Blog
Blog » DOES INSOLVENCY PREVENT ARBITRATION UNDER NEW ARBITRATION ACT IN HUNGARY?
DOES INSOLVENCY PREVENT ARBITRATION UNDER NEW ARBITRATION ACT IN HUNGARY?
24 August 2018
The new Hungarian Arbitration Act, effective from 1st January 2018 introduced important changes in relation with commercial arbitration in Hungary. Whether the new law will change the former restrictive case law regarding the effect of insolvency to arbitration proceedings? We address this question in our latest article.
The effects of insolvency on commercial arbitration is a delicate issue.
European jurisdictions often give divergent answers to the same question, like in the noteworthy Elektrim c. Vivendi case, where the Swiss Federal Court held that the insolvency of the Polish defendant invalidated the arbitration agreement, while the English High Court ruled that it had no effect on the arbitration clause concluded by the parties.
Although the former arbitration law of Hungary has not regulated the effect of insolvency in arbitration, Hungarian courts favour the restrictive approach of the Swiss courts.
Hungarian case law - insolvent debtor not bound by arbitral clause
The Regional Court of Appeal of Szeged rendered a decision in 2014[1], in which it held that by reason of the insolvency of one of the parties, the arbitration agreement becomes incapable of being performed.
The highly criticized decision justified the above conclusion by holding that the creditors can not intervene in the arbitration proceedings, which is closed for the public, the award cannot be subject of appeal and the judicial review is limited. Lastly, the court highlighted that in comparison with litigation, the arbitration procedure is more expensive, and the insolvent party cannot request cost-reliefs.
According to the court, these factors would hinder the effective exercise of rights of the insolvent party, who is, consequently not bound by the arbitral clause, and can start litigation in front of state courts.
New Arbitration Act
The new arbitration law, Act LX of 2017 on arbitration, effective from 1st January 2018 (“Arbitration Act”) deals with the effects of insolvency to arbitration proceedings more deeply, but some question remains still open.
Arbitration against insolvent debtor
The new Arbitration Act makes it clear when can arbitration be started against an insolvent debtor.
Based on the Arbitration Act[2], monetary claims can be enforced only in the insolvency procedure, so once the Hungarian insolvency procedure has been started, there is no place to start arbitration for monetary claims against the insolvent debtor.
The same rule provides that the above principle does not prevent the party from starting arbitration for non-monetary claims (eg. declaratory claims, specific performance, etc.) even after the debtor has been declared insolvent.
Party insolvency during arbitration
The fact that one of the parties becomes insolvent during arbitration, has no legal effect on the arbitration proceedings, since Act XLIX of 1991 on bankruptcy and liquidation proceedings provides that litigations and non-litigious proceedings started before the starting day of insolvency go on continuously in front of the competent court[3].
In this respect, the term “litigation” should be construed broadly to include arbitration proceedings.
It is another question, whether an insolvent debtor can comply with its payment obligations during the arbitration proceedings (e.g. advancing the fees of the tribunal, experts, etc.). Financial difficulties can prevent the party from effectively participating in the evidentiary procedure, or from property presenting its case, which may entail the risk of a potential setting aside procedure. However, this question must be assessed on a case-by-case basis in our opinion.
Can insolvent debtors disregard arbitration clauses?
It is a delicate question, whether the former Hungarian case law cited above, enabling insolvent debtors to disregard arbitral clause and start litigation in front of state courts still applies under the new Arbitration Act?
It must be highlighted that some of the arguments on which the above conclusion was built are no more valid in the new legal environment.
Firstly, the new Arbitration Act introduced the “intervention” of third parties in the arbitration proceedings. It means that a third party, who is interested in the victory of one of the parties, may intervene in the proceedings, if the arbitral tribunal so decides.[4]
Secondly, the Arbitration Act broadened the remedies against the arbitral awards, by introducing an extraordinary remedy, the retrial of the case.[5]
Thirdly, the Rules of Procedure of the Hungarian Arbitration Court attached to the Hungarian Chamber of Commerce introduced important changes in relation with the costs, according to which the parties have to advance the costs in 50-50%, and the claimant shall advance the costs in 100% only in case the defendant fails to do it.
Based on the above, in our opinion the above case law should not be maintained under the new Arbitration Act.
-
CJEU DECISION IN A GDPR-RELATED CASE: DOES THE VIOLATION OF THE GDPR AUTOMATICALLY CONSTITUTE NON-MATERIAL DAMAGE?
Does the infringement of the data subjects’ rights by the controller give automatically rise to compensation? Can the controller be exempted from liability solely on the basis that the damage was the result of the fact that its employee did not comply with its instructions? What are decisive criteria to determine the amount of damages? In this article we analyse the fresh decision of the CJEU which addressed the previous questions.
Read more » -
HUNGARY – PERSONAL SCOPE EXTENSION OF JURISDICTION CLAUSE TO NON-SIGNATORY UNDER BRUSSELS IBIS
Does the principle of independence of the choice-of-court agreement require that parties shall expressly transfer the dispute resolution clause in case of transfer of the main contract? When can the personal scope of a jurisdiction agreement be extended to a non-signatory? A Hungarian appellate court decided upon these questions under the Brussels Ibis Regulation in a recent judgment
Read more » -
SETTING ASIDE ARBITRAL AWARDS IN HUNGARY
Given that there is no right of appeal in arbitration proceedings, it is important to be aware of what other legal remedies are available to you against an arbitral award. According to the Hungarian Arbitration Act, the parties may request the competent state court to set aside the award, which is a “mandatory” remedy, which cannot be waived by the parties in advance.
Read more »