Chapter – Hungary


Hungary is not a common law country, and in relation to its legal system two main factors have to be emphasized.

First, Hungary’s legal system belongs to the so-called continental law family and disposes of strong Roman law and German–Austrian law basis. Furthermore, these basic elements have been influenced by the Austrian legal system during the era of the Austro–Hungarian Monarchy.

Second, Hungary is an accessed country to the European Union, therefore, intensive legal harmonisation of “acquis communautaire” has been and is taking place taking into consideration the planned accession date of 2004.

1. Agency Agreements

1.1. General relationship between agent and principal

The Hungarian legal regulation on agency agreements basically follows the Directive No. 86/653 of the European Union when it states that “a commercial agent is a person who – upon a permanent commission, for remuneration – intermediates contracts concerning purchase or other agreements on goods, including the case when the agent is entitled to conclude the contract either in the name and on behalf of the principal or in his own name in favour of the principal.”

It is also important to emphasize that a commercial agent can be considered as independent only if he/she is not employed by the principal. A person whose representation right is based on any legal provisions could not be considered as commercial agent as well.

The subject of the agency agreement might cover not only goods, but also services, valuable rights and securities.

1.2. Carrying on business in Hungary (when the principal appoints an agent to seek out orders and transmit enquiries or with delegated power to conclude contracts on behalf of the principal)

In this case the principal is regarded as carrying business in Hungary and considered to have a permanent establishment (branch office) in Hungary.

The principal is regarded to have a permanent establishment in Hungary if (inter alia):
1. it has permanent business premises, equipment, machinery in Hungary that are partly or wholly used for business purposes, 
2. it commissions a third party to conclude contracts in Hungary in the principal’s name and on its behalf or the third party stores the goods of the principal and regularly delivers them to buyers in the name and on behalf of the principal, except for if (inter alia):
a. the business premises are only used for storing or presentation of goods,
b. the storing of the principal’s goods is for storing and presentation purposes or the stored goods are raw materials to be assembled or manufactured by a third party,
c. the agent commissioned by the principal is an independent representative.
The agent is regarded to be independent if:   
a. he is economically and legally independent from the principal,
b. the representation of the principal belongs to his regular business and activities,
c. the principal has no right to directly instruct or inspect the agent, and
d. the business risk is undertaken by the agent.”

1.3. Carrying on business in Hungary (when the principal appoints an agent to sell goods owned by the principal, stored in the territory)

For details please see 1.2. above.

1.4. Formalities of carrying on business in Hungary

In order to establish an individual undertaking or firm the so-called undertaking permit is required. In order to carry out any activities in a form of a corporation, the establishment of the respective corporation (business association, Hungarian branch office, business representation office) is required.

1.5. Taxation

The principal is to pay corporate tax upon
a. the revenue generated by the permanent establishment (branch office) and
b. upon the other revenues generated from sources in Hungary (interest, royalties, dividend, etc.)

a. Permanent establishment:

The balance sheet profit/loss of the permanent establishment has to be determined, then this profit/loss is required to be adjusted in order to determine a profit/loss that is proportionate to the revenues of the permanent establishment out of the worldwide revenues of the principal. This adjusted profit/loss, but at least a minimum of 12% of the total expenses of the permanent establishment will be the tax base, and after this base, 18% of corporate tax is to be paid.

b. Other revenues from Hungary:

All revenues from interests, royalties are taxed at 18%, with the exception of (i) interests paid after Hungarian government bonds, (ii) interest paid by Hungarian banks, (iii) delay interest and (iv) the interest and royalties paid by a Hungarian party under agreements signed after January 1, 2001, if the interest (royalty) rate does not exceed the regular interest rate (royalty) applied on the Hungarian market by independent parties.

1.6. Specific product legislation

For the correct information of consumers the Hungarian Consumers Protection Act defines the labelling, packaging and safety requirements in general, however, specific provisions are also applicable for different kinds of products (such as for pharmaceutical, tobacco and dairy products).

Basically only safe products can be marketed that do not endanger the life, health, physical integrity of the consumers during the proper or reasonably expected usage of the product.

Besides the above, the package or the label placed inseparable on the goods shall contain all relevant data (i.e. precise indication of the name of the product, name and address of the producer, distributor, place of manufacturing) necessary for the proper information in a legible and unambiguous way in Hungarian language.

