i Background – new procedural regime
The Hungarian civil procedural rules underwent a sweeping reform in 2017, affecting the entire dispute resolution area, including both litigation and arbitration. The brand new regime better reflects the requirements of the 21st century and thus may give rise to a modern, professional and effective handling of procedures.
The renewed and restructured Act No. CXXX. of 2016 on Civil Procedures (Civil Procedural Act) entered into force on 1 January 2018, which contains the relevant procedural rules for civil lawsuits. The Civil Procedural Act introduces new fundamental principles, divided process structure – in time and function – during the first instance procedures, new concept of private experts in evidencing procedure, etc.
Hungary has had an arbitration act in place since 1994, which was based, to a large extent, on the UNCITRAL Model Law. The completely new and retailored Act No. LX of 2017 on arbitration (Arbitration Act) has been enacted with effect from 1 January 2018, which is based on the fundamental principle of party autonomy. Therefore, the parties are free to choose to have their dispute arising out of commercial relationship settled by arbitral tribunals instead of by the state courts. The Arbitration Act is largely based on the UNCITRAL Model Law as amended in 2006.
Arbitration has had a growing significance over the past two decades. An increasing number of contracting parties, in particular those active in the construction and energy industry, have submitted their disputes to arbitration in recognition of the advantages of these procedures. Timely process, efficiency, confidentiality and the freedom to appoint arbitrators with particular professional knowledge and expertise are the most commonly listed advantages of arbitration. The relatively high costs of arbitration are often referred to as a key disadvantage.
In general, the complete renewal of the procedural regime may influence the recognition of arbitration in the business sector.
ii The Hungarian Arbitration Act
The mandatory rules on arbitration are laid down in the Arbitration Act. The Arbitration Act contains provisions – among others – regarding the interpretation of the act, the arbitration agreement of the parties, the composition of the arbitral tribunal, the jurisdiction of arbitral tribunal, the interim and preliminary measures, the conduct of arbitral proceedings, the setting aside of arbitral awards, the retrial of arbitration matters, the enforcement of arbitral awards.
The Arbitration Act governs both domestic and international arbitrations with their seat in Hungary. Provisions governing the procedure of state courts related to international arbitration matters are applicable even if the seat of arbitration is outside of Hungary.2
Under the regime of the Arbitration Act, ad hoc or permanent arbitral institutions conduct arbitration proceedings.3
iii Arbitral institutions
The Arbitration Act introduces the institutional framework for Hungarian commercial arbitration on the basis of which the following permanent arbitration courts have been established:4
- Commercial Arbitration Court with general jurisdiction in Hungary as the main institution dealing with arbitration;
- Sports Arbitration Court under the provisions of Act on Sports which is competent in matters defined in such Act; and
- Arbitration Court for agricultural disputes which is attached to the Hungarian Chamber of Agriculture.
Commercial disputes are most commonly referred to the permanent court of arbitration attached to the Hungarian Chamber of Commerce and Industry (i.e. the Commercial Arbitration Court) which offers institutional arbitration both for domestic and international disputes. The Commercial Arbitration Court has adopted its own Rules of Procedure, which are applicable as of 1 February 2018 (Rules of Procedure).
Considering the revision of arbitral institutions in the Arbitration Act, the Money and Capital Markets Arbitration Court and the Energy Arbitration Court have been ceased to exist on 31 December 2017. According to the Arbitration Act, as of 1 January 2018 the Commercial Arbitration Court performs the duties as permanent arbitration court also in the cases, still pending, but submitted earlier to the Money and Capital Markets Arbitration Court and to the Energy Arbitration Court.5
iv Arbitration agreement
Arbitration agreements must be in writing and must contain the parties' submission of their disputes, arising from their contractual or non-contractual relationship, to arbitration, either to a permanent institution or ad hoc arbitration. The arbitration agreement may be entered into on a stand-alone basis or as part of another agreement (arbitration clause). An arbitration agreement will only be valid if duly signed by all parties (physically or electronically). Arbitration agreements concluded via electronic communication must be deemed to be in written form even if they are not signed electronically, but the electronic communication is available to the other party and is suitable for later reference. Arbitration agreements are also deemed to have been concluded in writing if the party alleges the existence of the arbitration agreement in his declaration on the referral to arbitration or in his statement of claim, and it is not disputed by the other party. The parties may also enter into valid arbitration agreements by referring to a separate document containing an arbitration agreement, provided that the parties' contract expressly refers to that separate document and sets out that the arbitration agreement in the separate document must be deemed as part of the parties' contract.6
If the parties participate in court proceedings, state courts will dismiss the claim and terminate the procedure at any stage if the court finds that it lacks jurisdiction on the basis of a valid and enforceable arbitration agreement. The state courts will only accept jurisdiction if they find that the arbitration clause is non-existent, null and void, non-effective or incapable of being performed. The defendant must present its objection to the jurisdiction of the court in its very first defence submission.7
If a party uses arbitration clauses as part of standard forms of contract or general terms and conditions, it will be this party's burden of proof to demonstrate that the other party was given a full and proper opportunity to read and understand the terms, and that the other party accepted such terms, expressly or by conduct. As a special rule, the other party must be expressly and specifically informed if the standard forms of contract or general terms and conditions contain unusual terms. Such terms will bind the other party only if such party expressly and specifically accepted such unusual terms. Court practice in Hungary tends to view arbitration agreements as such unusual terms in general terms and conditions. Therefore, a highly conservative approach is recommended when including an arbitration agreement in standard forms of contract or general terms and conditions.
