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HUNGARY: WHAT CLAIMS CAN THE ASSIGNEE LITIGATE AGAINST THE DEBTOR?

21 July 2022

The assignment of claims is a common practice in business, yet under Hungarian law it has not been clear what rights are transferred to the new owner of the claim, and what claims can be litigated by the assignee. It has been also unclear whether the assignor and assignee can determine the extent of the rights transferred by assignment. Due to the recent decision of the Hungarian Supreme Court, that we analyse in this article, the picture has become clearer.

1. Facts

On 4th May 2007, Plaintiff's predecessor ("Plaintiff's Predecessor") and Defendant ("Defendant") entered into a foreign currency loan and option agreement ("Loan Contract"). In August 2011, Plaintiff's predecessor terminated the Loan Contract and demanded payment of the outstanding debt from Defendant.

Plaintiff's predecessor assigned its claim against Defendant to Plaintiff ("Plaintiff") on 14th March 2014.

On the basis of the assignment, Plaintiff acquired the overdue claim and the accrued and accruing transaction and late payment interest, charges and collateral obligations securing the claim.

The Plaintiff first brought an action against the Defendant for payment of the debt based on the Loan Contract, but the action was finally dismissed on the grounds that the information in the Loan Contract concerning the exchange rate risk was unfair and therefore the Loan Contract was considered void, as a result of which the Plaintiff could not claim for performance.

Then the Plaintiff sued the Defendant for declaratory relief, to have the Loan Contract declared valid for a certain period, and to have the Defendant ordered to pay the amount arising from the settlement of the Loan Contract.

2. First Instance judgment

By its judgment, the first instance court (“First Instance Court”) dismissed the claim of the Plaintiff again. The Court held that, pursuant to the Act IV of 1959 on the Civil Code (“the old Civil Code”)[1], the object of the assignment is not the legal relationship but the claim arising from it, and therefore only the rights attached to the claim may be transferred by assignment, not the rights attached to the Loan Contract.

A declaration of validity of an invalid Loan Contract is a claim for a formative right which affects the contractual relationship itself, so that only the original contracting party, i.e. the Plaintiff's Predecessor could request the declaration of validity, and then the settlement and the application of the legal consequences.

However, the Plaintiff, as the assignee of the claim arising from the Loan Contract, has no possibility to bring an action for declaratory relief, seeking the declaration of the validity of the Loan Contract for a certain period.

3. Second Instance judgment

Following an appeal by the Plaintiff, the Second Instance Court upheld the judgment of the First Instance Court.

The Second Instance Court has found that unlike a transfer of the whole contract, the assignment did not result in a change of parties in the Loan Contract and that therefore the loan relationship continues to exist between the Plaintiff's Predecessor and the Defendant, irrespective of the assignment.

According to the Second Instance Court, no distinction can be made between the formative rights attached to the contract or attached to its performance, and the assignment does not transfer the formative rights to the assignee (ie. thePlaintiff).

The declaration of the Loan Contract as valid constitutes in substance an amendment of the Loan Contract, which, as a formative right, has not been transferred to the Plaintiff.

According to the provision of the old Civil Code concerning nullity[2], and to the Civil Division opinion No PK 2/2010[3], the invalidity of a void contract may be invoked without time limit by any person with a legal interest to be protected, unless the law provides for an exception.

According to the Second Instance Court, to have a legal interest in the invalidity of a contract, the party invoking the invalidity must have suffered a loss of interest which cannot be avoided otherwise than by challenging the contract or by applying the legal consequences of the invalidity.

However, the Second Instance Court held that the assignee (the Plaintiff) could assert a claim against the assignor (the Plaintiff’s Predecessor) on the ground that the assigned claim had been declared invalid and that the Plaintiff therefore had no legal interest to be defended in the present action.

4. Decision of the Curia

By its judgment, the Hungarian Supreme Court (“Curia”), ruling on the Plaintiff’s application for judicial review, upheld the final judgment.[4]

The Curia agreed with the opinion of the lower courts that in case of assignment, a distinction should be made between the rights attached to the claim and rights attached to the contract. The former rights are transferred together with the assignment of the claim, whereas the latter are not transferred to the assignee under the provisions of the old Civil Code, as referred to above, save in case the parties  expressly agreed in their contract to transfer those rights.

In case the purpose intended to be achieved by the contract is not possible due to a formal, substantive, or intentional defect, then  the legal relationship between the contracting parties, i.e. the Loan Contract is affected. Therefore, the legal consequences of such a situation shall be also resolved solely by and between the parties of the contract.