Furthermore, the label also has to contain – depending on the character and function of the product – the size, net weight of the product, its ingredients (quality and quantity composition thereof), its expiry date and basic technical features.

Certain products can only be marketed with instructions and handling guides (i.e. garment products) and in case of imported products a Hungarian handling guide shall also be attached to the product that is identical with the one enclosed in a foreign language.

The product shall be packaged in a way to protect the quality of the product, facilitate the transport of the product without any disadvantageous impact on the product, furthermore it should meet the requirements of safe work and health care.

1.7. Power to bind

Should the independent commercial agent be entitled to conclude the contract in the name and on behalf of the principal upon the agency agreement concluded between them, any declarations of third parties addressed to the agent concerning the conclusion of the agreement shall be effective towards the principal upon their announcement to the agent.

In case the agent is not entitled to conclude the contract, any declarations of the third parties are considered as not effective towards the principal on the basis of announcement to the agent.

1.8. Del-credere guarantee

A guarantee of the agent for the fulfilment of the obligations of third parties could be stipulated in the agency agreement, and it is also possible to stipulate a special commission for this responsibility (so-called del-credere commission).

Both the stipulation of the above guarantee and the amount of the commission depend on the parties’ mutual agreement. Should the parties set such provisions, the del-credere commission shall be due upon the conclusion of the contract.

1.9. Trademarks and other industrial property rights – authorized use

It is of great importance to conclude a licence agreement so as to be entitled to utilise any industrial property rights (trademarks, patents, designs) of the principal, in which it is expressly determined by the parties that which rights in which extent the agent is entitled to utilise, since the permission of the principal – as rightholder – is essential for the lawful use of these rights.

The Hungarian Patent Office is competent for the recording/registration of a licence agreement, however, there is no obligation to file such a request for registration with the Office. Nevertheless it is advisable to get registered the agreement since it might facilitate the assertion of rights (through authorization of the registered user/licensee).

1.10. Compensation on termination of the agreement

In case the principal terminates the agency agreement because of the agent’s fundamental breach of the agreement with immediate effect, no compensation behoves the agent. The respective law does not define the content of “fundamental breach of contract” therefore it is advisable to specify in the agency agreement the events, which would render the right to the principal to terminate the agreement with immediate effect.

No compensation behoves the agent if the agreement has been terminated by him, except those based on age, physical disability or illness of the agent or on the principal’s behaviour upon that the continuing of the activity cannot be expected from the agent any more.

In case of ordinary termination by the principal the agent can demand compensation only by meeting the following two requirements jointly: 1) the agent has obtained new clients and the principal gains significant benefit on the basis of business relations with clients obtained by the agent after the termination of the agreement and 2) the payment of the compensation is fair and reasonable (considering the lapse of the agent’s right for commission).

The amount of the compensation may not exceed the one year amount counted from the previous five years average amount. In case the contract does not last longer than five years it may not exceed the yearly average commission received by the agent during the agreement.

1.11. Corrupt gifts and secret commissions

The agent cannot accept any remuneration from third parties without the approval of the principal. In addition to it general criminal laws (e.g. corruption) are applicable concerning the illegal advantages given or promised by the agent to third parties for signing a contract; or concerning given or promised presents/benefits to the agent with the same aim.

1.12. Formalities of the agreement

Any agency agreement can be validly concluded only in writing, however, registration or government approval is not necessary for an agency agreement.

As a minimum requirement the written agreement shall contain the exact indication of the contracting parties, the subject of the agreement and the signature of the parties.

A written document is accepted in an eventual legal dispute as proof of evidence if it is witnessed by two persons (indicating the address of the witnesses as well) or the signatures of the parties are legalized by a notary public or the document is countersigned by an attorney at law.

These rules are also applicable for private deeds concluded abroad, however it is necessary to get them legalized by the territorially competent Hungarian embassy or consulate.

1.13. Exchange control permissions

There are not any exchange control permissions required for the remitting of the money collected by the agent on behalf of the principal.

1.14. Withholding taxes

Corporate taxes are to be paid by the principal either as a withholding tax or by direct payment to the Tax Authority.
Withholding tax is applied if the principal receives revenue from a business company or business entrepreneur in Hungary.