There are a number of disputes that cannot be submitted to arbitration: those arising from consumer contracts, marriage, personal or family status and capacity, public administration and labour relations, false or defamatory press statements, and enforcement procedures.8 Both arbitration tribunals and courts must scrutinise claims and applications brought before them to ensure that matters that cannot be arbitrated are not decided in arbitration. The lack of such arbitrability is a matter of jurisdiction.
In the first place it is the arbitral tribunal that decides on its own jurisdiction. If it establishes its own jurisdiction either party may, within 30 days, challenge this decision before the competent state court (the Metropolitan Court or county courts). The court may set aside the decision of the tribunal and find that the tribunal has no jurisdiction, or may approve the decision of the tribunal.9
vi Appointment and challenge of arbitrators
The number of arbitrators is agreed by the parties, but it must be an odd number. In general practice, each party appoints one arbitrator, and the party-appointed arbitrators elect the chairman of the tribunal. If the number of the arbitrators is three, and if a party fails to appoint its arbitrator within 30 days of the receipt of the other party's request, or if the party-appointed arbitrators fail to elect the chairman within 30 days of their appointment, the competent state court (the Metropolitan Court or county courts) will appoint the arbitrator. If the dispute falls within the jurisdiction of the Commercial Arbitration Court, such appointing responsibilities will be exercised by its President.10
Arbitrators must be independent from the parties, impartial and unbiased, they must not be instructed to rule one way or another, and they are under full confidentiality obligations. They must issue a declaration of impartiality upon their appointment, or a statement of disclosure on any matters that they believe in good faith to have a material impact on their independent, impartial and unbiased conduct.
Either party may, by written notice to the tribunal, challenge an arbitrator within 15 days of receiving notice of the arbitrator's appointment or within 15 days of becoming aware of circumstances giving rise to doubts as to the arbitrator's independence or impartiality, whichever occurs later. If the arbitrator fails to resign or the other party disputes the challenge, the tribunal will decide on the matter. If the tribunal dismisses the challenge, the challenging party may, within 30 days of the receipt of the decision, request the state court to decide on the challenge. The tribunal, including the challenged arbitrator, may continue the arbitration and issue an award until the receipt of the decision of the court of the state.11
Arbitrators must have the knowledge and expertise relevant to the matter in the arbitration. No person may be appointed as an arbitrator if he or she (1) is under the age of 24, (2) is prohibited from public matters by the court, (3) is condemned by court to imprisonment, (4) is under guardianship ordered by a court, (5) is prohibited by court from the exercise of jobs that require a law degree or (6) is under probation ordered by a court.12
There are no specific legal regulations on ethical duties. The general principle applies: arbitrators must be independent from the parties, impartial and unbiased; they must not be instructed to rule one way or another, and they are under full confidentiality obligations. Arbitration institutions are free to adopt a code of ethics; however, the most significant Hungarian arbitration institution, the Commercial Arbitration Court, does not have codes of ethics.
