What shall a foreign company take care of when entering into a contract with a Hungarian company?

According to the statistics of the German-Hungarian chamber of commerce and industry, it is quite obvious that in the last decades the business relationship has immensely strengthened between Germany and Hungary.

Introduction

From 2000 until 2014 the import between the two countries has grown from 10.000 million euros to approximately 19.000 million euros as well as the export which has increased from 10.000 million euros to 22.000 million euros (source: ahkungarn.hu). Nowadays the direct German investments to Hungary have also turned out favourably: from 2008 until 2013 the German capital in Hungary has increased from the sum of 14.000 million euros to 18.000 million euros (source: ahkungarn.hu). These data confirm without a doubt that the presence of the German companies have a great relevance in the Hungarian economical market.

I. The characteristics of the Hungarian market

Nowadays the company law disposes of a lot of advantages. The most relevant of them is the modern regulation circumstances of the legal territory, that is, from 2014 company law is regulated in Book 3 of the new Civil Code of Hungary.
We can also mention a disadvantage, though: there are few well-capitalised companies in the Hungarian business life, consequently most of the companies are not ’good debtors’. That means that our claims may not be satisfied, moreover the court procedures can take quite a longer period of time. Oftentimes these procedures can take such a long time that in the end the company itself does not exist anymore against which we wish to collect our claims. Although naturally there exist some breakthrough against the limited liability of the managing directors and owners, most of the times these mean demanding and lengthy procedures.

II. Possible solutions

Naturally we have a number of possibilities in hand to solve the above mentioned difficulties. One of those is if we set relatively short period of times for the payment which the Hungarian firm has to fulfill. We can also use several other guarantees such as the contractual penalty, the collateral security, warranty or first-loss guarantee.
Pursuant to the Hungarian Civil Code the obligor may pledge to pay a certain sum of money in case he/she fails to perform the contract for reasons attributable to him: this sum is the contractual penalty. The most relevant advantage of this guarantee is that the creditor can lay claim for contractual penalty even if he didn’t suffer any loss from the obligor’s non-performance. Another upside is that the creditor can also lay claim for damages which was not covered by the contractual penalty. It is important to mention that claiming contractual penalty is not obligatory. Pursuant to Article 4 of Section 6:187 the obligee is entitled to demand compensation for damages caused through non-performance even if he hasn’t enforced his claim for contractual penalty.
A collateral security may be arranged not only on money but also on dematerialized securities, on payment account balances and on other assets. In case of collateral security, the collecting of the claim is rather easy: at the effective date of the right to satisfaction, the lien holder can acquire the ownership by way of unilateral statement, naturally only up to the amount of the secured claim.
The difference between a suretyship and a first-loss guarantee is that the surety can refuse performance as long as the creditor can verify that he attempted to recover the debt from the principle debtor but it did not lead to result in a reasonable period of time. In case of a first-loss guarantee, the surety cannot refer to these rules. Thus, the managing director’s suretyship declaration constitutes as a way of breaking through the limited liability.

III. Mortgage

Another solution can be the entering of the mortgage to the real estate register when the Hungarian company disposes of a real estate over which there is a mortgage as an encumbrance. The creditor of the mortgage has different rights to secure the satisfaction of the claim. For example the lien holder is entitled to sell the pledged property if the loss in value jeopardizes the satisfaction of the claim and there exists no other way at the disposal of the creditor to prevent further loss in value.
I would advise the application of the mortgage but only as a secondary solution because pursuant to the Hungarian Civil Code if the same property is pledged to guarantee a collateral security and a mortgage, the holder of the collateral security has priority over the holder of the mortgage when it comes to the satisfaction of the claims.

You find our article in German here.

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