If the revenue is interest or royalty, then the Hungarian party shall determine and pay the corporate taxes to the Tax Authority (withholding tax) latest by the 12th day of the month after the month of payment.

If the revenue is other income, then the principal is to determine and pay the corporate taxes to the Tax Authority (no withholding tax) within 30 days counted from the receipt of the revenue.

If there is a double taxation treaty between Hungary and the domestic country of the principal, then the rules of the treaty are to be applied, however:

If the taxes are paid by the Hungarian party, then any surplus tax paid may be reclaimed by the principal after payment (the tax rate of the treaty may only be directly applied upon the permission of Tax Authority), whereas if the taxes are paid by the principal, it may directly apply the tax rate of the treaty, no additional reclaiming is necessary.

1.15. Ownership of the principal’s property (Questions 1.15. to 1.17.)

In the event of insolvency of the agent the agent cannot dispose over the assets not belonging to him and the creditors of the agent cannot assert any rights on such property. In the course of the execution procedure on such property the principal has the right to announce that the assets put in execution do not belong to the agent.

In the event the agent dishonestly disposes of the property remitted to him to any third parties 1) in the course of commercial trade, then the affected third party acquires ownership right on the property (breach of rule “nemo plus iuris”); 2) out the course of commercial trade only third parties acting in good faith acquire ownership right upon payment of the purchase price.

The principal can enforce his ownership right through litigation procedure and can request the court to declare its ownership right on the property.

2. Distribution agreements

2.1. General definition

There is no specific legal regulation concerning this type of agreement in Hungary, the general rules of contracts are applicable. A distributor is a person who purchases the goods of the principal for resale and sells it to different third parties.

The so-called vertical agreements, in which the participating undertakings operate at different level of distribution do not fall under the prohibition of restriction of competition in case the total annual turnover of the parties and their related undertakings does not exceed HUF 4 billion.

Basically no restrictions shall apply regarding exclusivity or non-exclusivity, however the exemption shall not apply to vertical agreements including exclusivity on the supplier, provided that the buyer’s market share on the concerned market exceeds 30 percent.

2.2. Carrying in business in Hungary

Please see the answer to 1.2. above

2.3. Formalities

General rules concerning the formalities of a written agreement are applicable.

2.4. Taxation

Please see the answer to 1.4. above

2.5. Intellectual Property Protection

All individual and original works – either creations of literature, science or art – may fall under copyright protection. The copyright protection of works originates from their creation, no registration is necessary to obtain such protection. Copyright protection shall be provided during the lifetime of the author and for 70 additional years following its death. (Act LXXVI of 1999).

Design protection can be obtained for any new designs that are of individual and original character in the course of a granting procedure. Design protection lasts for 5 years counting from the date of application and upon request it can be renewed for further 5-5 year periods for four times at the most. (Act No. XLVIII of 2001).
Basically it cannot be excluded that a design would qualify as a copyright work as well, and parallel protection may be applied for other protection forms (i.e. under certain circumstance an element of a trademark mark could qualify as copyright work, too).

Furthermore, there are specific legal regulations concerning trademarks (Act No. XI of 1997), patents (Act No. XXXIII of 1995), topography protection of microchips (Act No. XXIX of 1991).

2.6. Appointment of different distributors in Hungary

Basically the principal is free to conclude any agreements regarding the number of distributors and the terms and conditions of the contracts, however the principal shall meet the general competition law requirements. For example the exemption from restriction of competition shall not apply to agreements which directly or indirectly, or under certain circumstances restrict the buyer in fixing/determining the purchase prices.

2.7. Restrictive trading practices

Any agreements that restrict economic competition are prohibited in the view of the act on prohibition of unfair and restrictive market practices.

This prohibition shall in particular apply to those agreements that fix directly or indirectly the purchase or sale prices. It is also prohibited to conclude such an agreement restricting the distribution of goods or keeping under control the same, therefore a provision according to which the distributor may sell the products only to certain classes of customers collides with this prohibition.

An agreement shall not fall under prohibition if it of minor importance, that is agreements where the total joint market share of the contracting parties does not exceed 10 percent on the market concerned, however this exception shall not apply to agreements setting prices.

