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CONSTRUCTION TRUSTEESHIP IN HUNGARY – SCOPE AND GENERAL PROVISIONS

09 May 2019

Collateral management is a key issue in every construction project. In Hungary a special regime, the so-called construction trusteeship protects the interest of the participants of major private construction projects, and secures that contractors and subcontractors receive their remuneration for the work performed.

Introduction

Major construction projects involve more participants with different, sometimes conflicting interests. Employers are interested in timely project completion which can be easily frustrated in case insolvency issues arise in the main-contractor-subcontractor relation. At the same time contractors and sub-contractors shall be also protected from insolvency on the side of employer, so that they receive consideration for the work performed. The Hungarian construction trusteeship strives to reconcile these interests.

What is construction trusteeship?

Construction trusteeship was introduced in Hungary in the middle of the economic crisis in 2009[1], as a kind of statutory collateral management in construction projects in Hungary, with the aim of securing the targeted use of funds.

The main objective of the construction trusteeship is to prevent the chain of debts between the employer, main contractor and subcontractors, and thereby facilitate the successful completion of construction projects in Hungary.

The idea of the regulation is that the funds of the construction project are managed by a third-party, the so-called construction escrow agent, generally a bank or other financial institution like the State Treasury, who effects the payments by releasing the due amounts from the escrow account to the party who is entitled for it.

When construction trusteeship applies?

The construction trusteeship is mandatory in case of privately funded construction activities in Hungary, where the amount of the investment exceeds the EU threshold pursuant to public procurement provisions.[2]

In addition, construction trusteeship can be applied on a voluntary basis in cases, where the investment amount is below the EU thresholds.

Obligations of employer

The employer of the project shall ensure that the coverage, corresponding to the contract price of the main construction contract concluded with the general contractor is disposable by the construction escrow agent when the main construction contract comes into effect. The resource of the coverage of the construction implementation activity can be own resource, bank loan, etc.

The employer shall enter into contract with the escrow agent, open the construction escrow account and put the amount required for the project to under the exclusive disposal of the construction escrow agent until the commencement of the implementation of the given milestone defined in the main construction contract,

  1. by way of transfer of money to the Construction Escrow Account or
  2. by way of providing financial instrument which ensures the payment of the consideration in the deadline[3]

In case the Employer fails to put the amounts under the disposal of the Construction Escrow Agent, the General Contractor may suspend the performance of the main contract for 30 (thirty) days, and after that he is entitled to rescind the main contract.

Payments by Construction Escrow Agent

Given that the use of the amount on the escrow account is targeted i.e. it can be used only for the purposes of the project, the Construction Trustee can make payment from the construction escrow account only

  1. to the general contractor’s bank account;
  2. to the subcontractor’s bank account;
  3. to the employer’s bank account;
  4. to its own bank account.[4]

Subcontractor’s Register

The Construction Trustee shall act on the basis of the so-called sub-contractor’s register, which is an electronic register, forming part of the log-book of the construction project.

The construction trustee shall open the Subcontractor’ Register, and after that the main contractor and subcontractors shall register their claims into the register.

The Construction Trustee shall

  1. monitor the performance of the registration obligation of the main contractor and sub-contractors and the payment of the subcontractor performance,
  2. make payments to the main contractor or subcontractors, based on the data of the Subcontractor’s Register and the Construction Decree.

Summary

As it can be seen from the above rules, in Hungarian construction projects the Construction Escrow Agent can secure that the use of the funds made available by the employer of the project is targeted, and those contractors and sub-contractors, who duly performed the construction contract really get their receivables.

 


[1] Act LVII of 2009 came into force on 22 June 2009 and amended Act LXXVIII of 1997 on the Formation and Protection of the Built Environment, by introducing articles 39/B – 39/C on construction trusteeship. The detailed provisions governing the construction trusteeship were incorporated into Government Decree 2009/191 (IX.15.) on construction implementation activity (“Construction Decree”)

[3] Article 18 of the Constuction Decree

[4] Construction Decree Article 18 (8)