The right to dispose concerning the legal consequences of invalidity is necessarily a right relating to the Loan Contract as a whole and not to the claim arising from it, and therefore, in the absence of an express provision to that effect in the assignment agreement, it does not pass to the assignee (the Plaintiff) under the old Civil Code.

The Curia held that the Plaintiff is not entitled to bring an action as a third party to the application of the legal consequences of the invalid Loan Contract, as follows.

The assignee has a right to enforce the claim based on the assignment, but if the Loan Contract on which the claim is based proves to be invalid, the assignment alone does not constitute a legal interest in the application of the consequences of invalidity.

In accordance with the principles established by the case-law, the legal interest to declare the contract void cannot be assigned[5], i.e., the Plaintiff’s right to bring the claim cannot be derived on that basis.

Moreover, the Plaintiff, as a third party, may only request the application of the consequences of invalidity in the relationship between the contracting parties, even if it has a legal interest to be protected, and cannot request such application directly against the Defendant.

5. Analysis of the Decision

In its decision, the Curia, in line with the Second Instance Court, examined the legal effects of the assignment in two stages.

Firstly, it explained the rights transferred or not transferred to the assignee by the assignment of a claim from the concept of assignment under the Civil Code, it listed the formative rights connected with the contract in the latter category.

In relation to the first step, the Curia held that the assignment transfers only the rights attached to the claim to the assignee. This solution is in line with the solutions of German law, according to which the formative rights attached to the claim arising from the contractual relationship, e.g. the right to set an extension of the deadline, the right of choice of the obligee, follow the claim and are transferred to the new obligee by assignment, whereas the formative rights attached to the contract, e.g. the right to contest the contract, to rescind or to terminate it, are not transferred by assignment.[6]

By setting out the above, the Curia intended to unify the uncertain case law on the legal effects of assignment in Hungary. The recognition of the assignment of the rights attached to the assigned claim is in line with the legal literature, but both the court practice and the Hungarian legal literature are divided on the assignment of the formative rights attached to the contract.[7]

The rules of the Civil Code on assignment, however, cannot be interpreted in such an expanded manner that the transfer of the claim would also transfer the rights related to the basic legal relationship to the assignee[8], and therefore the Curia in the present case properly rejected the action of the assignee (Plaintiff) for the declaration of the Loan Contract valid.

However, the Curia also stated that contractual freedom shall also apply to the above issue, so the assignor and assignee may expressly agree in their contract that the formative rights related to the basic contract shall be transferred together with the claim.

In the second step, it examined whether the Plaintiff, if it had not acquired the formative rights of the Loan Contract, had a legal interest as a third party outside the contracting parties on the basis of which it could invoke the nullity of the Loan Contract directly against the Defendant.

As regards the second step, it should be noted that the old Civil Code was applied in the present case, and the provisions of the new Civil Code on contesting void contracts are also based on the old Civil Code and its practice as described above.

The Curia has also followed its consistent practice in relation to the second step, according to which a third party not involved in the conclusion of the contract may invoke nullity only if it proves its interest in contesting the contract, which is subject to the condition that its legal claim cannot be enforced by any other legal means.[9]

The Curia has also held that even if a third party has a legal interest to be protected, it is not entitled to apply the legal consequences of the invalidity of a contract between other persons.

6. Summary

Based on the above, if business actors wish to assign a claim so that the assignee acquires full rights to recover the claim in Hungary, it is advisable to make a specific provision in the assignment contract that the formative rights attached to the basic contract are assigned together with the claim.

In such a case, the assignee, as new owner of the claim may not only bring an action against the debtor to assert the claim, but may also bring alternative claims (e.g. declaration of validity, settlement, demand, etc.) in the event that the claim cannot be enforced for any reason.

 

[1] Section 328(1) of the old Civil Code

[2] Section 234(1) of the old Civil Code

[3] Opinion No 2/2010 (28.VI.) PK of the Civil Division of the Supreme Court on certain procedural issues in invalidity actions

[4] Judicial decision No. BH 2022.6.158

[5] Judicial decision No. BH 2001.335.

[6] Nagykommentár a Polgári Törvénykönyvről szóló 2013. évi V. törvényhez (szerk: Vékás Lajos / Gárdos Péter)

[7] Gárdos Péter: Az engedményezéssel átszálló jogok - átszállás és átruházhatóság a magyar jogban Polgári Jog 2022/5-6. Tanulmány

[8] See note 7.

[9] Judicial decision No. BH2004. 503.