Advertisements and cartells during the coronavirus pandemic: competition law principles to consider

author: dr. Katinka TÖLGYES

As a result of the coronavirus pandemic, the number of advertisements for health-related products and services has exponentially increased. In addition to existing ones, new players also entered the market and began selling products or services that do not fit their main profile. It is important however, that everyone utilises new business opportunities fairly, as authorities are closely scrutinising commercial communications. Kapolyi Law Firm’s expert examined the most important competition law provisions on advertisements and the cooperation of corporations.

Products and services related to the pandemic primarily address health concerns and the needs of customers who have to stay home as a result of the quarantine measures. Kapolyi Law Firm’s competition law expert, Dr. Katinka Tölgyes emphasises that companies which began selling a new product or service in response to the pandemic, which has not been produced or offered so far, or companies who have paid less attention to competition compliance should consider soliciting the services of a legal adviser.

Advertisements: not everything may be sold citing protection against Covid-19

According to Kapolyi Law Firm’s expert, defining the product category is the first step when designing advertisements and slogans, since different advertising statements are permitted for food, medicinal products, food supplements, prescription and non-prescription medicines, and cosmetics. For example, no disease-preventing or curative effect can be attributed to foods (even if for instance, several varieties of onions are known in the vernacular for their healing effects). A statement like this is in itself infringing the law (there is no possibility to prove otherwise) and may result in sanctions. As a general rule, prescribed medicines and non-prescribed medicines supported by the social security cannot be advertised at all. In case of medical products for which advertising is permitted, commercial communication content may be prepared within a rigorous framework and in strict compliance with the contents of the package leaflet only. Any reference to the recommendation of professionals or known persons should be avoided. A product may only be labelled medicinal if it has a truly meaningful, health-restoring effect, which can be substantiated by appropriate research (the personal experiences of the consumers of the product is not acceptable). It is also important to ensure that indirect statements also comply with the requirements, such as statements on the active substance or its ingredients in the product.

Dr. Katinka Tölgyes emphasized that the Hungarian Competition Authority (GVH) always examines commercial communication from the consumer’s point of view, therefore what matters is how consumers interpret an advertising statement and not what the manufacturer or distributor intended to mean, or what goal they wanted to achieve. Additionally, communications intended for vulnerable consumers are subject to increased scrutiny and stricter consequences applied by the GVH. The GVH considers a group of consumers to be vulnerable if they are more susceptible to a given product or service due to their age or state of health. During the current pandemic situation, for certain products (such as disinfectants, hand sanitizers, masks, etc.) even the society as a whole may be considered to be vulnerable consumer, therefore it is particularly important that communication complies with the law.

Cooperation: authorities may be more permissible, but not without limits

In addition to commercial communication, the application of laws concerning business-to-business cooperation between undertakings is expected to slightly differ during the coronavirus pandemic. In the current situation, serving consumers with essential products (i.e.: hand sanitizers, face masks) bears key importance, and may require increased cooperation between the involved parties. This may include allocating scarce available raw materials or solving challenges related to transport and storage issues. Kapolyi Law Firm’s competition law expert states that the GVH may consider society’s wider interests, and is therefore expected to treat cooperation with permissive approach. Dr. Katinka Tölgyes highlights the position of the European Competition Network, which clearly states that members of the network will not oppose necessary and temporary measures applied by companies to avoid supply shortages. Nevertheless, undertakings must be aware of the fact that “permitting” cooperation does not apply to every area and does not mean that there are no limits in terms of the degree and length of the cooperation. “Hardcore cartels”, i.e. price-fixing, market-sharing agreements restricting competition remain prohibited – if, for example, there is no shortage of a specific raw material, the undertakings concerned may not refer to cooperation during the competition authority’s investigation. The guidelines issued by the European Commission set forth similar principles. Therefore, it can be expected that the GVH will dedicate prior attention to the examination of the extent of cooperation and the necessity thereof. Dr. Katinka Tölgyes emphasises that if an undertaking (especially in the health sector) has questions about the nature and extent of the cooperation, it is advisable to consult with a legal adviser or contacting the GVH itself for guidance. It is important to note, however, that the competition authority is not bound by its guidance in any subsequent investigation.

 

How Hungarian listed companies may operate during the period of the emergency

author: dr. Gábor HORVÁTH

Government measures implemented to combat the coronavirus pandemic also made decision-making processes of Hungarian companies listed on stock exchange rather complicated. From the perspective of companies and their shareholders the timing of these measures is especially unfortunate, as annual general meetings, where last years’ annual reports and the payment of dividends are discussed, are normally held in April. Kapolyi Law Firm examined how the newest government decrees published during the Easter Holiday affect, among others, the convening of general meetings, the payment of dividends and how to continue to purchase own shares while maintaining shareholder’s control.

According to current provisions, it is prohibited to host indoor events with over 100 attendees, which affects several companies publicly listed on the Budapest Stock Exchange (“BSE”). A further decree generally prohibits the hosting of events and holding of meetings, and it does not mention the convening of companies’ governing bodies or attending them in person as an exception. To ensure that the operation of business associations, including the ones publicly listed on BSE, remains relatively uninterrupted in light of current circumstances, the government issued a decree[1] over the Easter Holidays on the provisions concerning the operation of partnerships and capital companies during the state of emergency. The decree sets forth special provisions for the corporate bodies (general meeting, board of directors, supervisory board, audit committee) of publicly listed companies (plc). The most pressing issues are presented by Kapolyi Law Firm’s Senior Attorney, Dr. Gábor Horváth.

When can the general meeting be convened?

While the newly released decree does not refer to it expressly, it follows from the previously imposed ban of hosting and attending events, that the meetings (sessions) of publicly listed companies’ corporate bodies may not be held by participation in person. Instead of the general meeting acting as the main governing body, the management of the company (the board of directors or executive board) is entitled to decide on all issues that otherwise belong to the competence of the general meeting.

How the governing bodies of publicly listed companies’ can consult or be held?

The corporate bodies of publicly listed companies (board of directors, executive board, supervisory board, audit committee) and further corporate bodies established by law or the Articles of Association may hold meetings through electronic communication devices, or through other electronic devices which permit the identification of attendees. Alternatively, corporate bodies may conduct written consultations, and make decisions in writing. In lack of relevant, approved procedures for the above, the rules and process of the meeting and decision-making is determined by the chairman of the body which must be communicated to the involved members. Written consultations and decision-making may also take place through electronic messages (i.e.: through email).

How can the company’s annual report be approved?

