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

25 August 2022

While review 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 the above rule also applicable under the new Civil Procedure Code? In our article, we answer this question by analysing the recent judgment of the Curia in a case concerning the impacts of COVID-19 on the Hungarian phase of the Giro d’Italia cycling race.

1. Facts

On February 7, 2020, Defendant ("Defendant"), which operates hotels, and Plaintiff ("Plaintiff") entered into a contract ("Contract") pursuant to which Defendant agreed to make 86 rooms available to Plaintiff at one of its hotels for group bookings from 7th to 9th May 2020.

Based on the preliminary correspondence of the parties it was clear that Plaintiff booked the rooms to accommodate the managers, employees, and partners of its Polish parent company during the Hungarian stage of the Giro d'Italia cycling race ("Giro d'Italia"). At the same time the contract did not contain any specific reference to this fact.

According to the provisions of the Contract, “(...) 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 26th March 2020 and 100% of the estimated revenue after 26th 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 (...)"

Plaintiff paid the Contract price to Defendant on 26th February 2020, but subsequently, on 13rd March 2020, in an email to Defendant, Plaintiff cancelled all rooms and suites reserved. In its e-mail, the Plaintiff claimed that on the same day it became 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, the Defendant to return the full amount paid as an advance payment for the accommodation. The Plaintiff argued that according to the the force majeure provision of the Contract the performance of the Contract may be cancelled without liability (legal consequence) in case of an event beyond the control of the parties (e.g., natural disaster, war, terrorist act, strike, etc.). The Government of Hungary has cancelled the Hungarian stage of the Giro d'Italia due to the coronavirus epidemic, i.e., force majeure.

On 12nd October 2020, the Defendant paid back 20% of the pre-paid amount to the Plaintiff.

2. Statement of claim and defence of the Defendant

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 was concluded to accommodate the managers and representatives of its Polish parent company's partners during the period from 7th to 9th May 2020, the date 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 therefore terminated at that time, and the email message of the Plaintiff dated 13th March 2020 is 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 defence of 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 Judgment

The first instance court (“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 an epidemic 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 14th March 2020, consequently a daily Facebook post or an article published on the internet before that date cannot be considered as a formal decision. In the light of the above, at the time of the Plaintiff's e-mail, on 13th March 2020, there was no legal or physical obstacle 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 Judgment

The second instance court (“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 Plaintiff. According to its reasoning, the appeal was well founded in respect of the alternative argument.

The Second Instance Court stated that neither the e-mail correspondence preceding the conclusion of the Contract, nor the Contract stated that the Plaintiff intended to use the service only in the event of the Giro d'Italia.

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

The Second Instance Court further informed the parties that, according to its official knowledge, on 11th March 2020, the World Health Organisation (“WHO”) had declared the coronavirus epidemic as pandemic. The pandemic is considered 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 13th March 2020 and could terminate the Contract without legal consequences by notice of termination. In view of the above, the Defendant shall repay the amount remaining from the services already rendered.

5. Decision of the Curia

The Defendant started review proceedings against the second instance judgment in front to the Hungiaran Supreme Court (“Curia”). The Curia has decided that the application for judicial review submitted by the Defendant is unfounded, and that the final judgment is not unlawful for the following reasons.

The Curia held that the Second Instance Court's power of review was reformatory, i.e. 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 Curia has 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” or „Civil Procedure Code”)[7].

Based on the consistent case law of the Curia, in the case of a challenge to judicial discretion in front of the Curia, the infringement of law usually cannot be established if the application for judicial review challenges the free assessment of the evidence.[8]

The application for judicial review directed against the assessment of evidence can only be successful, in case the second instance judgment assessed the evidence in a grossly unreasonable manner, or in case the facts established by the court are contrary to the documentary evidence, incomplete or contain logical inconsistencies. A grossly unreasonable conclusion may be reached if based on the evidence only one conclusion can be drawn, which is different from the one 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 Curia examined whether the force majeure clause in the Contract justified the Plaintiff's cancellation of its May 2020 reservation without any legal consequences on 13rd March 2020, i.e. the termination of the Contract.

The explanatory memorandum of the Civil Code mentions pandemic 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 the COVID-19 epidemic as a pandemic on 11st March 2020, even if this fact was not 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 leave no doubt that the reason for the conclusion of the Contract was the Giro d'Italia, scheduled to start from Hungary on 9th May 2020.

In the present case, it is the epidemic itself, its worldwide spread, and the governmental measure taken in response to it, which created a situation of force majeure for the Plaintiff, making it impossible for Plaintiff to use the hotel's services.

In an emergency situation, caused by an epidemic, the 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 acted in accordance with the Contract when it cancelled its reservation 'as soon as possible' on the same day.

The serious epidemic situation in Europe, which has also led to the postponement of the Giro d'Italia in Hungary, is an extraordinary, exceptional, unforeseeable, and unavoidable external circumstance which arose after the conclusion of the Contract which does not fall within the normal commercial risk of the Plaintiff, who referring force majeure.

6. Analysis of the decision

By its judgment in the present case, the Curia confirmed that the consistent judicial practice, according to which an application for judicial review usually cannot successfully challenge the free exercise of judicial discretion, applies under the new CPC, as well.

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 in the cases developed by the case-law of the courts.

Furthermore, the category of grossly unreasonable discretion developed by case-law itself 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 Curia held that the judgment of the Second Instance Court had not suffered from the above error, and in this regard, the Curia pointed out that the Second Instance Court had correctly assessed the COVID-19 epidemic and the government measures taken as a result of it as a case of force majeure which made it impossible for the Plaintiff to use the hotel's services.

Furthermore, the Curia also confirmed that the Second Instance Court could consider facts which were not invoked by the parties, in case these facts were publicly known.

While the above conclusion is right, it must be noted that according to the CPC, the court shall inform parties before it considers “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 Curia, whether the court of second instance 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 Curia according to well-settled case law.[12]

At the same time, the request for judicial review of the Defendant in the case at hand did not invoke any procedural irregularities of the second instance procedure, therefore the Curia could not have considered the above problem.

In summary, by its recent judgment, the Curia confirmed that under the new CPC, there is extremely limited possibility to successfully challenge the free deliberation of evidence by the court of second instance.

For this reason, it is advisable for litigants, who want to succeed in front of the Curia to try to challenge second instance court decisions rather by invoking errors in law, including the breach of procedural rules.

 

[1] According to the Section 6:179(1) of Act V. of 2013 on the Civil Code („CC” or “Civil Code”)

[2] According to Section 6:179(2) of the CC

[3] Government Decision No. 1105/2020. (III. 14.)

[4] According to Section 6:186(2) of the CC

[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., BH 2013.119.

[9] Judicial Decision No. Gfv.VII.30.675/2016/5.

[10] Section 266(2) of the Civil Procedure Code

[11] Section 262 of CPC

[12]Judicial decisions No. BH 2007.416; EH 2002.761.