Third party extension

Author: | Published: 24 Jun 2010
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The existence of an arbitration agreement is considered a basic precondition for an arbitration court or tribunal to have competence for a case. While there are formal requirements by law on the validity of arbitration agreements, under certain limited circumstances third parties might also be obliged to arbitrate, even if they did not sign an arbitration agreement or clause as a party.

According to Section 5(1) of the Hungarian Arbitration Act (1994), "arbitration agreement means an agreement of the parties to submit their disputes which arose or may arise between them in respect of a specific contractual or other relationship, to arbitration". An arbitration agreement can be concluded as part of another contract or in the form of a separate agreement, and can contain a clause for an ad hoc or standing arbitration tribunal (Section 5(2) of the Hungarian Arbitration Act).

Since an arbitration agreement is in effect an agreement, consent of the parties is necessary for it to be valid. This precondition is supported in Hungarian court case law (for example, EBH 2007 1705).

Written form

In addition to the above, arbitration agreements must be made in writing. Any agreement that has come into existence through the exchange of letters, telegrams, through telex or any other means of correspondence between the parties that permanently records the parties' messages shall be construed as an agreement made in writing (Section 5(3) of the Hungarian Arbitration Act).

It is not clear from the applicable legal regulations whether a signature is necessary to comply with the requirement of written form.

While the Hungarian Civil Code (1959) itself does not require the written statement to be signed, the Supreme Court has issued general guidelines, which interpret the requirement of written form in the context of agreements on the transfer of property rights in real estate. According to these guidelines, the real estate sale and purchase agreements must not only be in writing but must also be signed by the parties.

This requirement is applied in court practice to all contracts where the law provides or if the parties stipulate the contract is to be in writing. However, if the law requires a contract to be concluded in writing in order to be valid, then (unless otherwise provided by law) the following means are also regarded as fulfilling the requirement of written form: (i) correspondence by letter; (ii) correspondence by telegram; the transmission of messages by way of (iii) teleprinter and (iv) facsimile; and finally (v) any agreement concluded by exchange of declarations made through any permanent device defined in any special act. For example, a deed signed by an advanced electronic signature (Section 38(2) of Law Decree 11 of 1960 on the entry into force and enforcement of the Civil Code).

It is clear that the requirements of written form under the Hungarian Arbitration Act and under the Hungarian Civil Code are not identical but rather overlap considerably. The main difference is that, pursuant to the Hungarian Arbitration Act, "any means of correspondence between the parties that permanently records the parties' messages" shall be construed as an agreement made in writing. It can be concluded from this that the Hungarian Arbitration Act should be considered as a specialist law that can exclude the applicability of the general rules of civil law. It is therefore arguable that arbitration agreements can be concluded without signature, if there is "correspondence between the parties that permanently records the parties' messages" (notwithstanding the general requirement for signatures on written agreements).

General terms

Pursuant to Section 5(5) of the Hungarian Arbitration Act, reference in a written contract to a document containing an arbitration clause shall be treated as an arbitration agreement, if the arbitration clause is an integral part of the contract.

According to Section 205/A(1) of the Hungarian Civil Code, general contract terms become a part of the main agreement only if the party using it made it available to the other party and if the other party has, either explicitly or by implied conduct, accepted it. According to a published award of the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry, if the parties sign a contract that has its general terms printed on the back, the arbitration agreement contained in these general terms cannot be considered as accepted. That is unless the main contract explicitly refers to the general terms or the parties sign the general terms. In its award, the Court of Arbitration referred to Article II of the 1958 New York Convention (Convention on the Recognition and Enforcement of Foreign Arbitral Awards).

In addition to the above, Section 205/A (2) of the Hungarian Civil Code provides that any standard contract condition that substantially differs from the usual contract conditions shall only become part of the contract if the other party is specifically notified of these in advance. The Hungarian Supreme Court has published several judgments on the applicability of arbitration clauses included in the general contract terms and conditions of entities such as banks and stores, where the clause was not specifically negotiated. The Supreme Court consistently held that an arbitration clause qualifies as an "unusual" condition and therefore prior notification must be made (for example by underlining the term or putting it in bold).

Therefore, as per the current court practice, an arbitration clause incorporated into a standard contract shall be regarded as null and void if prior notification is not made. In a case from 2007, the Supreme Court reaffirmed this approach with regard to arbitration agreements that provide for an ad hoc arbitration according to the Model Rules of the Budapest Bar Association. The Supreme Court based its judgment inter alia on the fact that, according to the Model Rules of the Budapest Bar Association, only members of the Budapest Bar Association may be elected as arbitrators. This restriction is not contained in the Arbitration Act. According to the Supreme Court, the other party should have specifically been notified of this restrictive provision of the Model Rules.

Not contesting

Pursuant to Section 5(4) of the Hungarian Arbitration Act, any allegation made by one of the parties in a statement of claim that an arbitration agreement was in fact concluded between the parties shall also be construed as an arbitration agreement made in writing. This is provided that the other party does not refute this in its answer to the claim. (This provision is similar to Article 4 of the UNCITRAL Model Law on International Commercial Arbitration: Waiver of right to object.)