vii Interim and preliminary measures, judicial assistance
Arbitrators may issue a wide range of interim measures (including those devoted to preserving a situation of fact or law, to preserving evidence, to seizing assets or freezing bank accounts). Interim measures of arbitral tribunals are adopted in the form of orders (i.e. not awards). Such order will only be granted following the constitution of the tribunal (the emergency arbitrator instrument has not been introduced into the rules of the major arbitration institutions in Hungary). When requesting interim measures the party may also request preliminary measures. Preliminary measures may be capable of preventing the other party from frustrating the purpose of the interim measure. The provisions of the Arbitration Act explicitly stipulate that the above orders should be enforced in accordance with the rules of judicial enforcement (i.e. the same way as regular court orders).13
The Arbitration Act provides that it is not incompatible with an arbitration agreement for a party to request from a Hungarian or a foreign state court, before or during arbitral proceedings (1) preliminary evidencing, (2) interim measures, (3) freezing orders, (4) granting enforcement endorsements on documents and (5) ordering securities against potential damages, and for a court to grant such measures. Accordingly, Hungarian courts will accept applications for the aforesaid measures related to arbitration – irrespective of the place of arbitration. The applicant will bear the burden of proof to demonstrate that the request is well grounded in facts and law. If the request is properly supported with probative evidences, the court will grant the measure even if the arbitral tribunal has been constituted. If ordered prior to the constitution of the tribunal, it will remain in effect as the tribunal does not have power to overrule the order of the court.14
State courts will grant evidentiary assistance in support of the arbitration upon the request of the tribunal or the request of a party as approved by the tribunal, if the tribunal believes that the evidentiary procedure would be conducted in a more time and cost efficient manner by the court of the state.15
Under the Arbitration Act, at the request of either party, the arbitral tribunal informs the person, who has legal interest as to the outcome of the arbitration procedure that they may join the procedure to promote the party who has the same interest, in order to succeed in the arbitration procedure.16
ix Arbitral awards
The Arbitration Act requires that an award must be in writing and signed by all arbitrators. The award must contain provisions on the amount and allocation of procedural costs and expenses, including the arbitrators' fees, only if either party so requests. The award must describe the reasons and grounds of the decision, and must provide a proper justification of the decision. The date of the award and the seat of arbitration must be clearly shown. A copy of the award must be delivered to each party.17 Interim or partial awards are enforceable if they meet the validity criteria for final awards set out in the Arbitration Act.
Unless the parties agree otherwise, the arbitral tribunal adopts its award with a majority of votes.18 Dissenting opinions are allowed, however, they will not be added to the award, but kept on record.
During the arbitration the parties may at any time agree to terminate the disputed matter. In that case, the arbitral tribunal will terminate the proceedings by adopting a ruling (not an award). If the parties request, their settlement will be set out in an arbitral award, provided that the arbitral tribunal is convinced that the settlement is in full compliance with the applicable substantive law.19
Either party may request that the arbitral tribunal to correct any misspelt or erroneous names, figures, calculations or other typographical errors in the award. Such errors can be corrected by the arbitral tribunal ex officio, too. Either party may request that the arbitral tribunal interpret certain parts of the award. Such interpretation will become part of the reasoning of the award. Either party may request that the arbitral tribunal supplement the award if requests, claims or applications presented in the process remained unresolved. The arbitral tribunal may, if it finds it necessary, hold another hearing, and will issue a supplementary award.20
x Setting aside of arbitral awards
The arbitral awards cannot be appealed, only a request for setting aside can be filed with the state courts within 60 days following the receipt of the award on grounds specifically listed in the Arbitration Act:21
- the party concluding the arbitration agreement had no legal capacity or capacity to act;
- the arbitration agreement is invalid;
- a party was not given proper notice of the appointment of an arbitrator, or of the arbitral proceedings or was otherwise unable to present its case;
- the award was made in a legal dispute to which the arbitration agreement did not apply or which was not covered by the provisions of the arbitration agreement;
- incorrect composition of the arbitral tribunal or the proceedings were not in accordance with the parties' agreement;
- the subject matter of the dispute is not arbitrable under Hungarian law; and
- the award is in conflict with the rules of Hungarian public policy.
Challenge proceedings before the state courts are usually completed at one single court hearing. It is exceptional that a second hearing is scheduled to further discuss complicated legal issues. Therefore challenge proceedings usually terminate within three to six months.
