COVID-19 AND LIMITS OF DELIBERATION OF EVIDENCE BEFORE THE HUNGARIAN SUPREME COURT

25 August 2022

While the reviewing of questions of law by higher courts is generally permitted at the judicial remedy stages of civil litigation in Hungary, questions of fact, and the free deliberation of evidence, can only be reviewed exceptionally by the Hungarian Supreme Court under well settled case law. Is this rule also applicable under the new Civil Procedure Code? This article answers this question by analysing the recent judgment of the Supreme Court in a case concerning the impacts of covid-19 on the Hungarian phase of the Giro d'Italia cycling race.

1. Facts

On 7 February 2020, the defendant, which operates hotels, and the plaintiff entered into a contract pursuant to which defendant agreed to make 86 rooms available to plaintiff at one of its hotels for group bookings from 7 May 2020 to 9 May 2020.

Based on the preliminary correspondence of the parties, it was clear that plaintiff had booked the rooms to accommodate the managers, employees and partners of its Polish parent company during the Hungarian stage of the Giro d'Italia. However, the contract contained no specific reference to this fact.

The contract specified that:

in case the Plaintiff cancels the group booking in its entirely, it will be liable to pay an amount equal to the loss of revenue resulting from the cancellation of services. The cancellation fee is not liquidated damages.

The cancellation fee was 80% of the estimated revenue until 26 March 2020 and 100% of the estimated revenue after 26 March 2020.

The contract also contained a force majeure provision, according to which:

The Contract may be terminated without liability in the event of circumstances beyond the control of the parties, such as force majeure, war, acts of terrorism, disasters, strikes, . . . , civil disobedience, traffic restrictions, as long as these circumstances make the performance of the services by the Hotel or the use of the hotel services by the group or any person unlawful or impossible. The Contract may be terminated in accordance with this section by giving written notice to the other party as soon as possible.

On 26 February 2020, the plaintiff paid the contract price to the defendant. Subsequently, on 13 March 2020, in an email to the defendant, the plaintiff cancelled all rooms and suites reserved. In its email, the plaintiff claimed that, on the same day, it had become official that the Hungarian stage of the Giro d'Italia would not take place in May 2020, at the time of the plaintiff's booking.

The plaintiff further requested, with regard to its cancellation, that the defendant return the full amount paid as an advance payment for the accommodation. The plaintiff argued that, according to the force majeure provision of the contract, the performance of the contract could be cancelled without liability (ie, legal consequence) in the case of an event beyond the control of the parties (eg, a natural disaster, war, terrorist act or strike). The Hungarian government had cancelled the Hungarian stage of the Giro d'Italia due to the covid-19 pandemic, which the plaintiff argued constituted force majeure.

On 12 October 2020, the defendant paid back 20% of the pre-paid amount to the plaintiff.

2. Arguments

In its application, the plaintiff requested that the defendant be ordered to repay 80% of the remaining amount, failing which the plaintiff requested a reduction of the 80% cancellation fee as liquidated damages.

According to the plaintiff, the contract had been concluded to accommodate the managers and representatives of its Polish parent company's partners during the period from 7 May 2020 to 9 May 2020, the dates of the Hungarian stage of the Giro d'Italia.

According to the plaintiff's primary argument, the performance of the contract became impossible under the Civil Code(1) when the Giro d'Italia was postponed, and the contract had therefore been terminated at that time. The plaintiff's 13 March 2020 email message constituted a notice of impossibility under the Civil Code.(2)

According to the plaintiff's alternative argument, the contract was terminated under its force majeure provision by the plaintiff's email to the defendant cancelling the reservation.

In its defence, the defendant sought dismissal of the statement of claim. According to the defendant, the contract did not refer to the Giro d'Italia, its organisation was in the interest and at the commercial risk of the plaintiff and its postponement did not constitute force majeure as defined in the contract.

