The Supreme Court of Hungary recently put an end to a long debate amongst legal practitioners and academia. In its decision No. 1/2021 PJE, the court confirmed that an agreement cannot be considered null and void only because it was signed on the basis of a power of attorney by:
- an authorized representative of a company having joint signing and representation rights who was given the power of attorney by another authorized representative of the same company also having joint signing and representation right; or
- a person who was authorized by two authorized representatives of a company having joint signing and representation rights.
Although the court decision is based on the provisions of previous versions of the Hungarian Civil Code and Hungarian Banking Act, its conclusions in this case will be applicable to future cases.
Our clients often ask whether one person can sign a contract on behalf of both parties. This dilemma has particular relevance if the contract is signed on behalf of two parties within the same group of companies (e.g. between a parent company and a subsidiary) and the two members of this group of companies are represented by one person who is an authorized representative (e.g. the managing director, the CEO) of both companies.
Certain jurisdictions expressly prohibit such treatment; in other words, if a contract is signed on behalf of both parties by the same person (even in that person's capacity of holding different positions), the contract may be deemed invalid. The previous Hungarian Civil Code (Act IV of 1959) contained a similar rule, i.e. a representative who also represented the counterparty was not allowed to act.
The “new” Hungarian Civil Code (Act V of 2013) changed this and introduced the rule that a contract signed by a representative on behalf of a principal can be challenged by that principal if there is a conflict of interest between the representative and principal. Accordingly, Hungarian law does not expressly prohibit the signing of a contract on behalf of both parties by the same person (and therefore, this situation does not lead to automatic invalidity); however, careful steps must be taken (e.g. by passing internal approvals and acknowledgments) to avoid creating grounds for any right to challenge the contract.
By Akos Bajorfi, Counsel, and Akos Mates-Lanyi, Counsel, Noerr