Hungary: Force Majeure - Hardship in relation to Conflict and Sanctions

From a civil law perspective, Hungarian law has no specific legislation addressing the legal consequences of war or sanctions on commercial contracts. If the European Union imposes sanctions in the form of Regulations, such sanctions will be directly applicable in Hungary. Consequently, these sanctions may influence on-going commercial contracts and their performance.

In Hungarian civil law, however, there are three general concepts, which could be relevant under such circumstances. These are (i) an exemption from liability for damages caused by breach of contract; (ii) impossibility of contract; and (iii) contract modification by the courts. Force majeure and unforeseen circumstances may trigger these concepts. However, a case-by-case analysis is required in each circumstance.

In addition, on the basis of the Hungarian Criminal Code, any person who breaches a EU or international law sanction may be sentenced to imprisonment for a period ranging from one to five years. Such criminal sanctions should also be considered for companies (and their management) doing business in Hungary. 

Note that this document will focus on the civil law aspects of the sanctions.

There are no specific war- or sanction-related clauses in the Hungarian Civil Code (''Civil Code''). However, the topics of (i) exemption from liability for damages caused by breach of contract, (ii) impossibility of contract, and (iii) contract modification by the court can be relevant.

Article 6:142 of the Civil Code states: “The person who causes damage to the other party by a breach of contract shall be liable for such damage. The said party shall be relieved of liability if they are able to prove that the damage occurred as a consequence of circumstances beyond their control, unforeseeable at the time of the conclusion of the contract, and it could not have been expected to avoid the circumstance or prevent the damage.”

Article 6:179 of the Civil Code states:
“If performance has become impossible, the contract shall be terminated.”

Article 6:180 of Civil Code states: 

1. “If performance of a contractual obligation has become impossible for a reason that cannot be attributed to either of the parties, the monetary value of the services provided before the termination of the contract shall be compensated. If the consideration corresponding to the money already paid has not been performed by the other party, the money shall be returned.
2. If performance has become impossible for a reason attributable to one of the parties, the other party shall be relieved from the obligation of contractual performance, and may assert a claim for damages for loss caused by non-performance of an obligation.

Article 6:192 of the Civil Code states:

“Either of the parties shall be entitled to request to have the contract modified by the court if in the long-term contractual relationship of the parties, after the conclusion of the contract, performance of the contract on unchanged terms would be prejudicial to its substantial legal interest, and:

1. the possibility of that change of circumstances was not foreseeable at the time of conclusion of the contract;
2. it did not cause that change of circumstances; and
3. such change in circumstances cannot be regarded as normal business risks.”

There is no specific force majeure clause in statutory Hungarian law. However, based on court practice, performance rendered impossible due to acts of war and/or related sanctions can constitute force majeure. However, the establishment of the existence of a force majeure event in a given case is the sole discretion of the court, which will consider all relevant circumstances and perform a case-by-case analysis.

In general, Hungarian court practice considers force majeure an "irresistible force" of natural or man-made origin, which is absolute in nature and cannot be eliminated by means available to man. Courts require that performance must be – for all practical purposes – impossible in order to be exempt from liability on the grounds of force majeure.

To prevent any dispute from constituting force majeure, the parties to a contract should clearly define what they consider the scope of "force majeure" in the contract.  

For instance, the parties could agree that force majeure occurs when one of the parties is unable to perform its contractual obligations due to governmental measures or restrictions (i.e. sanctions) or that situations of war amount to force majeure.

We strongly recommend including a precisely drafted force majeure clause that is mutually agreed on by the parties as it may help to prevent potential legal disputes. Having a well drafted clause could, in principle, mean that a party may be exempt from liability for non-performance when a situation pertaining to the agreed scope of force majeure occurs.

Under Hungarian law, 'unforeseen circumstances' is particularly relevant in the topics of (i) exemption from liability for damages caused by breach of contract, and (ii) contract modification by the court. 

Under Section 6:142 of the Civil Code (cited above), the principle of 'unforeseen circumstances' is one of the cumulative criteria of being exempt from liability for damages resulting from breach of contract. The other two criteria are that (i) these circumstances should be beyond the breaching party’s control, and (ii) it could not have been expected to avoid the circumstances or prevent the damage.

The breaching party may only be exempt from liability if the circumstances resulting in damages had been objectively unforeseeable at the time of the conclusion of the contract. Therefore, whether  sanctions or war were foreseeable at the time of the conclusion of the contract is decisive.

In the event that the law of another non-EU country has been applied in a contract and the legal dispute concerning this contract is to be decided in Hungary, on the basis of the principles of public policy doctrine and imperative rules as regulated in the Hungarian Act on private international law, it is likely that the Hungarian court would apply the respective sanctions-related EU Regulation even if foreign law has been declared applicable.

Nevertheless, a case-by-case analysis would be required to confirm this, taking into account the relevant sanctions and the circumstances of the case.

In general, a sanctioned or warring counterparty remains entitled to file a lawsuit against the Hungarian party failing to perform due to sanctions. It is, however, likely that the Hungarian court will take into consideration the sanctions-related EU Regulations as an unforeseen circumstance beyond the Hungarian party’s control and exempt the Hungarian party from liability.

Nevertheless, a case-by-case analysis would be required to confirm this, taking into account the relevant sanctions and the circumstances of the case.

As detailed above, there is no special sanctions law or statutory force majeure clause under Hungarian civil law. Therefore, exemption from liability for non-performance due to war and sanctions related to war depends largely on the precision of force majeure clauses in contracts. In the event there is no specific force majeure clause in an agreement, a case-by-case analysis will be necessary to determine whether the party in default may be exempted from breach of contract.

With an appropriate force majeure clause, the risk that a sanctioned entity may successfully sue a Hungarian party for payment of damages or compensation for non-performance is rather low, provided that the court of Hungary has jurisdiction over the matter. It is therefore strongly recommended to include and define the concept of ''force majeure'' with special care in the contract, and to set the jurisdiction of courts in Hungary or a EU member state in order to safeguard the application of any applicable EU sanctions regulations.