3. First-instance court

The first-instance court ordered the defendant to repay the plaintiff 20% of the amount paid plus default interest; the remainder of the statement of claim was dismissed.

It reasoned that the mutual contractual intention of the parties did not extend to the fact that the defendant's services were to be requested by the plaintiff exclusively for the event of the Giro d'Italia in Hungary.

It further noted that, although a pandemic or governmental restriction may result in the impossibility of performance, the government decision(3) regarding the postponement of the Hungarian stage of the Giro d'Italia was only published on 14 March 2020. A Facebook post or an article published on the Internet before that date could not be considered a formal decision. In light of the above, at the time of the plaintiff's email on 13 March 2020, there were no legal or physical obstacles to the performance of the contractual obligations.

In relation to the plaintiff's third claim, the first-instance court held that the parties had not agreed on liquidated damages.(4)

4. Second-instance court

The second-instance court, in its judgment on the appeal brought by the plaintiff, altered the judgment of the first-instance court, ordering the defendant to pay 80% of the amount paid by the plaintiff and default interest to the plaintiff. According to its reasoning, the appeal was well founded in respect of the alternative argument.

The second-instance court stated that neither the email correspondence preceding the conclusion of the contract nor the contract itself stated that the plaintiff had intended to use the service only in the event of the Giro d'Italia.

The date of the Facebook post announcing the cancellation of the Giro d'Italia before the entry into force of the legislation could not be regarded as the date of impossibility. The cancellation of the Giro d'Italia itself was not an external unavoidable cause and did not constitute force majeure regarding the use of the hotel service.

The second-instance court further informed the parties that, according to its official knowledge, on 11 March 2020, the World Health Organization (WHO) had declared covid-19 to be a pandemic. A pandemic is considered to constitute force majeure according to the ministerial explanatory memorandum of the Civil Code. The contract allowed for termination on the grounds of force majeure and contained only an illustrative list of force majeure causes.

In the light of the above, the plaintiff could invoke the pandemic as a force majeure event on 13 March 2020 and could terminate the contract without legal consequence by notice of termination. In view of the above, the second-instance court ordered the defendant to repay the amount remaining from the services already rendered.

5. Supreme Court

The defendant started review proceedings against the second-instance judgment before the Hungarian Supreme Court. The Court decided that the application for judicial review submitted by the defendant was unfounded, and that the final judgment was not unlawful for the following reasons.

The Supreme Court held that the second-instance court's power of review was reformatory – that is, it could reverse the decision of the first-instance court, which was wrong on the merits, without adding any further evidence, and reach a different legal conclusion. The Supreme Court had already stated in an earlier decision(5) that the case law developed in connection with the provision of the old Civil Procedure Code(6) on judicial discretion is also applicable under the new Civil Procedure Code (CPC).(7) Based on the consistent case law of the Supreme Court, in the case of a challenge to judicial discretion in front of the Supreme Court, an infringement of law cannot usually be established if the application for judicial review challenges the free assessment of the evidence.(8)

An application for judicial review directed against the assessment of evidence can only be successful if:

• the second-instance judgment assessed the evidence in a "grossly unreasonable" manner; or
• the facts established by the court are:
  • contrary to the documentary evidence;
  • incomplete; or
  • contain logical inconsistencies.

A conclusion that the second-instance court assessed the evidence in a "grossly unreasonable" manner may be reached if, based on the evidence, only one conclusion can be drawn, which is different from that inferred by the second-instance court.(9) The above infringement of law could not be established on the basis of the grounds set out in the application for judicial review in the present case.

In reviewing the final judgment, the Court examined whether the force majeure clause in the contract justified the plaintiff's cancellation of its May 2020 reservation without legal consequence on 13 March 2020 – that is, the termination of the contract. The explanatory memorandum of the Civil Code mentions pandemics as a traditional case of force majeure among natural disasters, but also considers that certain state measures may be included. It is a matter of judicial discretion to determine whether an event constitutes force majeure.