Dr. Gábor Horváth emphasises that plc.’ invitations to the annual general meeting, the related submissions, the proposals for resolutions as well as further documents must be published on the plc’s websites as before, even if they were not yet published on the date when the decree entered into force. He, nevertheless, added that the deadlines for publishing the above has been shortened: the invitation must be published at least 21 days prior to the general meeting, while submissions, proposals for resolution and other documents must be published at least 8 days prior to the general meeting. The plc. may differ from the content of the invitation by way of notice published on its website if the invitation has already been published by the date when the decree has entered into force. The decree does not set forth any deadline for the publication of this notice; therefore, in Kapolyi Law Firm’s opinion the company is obliged to publish it immediately upon becoming aware of such changes. The plc.’s management is entitled to make decisions on any and all matters listed in the published agenda – including the amendment of the Articles of Association –, the approval of annual report, the utilisation of the after-tax profit as well as on issues that belong to the competence of the general meeting, are necessary for the maintenance of the plc.’s lawful operation and the management of the emergency situation, as well as on urgent matters belonging to the scope of and for providing reasonable and responsible management. The management is also entitled to decide on the issues listed on the published agenda differently as of recommended in the published proposals for resolutions. (However, the management can only decide on the annual report if the supervisory board’s report for the approval thereof is already presented). It remains compulsory for resolutions passed by the management acting within the competence of the general meeting to be published. The plc.’s management is obliged to pass a resolution on the plc.’s annual report prepared on the basis of the Accounting Act until 30 April 2020 and if the plc.’s business year differs from the calendar year, then by the end of the fourth month following the balance sheet date of the relevant business year. Concurrently, the management may decide on the utilisation of the after-tax profits, including the payment of dividends. However, if shareholders holding at least 1% of the votes initiate the convening of the general meeting (see below for more details), dividends may only be paid if the annual report and the payment of dividends have been subsequently approved by the general meeting. It is important to note that the auditing of the annual reports may also be done if the plc.’s management decides thereon. Nevertheless, the plc.’s management may only decide on the annual report, if the supervisory board has already approved it in its report.

Shareholder’s control is maintained, however, in certain cases decisions can only be made after the cessation of the emergency period

Shareholders maintain control over the operation of the management acting in the competence of the general meeting, meaning that shareholders holding at least 1% of the votes may request the subsequent convening of the general meeting with the aim of the subsequent approval of resolutions passed by the management. Kapolyi Law firm’s expert highlighted that this right may be exercised within different (limitation) periods depending on whether the subsequent approval of a resolution concerns the amendment of the Articles of Association, the annual report, the utilisation of after-tax profits or further resolutions of the general meeting. In case of the initiation of the convening of the general meeting, the invitation must be published within 45 days after the cessation of the emergency period. If the emergency has already ceased at the date of receipt of the shareholder’s request, the invitation must be published within 45 days of receiving the shareholder’s request. If the general meeting does not subsequently approve the amendment of the Articles of Association, it will be repealed on the day following the date of the general meeting. Nevertheless, if a subsequent resolution of the general meeting amends or repeals a previous resolution, it does not affect the rights and obligations that arose before to the amendment or repeal.

Purchase of own share

If the general meeting authorised the plc.’s management to decide on purchase of own share, and the authorisation expires during the emergency period, the duration of the authorisation will be extended until the date of the first general meeting held after the cessation of the emergency period, unless the management already decided on the subject of the authorisation within its own competence.

The management of changes in the personnel of the publicly listed companies’ governing bodies

Dr. Gábor Horváth, Senior Attorney at Kapolyi Law Firm stated that according to a further temporary rule shall the term of appointment of a member of a plc.’s governing bodies or the appointment of its permanent auditor expire during the emergency period (even if their appointment expired after the announcement of the emergency, but before the publication of the decree and no other person has been appointed to replace them), their mandate will remain effective until the date of the first general meeting held after the cessation of the emergency period and they are obliged to continue to perform their duties. Exceptions arise if the appointment of said person ceases due to the death, recall or removal by the decision of the authority exercising prudential supervision, or if the plc.’s management makes the necessary decisions in its own competence. If during the period of the emergency the number of members in the abovementioned bodies decreases bellow the number set forth by law or the Articles of Association, or if a member is unable to act due to the coronavirus pandemic, the remaining members are entitled to pass resolutions. In this case, the rules on the quorum of the said body shall be determined by the number of members available to decide. Even in this case, resolutions must be passed by simple majority; however, even one member is entitled to pass resolutions if all the other members of the relevant corporate body are unavailable.

[1] 102/2020. (IV. 10.)

Tenants in the hospitality and the retail sectors may not always refer to the Covid-19 pandemic as force majeure

author: dr. Mátyás RADA

Restrictive measures enacted to combat the coronavirus pandemic have proven to be exceptionally sensitive for tenants in the hospitality and retail sectors. Many are unable to pay their rent through no fault of their own. However, landlords are under no obligation to accept a tenant’s claim for a reduction in rent due to a loss of income. According to Kapolyi Law Firm, enterprises in the tourism sector are somewhat protected by a government decree adopted during the state of danger. However, in the retail sector, the only solution seems to be a mutual agreement between the landlords and the tenants. Claiming force majeure in either sector would not be easily defensible in court.

The coronavirus pandemic put many businesses operating in leased properties in a difficult position. This warrants the question of what legal options tenants have to reduce rents or delay payment. One of the most severely affected sectors is the tourism industry. The curfew measures implemented on the 28th of March implicitly prohibit the use of hotels for hospitality services. Prior to this, foreign private persons have been prohibited from entering Hungary from the 16th of March. As a result, several hotels temporarily suspended their operation. Several retailers have been severely affected by the pandemic too. While governmental measures do not prohibit the opening of stores which do not sell essential products (i.e. bookstores and clothing retailers), as a result of curfew measures, said retailers will have less customers, which may result in their closure.

Hotels enjoy some protection due to the Government Decree, while retailers do not

According to Kapolyi Law Firm, for hotel operator tenants a temporary source of help could be the Government Decree[1] which stipulates that leases for non-residential purposes may not be terminated until the 30th of June 2020, and the rent may not be increased until the state of danger is over. It may strengthen the tenant’s bargaining position. Therefore, the landlord may not terminate the lease by extraordinary notice until said date if the tenant is unable to pay its rent due to a lack of revenue. However, this does not preclude the landlord from continuing to claim the due rent, interest for late payment or penalty for late payment. Concurrently, tenants of stores in malls, shopping centres and other buildings do not enjoy any legal protections despite restrictions on opening hours and shopping.