The court of the state may, upon a party's request in a procedure for the set aside of an award, stay the process for 90 days to grant the opportunity to the arbitral tribunal to reopen the arbitration procedure or to make procedural measures that are considered by the tribunal appropriate to eliminate the grounds of setting the award aside. Thus, the arbitration procedure continues for the time period and purpose as determined by the court of the state, and a new arbitration award is adopted.22
xi Preparatory consultation
As a positive development, the Rules of Procedure contains provisions regarding the preparatory consultation. The arbitral tribunal holds consultation with the parties in person or via telecommunication devices within 30 days following the constitution of the tribunal in order to plan the conduct of the procedure. The arbitral tribunal and the parties discuss the rules of procedure, the evidences to be used foreseeably, and as a result of this fix the timing and deadline of procedural actions.23
xii Renewal of procedure
As one of the unique and new provisions, the Arbitration Act provides for the possibility of renewal of the procedure of arbitration matters within one year following the receipt of the award, based on facts or evidence that were not taken into account during the original arbitration procedure for any reason not attributable to the party relying on them, provided that it could have resulted in a more favourable decision to this party.24
The main novelty of the Arbitration Act is the renewal of the procedure. This legal instrument is basically unknown to the arbitration. The essence of arbitration is the professional, fast, efficient and final settlements of disputes.25
The renewal of procedure is only applicable unless otherwise agreed by the parties. Therefore, the application of renewal of procedure can be excluded by the parties in their arbitration agreement.
xiii Recognition and enforcement of arbitral awards
Awards of arbitral tribunals will be directly enforceable through the judicial enforcement system. The applicant party must file an application to the competent state court (county courts or the Metropolitan Court), enclose the original arbitral award or a certified copy thereof, and pay the statutory duties and fees. The award will be enforced by the judicial enforcement officer in the same manner as state court judgments.26
Enforcement may be opposed on the grounds that (1) the subject matter of the dispute was not capable of settlement by arbitration under the laws of Hungary or (2) the enforcement of the award would be contrary to the public order of Hungary.27
The party opposing enforcement may request the court to stay enforcement. The court will assess all relevant circumstances in determining whether to stay enforcement or grant leave to enforce. There are no statutory aspects or factors to consider; it is in the absolute discretion of the court to make the decision.
A foreign arbitral award may be recognised and enforced under the Hungarian enforcement rules, subject to international treaties and regulations of the European Union. Hungary is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention), with the reservations that the Convention will only be applied to disputes arising out of legal relationships, whether contractual or not, that are considered commercial under Hungarian law; and only to awards which were made in another contracting state. Hungary is also a party to the European Convention on International Commercial Arbitration of 1961 (European Convention).
II THE YEAR IN REVIEW
i Developments affecting international arbitration
In general, the Arbitration Act does not make distinctions between domestic and international arbitration. The only manifest exception is that in international arbitration the presiding arbitrator's or the sole arbitrator's citizenship must differ from the citizenship or domicile of the parties.28
Pursuant to the Arbitration Act, the Presidium of the Commercial Arbitration Court may make recommendations on procedural issues. The President also ensures that the anonymised extract of arbitral awards will be available on the website of the Commercial Arbitration Court.29
There is an active communication and professional cooperation between the Presidium of the Commercial Arbitration Court and the Hungarian arbitration community in order to review whether the Arbitration Act and the Rules of Procedure comply with the international standards, to envisage possible next steps, and to ensure that arbitration is a high professional service available to domestic and international parties.
ii Arbitration developments in local courts
In previous years severe statutory restrictions were in effect in respect of disputes arising from contracts that related to 'national assets'. There was a comprehensive ban on arbitration in disputes, the subject matters of which were rights, claims or demands arising from civil law agreements governing 'national assets' located on the territory of Hungary. 'National assets' are assets under the ownership of the Hungarian state or the local municipalities, such as company shareholdings, rights with quantifiable value, emission quotas, the airspace above the territory of Hungary, etc. Due to this prohibition on arbitration that was in effect between 2012 and 2015, the applicability of arbitration agreements was narrowed and the disputes were settled before the competent state courts. These legislative bans and prohibitions completely ceased to exist, and the full scope and powers of arbitration have been restored in the Hungarian legal system.