Agreements concluded between related undertakings (i.e. one controls the other) do not fall under the application of the prohibition.

The Office of Economic Competition may be requested to declare that an agreement (or a planned agreement) does not fall under prohibition.

2.8. Principal’s possibilities of imposing different obligations upon the distributor

If such a binding order qualifies as abuse of dominant position, it is illegal and invalid.

2.9. Unfair trading practices

In general it is prohibited to conduct economic activities in an unfair manner, in particular in a manner violation or jeopardizing the lawful interests of competitors and consumers. Furthermore, the so-called slavish copying and the violation and jeopardizing of the reputation and the credit-worthiness of the competitors are also prohibited. It is prohibited to interfere with the integrity of tendering, further, any misuse of business secrets (in details please see below under 4.1.).

It is prohibited to mislead the consumers (i.e. in respect of the price, essential characters of the products, or information influencing the consumers’ choice), further to apply methods restricting the consumers’ freedom of choice (i.e. to make the objective comparison of goods more difficult).

2.10. Limitation of liability

Liability for the breach of contract cannot be excluded validly, limitation of liability is only possible if it fulfils the below requirements:

On the one hand liability for breach of a contract caused deliberately, or by culpable negligence or by crime or liability for damages of life, physical integrity, health cannot be excluded. On the other hand limitation or exclusion of liability is only possible if the disadvantages caused by such limitation are balanced through any other advantages given to the adverse party.

There is no noteworthy published judicial decision on this matter, still it has to mentioned that any discount of the purchase price itself cannot be considered as an advantage that could serve as a basis for limitation of liability.

2.11. Specific product legislation

Please see the answer to 1.6. above

2.12. Power to bind

The distributor is entitled to undertake obligations towards third parties in the name and on behalf of the principal, if there is a respective authorization in the distribution agreement concluded between the principal and the distributor.

2.13. Trademarks and other industrial property rights – authorized use

Please see the answer to 1.9. above

2.14. Termination because of breach of contract

It is possible to terminate the contract because of breach of contract or of any other reason, however, only in the frame of the contract and on the basis of the general rules of law of contracts. For example in case of a delay the other party may terminate the contract in case his contractual interest has ceased provided that he can prove this fact.

2.15. Termination without notice

The above are accordingly applicable to termination of the contract with immediate effect.

2.16. Formalities, Exchange control permissions, Withholding taxes

Please see the respective answers written above concerning agency agreements, especially to 1.14.

2.17. Limitation of liability between distributor and principal for defective products

According to the Hungarian act on product liability – that fully corresponds to the rules of the European Union – the manufacturer of a product is liable for damages caused by the defective product. In case of an imported product this rule shall apply to the importer of the product as well, however, this does not influence the importer’s enforceable claims towards the manufacturer.

In case the manufacturer or the importer of the product is unknown, all known distributors of the product shall be considered as manufacturer of the product until the distributor indicates the manufacturer or that distributor, from whom he purchased and sold the product to the consumer.

Any limitation or exclusion of liability towards the consumers shall be deemed as null and void. Product liability devolves upon the manufacturer for 10 years from the date of first distribution of the product.

2.18. Selective distribution system

In case the aim of the agreement is to restrict the competition, i.e. to impose a condition upon the distributor to whom he may purchase or to restrict the number of the purchases of the members of the distribution system, that is in conflict of the effective rules and are considered as invalid.

3. Manufacturing agreements

3.1. Control of technology transfer and its details

Government regulation No. 86 of 1999 lists the exemptions from prohibition of restrictive market practices concerning technology transfer agreements in Hungary, according to which the prohibition shall not apply to patent licensing agreements, to know-how licensing agreements and to mixed patent and know-how licensing agreement (hereinafter referred to as: mixed licensing agreement), furthermore to sub-licensing agreements.

That circumstance that the agreement include an obligation on the licensor a) not to exploit the licensed technology in the territory himself or b) not to license other undertakings to exploit the licensed technology does not exclude the applicability of the exemption.

The exemption is only granted if the agreement concluded between one patentee (in case a joint patent, several patentees) and one licensee.

The exemption shall not apply where – for example – the contacting parties had been competing manufacturers before concluding the agreement concerning the licensed product or patented process and upon the agreement either of them is restricted as to the customers he may serve or they joint market share of parties exceed 30 percent on the concerned field of products.