Claiming force majeure is difficult to defend before courts, therefore the appropriate solution is the mutual agreement of the parties

The question arises for tenants engaged in commercial activities and accommodation provision services if they can claim relief for a force majeure event due to the coronavirus pandemic, which would relieve them of their obligation to pay rent and from their liability for a breach of contract resulting from the late payment of rent. According to Kapolyi Law Firm, since force majeure clauses in lease contracts usually cover such events, which are beyond the control of the parties, and may result in the damaging or destroying of the property stipulated in the lease contract, which events makes the property unusable (i.e.: fire, flood, or even events of war). As such, a new interpretation of “unusable” may arise as a result of the pandemic situation. However, it is Kapolyi Law Firm’s view, that in the present absence of a supportive legal interpretation, it cannot be said with absolute certainty that a tenant can successfully claim in court that he/she could not utilise the rental property for the purpose stipulated in the lease contract as a result of the pandemic, and therefore he/she should be exempt from their obligation to pay rent. Furthermore, it is questionable whether this claim will stand in court, as based on case law, if – for any reason – the tenant is unable to meet his/her obligation to pay the rent for a reason beyond his/her control, that is a commercial risk assumed by the tenant. Pursuant to legal provisions currently in force, landlords are not expected to assume the risks of running a hotel or business at a loss. As the current pandemic and its effects are unprecedented, there are usually no detailed provisions stipulated in the leases that permit tenants to claim situation-specific discounts and reductions.

From a business perspective, landlords may in the long run have a greater interest in retaining otherwise reliable tenants, than in forcibly collecting rents and applying penalties for late payment. In affected sectors, there are already several cases where the landlord and the tenant are negotiating changes to the leases and the landlords provide various facilitations to the tenants. However, it is important to note that the provision of facilitations are dictated by the landlord’s commercial interests, instead of specific contractual or legal obligations. In the absence of supporting legislation, cooperation and negotiation between landlords and tenants could be a temporary solution in the current crisis.

[1] 47/2020. (III. 18.)

How EU frontier workers are legally affected by the border seals ordered due to the corona virus?

author: Dr. Gábor HORVÁTH

Most EU Member States have closed their borders in order to curb the coronavirus epidemic, which has hit millions of frontier workers, including tens of thousands of Hungarian ones, particularly negatively. The labor law background of the situation is summarized by the professional of Kapolyi Law Firm, who points out:if frontier workers are prevented from going to work due to entry or exit bans, the laws of the EU Member State in which the employee regularly works apply to the consequencies. However, if the frontier worker loses his job, he can claim unemployment benefit from his Member State of residence (home Member State).

Because of the coronavirus epidemic, most EU countries have closed their borders; to a large extent, only their own nationals can enter these countries. This situation has affected frontier workers particularly negatively who work in an EU Member State other than their home Member State while they are regularly returning to their home country. Dr Gábor Horváth, EU labour law expert of Kapolyi Law Firm, said that in order to facilitate the situation of frontier workers, the European Commission issued recommendations[1] in March 2020, according to which Member States shall allow free and rapid border-crossing for frontier workers. In line with this, measures have already been taken in Hungary too, since daily border-crossing (commuting) to several neighbouring countries for working perspective has become possible recently. It means that frontier workers are exempt from the 14-day quarantine imposed by the authorities as well as the entry ban for non-nationals. Nevertheless, cross-bordering (commuting) can, for example, turn to be impossible due to entry ban(s) imposed by the country of destination,.  In this case, according to the law applicable to contractual obligations and in the absence of choice of law, an individual contract of employment is, in principle, governed by the law of the country in which, or in lack of that, from which the employee habitually carries out his work. In view of the EU labor law expert of Kapolyi Law Firm’s if a frontier worker is unable to go to work due to entry or exit ban(s), the laws of the EU Member State where the frontier worker habitually works (Member State of employment) is applicable for the consequences of not being able to work and the assessment thereof.

According to the Regulation on the free movement of workers within the Union[2], frontier workers are entitled to the same social and tax advantages equal to the nationals of the Member State of employment.

Dr. Gábor Horváth also pointed out that if a frontier worker could only carry out his job teleworking (working from home, home office) due to entry restrictions, that would not change the situation and the laws of the Member State of employment would apply to the frontier worker’s employment contract, and he should be entitled to the same social and tax advantages as the nationals of the Member State of employment. Therefore, if a frontier worker works from home in his Member State of his residence (home-work, telework, home office) since he cannot travel to the Member State of employment due to entry restrictions, this does not change his entitlement to social security allowances: he is entitled, in principle, to the social security allowances offered by and according to the provisions of the Member State of employment, since he is insured in this Member State on the basis of his employment. Nevertheless, if the frontier worker falls ill in his Member State of residence while teleworking (home-work, home office) and is not able to access to the social security benefits of the Member State of employment due to entry restrictions, he will also be entitled to access thereof in his Member State of residence by providing/submitting the so called S1 form.

Kapolyi Law Firm points out that in the unfortunate event that, in the current situation, a frontier worker loses his job, he can claim unemployment benefits from his Member State of residence, according to the relevant regulations and provisions of this EU Member State.

[1] Recommendations on border management measures to protect health and ensure the availability of goods and basic services and to exercise free movement of workers during the outbreak of COVID-19

[2] Article 7 of EU Regulation No 492/2011/EU

These are the effects of the payment moratorium on debtors due to the Coronavirus in Hungary

author: Dr. Balázs József FERENCZY

 The detailed regulations of the payment moratorium were published a week ago, but there are several issues that private and corporate clients are facing now. The experts of Kapolyi Law Firm have compiled a 12 question Q&A on the most important issues regarding the moratorium.

Actors in the credit market were also taken by surprise by the new coronavirus pandemic,  as a result the government has as of now issued two decrees in order to alleviate the burden of the crisis on the national economy and on credit market participants.  The second decree detailing new regulations was issued a week ago, on March 24, 2020 and Kapolyi Law firm made a 12-bullet point summary about how this will impact creditors, debtors and loan agreements between them.

  1. What is the background of the payment moratorium?

The government decree stipulates (1. §) the general rules of the payment moratorium during the period of the state of emergency, that during the period of the emergency the debtor shall be granted a payment extension (hereinafter “payment moratorium”) for all principal, interest and fee payment obligations arising from credit, loan and financial lease agreements (hereinafter “agreement”). The government decree stipulates that the payment moratorium entered into force on March 19, 2020 and will be in effect until December 31, 2020, but this deadline can be extended by the government at anytime. The government decree with detailed regulations entered into force on March 25, 2020. According to the new rules, the moratorium shall be applied to all the loans disbursed before March 18, 2020 on the basis of already existing agreements.

  • What happens with the deadline and term of contractual obligations?

Based on the regulations, the deadline and the term of contractual obligations shall be extended by the period of the payment moratorium. In case an agreement expires before the end of the state of emergency, the agreement shall be extended to December 31, 2020.

  • What to do if somebody wants to use the extension allowed by the moratorium?

According to Kapolyi Law Firm, no action is required by the debtor. Based on the government decree all credit and loan agreements subject to the payment moratorium have been amended automatically. However, the financing banks will try to clarify the matter by obtaining statements (declarations) from debtors.

  • Who is the moratorium applied to?

The effect of the government decree extends to all private persons, and – unless they do not fall under the exceptions stated in the decree – all legal persons, who are constituted as debtors on the basis of credit, loan or financial lease agreements concluded on a commercial basis.