In a recent setting-aside matter, the Supreme Court of Hungary set aside an arbitral award relating to the decision-making of the tribunal. According to the summary on the arbitration matter, one of the arbitrators stated in his dissenting opinion that he received the draft of the award from the chairman of the tribunal in email and the chairman also let him know the draft of the supplemented award by email. Based on the exchange of emails, the chairman of the tribunal and the other member of the tribunal did not accept his legal conclusion and interpretation. Therefore, the chairman prepared the final version of the award which was ready to be signed. In the course of the setting aside procedure, the Supreme Court set aside the arbitral award because the members of the tribunal did not make their decision during a closed meeting. The Supreme Court referred to the provision regarding the closed meeting of the tribunal contained in the applicable rules of procedure and ascertained that the procedure of the tribunal did not comply with such provisions. According to the Supreme Court, the procedure is not in compliance with the relevant provisions of rules of procedure if the chairman of the tribunal – without holding closed meeting – prepares the award and the other members may join thereto. In the reasoning, the Supreme Court explained that the council meeting as a decision form requires joint activities during which the arbitrators work together, cooperate with each other and discuss their views when they determine the facts, consider the evidences and interpret the underlying laws.30 It is important to highlight that the resolution of the Supreme Court can be considered as an isolated solution in this case and not as a general practice. The breach of the procedural rules should only lead to the setting aside if they had an impact on the merits of the decision. In international matters, it is not rare for members of the arbitral tribunal not to meet in person but to be in contact electronically.31
iii Investor–state disputes
Hungary is party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), as well as it is party to approximately 60 bilateral investment treaties.
On the basis of the publicly available information, under the ICSID regime currently there are six cases pending in which Hungary is the respondent state (and the following bilateral investment treaties have been invoked: Jordan–Hungary; United Kingdom–Hungary; France–Hungary; Hungary–Portugal).
III OUTLOOK AND CONCLUSIONS
The new new Arbitration Act was enacted with effect from 1 January 2018. Moving from the outdated platform of the previous Act (in effect since 1994) the new Act follows the UNCITRAL Model Law as amended in 2006. The Arbitration Act brought changes, long-awaited in the legal community, such as more active support provided by state courts in arbitration matters, the enforceability of interim measures adopted by arbitral tribunals and the harmonisation of statutory rules applicable in domestic and international arbitration.
With the re-tailored Arbitration Act and by transforming the arbitration institutions, the Hungarian arbitration environment is about to change and the arbitration practice may face new challenges and create new trends in line with the international best practice. On the one hand it may affect the Hungarian arbitration community; on the other hand it may make arbitration more attractive to the business sector.
In general, litigation and arbitration compete on the legal market. As a result of the complete renewal of the Civil Procedural Act (including particularly the new and untested procedural rules and electronic communication system with the state courts) applicable.
Considering that in international arbitration practice of third-party funding is becoming increasingly common, thus there is a good chance that it will start to appear in Hungarian arbitration practice.
1 Zoltán Faludi is a partner and Enikő Lukács is an associate at Wolf Theiss Attorneys-at-Law.
2 See Article 1 (2) of the Arbitration Act.
3 See definition of 'arbitration' in Article 3 (1) of the Arbitration Act.
4 See Article 59 of the Arbitration Act.
5 See Article 67 of the Arbitration Act.
6 See Article 8 of the Arbitration Act.
7 See Article 9 of the Arbitration Act.
8 See Article 1 (3) of the Arbitration Act.
9 See Article 17 of the Arbitration Act.
10 See Article 11-12 of the Arbitration Act.
11 See Article 14 of the Arbitration Act.
12 See Article 12 (7) of the Arbitration Act.
13 See Article 18-20 of the Arbitration Act.
14 See Article 10 of the Arbitration Act.
15 See Article 40 of the Arbitration Act.
16 See Article 37 of the Arbitration Act.
17 See Article 44 of the Arbitration Act.
18 See Article 42 of the Arbitration Act.
19 See Article 43 of the Arbitration Act.
20 See Article 46 of the Arbitration Act.
21 See Article 47 (1)-(2) of the Arbitration Act.
22 See Article 47 (4) of the Arbitration Act.
23 See Article 36 of Rules of Procedure.
24 See Article 49 of the Arbitration Act.
25 Prof. Dr. Kecskés László: A választottbíráskodás problémái Magyarországon a 2017. évi LX. törvény elfogadása utáni helyzetben (Európai Jog 2017/5).
26 See Article 53 of the Arbitration Act.
27 See Article 54 of the Arbitration Act.
28 See Article 12 (5) of the Arbitration Act.
29 See Article 62 (1)-(2) of the Arbitration Act.
30 Resolution No. Gfv.VII.30.089/2016/6 of the Supreme Court.
31 Dr. Lajer Zsolt: Gyors széljegyzetek az új választottbírósági törvény margójára (14 June 2017).