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CAN B2B CONTRACTS BE INVALIDATED BASED ON UNFAIR EXPLOITATION IN HUNGARY?

05 July 2024

What are the limits of taking advantage of the unfavourable business situation of the contractual partner under Hungarian law? What conditions must be fulfilled to have the contract invalidated by the court based on unfair exploitation in B2B relations? We analyse a recent Hungarian appellate court judgment dealing with the above issues.

1. Facts

In February 2018, the plaintiff, as seller, (“Plaintiff”) and the defendant, as purchaser, (“Defendant”) concluded a real estate purchase contract (“Contract”), by which the Plaintiff sold two of its real estates (“Real Estates”) to the Defendant.

In the Contract, the parties agreed that the purchase price of the Real Estates shall HUF 200 Million. Later the parties modified the payment terms.

2. First Instance Court proceedings

In its statement of claim, the Plaintiff requested the court to invalidate the Contract and restore the original condition, on the grounds of unfair exploitation.  The Defendant's defence was to dismiss the statement of claim; it disputed the invalidity of the Contract.

The First Instance Court pointed out that a business undertaking which has more real estates, and which may lose its headquarter because of a transaction which it has entered into cannot be regarded as a crisis.

The fact that the Plaintiff had to enter into the Contract in order to keep another real estate cannot in itself constitute a crisis situation.

The First Instance Court pointed out that the Plaintiff’s business was consistently profitable between 2015 and 2019, which was not affected by the fact that there were periods when it might have experienced temporary liquidity problems.

According to the bank valuation of November 2017, the market value of the Real Estates was between HUF 151 million and HUF 216 million, while the market value proposed for acceptance was HUF 170 million. Based on the above, the purchase price fixed in the Contract did not differ significantly from the market value.

Based on the above, the First Instance Court dismissed the statement of claim on the ground that the mere fact that a contracting party enters into a contract which it considers to be unfavourable in a situation determined by economic circumstances does not make it an unfair exploitation.

3. Appeal by the Plaintiff

In its appeal, the Plaintiff argued, among others, that it had debts in the hundreds of millions of Hungarian forints and his debts were several months due, moreover, it was not eligible for financing from a credit institution, and therefore Plaintiff's crisis was well established.

It also argued that a grossly disproportionate consideration, resulting from the exploitation of an economic necessity, could lead to the finding of unfair exploitation. Even in the absence of an existential crisis, economic necessity leads to a restriction of the party's freedom of will and action, and the party does not enter into a contract within the normal risk-bearing framework, but in a way that goes beyond any reasonable commercial risk.

4. Second Instance Court decision

The second instance court (“Second Instance Court”) laid down that contrary to the Plaintiff's appeal, Plaintiff’s crisis is an independent condition for establishing unfair exploitative nature which shall be examined independently of the issue of gross disproportionality.

The Second Instance Court fully agreed with the judgment of the First Instance Court that, in the case of a contract concluded between business undertakings, the objective condition for the establishment of unfair exploitation is that the contracting party shall be in crisis.

The effect of a decision taken in a crisis, which is driven by existential pressure, is disadvantageous and seriously damaging to the decision-maker and is different from a decision driven by economic pressure, which is often the case in economic terms.

The latter is a decision made in response to economic circumstances, whereby the decision-maker chooses the solution with the greatest possible gain or the least possible loss in the given situation.

The difficulties in the operation of the Plaintiff were caused by the need to advance the investment costs of the improvements financed by the non-refundable State aid, in addition to the operating costs.

The cash-flow problem arising from that situation cannot, however, be regarded as a crisis in the company: the fact that a contracting party enters into a contract which it considers to be unfavourable in a situation affected by economic circumstances is a decision which is subject to economic risk and does not make the contract an unfair exploitation.

According to the Second Instance Court, the First Instance Court was therefore correct in its conclusion: the existence of a crisis, one element of the unfair exploitation contract was not substantiated.

In view of the above, the Second Instance Court upheld the first instance judgment.

5. Comment

While the freedom of contract is a fundamental principle both in civil law and common law jurisdictions, allowing the parties to freely determine the content of their contract, including the price, every major legal system adopts some exceptions and limitations to this principle.

In most civil law jurisdictions, the legislator adopts provisions which limits parties to take advantage of the unfavourable business situation of their contractual partners, and to gain excessive benefits from such situation.

This principle is reflected in contemporaneous soft law instruments as well, like the Principles of European Contract Law (Article 4:109 - Excessive Benefit or Unfair Advantage) or in the Draft Common Frame of Reference (7:207  - Unfair exploitation).

The Hungarian Civil Code also sets forth a similar rule by providing that in case a contracting party gains excessive benefit or unfair advantage when the contract is concluded by exploiting the other party’s situation, the contract shall be considered null and void.[1]

According to Hungarian case law, an objective and a subjective condition shall be met to establish the invalidity of contracts because of unfair exploitation: i) the objective condition is that the party shall be in a critical economic situation, ii) the subjective condition is that the other party shall exploit this critical situation.

In relation with the first objective condition ie. the critical economic situation of the aggrieved party, the courts rightly pointed out that distinction shall be made between existential pressure on the one hand and economic pressure on the other. While the former may give rise to unfair exploitation, the latter is within the normal business risk.

A company, which has more real estates, and an ongoing, lucrative business, cannot be considered as being under an existential pressure, even if by reason of cash-flow problems it is forced to sell its corporate headquarter, which is a decision belonging to the normal business risk.

By arriving to the above conclusion, the Hungarian courts demonstrated that invalidation of a B2B contract by reason of unfair exploitation is not impossible, but it can be applied only in exceptional cases.

 

This article analysed the judgment 14.Gf.40.354/2022/5/II. of the Regional Court of Appeal of Budapest, published under Judicial decision no. ÍH 2024.26.

 

[1] Article 6:97 of Civil Code