As an interpretation of the above provision of the Hungarian Arbitration Act, the Supreme Court added in one of its published judgments that the minutes of the hearing of the Arbitration Court may also be evidence for a valid arbitration clause. According to the facts of the case, the hearing minutes included a declaration of the parties that they had no objection to the procedure of the arbitration tribunal, including the composition thereof (case EBH 2006 1525).

Third parties

Under certain circumstances, arbitration agreements may be extended to third parties. Such third parties are often referred to as 'non-signatories' because they did not sign the arbitration agreement (or the agreement containing the arbitration clause). However, this can be misleading in cases where the third party put its signature on the agreement, but not as a party. This may be the case where the third party, being for example the ultimate beneficial owner of one of the contracting parties, approves the agreement or guarantees the fulfillment of certain obligations of the actual contracting party.

The published decisions of Hungarian state courts and arbitration courts cover three types of cases where the question of extension was raised.

a) Sureties

With a contract of suretyship, the surety assumes the obligation of performance to the obligee if the obligor does not perform its obligation (Section 272 of the Hungarian Civil Code). Sureties are therefore collateral obligors that guarantee the performance of an agreement by one of the parties. If the underlying main agreement contains an arbitration clause, but not the agreement on the collateral obligation (the suretyship), it is questionable whether the collateral obligor may be forced to arbitrate and join the obligor as co-respondent.

In an award from 1997, the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry stated that the arbitration agreement concluded by the obligee and the obligor does not affect the agreement concluded between the parties and the surety (collateral obligor). Therefore the same formal requirements shall apply to (and must be fulfilled by) both agreements irrespective of the fact that they are closely connected (Case number VB/95113). It must therefore be emphasised that, as per the current court practice in case of a collateral agreement securing other contract(s), an arbitration clause shall be incorporated into the collateral agreement irrespective of the fact that an arbitration clause exists with respect to the secured main contract.

b) Assignees

In the case of an assignment, the assigning party assigns its rights from a particular legal relationship to another party (see Section 328(1) of the Hungarian Civil Code). If one of the contracting parties assigns its right (and only its rights) arising from an agreement that contains an arbitration clause, it then becomes questionable whether the assignee is entitled or obliged to arbitrate. According to an award of the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry, in this case, the assignee will have exactly the same rights as the assignor, including the rights to arbitrate disputes (case number VB/00188). Although the assignee was not a party to the original agreement and therefore did not sign it, it should nevertheless be regarded as the legal successor of the assignor with respect to its contractual rights. This fully justifies the validity of the arbitration agreement between the assignee and the other contracting party.

c) Party approval

In a recent case, the Hungarian Metropolitan Court was invited to interpret and apply the formal requirements of arbitration clauses to a different situation from the above cases. In the case, one of the respondents to the arbitration had not signed the agreement containing the arbitration clause, but had "approved it". (Due to the confidentiality of the parties involved and for the sake of convenience, the parties will be referred to as A, B, etcetera).

(i) The facts

The case was based on a pre-contract concluded between A on one side and B and C on the other, to conclude a final contract between the same contracting parties. The pre-contract and the anticipated final contract were subject to the approval of D, as the supervisory authority of B.

In the pre-contract, the contracting parties undertook to later conclude a final utilisation contract for the restoration, development, and operation of a monument. It also looked to establish a usufruct with respect to a real property within 8 days from the issuance of the construction permit issued in accordance with the contents of separate sections of the contract. The contracting parties agreed that the final contract would be executed upon the fulfillment of the condition with the content fixed and determined in detail in Part II of the pre-contract mutually accepted by the execution thereof.

The pre-contract incorporated the terms and conditions of the anticipated final contract pursuant to the pre-contract. The second part of the pre-contract, which contained the terms of the final contract, contained an arbitration clause according to which "for all disputes arising from or in connection with the present Contract, its breach, termination, validity or interpretation, the Parties submit themselves to the exclusive competence of the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry, Budapest which shall proceed in accordance with its own Rules of Proceedings."

The parties concluding the arbitration agreement stipulated the number of arbitrators and the language of the procedure. By referring to the relevant administrative law provision (Section 109/I of Act XXXVIII of 1992 on Fiscal Administration), the parties stipulated that the existence of the declaration of approval issued by D is a validity condition for the contracts.

The pre-contract was duly approved by the Minister of D as supervisory authority of B. However, after several exchange of declarations following the conclusion of the pre-contract, the parties concluding the pre-contract failed to conclude the final contract as the performance of the pre-contract.

(ii) The arbitration proceeding

A (and E, another party that was only supposed to be a party to the final contract) initiated arbitration proceedings before the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry against B, C and also against D as third respondent, requesting the creation of the final contract between the claimants (A and E) and the respondents (B, C, D).

D raised a number of objections to the competence of the Arbitration Court, arguing in particular that it was neither a party to the pre-contract nor was it supposed to be party to the final contract.

