07 June 2024

Can creditors start legal proceedings without issuing invoice in respect of the litigated claim in Hungary? Can a simple payment notice have the same legal effects as an invoice? We analyse this issue in the light of recent ruling of the Hungarian Supreme Court.

1. Facts

In August 2016, the defendant (“Defendant”), as principal, entered into an indefinite engagement contract (“Contract”) with the plaintiff (“Plaintiff”) for the management of his legal affairs.

According to Section 4 of the Contract, in the case of legal services relating to immovable property of the Defendant, the Defendant shall pay the Plaintiff the fees and costs within 15 days of the sale of the immovable property.

In June 2019, the Defendant terminated the Contract, but he did not pay certain fees to the Plaintiff.

In a letter received by the Defendant on 18th July 2019, the Plaintiff requested the Defendant to pay its the debt based on the Contract within 8 days but did not issue an invoice to the Defendant.

2. Statement of claim and defence of the Defendant

In its statement of claim, the Plaintiff requested the Defendant to pay its debt based on the Contract and interest on late payment from 27th July 2019 until payment.

In his statement of defence, the Defendant sought dismissal of the statement of claim. The Defendant disputed, among others, that the claim was not due and payable, since no certificate of performance or invoice had been issued by the Plaintiff.

Moreover, the Defendant also argued that the deadline for performance was not clearly defined in section 4 of the Contract, and therefore did not give rise to an obligation to pay without an invoice.

3. First instance court decision

The first instance court (“First Instance Court”) ordered the Defendant to pay most of the Plaintiff's claim.

The First Instance Court found that the time limit for performance was clearly specified in section 4 of the Contract, and therefore the Defendant should have performed the Contract without issuing an invoice or payment notice.

Moreover, the First Instance Court laid down that the failure to issue an invoice may entail other legal consequences outside the legal relationship of the parties, but it does not relieve the Defendant of its contractual obligation to pay, does not constitute a delay in the Plaintiff's right to claim, and does not extend the time limit for the Defendant to perform.

4. Second instance court decision

The second instance court (“Second Instance Court”) upheld most of the findings of the First Instance Court's judgment.

However, in relation to the starting date of the obligation to pay interest for late payment, the Second Instance Court held that the parties had made the time for performance conditional on an uncertain future event, i.e., the date of the sale of the Defendant's property(ies), which may never occur. Therefore, the time for performance could not be considered clearly defined.

Based on the above, in the absence of contractual provision regarding the time for performance, the provisions of the Hungarian Civil Code (“CC”) shall be applied.

According to the Hungarian CC, if the parties did not determine the time for performance of a debt, it shall be performed within thirty days following the receipt of the obligee’s payment notice or invoice.1

Consequently, the Plaintiff could have made the Defendant's debt due either by issuing an invoice or by sending a payment notice, regardless of whether he is otherwise obliged to issue an invoice.

The question of the consequences for the Plaintiff of not having complied with the obligation to issue an invoice is a different matter(s) (e.g.: tax fines), but it does not affect the time-limit for performance. Therefore, the Plaintiff could have made its claim due by sending the payment notice to the Defendant.

5. Request for judicial review

The Defendant brought a request for judicial review of the Second Instance Court’s final judgment, seeking, first, annulment of the final judgment and, second, an order that the Second Instance Court should reopen the proceedings and give a new decision.

According to the Defendant, the Plaintiff should have issued an invoice for the performance of its legal services under the provisions of, among others, the Hungarian VAT Act and the Accounting Act. By his failure to do so, there was an intermediate breach of Contract, so that the Plaintiff’s claim cannot be asserted.

Concerning the provisions of the Hungarian CC regarding time for performance, he argued that if a party is obliged to issue an invoice, it must send an invoice to the debtor, and that a payment notice can only be used if the party is not obliged to issue an invoice. Consequently, the Plaintiff cannot choose between the possibility of issuing and sending the two documents.

The Defendant also added that the tax and financial rules on invoicing under the Hungarian VAT Act, the Accounting Act become part of the Contract even if the parties have not laid down these rules, consequently, the provisions of the CC cannot result in an exemption from this obligation and, in the absence of an invoice, the Plaintiff cannot claim payment.

6. Decision of the Hungarian Supreme Court

The Hungarian Supreme Court reviewed the final judgment on the grounds set out in the requests for review and, based on the grounds set out therein, did not find that the final judgment was contrary to law on the merits of the case.

Based on the request for review, the Hungarian Supreme Court was to decide on the legal question whether the failure of the contracting party to issue an invoice could in itself lead to the rejection of the statement of claim.

Under the Hungarian CC, the main rule for a contract is simultaneous performance2 but the parties may also agree that, as was the case in the Contract, one party is obliged to perform in advance.

If the parties have specified a time limit for performance in their contract, the consideration is due only when the time limit expires.

The Hungarian CC also contains provisions for cases where one party is obliged to pay money under the contract, but the parties have not specified the time for performance in the contract.

Pursuant to this provision, a creditor can send to the debtor either a payment notice or an invoice, the service of either of them is suitable for the exact determination of the time limit for performance.

The Plaintiff also argued that the failure to issue an invoice is an intermediate breach, which prevents the Defendant to pay his debt. According to the Hungarian CC, an intermediate breach may be constituted by conduct or omission which prevents the other party from

performing any of its obligations under the contract.3 Therefore, an intermediate breach does not normally preclude the other party from breaching the entire obligation, but only the causally related obligation affected by the intermediate breach.

However, Plaintiff does not fulfil his contractual obligation by invoicing, but by providing his own services, the issue of the invoice was not a contractual obligation of the Plaintiff, consequently, he can claim payment even without the issue of an invoice.

The Hungarian Supreme Court, agreeing with the Second Instance Court, held that a breach of the provisions of the VAT Act do not affect the contractual relationship of the Parties, because its provisions do not apply to rights or obligations arising from a contract. However, it may give rise to a tax sanction.

7. Comment

The Hungarian Supreme Court had to decide on a frequent situation where the creditor, which should have issued an invoice, but failed to do so, simply demanded payment from the debtor.

Under the previous Civil Code4, the courts made a number of decisions on this situation, in addition, a judicial opinion has been issued in relation to this case.5

Based on the well-established case law, failure to issue an invoice does not affect the due date of payment of the consideration at the time of performance of the service.6 Unless otherwise agreed, the consideration becomes due upon performance of the service, the creditor's obligation to invoice (interim measures) arises and must invoice within the limitation period.

In the event of failure to issue an invoice, in court proceedings for payment of a claim, the statement of claim containing the details of the omitted invoice will replace the missing invoice (payment notice), but the plaintiff will only be entitled to interest on late payments from the date on which the action was brought7.

The above findings have been confirmed by the Hungarian Supreme Court in the present case under the new Hungarian CC and it has been held that the failure to issue the mandatory invoice is not an obstacle to the enforcement of the claim before the courts. However, of course, there may be tax implications in this case.

In this article we analysed judicial decision issued under No. BH2024.112. by the Hungarian Supreme Court.