The Current State and Reform of Arbitration in Hungary

Civil procedural law is currently under reform in Hungary. It is the Government’s intention to draft a new Code of Civil Procedure and also to revise the rules on arbitration. Authors of our blog participated in a roundtable discussion about the current state and possible reforms of arbitration in Hungary.

On April 28, 2015 a roundtable discussion was held at the Institute for Legal Studies of the Hungarian Academy of Sciences. The participants discussed the current legal framework of arbitration in Hungary. Three prominent figures from the Hungarian arbitration scene made opening presentations: Prof. László Kecskés (president of the Court of Arbitration attached to the Hungarian Chamber of Commerce and Industry), Prof. István Varga (vice-dean, ELTE Faculty of Law) and Prof. András Osztovits (Supreme Court judge).

Authors of our blog, Miklós Boronkay and György Wellmann, prepared a working paper for the discussion which summarized the current state of Hungarian arbitration law, identified problematic issues and suggested certain changes to both the legislation and the court practice.

The central point of the discussion was whether the legislator and the courts acknowledge arbitration as an equivalent alternative to ordinary court procedure. In particular, two recent decisions published by the Supreme Court gave the impression that the courts regard arbitration as a secondary, less effective method of dispute resolution. Generally speaking, the participants agreed that the Hungarian legal environment (including the courts’ approach) is favourable for arbitration, even though there are a few instances where the legislation or the court practice could be improved.

  1. Functional equivalence: the courts’ approach

In one of these decisions the court stated that a company under liquidation is not bound by the arbitration clause because arbitration hinders the enforcement of its rights to such an extent that the arbitration clause became “incapable of being performed”. Most of the participants agreed that this approach may be disputed because it cannot be generally said that arbitration is less effective than ordinary court procedure, even for companies under liquidation. For a detailed analysis see our previous blog entry.

In the other debated decision, the Supreme Court stated that arbitration clauses in general terms of consumer contracts are always and necessarily unfair. For the Supreme Court the “unfairness is based on the fact that the arbitration clause is exclusive, which means that it excludes ordinary court proceedings and thereby hinders the consumer in enforcing its claims”. While the participants agreed that consumer disputes are not a classic area of arbitration, the above reasoning is not convincing because it suggests that arbitration is always detrimental to the consumer.

  1. Functional equivalence: legislation

As reported in our blog, recently the Hungarian parliament repealed the controversial restriction on arbitration relating to so-called national assets. The participants of the discussion welcomed this change.

  1. Other issues raised by authors of our blog

a) Limitation of arbitration: commercial disputes

Under Hungarian law, arbitration is limited to commercial disputes. Authors of our blog suggested that this limitation should be abolished because there is no legitimate reason to exclude private individuals from arbitrating their dispute in cases where they can freely dispose of the subject matter of the dispute. In the Hungarian Constitutional Court’s practice, arbitration is based on the constitutional right of freedom of contract, which is not limited to commercial matters.

b) Interim measures

The Hungarian Arbitration Act regulates interim measures in line with the original 1985 UNCITRAL Model Law. Therefore, an arbitration tribunal cannot grant enforceable interim measures. Authors of our blog suggested that Hungarian law should be brought in line with the revised 2006 UNCITRAL Model Law, which clearly states that an interim measure issued by an arbitral tribunal shall be recognized as binding and enforceable upon application to the competent court.

c) Assignment

The practice of Hungarian courts is ambiguous concerning the question of whether, in case of an assignment of claims, the arbitration clause contained in the assigned contract is automatically transferred to the assignee. Authors of our blog suggested that as a general rule it should be.

d) Corporate disputes

There is no uniform Hungarian court practice regarding arbitration clauses in companies’ statutes. The main problem is that in a number of cases the members (shareholders) of the company are not required by law to sign the statutes, and statutes may be amended with majority voting. Therefore, strictly speaking, the requirements of consent and written form are not necessarily fulfilled in the case of the arbitration clauses in the statutes. Authors of our blog suggested that an arbitration clause incorporated in to the statutes of a company should follow the legal destiny of the statutes, i.e. whenever the statutes are binding on the member (shareholder), the arbitration clause should also be binding. For a more detailed discussion of this topic, please see our previous blog entry.

Since a Codification Committee is currently working on the new Code of Civil Procedure, it remains to be seen which of the above suggestions will be reflected in the amended arbitration rules.

The video about the roundtable discussion is available here (the language of the discussion was Hungarian). The working paper is available here.

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