The Arbitration Court established its competence over all three respondents (including D) based on the fact that the pre-contract containing the provisions of the final contract was a single agreement. According to the Arbitration Court, the parties did not intend to split the resolution of the possible legal disputes but treated the contents of the pre-contract as a whole. The Arbitration Court further held that the pre-contract and the final contract are firmly connected and may therefore not be separated.

(iii) The Court's order

B and D initiated court proceedings and requested the Hungarian Metropolitan Court to establish that the Arbitration Court has no competence over them. In its order the Court rejected the Plaintiffs' (B's and D's) request and confirmed the competence of the Arbitration Court.

According to the reasoning of the Court, D gave its approval to the pre-contract, thereby also signing the arbitration agreement. As D's signature and approval on the pre-contract was generic and considering the arbitration agreement was a part of the pre-contract, one can only conclude that D also accepted the provisions of the arbitration agreement as binding on itself.

The Court's order is noteworthy because in spite of the fact that the final agreement had not been concluded and that D was neither a party to the pre-contract nor to the final contract, D was considered to have accepted the competence of the Arbitration Court, merely by giving its approval and consent to the pre-contract. D was not party to the pre-contract nor was it supposed to be party to the final contract. Its role was entirely exhausted by granting its consent to a contract between others. Finally, D did not sign any separate arbitration agreement. The competence of the Arbitration Court was based on the clause contained in the pre-contract, to which D was not a party.

Extension?

The published decisions of Hungarian courts and arbitration courts cover three types of cases where the question of extension was raised. First of all, extension was denied in case of suretyship agreements, despite the close connection to the underlying agreement. On the other hand however, in the second case concerning assignment, the assignee is entitled to arbitrate since it enjoys exactly the same rights as the assigning party. The third scenario relates to a situation where the third party, being the supervisory authority of one of the contracting parties, approved the contract containing the arbitration agreement and in which case the approving party was regarded as a party to the arbitration agreement.

As far as this third type of case is concerned, it seems that both the Arbitration Court and the Metropolitan Court have adopted a flexible and practical approach, with the aim of avoiding parallel proceedings and potentially conflicting awards. For this purpose, the formal preconditions for arbitration agreements were interpreted rather more flexibly.

About the author

Dr András Szecskay is the managing partner of Szecskay Attorneys at Law, a law firm with an international scope and client base. Dr Szecskay received his JD, summa cum laude, from the Szeged University Law School in 1973 and has participated in a professional continuing education program in Canada. He has been practicing law as a member of the Bar Association since 1975. He was a partner at the SBG&K Patent and Law Office in Budapest between 1975 and 1992, and at the international law office of the French firm of Moquet Borde & Associés between 1992 and 2004. His firm's practice encompasses all areas of commercial law. He has been an active member of the Budapest Bar Association, first as its secretary, then as a member of the Executive Board during several cycles and since March of 2002, as Vice-President responsible for International Relations. In 2000, he was presented with the Eötvös Award, in 2002, he was recognised as an Exemplary Lawyer and in 2008, the President of Hungary awarded Dr Szecskay with the "Knight's Cross Order of Merit of the Republic of Hungary".

Dr Szecskay is actively involved in numerous international organisations. These include roles as the head of the CCBE's Hungarian Delegation and a member of the UIA's Executive Committee. He was written a number of articles on Hungarian and international corporate law, competition law, arbitration and IP law. He provides legal counsel in M&A transactions, corporate and project finance, litigation/arbitration and IP law. Dr Szecskay is on the Roll of Recommended Arbitrators of the Hungarian Chamber of Commerce and Industry. His articles have appeared in international publications, such as Digest of Commercial Laws of the World, Worldwide Trade Secrets Law, International Banking Law & Regulation and Hungarian professional periodicals. Dr Szecskay is fluent in English. For further information, please visit www.szecskay.com

Contact information

Dr András Szecskay
Szecskay Attorneys at Law

H-1055 Budapest, Kossuth Square 16-17. III. (Mail: H-1245 Budapest POB 1228) Hungary

Tel: +36 1 472 3000
Fax: +36 1 472 3001
Email:info@szecskay.com
Web:www.szecskay.hu

About the author

Dr Miklós Boronkay is a Hungarian attorney candidate. He received his JD, cum laude, from the Catholic University Pázmány Péter in 2007. In 2004 and 2005, he studied at the University of Salzburg on an Erasmus scholarship.

In 2007, Dr Boronkay won a number of prizes: his comparative thesis on tort law won second prize in the National Competition for University Students and he was awarded a speaker prize at the Central and Eastern European Moot Court Competition, organised by the University of Cambridge. In the same year, Dr Boronkay also won second prize in the Hungarian Criminal Law Moot Court Competition with his defence speech.

Dr Boronkay is a member of the Competition Law Research Centre and has written articles on the subject of tort law. Dr Boronkay joined the firm in September 2007 and is fluent in English and German.

Contact information

Dr Miklós Boronkay
Szecskay Attorneys at Law

H-1055 Budapest, Kossuth Square 16-17. III. (Mail: H-1245 Budapest POB 1228) Hungary

Tel: +36 1 472 3000
Fax: +36 1 472 3001
Email:info@szecskay.com
Web:www.szecskay.hu