Furthermore, the exemption shall not apply to those agreements that include determination of prices of the licensed product.

For purposes of the regulation know-how means all valuable economic, technical, organizing knowledge and information, patent means patent applications, utility models, utility model applications, microelectronic topographies and applications as well

3.2. Industrial property legislation

Please see the respective parts written concerning the distribution agreements.

3.3. Set of resale prices

Set of minimum prices, determination of prices are prohibited as restrictive to competition and shall be considered as null and valid.

3.4. Unfair trading practices, Limitation of liability, Specific product legislation, Trademarks and other industrial property rights, Formalities, Exchange control permissions, Power to bind, Termination of the agreement

For these questions the respective parts are applicable as written concerning the agency and distribution agreements.

4. Miscellaneous Questionnaire

4.1. Confidentiality

In general it can be stated that according to the Hungarian Civil Code any person who discloses or misuses any business secrets come to his knowledge commits breach of law.

Beside the above the act on the prohibition of unfair and restrictive market practices also states that “it is prohibited to gain access to or to use business secrets in an unfair manner, furthermore, to disclose such secrets or to publish them.”

It is considered as gaining access to business secrets in an unfair manner where the access has been gained without the approval of the entitled person through a party who has got confidential or business relationship with the entitled person.

Business secrets are all facts, information, solutions or data in connection with which the entitled person has lawful and justified interests in keeping them in secret provided that the entitled person has taken all necessary steps to keep them in secret. Confidential relationship shall cover employment relationships, other work-related relationships and membership relationships, whereby business relationship means all information, negotiations, offers prior to any deals even it is not followed by the conclusion of the contract.

Taking into consideration that the parties are free to stipulate the terms and conditions of the agreement (within the framework of the compulsory legal provisions) they also can stipulate sanctions and the extent of liability for breach of confidentiality.

4.2. Restrictive Covenants

As a main rule it is not possible to restrict an agent/distributor etc. with whom a contract to provide services is made from competing with the other to the agreement during the existence of the agreement. However the act on agency agreements contains certain exceptions to these rules: restrictive covenants can be validly concluded in writing, to a maximum period of 2 years after termination of the agreement, only against remuneration and involving identical activity. To the other two types of agreements – in lack of any specific rules – the general regulations are applicable.

4.3. Software

In the sense of the effective Hungarian copyright act computer programs and their related documentation (hereinafter referred to as: software) shall fall under copyright protection whether fixed by source code or object code or any other form, including user application programs and operation systems. Copyright protection shall be provided to the adaptation of the original program language to a different program language, too.

Economic rights (right of exploitation) on software can be transferred. On the basis of a licensing agreement authorization to use a software can also be obtained.

Unless otherwise concluded, the author’s exclusive rights shall not cover reproduction, alteration, adaptation, translation or any other modification of the software – including the correction of mistakes – as well as reproduction of the achievements of these activities in so far as these activities are carried out by the person authorized to acquire the software in compliance with the intended purpose of the software. No provisions in the licensing agreement shall prohibit the user from making back-up copies of the software provided that it is necessary for the use. Any person entitled to use a copy of the software shall be entitled – without the author’s further authorization – to observe and study the operation of the software and to try it in the process of its loading, display, running, transmission or storage in order to get to know the idea/principle that is the basis for any software elements.

No authorization from the author is required for the reproduction or translation of the code that is indispensable for the acquisition of the information necessary for the combined operation of independently created software, provided that a) these acts of use are performed by the entitled user; b) the information necessary for the combined operation has not been easy to access; c) these acts of use are limited to those parts of the software that are necessary for combined operation.

Licensing agreements shall be concluded in written form, however, in case software copies are commercially distributed it is not obligatory to conclude a written agreement.

4.4. Escrow Agreements

Hungarian local law does recognize the concept of escrow agreements. Basically it has to be stipulated that who the parties are, what the subject of the contact is, for how long the contact lasts and upon what events the party is obligated to hand out the held documents to the other party.

Such an agreement cannot be irrevocable. As to its formalities: please see those written concerning the formalities of the agency agreement.

