END OF BACK-TO-BACK CONSTRUCTION CONTRACTS? – GROWING SUBCONTRACTOR PROTECTION IN HUNGARY

16 October 2019

The case law of Hungarian construction disputes in the last years sheds light on the intention of courts to protect the “weaker party”. The Supreme Court has already started to protect subcontractors by declaring certain contract terms invalid, and its recent decision even places more risks at general contractors. How to cope with these challenges in Hungary? We address this question in our article.

1. “Back-to-back” contracting as industrial practice

In the construction industry, it is well-known practice, that the vast majority of contractual conditions of the Employer are inserted into the contracts of the whole contractual chain.

Therefore, the essential provisions of the main contract between the Employer and the General contractor are replicated in the subcontracts between the General contractor and the Subcontractor.

The “back-to-back” contracting guarantees, that in case of a legal dispute, any member of the contractual chain can enforce the same rights, which can be enforced against him. It is also frequent that the enforceability of subcontractor’s claim is linked to the performance or approval of Employer in the Employer – General Contractor relationship.

However, in the last years the Hungarian Supreme Court (Curia) has started to restrict the freedom of the contracting parties in order to protect the Subcontractors by putting the General contractor at significant risk.

2. The 2015 decision – General contractor runs the risk of employer’s insolvency

For the first time the Curia declared the contractual term, making the payment from the General contractor to the Subcontractor dependent on the payment of the Employers is contrary to good morals and therefore shall be null and void in 2015. [1]

According to the court, this kind of risk reduction of the General contractor is a disadvantageous condition to the Subcontractor, which can cause that the latter cannot have the payment of his finished work, even if he performs it in accordance with the contract.

The above decision of the Curia, in which the risk of insolvency of the Employer was placed at the General contractor, is understandable to a certain extent, as it can be expected from a General contractor to finance the performance of the Subcontractors, even in the case, when he is not paid by the Employer temporarily. In the contrary case, the role of General contractor would become meaningless.

3. The 2019 decision – General contractor runs the risk of items missing from budget

However, the Curia went further in its recent published decision, when declaring the terms of the subcontract, under which the General contractor shall accept the additional works of the Subcontractor only in such cases and to the extent when the Employer accepts these works, contrary to good morals and therefore null and void[2].

This decision practically places the risk of the costs of the works, not listed in the budget but actually done during the construction, totally at the general contractor.

Indeed, the disputes around additional work emerge because works not listed in the budget become necessary, and they are performed by the General contractor. According to the Employer, these works are necessary for the proper use, therefore should not be paid, while in the General contractor’s opinion, these works, not specified in the designs, were done because of variations, therefore these should be paid.

While the payment by the Employer is totally independent from the Subcontractor, the same does not apply to the approval of the additional work, as the General contractor makes the budget of the project on the basis of the bids given by the Subcontractors.

In view of the above, it is not fair to handle the different situations in the same way and to put the risk of the reimbursement of the additional work at the General contractor.

4. Options of the General contractor

The question arises, how can you avoid the above risks as a General contractor?

If the project contains any foreign element, for instance foreign Employer, General contractor etc., other applicable law can be chosen instead of the Hungarian, in which these terms are not applicable.

It can be another solution for the Parties to choose an arbitration, in a country, where the national law does not provide similar prohibitions like the above.

It is important to underline, that the choice of law, and the arbitration can only provide a solution for the contractual terms, as the EBCC or the construction trusteeship shall be applied to all construction projects in Hungary, regardless the applicable law.

5. Conclusion

In the Hungarian construction law, there is limited option for putting the risks at the subcontractors, because of their increased protection by courts. The judicial protection of Subcontractors can be reduced by the choice of appropriate law or dispute resolution forum.