According to the government decree the state, local municipalities and the enterprises which are defined by the acts set out in the Act on the National Bank of Hungary (Section 39. of Act CXXXIX of 2013.) are not considered as debtors, thus they are exempt from the payment moratorium, including – among others – credit and financial institutions, financial enterprises, mortgage banks and payment service providers, home savings type credit unions  that are supervised by the Hungarian National Bank (MNB).

However, the decree on the detailed rules provides otherwise. It states that in regard to the application of the payment moratorium, all financial enterprises governed by the law on credit institutions and financial enterprises shall be considered as debtors, as well as the investment funds under the Kbftv. Act.

Dr. Balázs Ferenczy, practice group leader of Kapolyi Law Firm says that it is important to highlight the addition included in the detailed rules stating that the regulations of the payment moratorium must be applied to employer loans as well.

  • Is it possible to continue payment despite the moratorium?

Dr. Ferenczy thinks that such provisions are possible as the parties may deviate from the general rules of the moratorium by mutual agreement and the payment moratorium does not apply to the legal rights of debtors to continue payment in accordance with the terms of the original agreement. In the first case for the derogation from the main rule a mutual agreement of the parties is necessary, while in the second case the debtor can unilaterally decide on his own to continue his payment obligations in accordance with the original agreement.

  • Is it possible to modify the declaration of the debtor to the creditor, meaning to request a payment moratorium later?

According to Kapolyi Law Firm if the debtor continues payment in accordance with the original terms of the agreement, it does not concern the effect of the payment moratorium. The detailed rules also state that if performance (payment) is done in accordance with Section 1. of the government decree, the settlement must be credited on the basis of the rules existing before the moratorium. The joint application of these regulations means that the debtor can in principle submit a partial repayment declaration too (which is valid for a given deadline or time period), or with regards to the later payment periods the debtor may maintain the scope of the moratorium, alternatively may submit a declaration later or may provide a different declaration than it might appear from an earlier made declaration (i.e. he can withdraw his declaration).

Based on the banking practices known by Kapolyi Law Firm, banks will endeavor to fully settle the above-mentioned cases with the debtor by requesting his declaration. Dr. Ferenczy also highlighted on this point that the debtor may use the above-mentioned options even in case the financing bank does not send any clear information thereof.

  • What kind of declaration should you provide if you want to continue repayment or want to deverge from the original repayment schedule?

In case of a financing documentation set out in a public document the declaration on continuing repayment may also be submitted in the form of a private document. The expert of Kapolyi Law Firm adds however that in case the parties wish to modify the contractual terms regarding principal or interest payment as a result of the moratorium, or for any other reason, concerning terms that are not provided for by the government decree, the agreement can only be modified in an public document. This case is provided for by a clause in notarized credit and loan agreements that may be considered standard, according to which the aforementioned documents can only be modified in the form of a public document. If such an exception is not mentioned in the notarized document or the parties have agreed in a private document, it is sufficient to make modifications on the content not governed by the decree in a private document.

  1. What happens with the interests and principal not repaid during the time of the moratorium?

The principal cannot be increased by the amount of the unpaid interest accumulated during the period of the payment moratorium. The interest accumulated during the period of the moratorium shall be paid annually in equal parts together with the amounts due within the remaining maturity of the loan. After the end of the moratorium the maturity of the loan will be extended in a way that the partial payment of the due interest accumulated during the moratorium and the actual amounts due should not exceed the payment amounts of the instalment amounts of the original contract, furthermore the rules applicable to the interest must be applied to all the fees as well.

  1. Does the payment moratorium apply to the repayment of shareholder loans too?

According the interpretation of the Kapolyi Law Firm, it does not apply, because the government decree primarily applies to the loans granted on a commercial basis, in other words by banks and financial institutions. Shareholder loans – unless falling under the criteria of the commercial loans defined by Hpt. – are normally not commercial loans, therefore the payment moratorium detailed in the decree do not apply to those. However, the parties may – by way of a bilateral civil agreement – always agree that with regards to the pandemic situation they also agree on a moratorium with their own terms and conditions.

  1. How does the moratorium concern the loans in case of property development companies if they want to sell a property during the moratorium secured by a mortgage?

It is important to state that selling a property secured by a mortgage without the previous authorization of the financing bank is considered as serious breach of the contract even during the time of the moratorium, therefore in each case when the debtor plans to take any steps with the financed properties, he must agree with the bank and initiate business discussions.

The question might arise whether the government decree includes that the payment moratorium is applicable for the incoming purchase price, in other words, if there is no early repayment obligation. The position of Kapolyi Law Firm is that normally the payment moratorium applies to all payment obligations, including any repayments of the loan before the end term arising from any kind of legal rights (i.e. early repayment, termination, etc.).

  1. In connection to the above question, can the financing bank be obliged to disencumberment of the sold properties during the moratorium if the purchase price is not repaid earlier but it remains on the escrow (deposit) account designated by the bank? 

Dr. Ferenczy thinks that banks cannot be obligated to this, as the government decree states that any modification of the completion period of the agreement shall modify all ancillary and non ancillary obligations regardless of the fact that the ancillary obligation was established in any legal contract or unilateral legal declaration by the parties. The government decree also stipulates that the term of contractual obligations and the term of undertaking such obligations shall be extended by the time of the moratorium. Based on the above we can conclude that although payment obligations do not need to be performed during the time of the moratorium, any other ancillary obligations ensuring those obligations (mortgages, security deposits, individual guarantees, etc.) shall remain in effect during the total period of the moratorium, thus the financing bank may validly claim that it is not obliged to alleviate its system of securities – by cancelling certain securities during the time of the moratorium.

The Kapolyi Law Firm draws the attention to the fact that early repayment on any credit or loan agreement is always possible.  The debtor cannot be put into a position whereby it cannot execute a business scheme because of the moratorium that he could have executed or wished to execute regardless of the moratorium.

  1. What kind of general conduct is proposed to be followed by the debtor during the moratorium?

In case of any credit, loan or financial lease agreements, it is always advisable to meet with the financing bank and discuss the mutual intentions during the moratorium. Dr. Ferenczy suggests that it is in the interest of both parties that – in order to prevent any contractual breech by the debtor –  each party is informed on any steps taken and viewpoints during the time of the state of emergency which has been thus far unknown in Hungary, and that the mutual trust should remain between the parties during the time of the moratorium. It is also advisable to refrain from any conduct or actions during the moratorium that might encourage the creditor to declare the lines of credit or the loan matured before the repayment deadline (after the end of the moratorium). In case these expirations coincide with the term of the moratorium, the repayment obligation of the debtor would have an immediate effect right after the end of the moratorium, which is manifestly not in the interest of the debtor.

