not fulfilling a duty, first we have to investigate the possibility of performance becoming impossible.

According to the Section 6:179. of the Hungarian Civil Code in force, if the performance becomes impossible, it results in the termination of the contract.

The Sections 6:179–180. of the Hungarian Civil Code in force are as follows:

Section 6:179 [Performance becoming impossible]

(1) If performance has become impossible, the contract shall terminate.

(2) The party becoming aware of the fact that the performance has become impossible shall be required to inform the other party of it without delay. Damage arising from failure to provide information shall be compensated by the party who was at fault with respect to that failure.

Section 6:180 [Liability for performance becoming impossible]

(1) If neither of the parties is liable for the performance becoming impossible, monetary reimbursement shall be provided for the service provided prior to the termination of the contract. If the other party did not provide the consideration corresponding to the monetary service already performed, the monetary service shall be returned.

(2) If one of the parties is liable for the performance becoming impossible, the other party shall be released from the performance obligation arising from the contract, and may claim compensation for the damage caused to him as a result of the breach of contract.

(3) If both parties are liable for the performance becoming impossible, the contract shall terminate and the parties may claim damages from each other pro rata to their contribution.

Regarding our topic it is important to point out to the fact that these sections are about the cases, when the performance was not impossible at the time of the conclusion of the contract, but it becomes impossible with the occurrence of an (usually extraneous) circumstance.

If the performance becomes impossible and it happens due to circumstances not imputable to either one of the parties, it results in a legal relationship about the settlement, namely reimbursement shall be provided for the service already provided.

If we want to refer in a given legal dispute to the fact, that the performance of the contract became impossible due to the coronavirus pandemic, it is essential to prove that the performance becoming impossible truly happened due to a reason for which neither of the parties is liable.

It would make sense to examine one event of performance becoming impossible represented among the general rules on contracts through one particular type of contract, namely the contract to produce a work, which is really usual in the economy.

Regarding the fact that the contract to produce a work often performed with the assistance of more than one intermediate subcontractors, it is an important question, if the main contractor is able to duly enforce his or her rights of performance.

In respect of the contracts to produce a work it is very common that the performance becomes impossible (in some cases as a result of the particularities of the work) for a reason for which neither of the parties is liable. In these cases – according to the Section 6:248. of the Hungarian Civil Code – the following procedure shall be followed.

If the performance becomes impossible for a reason occurred within or outside of both parties’ spheres of interest, the contractor shall be entitled to the pro rata fee of the work performed and costs. In this case the parties have to compensate each other, which is easier if the parties have entered into a fair contract, and during the contractual relationship the performance was properly documented.

If the reason for becoming impossible occurred within the contractor’s sphere of interest, the contractor shall not claim remuneration. In this case the performance became impossible not due to the contractor, but the reason for becoming impossible occurred within the contractor’s sphere of interest. The legal consequence is detrimental for the contractor, since he cannot claim remuneration.

If the reason for becoming impossible occurred within the client’s sphere of interest, the contractor shall be entitled to the contractor’s fee; however, the client may deduct the amount of the costs saved by the contractor due to the performance becoming impossible, as well as the amount the contractor earned or could have earned elsewhere without difficulty in the time freed up. In this case the client is allowed to deduct amounts from the contractor’s fee with two legal titles. The first legal title is that the client is allowed to deduct the amount of the costs saved by the contractor, and the second legal title is that the client can deduct the amount the contractor earned or could have earned elsewhere. It is noteworthy that in case of probative proceedings the appropriate documentation of the contract can be essential.[iv]

Giving a specific example is a good way for illustrating that it is really relevant that who is at fault for the performance of the contract to produce a work becoming impossible, or in case of force majeure neither of the parties is at fault, since according to the civil law the legal consequences are fundamentally different, and this wide range of consequences influences differently but decisively the parties standing.

In my view in the current phase of the coronavirus pandemic the principle of force majeure is certainly not applicable for all of the concluded contracts, thus, it is obvious, that the parties are not exempted from the contractual obligations. In a specific case it is evidently necessary to examine the occurrence of the principle of foreseeability, namely, if any of the parties was able to (or could be able to) reckon with the possible legal consequences or effects of the coronavirus pandemic at the time of the conclusion or performance of the contract.

Our Civil Law Code in force (Act V of 2013 on the Civil Code), although basically in connection with the consequential damages, defines the restriction of foreseeability, and this possibly can serve as a norm for considering force majeure events as well.[v] Thus, in my opinion, it is necessary to examine in every single case, if the parties had to realistically reckon with possible effects of the coronavirus pandemic at time of contracting.

Evidently, the situation is entirely different, if the parties have already known about the coronavirus pandemic at time of contracting. Although it is obvious from the nature of the pandemic that it is unforeseeable, what sort of further consequences will in the subsequent period happen, the fact is significant that the parties entered into a contract with a definite knowledge of the existence of the coronavirus and its already visible effects on everyday life and economy. In this case we can state – relating to the Roman law doctrine – that the parties entered into the contract with a definite knowledge of the existing force majeure, thus its risk was undertaken by them.

The legal consequence of the above described event is that the contract entered into will be valid and its contractual obligations will be legally binding between the parties, unless the force majeure do not ab initio causes the impossibility of the obligation, namely the performance of the obligation is not self-evidently impossible due to the force majeure event.

This also raises an important question that, given that the parties incorporated into their contract a force majeure clause, whether this clause covers the event of pandemic (is the word ‘pandemic’ or anything equivalent occurring in the contract?), and does the contract contain a force majeure clause, which can subsume the event of pandemic? It is also self-evident that, if the parties enter into a contract in the current situation, they should define the pandemic as a force majeure.

