This content is from: Local Insights

Hungary

In recognition of the prevalent sovereign immunity doctrine, Act IV of the Hungarian Civil Code (1959) specifically allowed the Hungarian state to enter into private law contractual obligations (for example, loans, state guarantee and construction mandates). However, for several years the scope and procedure governing the state's liability for the performance of these contracts have not been clarified further by publicly-accessible regulations.

In particular, the problems created by the dual nature of the state's role - acting as a private law contractor and requiring public law authorization at the same time - has become apparent as a consequence of recent court judgments, in which enforcement against the Hungarian state has been considered in both theory and practice. While the state, either through acts of government or other representatives, has been able to enter into private law relationships, the performance of related obligations in certain circumstances has made it necessary for the Hungarian parliament to exercise its public powers (such as the requirement of budgetary authorization for the payment of surety obligations). Therefore, certain obligations exceeding the budget line authorization of the then current budgetary year (for example, long-term individual state suretyship) have been seen to present an inherent risk to the enforceability of such obligations. This is due to the fact that the financing of the performance of such obligations depends ultimately on a formal Act of the Hungarian parliament.

As part of renewed efforts by the government to pave the way towards a more transparent and unambiguous legal basis for successful public participation in private law based initiatives (including PPP projects) and in response to the demands of local and international market participants for increased protection, the Hungarian Civil Code and Act XXXVIII of 1992 on Public Finance were amended on June 23 2003. According to the modifications, compensation, indemnity and default payments, together with contractual obligations towards third parties acting in good faith, will be recognized as representing an enforceable private law state obligation. This is the case even if there is no corresponding budgetary authorization for such payment obligation in the central budget or the limit of the related authorization has already been exceeded. Whereas the legal basis for enforcing payment obligations against the state has been further clarified, additional amendments have focused on setting monetary limits for government obligations which could be assumed independently. Consequently, the government must seek the authorization - based on the main terms of the underlying contract - of the Hungarian parliament for assuming any payment obligation exceeding one year and reaching or exceeding Ft50 billion ($213.5 million), or for any investments that reach or exceed the value of Ft25 billion ($106.8 million).

Although the above changes represent a significant step towards enhancing legal certainty concerning the liability of the Hungarian state for its private law based payment obligations (and/or any of the entities subject to the mandate of the Public Finances Act), the exact details of the enforcement procedure have still not been released. Thus, the definition of assets, subject to enforcement, the exact procedural rules (for instance, deadlines and formalities) of enforcement and the legal consequences of failing to meet budgetary authorizations are yet to be defined.

Attila S Horváth

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