 

Effects of the Coronavirus on General and Members’ Meetings for Listed and Other Companies

author: Dr. Gábor HORVÁTH

Measures implemented to combat the spread of the coronavirus may not only cause liquidity problems for companies but also make decision-making harder. This is becoming an increasingly pressing issue given the approaching deadline for closing the 2019 business year, the approval of yearly financial statements and annual general or members’ meetings, which are especially relevant for companies listed on the Budapest Stock Exchange. Kapolyi Law Firm reviewed how general and members’ meetings may be held under current circumstances.

As per Section 4(d) of Government Decree 41/2020. (III. 11.), it is unlawful to host indoor events with over 100 attendees. This affects several publicly listed companies on the Budapest Stock Exchange. Section 4 of Government Decree 46/2020. (III.16.) generally prohibits the hosting of events and meetings, and does not consider the convening and attendance of general meetings (or other decision-making bodies) of commercial entities to be an exception. Dr. Gábor Horváth, Senior Attorney at Kapolyi Law Firm, highlights that restrictive measures now affect smaller companies, meaning, executives must find alternative solutions.

What are the Options for Corporations Listed on the Budapest Stock Exchange?

Considering the current practices of the issuers and public limited companies listed on the Budapest Stock Exchange, it can be concluded that in most cases (provided that the currently enacted restrictions don’t get lifted) the annual general meetings will be postponed. However, a few companies argued that the restrictions imposed by the Government Decree are not applicable to the operation of commercial enterprises and they are therefore only required to comply with the hygiene standards. According to Kapolyi Law Firm’s Senior Attorney, the issued Government Decrees and the company law provisions for holding and convening general or members’ meetings are conflicting. However, based on the principles of statutory interpretation, special provisions overrule ordinary laws. Therefore, in light of the current pandemic, Government Decrees override general legislation. But, considering that it is still not prohibited to visit your workplace, holding general and members’ meetings pose no greater risk than visiting a larger workplace, if proper procedures are followed. Thus, current measures unduly restrict the decision-making mechanisms of companies. Many everyday scenarios, beyond the approval of the annual accounts, requiring decision-making can’t be resolved. Several of these issues are easily remediable. Although no steps were taken yet, the Government is expected to permit corporations to postpone their annual or general meeting, as is already the case in several EU Member States (e.g.: Italy). Until this happens, the Budapest Stock Exchange recommends issuers to comply with their disclosure obligations more stringently.

What are the Options for Executives?

To deal with this situation, one must first examine the articles of association and its rules of procedure. For publicly listed corporations, the law does not prohibit decision-making bodies to host their annual meetings electronically. However, the memorandum/articles of association must contain express permission to do so. According to Kapolyi Law Firm’s Senior Associate, an alternative is to vote through a proxy. This is an option available for most commercial companies. Furthermore, written decisions, if permitted by the articles of associations, can also be appropriate.

If the Meeting can be Held via Electronic Means

The articles of association of companies may permit voting by electronic means without personal presence. In this case, according to the Section 3:74 (2) of the Civil Code, participation may occur via electronic communication in a way which enables the identification of the members and mutual and unrestricted communication between them. Eligible electronic communication devices include, but are not limited to, the latest versions of Skype or Microsoft Teams software, as well as videoconferencing services available through bluejeans.com. The means of holding of the general meeting must be indicated in the invitation, possibly supplemented with a provision stating that, in the event that the emergency is declared to be over, personal attendance is also an option. It is important to note that if the general meeting is held in this form, electronic devices that do not permit the identification of the participants of the general meeting (i.e.: identification by presenting identity documents) and mutual, unrestricted communication are not appropriate. The holding of the meeting is conditional on the usage an electronic tool which is capable of simultaneously transmitting and live recording sound and images, and the keeping of written minutes. According to Dr. Gábor Horváth, a larger number of participants may pose problems in terms of building an appropriate network infrastructure. Using professional corporate technologies may be a solution, but free conference call services available through various web services are typically not suitable for large meetings.

Attendance by a Proxy

According to Kapolyi Law Firm’s Senior Attorney, a further option is for the members or shareholders to attend the meeting via proxy. This is possible even if the articles of association do not allow the general or members’ meeting to be held by electronic means. In this case, it is possible that all members or shareholders would authorize the same person. The proxy will thus be able to hold the general meeting in the presence of one other person, who confirms the minutes. Where the articles of association permit, the address of the authorized representative can be indicated to be venue of the meeting. It is crucial that the invitation contains all items on the agenda, which will enable the members or shareholders to express their opinion without being physically present. If a member or shareholder is only able to issue his authorisation abroad, it shall be duly presented in accordance with the laws governing the authentication and legalisation of documents issued abroad. This means that it is necessary to have the authorisation Apostilled.

Decision-Making in Writing

Where possible, decisions may be made in writing without holding a meeting (except for publicly listed companies). When voting in writing, the draft decision must also be sent to members who do not have voting rights on the particular matter. Written decision-making is not possible for publicly listed companies, and this option is generally available to smaller entities.

The Coronavirus Crisis: How to Terminate Employment Lawfully

author: Dr. Gábor HORVÁTH

Due to governmental measures taken to combat the coronavirus epidemic, small and medium-sized enterprises and even large enterprises are at danger of being unable to fulfill their contractual obligation to provide employment. Therefore, the possibility of having to terminate employment relationships may become a central question for businesses. Kapolyi Law Firm summarized how employers can – with reference to the coronavirus epidemic – lawfully terminate an employee’s indefinite or fixed-term employment contract.

Termination by the Employer: Indefinite Employment

Generally, the employer is entitled to terminate an employment relationship by (ordinary) notice, if it is appropriately reasoned (i.e.: true, transparent and factual). On their own, industry-wide concerns, or for instance, the lack of orders by customers does not exempt the employer from its contractual obligation to provide employment. In this case, the employer must handle the situation in a way which does not result in the termination of employment. Several solutions are already available, such as working from home or paying the absentee pay. Dr. Gábor Horváth, a Senior Attorney at Kapolyi Law Firm emphasizes that governmental epidemiological measures by themselves cannot constitute a reason for the dismissal of employees. This is because the measures bear no relationship with the employees’ behaviour, skills, health or the operation of the employer. However, if, because of the extraordinary measures taken by the government, the operation of the employer is rendered impossible, there is a relationship between the measures taken and the employer’s operations. Therefore, an exemption from the rules may be granted. If conditions caused by the coronavirus (i.e.: diminishing turnovers, the closure of stores, etc.) result in the employer’s financial situation deteriorating to an extent where the employer is unable to guarantee lasting employment, the employer may refer to the economic damage caused by the coronavirus as grounds for the termination of employment, since reorganisations and/or the dissolution of positions become inevitable. If the employee takes legal proceedings against the dismissal, he may not plead that the reorganization was inappropriate or economically inefficient, as these grounds are not examined by the courts.