In order to solve the legal disputes caused by the coronavirus pandemic – at least in the case of certain contracts – the principle of the clausula rebus sic stantibus seems to be applicable as well. The new Hungarian Civil Code (Act V of 2013 on the Civil Code) in comparison with the former Civil Code (Act IV of 1959 on the Civil Code of the Republic of Hungary) rendered this rule more clear and elaborated.[vi] According to the Section 6:192. of the Hungarian Civil Code in force:

Section 6:192 [Amendment of the contract by court]

(1) Any of the parties may request the court to amend the contract if, in the permanent legal relationship between the parties, due to a circumstance that occurred after the conclusion of the contract, the performance of the contract with unchanged conditions would harm his substantial legal interest, and

a) the possibility of a change in the circumstances was not foreseeable at the time when the contract was concluded;

b) the change in circumstances was not caused by him; and

c) the change in circumstances falls outside his normal business risk.

It is important to highlight that this principle is exclusively applicable for a permanent legal relationship of the parties – and never on case by case basis –, and upon this the party, whose substantial legal interest would be harmed by the performance of the contract with unchanged conditions, may request the court to amend the contract, unless there is an exception defined by law

It seems quite certain from the nature of the coronavirus pandemic that points b) and c) of the Section 6:192. of the Hungarian Civil Code are not relevant, but point a) can be essential. Thus, similarly to the legal institution of the performance becoming impossible, in this case the question to be answered is, if the coronavirus pandemic and its possible effects were foreseeable for the contracting parties? If the answer is yes, the next question, to what extent?

The Parliament has already adopted the Act XII of 2020 on the containment of coronavirus, and its 2 Section is as follows:

(1) During the period of the state of danger, in addition to the extraordinary measures and rules laid down in Act CXXVIII of 2011 on disaster management and amending certain related Acts, the Government may, in order to guarantee that life, health, person, property and rights of the citizens are protected, and to guarantee the stability of the national economy, by means of a decree, suspend the application of certain Acts, derogate from the provisions of Acts and take other extraordinary measures.

(2) The Government may exercise its power under paragraph (1) for the purpose of preventing, controlling and eliminating the human epidemic referred to in the Decree, and preventing and averting its harmful effects, to the extent necessary and proportionate to the objective pursued.

Under these circumstances it is obviously not foreseeable, what kind of extraordinary measures will the government take in accordance with the 2 Section of the above mentioned act, but probably these extraordinary measures will have an effect on the civil law relationships, in case civil law contracts already concluded as well, applying necessarily new and already not known methods and legal consequences as well.

Omnis definitio in iure civili periculosa est: parum est enim ut non subverti possit – every definition in civil law is dangerous, for rare are those that cannot be subverted. This old maxim mutatis mutandis can also be meaningful under these circumstances. Since from this short paper it is visible that, although the coronavirus can be theoretically considered as force majeure in the field of civil law, it is not sure, if it will be considered as force majeure in a specific legal case as well.

Based upon the above presented principles and guidelines we need to stress that every single case should be individually examined, and the upcoming case law (evidently based on a vast amount of cases) will be extremely important and decisive.

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[i] For this see:  Földi   A. – Hamza G.: A római jog története és institúciói. Budapest, 201217. p. 430; Benedek F. – Pókecz Kovács A.: Római magánjog. Budapest – Pécs, 20175. p. 271.

[ii] For the topic above see: Visky K.: A vis maior a római jog forrásaiban. Budapest, 1942.; Földi A.: A jogi felelősség fogalmáról.  Acta Fac. Pol.-Iur. Univ. Budapest. 30 (1988), p. 7-23.; Hamza G.: A felelősség elemzése és az antik jogok.  Acta Fac. Pol.-iur. Univ. Scient. Budap. de Rol. Eötvös nom. 31 (1989) p. 31-48; Marton G.:  A polgári jogi felelősség. Budapest, 1993. Molnár I.: A római magánjog felelősségi rendje. Szeged, 1994.; Siklósi I.: Custodia-felelősség és dolog rongálása klasszikus római jogban.

[iii] See: Fehérváry J.: Magyar magánjog kistükre. Budapest, 1941. p. 366.

[iv] For this see: Boóc Á. – Sándor I. (edd.): Előadásvázlatok a Kötelmi Jog Különös Részéből. Budapest, 2020. (under publication). p. 60-69.

[v] For this particularly see: Fuglinszky Á.: A kártérítés mértéke. In: Wellmann Gy. (ed.): Polgári Jog. Kötelmi Jog. Első és Második rész. Budapest, 2013. p. 239-250. See also: Fuglinszky Á.: Az előreláthatósági klauzula értelmezésének újabb dilemmái. Gazdaság és Jog. 2019. no. 7-8. p. 1-7.

[vi] For the principle of the clausula rebus sic stantibus in the former Civil Code see: Boóc Á. – Fábián F. – Sándor I. – Török G.: A civilisztika dogmatikája. Budapest, 2009. p. 193.

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Dr. habil. Adam Boóc, PhD., Associate Professor (Head of Department Károli Gáspár University of the Reformed Church in Hungary, Faculty of Law Department of Civil Law and Roman Law), attorney-at-law (Budapest), arbitrator (Permanent Arbitration Court attached to the Hungarian Chamber of Commerce and Industry), former research fellow of the Centre for Social Sciences Institute for Legal Studies, Hungarian Academy of Sciences E-mail: booc.adam@kre.hu

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The views expressed above belong to the author and do not necessarily represent the views of the Centre for Social Sciences.

 

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