On the basis of its official knowledge, the second-instance court took into account the relevant fact(10) that the WHO had classified covid-19 as a pandemic on 11 March 2020, even if this fact had not been expressly invoked by the parties. On the same day, the Hungarian government declared a state of emergency for the whole territory of Hungary. In the contract, the date of the group booking, the number of rooms booked and the name of the event in the booking left no doubt that the reason for the conclusion of the contract was the Giro d'Italia, scheduled to start from Hungary on 9 May 2020.

In the present case, it was the covid-19 pandemic itself, its worldwide spread and the governmental measure taken in response to it that created a situation of force majeure for the plaintiff, making it impossible for the plaintiff to use the hotel's services. In an emergency situation caused by a pandemic, a governmental measure may not only be a legislative measure, but also a measure otherwise disclosed as a fact. On the basis of the information available to it, the plaintiff had acted in accordance with the contract when it cancelled its reservation "as soon as possible" on the same day. The serious pandemic situation in Europe, which also led to the postponement of the Giro d'Italia in Hungary, was an extraordinary, exceptional, unforeseeable and unavoidable external circumstance that arose after the conclusion of the contract. It did not fall within the normal commercial risk of the plaintiff, and therefore constituted force majeure.

6. Comment

By its judgment in the present case, the Supreme Court has confirmed that the consistent judicial practice according to which an application for judicial review cannot usually successfully challenge the free exercise of judicial discretion applies under the new CPC as well as the old Code. In the light of the above, the "infringement of law affecting the merits of the case", as defined in the CPC, which is the basis for judicial review, must be interpreted narrowly in the context of judicial discretion, and can only be established with regard to the case law of the courts.

Further, the category of "grossly unreasonable" discretion developed by case law must be interpreted restrictively. For this reason, when a different conclusion could have been also drawn from the evidence, this does not amount to a "grossly unreasonable" discretion of the second-instance court. In the specific case, the Court held that the judgment of the second-instance court was not "grossly unreasonable". The Court pointed out that the second-instance court had correctly assessed the covid-19 pandemic and the government measures taken as a result of it as a case of force majeure that made it impossible for the plaintiff to use the hotel's services.

Further, the Court confirmed that the second-instance court could consider facts which were not invoked by the parties if such facts were publicly known. While this conclusion is right, it must be noted that, according to the CPC, the courts must inform parties before they consider "publicly known facts" so that the parties can submit further motions for evidence.(11)

Unfortunately, it is not clear from the disclosed judgment of the Court whether the second-instance court provided the parties with the above preliminary information in due time. Failing to do this can result in a serious procedural irregularity, which can be a successful ground for judicial review before the Supreme Court according to well-settled case law.(12) At the same time, the defendant's request for judicial review in the case at hand did not invoke any procedural irregularities of the second-instance procedure. Therefore, the Supreme Court could not have considered the above problem.

In summary, by its recent judgment, the Supreme Court confirmed that, under the new CPC, the possibilities to successfully challenge the free deliberation of evidence by the court of second instance are extremely limited. For this reason, it is advisable for litigants who want to succeed in front of the Court to challenge second-instance court decisions rather by invoking errors in law, including breaches of procedural rules.

 

Endnotes

(1) According to section 6:179(1) of Act V of 2013 on the Civil Code.

(2) According to section 6:179(2) of the Civil Code.

(3) Government decision No. 1105/2020 (III 14).

(4) According to section 6:186(2) of the Civil Code.

(5) Judicial decision No. BH 2022.18.

(6) Act III of 1952 on the Civil Procedure Code.

(7) Act CXXX of 2016 on the Civil Procedure Code.

(8) Judicial decisions No. BH 1994.221 and No. BH 2013.119.

(9) Judicial decision No. Gfv.VII.30.675/2016/5.

(10) Section 266(2) of the CPC.

(11) Section 262 of the CPC.

(12) Judicial decisions No. BH 2007.416 and No. EH 2002.761.