Termination by the Employer: Fixed-term Employment

The Employer may terminate a fixed-term employment contract, with appropriate reasoning, if maintaining the employment relationship is no longer possible due to unavoidable external reasons. This criterion is fulfilled by a force majeure event affecting the employer (in a narrow sense), over which the employer has no influence. According to Kapolyi Law Firm, governmental measures taken to tackle the coronavirus epidemic may constitute a force majeure event, depending on the examination of every circumstance of the case and their results. It is important to highlight that if the employer dismisses the employee, the employee is entitled to his salary for the duration of the notice period. If the employment relationship lasted over 3 years, the employee is entitled to severance pay as well.

Termination by the Employer: Dismissal with Immediate Effect

With a sufficiently reasoned dismissal, the employer may dismiss an employee with immediate effect. This may be appropriate if the employee intentionally or negligently, grossly violates his/her employment obligations or behaves in a way which renders the employment relationship impossible. However, according to Kapolyi Law Firm’s Senior Attorney, these grounds for termination are associated with the behaviour of the employee. The adverse economic effects caused by the government measures intended to combat the effects of the coronavirus – which negatively affect the employer – cannot constitute as grounds for termination with immediate effect. However, in the case of fixed-term employment, the employer may terminate the employment relationship without notice. The employee in question is entitled to twelve months of absentee pay or, if the remainder of the fixed period is less than one year, absentee pay for that period.

Collective Redundancies

If the termination of the employment relationships concerns several employees, the employer must consider the provisions of the Labour Code on collective redundancies. If the employer intends to terminate employees at least in the numbers prescribed in the Labour Code for the termination to constitute a collective redundancy, the employer must negotiate with the works council to determine the possible ways of avoiding collective redundancies. Furthermore, talks must also be conducted on the means of the redundancy, its underlying principles, the options to mitigate its consequences and the possible reduction in the number of dismissed employees. The employer has a disclosure obligation towards the works council and the government employment agency.

“Suspension” of Employment

If the employer decides not to terminate the employee, the employment relationship essentially becomes “suspended” due to the force majeure event. As a result of said event, the employer is no longer obliged to provide employment as contracted, and the employee is not bound by the requirement of availability. Therefore, employees are not entitled to their base salary. For the sake of clarity, it is recommended for this to be recorded in writing. To retain employees, the employer may decide to pay their wage or at least a part of it, to ensure the normal, timely resumption of work, once the crisis caused by the epidemic is over. However, a binding agreement must be composed for this to happen, as the wage forms a compulsory part of an employment contract. Several Member States of the European Union have taken measures to ensure that unemployment benefits can still be claimed even if the employment relationship is not terminated.

The effects of the Coronavirus in the construction industry: the biggest projects may be exposed to the greatest risk

author: dr. Mátyás RADA

The spread of Covid-19 pandemic imposes major challenges on the construction industry and the real estate developers as well. The already experienced shortages in the sector regarding workforce and the prolonged deadlines for completion are likely to be further aggravated by the spread of the pandemic. According to Kapolyi Law Firm, construction of large office buildings, industrial buildings and hotels may be particularly exposed to risk because these investment projects usually employ a significant amount of workforce and use construction materials and equipment imported from abroad. Nevertheless, the Covid-19 crisis may qualify as force majeure, and contractor companies may be exempted from performing their contractual obligations within the agreed deadlines by referring to force majeure.

In case of larger real estate development projects, it means a significant risk for both the employer and the contractor if the concerned project has to be suspended or it cannot be completed in accordance with the agreed timetable because of the pandemic and subsequent government actions. By concluding a contract for construction and/or installation works, the contractor undertakes the basic obligation to construct the building in accordance with the building plans and within the agreed deadlines. He commits a breach of contract if he is unable to do so. In that case, he will face the consequences laid down in the contract, irrespective of the reasons underlying non-performance or late performance. However, he may be exempted from his liability for breach of contract in the event of force majeure.

In construction contracts, force majeure is usually defined as an exceptional event or circumstance, (i) which is beyond the control of the contracting parties, (ii) which could not have been foreseen by the parties prior to the conclusion of the contract, (ii) which could not reasonably have avoided by the parties and, (iv) which is not substantially attributable either of the parties. What event can constitute an extraordinary circumstance beyond the contractor’s control, which can exhaust the criteria of force majeure? Occurrence of war, terror event, natural and nuclear disaster and pandemic is usually cited as force majeure event in construction contracts. Accordingly, a contractor, who – due to the pandemic – is unable to complete the construction within the agreed time limit, may invoke to force majeure event if the above detailed criteria are met. The most important consequence of the occurrence of a force majeure event is that the defaulting party may be exempted from the liability of breach of contract, furthermore, he might be released from fulfilling his contractual obligations for the duration of force majeure event as well. This could practically mean that the contractor would not be obliged to pay penalty, furthermore, he could also extend the deadline for his performance by the actual duration of the force majeure event and the impediment thereto.

The employer – being the prospective owner of the building – usually enters into lease agreements – as a landlord – with the prospective tenants of the building, before or during the construction, in which agreements he undertakes to hand over the leased premises to the prospective tenants within the deadlines stipulated in these lease agreements. If the employer as landlord fails to meet the above deadlines, he may face penalty for breach of contract, furthermore, he may lose the rents to be paid by the tenants for the period between the deadlines and the actual handover of the leased premises. As the construction and utilization of commercial buildings are closely linked, the employer intends to mitigate his above detailed risks by stipulating penalty with high amount in the construction contracts.

However, Kapolyi Law Firm points out that in case of a force majeure event, it is not enough if the contractor refers to the pandemic as a well-known fact, he has to prove that its effects were not foreseeable at the time of conclusion of the contract and he has done everything to avoid and alleviate the consequences of it. Only if the above conditions are collectively met, the contractor might be released from the consequences of breach of contract and the performance of his contractual obligations due to the force majeure event. Construction contracts usually require  the contractor to notify the employer immediately if a force majeure event occurs or it will probably occur. It can be reasonably expected from the contractor to indicate in his notification how and to what extent the force majeure event prevents him from performing his obligations, what delay may be anticipated and what preventive measures he intends to introduce. Even if the consequences appear to be avoidable, a diligent contractor can be expected to inform the employer on the imminent danger and the preventive measures. Regarding the recent situation, it can safely be said that Covid-19 virus have been unpredictable, as there has been no example for this kind of pandemic or the limitations imposed by the governments following its outbreak, and there was no indication of its immediate detrimental effects on the economy. Accordingly, it can be stated with full certainty that Covid-19 virus may qualify as force majeure event.