4.5. Powers of Attorney

In commercial matters the Power of Attorney has to precisely contain the name (firm name), address (seat) of the principal, the name and seat of the attorney or attorneys at law, the signatures of the parties, the date and place of signature, the matter concerned. In taxation matters a Power of Attorney with special formalities required by the taxation authorities is necessary. A Power of Attorney can be revoked at any time.

4.6. Whole Agreement Clauses

The effective Hungarian Civil Code does not contain any provisions concerning whole agreement clauses, however, does not prohibit them either, therefore the application of such clauses up to the contractual will of the contracting parties.

The concept of the new Hungarian Civil Code does contain that a clause of the parties’ written agreement declaring that the written agreement shall be deemed to be the whole agreement between the parties with the consequence that all previous negotiations not included in the agreement or such undertakings of obligations shall not form a part of the agreement shall be expressly included in the Civil Code.

4.7. Arbitration

According to the Hungarian Civil Code “the parties may stipulate arbitration instead of judicial litigation procedure for their disputes if at least one of the parties is a person who carries out business activity professionally, the dispute has arisen in connection with this activity and the parties are free to dispose of the subject of the procedure”.

The Act on Business Associations makes is possible to the parties that in accordance with the provisions of Act LXXI of 1994 on Arbitration, they may stipulate a permanent or contingent arbitration procedure in the articles of association (deed of foundation) with regard to corporate legal disputes.
Legal disputes arising in relation with the articles of association or to the operation of the business association between the business association and its members (shareholders), including former members excluded from, or otherwise withdrawing from the business association, or among the members (shareholders) inter se shall qualify as corporate legal disputes.
Ordinary courts’ competence to intervene in the arbitration are as follows, which the parties cannot exclude by expressed terms in their agreement:

– the court in front of which a suit has been initiated in a matter that is the subject of the arbitration agreement rejects the claim without any summons or ceases the lawsut upon the request of any of the parties;

– should any of the parties fail to appoint his own arbitrator or should two arbitrators not agree on the person of the third arbitrator, the missing arbitrator will be appointed by the court upon the request of any of the parties;

– in case an arbitration court consists of only one arbitrator and the parties cannot agree on the person of the arbitrator upon the request of any of the parties ordinary courts appoint the arbitrator, furthermore ordinary courts do decide on petitions concerning the expulsion of arbitrators;

– ordinary courts provide legal aid concerning the performance of the evidencing procedure, i.e. through ensuring constraining measures;

– ordinary courts have competence to nullify the arbitration awards in specified case.

The arbitration award has the same effect as a legally binding judicial decision. To the enforcement of the arbitration award the general judicial enforcement provisions are applicable. As a general rule, arbitration awards made abroad can be enforced if they meet the requirements necessary to be considered as “acknowledged” on the basis of Hungarian laws. The acknowledgement does not require a separate procedure. Should the award be acknowledged, the general judicial enforcement provisions are applicable.

4.8. Force Majeure (vis maior)

The Hungarian Civil Code determines “vis maior” only in a very general manner according to which “vis maior” means all unavoidable external event that occurred outside of the interests of the parties (i.e. earthquake), for which a party is not liable (i.e. because of an arson burns down the tenancy owned by the lessor). Furthermore, the parties are entitled to stipulate those event, which shall be deemed as “vis maior” in their relationship.

Should the performance of the contract become impossible due to any reason, for which none of the parties is responsible, the contract will terminate. However, the party becoming aware of the impossibility of the performance is obliged to advise the other party on same without delay. For any damages occurred due to lack of such notification the party obliged thereto is responsible.

In general, the Hungarian Civil Code enables the possibility of modifying a contract by the Court only and exclusively for the case, if in consequence of any circumstances occurred in the long-term legal relationship of the parties after the conclusion of the contract; the contract harms the significant interests of any parties. Besides, in case of certain contract types it is possible for the party to get absolved from some obligation of the contract. So on the basis of the concluded preliminary contract, any of the parties may reject the conclusion of the final contract, should he/she prove that due to a circumstance occurred after the conclusion of the preliminary contract he/she is not able to execute the contract, or under this circumstance after the conclusion of the contract waiver or notice would lie.

This chapter was written by Dr. Tamás Gödölle Attorney at Law, Partner (Budapest), with the assistance of Dr. Alexandra Molnár (Budapest) both of Bogsch & Partners of Budapest.