Hungary to repeal the restriction relating to arbitration in connection with so-called national assets

The Hungarian parliament repealed the controversial restriction on arbitration relating to so-called national assets. Two and a half years after the introduction of the restriction, and one and a half years after its much debated approval by the Hungarian Constitutional Court, Hungarian law will again permit arbitration in relation to contracts that relate to national assets.

(1)       The restrictive rules

As of June 30, 2012, Act CXCVI of 2011 on National Assets (the “National Asset Law”) was amended, to include the following prohibition on arbitration in its section 17 (3):

In the case of a civil law contract relating to an asset qualifying as a national asset and situated within the territory surrounded by the borders of Hungary, the person entitled to dispose over the assets can only agree on Hungarian law as the governing law, on the Hungarian language as the governing language and on the competence of the Hungarian courts – not including arbitration – for any disputes.” For emphasis, the next sentence repeated that “the person entitled to dispose over the asset may not stipulate an arbitration procedure for these disputes.

Shortly after, Act LXXI of 1994 (the “Arbitration Law”) was amended to bring it in line with the new rules of the National Assets Law. The modification introduced a new section 4 into the Arbitration Law, stating that “there shall be no arbitration proceeding – with a seat within or outside of Hungary, whether institutional or ad hoc – […] in matters where the subject matter of the dispute is a national asset and situated within the territory surrounded by the borders of Hungary, or any relating right, claim, demand […]”.

The rules of section 17 (3) of the National Assets Law and Section 4 of the Arbitration Law were reviewed and – with certain specifications as to their temporary application – upheld by the Hungarian Constitutional Court in its decision 14/2013 (VI.17.) AB. The Constitutional Court rejected the motions to set aside and annul the new rules on the ground that they were incompatible with Hungary’s obligations under international treaties.

Both the restrictive rules and the Constitutional Court’s approval were criticized within Hungary  and internationally.

(2)       The amendment

On Mach 3, 2015, the Parliament adopted, and on March 11, 2015 the Official Gazette published, Act VII of 2015 on the Investment Relating to the Maintenance of Capacity of the Paks Nuclear Plant and the Relating Amendments of Certain Laws (the “Paks Investment Law”). The Paks Investment Law shall enter into force on the 8th day following its publication; thus, on March 19, 2015.

The Paks Investment Law contains the new or amended domestic laws relating to the international treaties concerning the enlargement of Hungary’s only nuclear plant by Russia. Amongst others, the Paks Investment Law replaces Section 17 (3) of the National assets law with the following text:

In the absence of international treaty, in the case of a civil law contract relating to an asset qualifying as a so-called national asset and situated within the territory surrounded by the borders of Hungary, the person entitled to dispose over the assets can only agree on Hungarian law as the governing law, on the Hungarian language as the governing language and on the competence of the Hungarian court for any disputes. The exclusive jurisdiction of Hungarian courts does not affect the right to agree on arbitration.

A newly introduced Section 18/B orders that the new rules shall be applied to international treaties concluded before the entry into force of the new rules, as well as to agreements concluded on the basis of such international treaties.

The Paks Investment Law also cancels the restrictive rules from Section 4 of the Arbitration Law.

The ministerial reasoning of the Paks Investment Law does not provide any meaningful explanation for the change of policy. It concentrates instead on the explanation of the somewhat retroactive introduction of the new rules, by stating that this is not closely related to the enlargement of the nuclear plant, because an international treaty, as lex specialis, would anyway override the rules of domestic law.

(3)       Evaluation

As a result of the new rules, arbitration agreements relating to national assets will be valid if they are concluded before June 30, 2012 or after March 19, 2015. However, if such an arbitration agreement is concluded on the basis of an international treaty, it will be valid irrespective of its date. This development is obviously welcomed.

Since the restriction is basically abolished and its application is limited to contracts concluded during its short lived period, the questions of interpretation are mostly moot as a matter of practicality. Nevertheless, we must note that such questions abound and they may theoretically give rise to future disputes.

Among others, it may still be debated under which circumstances an international investment contract could qualify as a civil law contract. The validity of an agreement dated after the entry into force of the Paks Investment Law, which confirms an arbitration agreement originally entered into during the restriction, may also lead to disputes.

Most importantly, it is also to be seen what qualifies as an arbitration agreement concluded on the basis of an international treaty. For example, Hungary is party to the Geneva Convention on International Commercial Arbitration. Article II of the Geneva Convention explicitly grants “legal persons of public law” the right to conclude valid arbitration agreements. At first sight, it is not excluded that any arbitration agreement concluded by Hungarian government entities relating to national assets qualifies as an arbitration agreement concluded on the basis of international treaty as a result of this rule. Similar questions could be raised in case of an arbitration agreement submitting the dispute to ICSID jurisdiction; it could possibly qualify as an arbitration agreement concluded on the basis of an international treaty, the Washington Convention.

 

 

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