Kapolyi Law Firm points out that the contractors must continue to make every possible effort to fulfil their contract, and if they are ultimately prevented from performing, they must be able to prove that they have been significantly constrained by the pandemic. Furthermore, they have to prove to what extent they were prevented and that they have done their utmost to eliminate any delays in the construction and to minimize the extent of the delays by means of possible restructuring of the work or any other emergency measures. For example, contractors importing constructing materials from countries concerned by import ban may be obliged to find alternative suppliers and transport routes. Similarly, in order to ensure and protect the workforce, the contractors may be obliged introduce health protection measures (e.g. prescribing the use of protective clothing) at the construction site to minimize the consequences of the pandemic. Based on the above, although the pandemic can be assessed as force majeure event, it does not automatically mean that the contractor is exempted from liability or released from paying penalty if he is unable to meet the agreed deadlines. At the moment, it may not be clearly seen what exact detrimental effects will the Coronavirus have on the construction industry, but it is reasonable to prepare in advance for possible scenarios on both sides. A diligent contractor in this situation draws up an action plan and a prevention protocol to eliminate/alleviate the risks posed by the pandemic and informs the employer about their contents. The present situation poses a serious risk to everyone, therefore the parties need to cooperate more closely and in good faith with each other and they need to inform each other about the appearing problems and the intended responses and they need to keep constantly discussing on crisis management regarding the pandemic.

HOW TO RING THE BSE BELL – NOW IS THE TIME FOR HUNGARY’S SMES AND STARTUPS TO GO BIG AND GO PUBLIC!

Ringing the bse opening bell could be within reach through XTEND MARKET, Budapest Stock Exchange’S new trading platform launched in 2017 that aims to help promising companies go public.

author: dr. Roland KARSA

On January 10th of this year CyBERG Corp’s Chairman of the Board Balazs Rozsa and Deputy Chief Executive Officer Erik Szabo rang the bell to open the day’s trading session on Budapest Stock Exchange (BSE). At BSE the opening bell marks an event worth celebrating, like an initial public offering (IPO) when a company goes public and offers its shares to the general public for the first time. Usually the company’s chief executives are given the honor to ring in their company’s first day of public trading. Although it is not quite like hitting a Chinese gong as was the case in the late 1800’s and early 1900’s at the New York Stock Exchange (NYSE), it is still a very ceremonious and honorable moment, as well as a major milestone for any company.

CyBERG Corp – a Hungarian startup founded in 2015 – is the second company to have benefited from the new trading platform Xtend. Xtend market is commonly referred to as a multilateral trading facility (MTF) and is indeed an alternative trading platform to Hungary’s traditional stock exchange BSE. It differs from other MTFs in Europe in that its declared purpose is to help small to medium-sized enterprises (SMEs) smoothly and gradually transition into public trading. By default, it is also an appealing option for Startups, such as CyBERG, that are hungry for increased capital, wish to get better financially established and are determined to bring their ideas to life.

Xtend is part of Hungary’s recent strategy to increase activity on capital markets by making it possible for new companies to go public. And BSE is doing everything in its power to make it a success story including reshaping its listing category system to further strengthen Xtend’s position on BSE and to better emulate international stock exchange standards and practices. These changes have been underway since January 2019 and one of the most significant changes is that the infamous category T, known for unreliable and penny stocks, is being phased out leaving only the Prime and Standard categories. Therefore, companies that would have gone public through category T are now invited to enter through Xtend and the phasing out of category T should be fully completed by January 2020.

Companies entering the Standard category must have a minimum market capitalization of HUF 250 mln, and at least 10% public float (stocks that are in the hands of public investors), and at least one closed business year.

By boosting its capital markets which have traditionally been neglected, Hungary hopes to encourage increased investment in bonds and shares and enjoy a healthier balance between corporate and banking finance. This would ideally lead to a more diversified, and therefore, more competitive and stable economy: more diverse because of the entry of new and different kinds of companies into public trading through internal funding mechanisms, and more stable because of internally available funding even when banks slow down lending.

What does Xtend have to offer?

The advantages that Xtend offers are significant and mitigate the risk involved when a company attempts to go public. Xtend therefore acts as an “anteroom” of the bourse by offering lower costs, financial incentives, as well as exemptions and other forms of reliefs from otherwise onerous reporting and financial obligations.

  1. Reliefs

Xtend offers reliefs from onerous reporting requirements. First of all, Xtend-listed companies are not obliged to comply with the burdensome International Financial Reporting Standards (IFRS). Second of all, companies with stock issuance under the amount of EUR 5 mln are not required to prepare a prospectus for approval by the National Bank of Hungary (the general authorization and regulation authority of financial and capital markets institutions and market operators). They are only required to draft an informational document which is much less complex and resource-intensive and only needs BSE’s approval.

Because Xtend market wants to attract and help promising companies with ambitious goals to eventually enter the BSE market, there is no minimum stock issuance requirement. This is significant given the HUF 5 bln and HUF 250 mln respective market capitalization (the total HUF market value of a company’s outstanding shares) requirements of the Prime and Standard markets.

Xtend also makes its stocks more attractive to investors by providing an opportunity to place them in long term investment accounts. If investors choose a minimum five-year investment account, they can collect interest, dividends and capital gains tax free.

2. Financial incentives

A number of financial incentives are offered to companies wishing to enter the Xtend market. A company may apply for partial funding from BSE. This funding is available thanks to an agreement concluded between BSE and the Ministry of Finance and has been made possible through the EU Economic Development and Innovation Operational Program.

The National Stock Exchange Development Fund is another funding source which was recently launched in the first quarter of 2018. It provides capital and private investors to companies wishing to list on Xtend and prepare for future public offerings. Investors typically invest HUF 1 Bln and in exchange they acquire a minority stake in the given company.

Listing on Xtend can be a great alternative to taking out traditional bank loans when a company needs external financial aid for expanding and growing business and in some cases it may be the only option for increasing capital.

3. Public image

One of the main reasons that companies wish to go public is to gain more exposure, power and build up their reputation. Xtend provides companies the opportunity for an easier conversion into a public limited company (PLC). The PLC legal designation is instantly indicative of the company’s size and reputation. As such, it is good for marketing, it improves public and corporate image and constitutes a quantifiable asset which is calculated as part of the company value.

What does entering and trading on Xtend market entail?

The first thing a company needs before jumping on the Xtend bandwagon is a good lawyer, preferably a capital markets expert with interest and knowledge of Xtend and its twists and turns. In addition to this, an advisor is required for companies getting listed on the Xtend platform and will be assigned by BSE. The advisor’s task is to support the company during the listing and ultimately the trading process. The advisor also protects the investors’ interests by regularly monitoring the issuing company’s financial status

In order to enter Xtend, a company must undergo a formal change from private limited company to a PLC. The conversion occurs in two partially overlapping parts: first deciding to become a PLC and preparing the necessary internal changes by the effective date, and second, registering the stocks on Xtend.

i) Conversion into a PLC

In order to be eligible for conversion into a PLC, a company must be a private limited company and it must meet the requirements for PLCs prescribed by laws. Most significantly there is a minimum registered capital requirement of HUF 20mln. In addition, the company must make a series of internal changes including appointing a Board of Directors and a Supervisory Board, or the company can opt to appoint a Board of Management which is a mix of the two and drafting new bylaws for the PLC.

All corporate documents related to the conversion (e.g. shareholders’ resolutions, bylaws, etc.) have to be submitted to the Court of Registry for registration. Once this steps has been fulfilled to the satisfaction of the Court of Registry, it will issue a conversion order. In order to initiate the process of stock registration, the conversion order must be submitted to BSE who will make a final decision on whether to grant an effective date, the date as of which the PLC officially comes into existence and trading can begin. During the transitional period, up until the effective date, the company continues to exist and operate as a Private Limited Company.

ii) Stock registration

BSE’s decision to grant an effective date for the registration of a company’s stocks on Xtend, thereby concluding the its conversion into a PLC, is conditional upon receipt of either an information document or a prospectus according to the company’s stock issuance.

In the case of companies with a stock issuance under EUR 5 mln, the submission of an information document for BSE’s approval is sufficient. The information document should include the company’s basic information and should be drafted with the assistance of the designated advisor.

In the case of companies with a stock issuance above EUR 5 mln, a prospectus must be prepared which is much more complex than the information document and requires knowledge and experience in corporate and capital markets, as well as knowledge and understanding of accounting and finance. It should include a brief history of the company, a due diligence report outlining the company’s major contracts in effect, the company’s future plans and prospects as well as a description of the offering, description of the underwriting, financial information, risk to buyers, etc.

The transition from being a private company to a public one is a challenging one. Despite the reliefs and exemptions Xtend provides to facilitate a smoother transition, there still remain numerous obligations that are not imposed on non-listed companies. These can include annual and biannual reporting and submitting corporate governance reports. A company might also be required to prepare extraordinary publications or disclosures under circumstances such as when price-sensitive information arises which could directly or indirectly affect the value of or the yield on the issuer’s securities or could be relevant to for the market participants’ investment decisions.

Public companies are also obliged to comply with European Union laws on market abuse, which do not apply to private companies. Market abuse encompasses issues such as insider trading, unlawful disclosure of inside information, and market manipulation. On the plus side, complying with these laws provides and ensures greater transparency.

Xtend-listed companies have the opportunity to gradually warm up to the changes and newly imposed obligations by not taking them all on at once. As they get comfortable enough or sufficiently increase their capital, they can decide to “go the whole hog” and upgrade to BSE’s Standard bourse category – which ultimately is the intented purpose of Xtend and would contribute to boosting the capital markets. Nevertheless, there is no obligation to upgrade, nor is there a limit to the amount of time a that a company can remain listed on Xtend. In addition, companies that decided to test the waters of public trading through Xtend but end up drowning can leave the platform voluntarily through the delisting process.

As of today, there are two companies listed on Xtend with a third oneon the way. GOPD Zrt. has already registered its stocks on Xtend, but the bell has yet to be run to launch its public trading. And hopefully others will have the opportunity to ring the BSE opening bell too. It is an opportune moment for eager and hopeful companies to take advantage of the unique opportunity that Xtend is offering. Without Xtend, CyBERG might not have been able to go public at all let alone so quickly. By ringing the BSE bell, you might just be part of the ringing in of a new and hopefully a buoyant chapter in Hungary’s economy. BSE is Xtending a helping hand, so grab a hold and enjoy the ride!

Legal challenges of the construction industry boom_Part 2

Author: dr. György BOROS-GYÖMBÉR

In our last article on the construction boom’s legal challenges, we considered three cases where an appropriately drafted construction contract helps projects be executed in a timely, cost-effective manner. This paper considers two further instances, where poor drafting may result in legal disputes or even delays in the project.

Contract Price and Additional Works

There are two ways in which parties generally set the contract price: as a lump sum, or through an itemised final statement. If the latter is used, it is usually clear from the statement how the contractor would like to receive payment for the material costs and the works carried out. However, the use of a lump sum contract price – which is mainly used in large-scale, multi-phased construction projects – may lead to disputes over the contract price and additional works.

The first issue arises when defining the two concepts. ‘Contract price’ and ‘additional works’ are defined differently in the Hungarian Civil Code and in the sectoral construction regulation. It is therefore strongly recommended that parties explicitly define what they mean by these terms in the construction agreement. The Civil Code may serve as a good basis of the definition, but it has to be modified to fit the needs of the parties and the project itself.

At the beginning of a construction project, if parties agree upon a lump sum contract price, they usually must not contest that the project or a given phase of the project has to be executed at the price set in the contract. The use of ‘additional works’ further supports this agreement by listing those works, which were not considered when calculating the contract price, but still has to be carried out to satisfy technical specifications, or for the sake of using the property for its intended purpose, at no extra cost or fee. It is worth mentioning that the contractor may still claim payment for additional works which were not foreseeable at the time of signing the contract. However, it is also possible for a contract to explicitly exclude payments for unforeseeable costs.

To balance the effects caused by the use of ‘additional works’, ‘extra works’ serves to address demands made by the contractor to modify the contract price. The concept of ‘extra works’ is that if the employer demands new works to be undertaken by the contractor, or the employer modifies works during the execution phase, then it has to pay for those works.

As we discussed in the previous articles, alterations are inevitable and regularly happen during constructions. It is therefore essential to define the timeframe and means by which the contractor can claim payment for extra works and/or request an extension, and list the documents required for submission. The timeframe and method for the evaluation of requests by the employer should also be defined. In order to avoid a later dispute, it is crucial to document the order of extra works, given that it will form a part of the original contract. It is important to stipulate in the contract that the contractor may only perform the extra works, once the price and the technical specifications have been agreed upon by the parties. It is inadvisable to demand payment for extra works from the employer without prior negotiations, after the works have been finished, as in this event, the contractor’s invoice may be at risk of being rejected.

Guarantees

The means of provision (such as: bank guarantees, withholding of payments by the employer etc.) and the size of different securities form a central part of the construction contracts. Often, the enforceable claims against a security are not defined in sufficient detail in the contract. The lack of precise definitions may even legally invalidate the exercise of a guarantee, in which case the full amount may be recovered by the employer from the contractor. For instance, this may be the case if the employer uses the performance guarantee as security against penalty payments, and/or compensation claims, without an express permission provided in the contract.

Recently, bank guarantees became one of the most widely used means of providing securities in the Hungarian construction industry. When using a bank guarantee, aside from a few exceptions, the guarantor bank is obliged to pay without examining the underlying legal relationship of the parties. It is often the case, however, that while the bank guarantee was exercised, the conditions set out in the contract are not satisfied. Even if the payment is made by the guarantor, this may justify a claim for fully recovering the amount of the bank guarantee from the contractor, including accrued interest and the costs of court proceedings. The same goes for cases when payments are unduly withheld or even used by the employer. Therefore, it is crucial to not only define the claims enforceable against the guarantee, but also the means of exercising it, relevant deadlines, and to lay down the contractual method for the making a formal written request for contractual performance.