Under Hungarian law the judge can reduce the amount of the contractual penalty if it is excessive. The penalty reduction shall be expressly requested by the defendant during the litigation. Can the defendant submit such request at any time during the litigation, or is there any deadline for that? In a recent decision, the Hungarian Supreme Court addressed this issue.
On 28 August 2017, the plaintiff („Plaintiff”) as a client and the defendant („Defendant”) as architect concluded two design contracts (“Contracts”), in which they agreed on a 60-day deadline for the preparation and submission of permit design documentations for two projects.
The Contracts specified penalties in case of the late performance by the Defendant.
The Defendant fulfilled its contractual obligations under Contracts but with considerable delays.
Statement of claim of the Plaintiff and defence of the Defendant
The Plaintiff brought an action against the Defendant in which he claimed late performance penalties for the delays in the deliveries of the permit plans and the deliveries of each construction plans.
The Defendant's statement of defence was for the dismissal of the Plaintiff’s action.
In the preparatory phase of the litigation, the Defendant argued that the Plaintiff's failure to inform him of the data necessary for the design in due time constituted an intermediate breach of Contracts and it prevented the defendant from performing within the deadline. Consequently, he shall not pay any late performance penalty.
Later, at the trial phase of the litigation, the Defendant also requested reduction of the penalty of late performance claimed by the Plaintiff, arguing that the amount of the penalties significantly excessive even though the Defendant had fulfilled its contractual obligation.
First Instance Court
The first instance court (“First Instance Court”) founded the late performance penalty claims well-founded but reduced their amounts.
It held that the amount of penalty of late performance claimed by the Plaintiff, was grossly excessive and was not compatible with the Hungarian Civil Code and reduced them.
Second Instance Court
Following appeals by both sides, the second instance court (“Second Instance Court”), amended the first instance decision and awarded the penalty claims fully.
The Second Instance Court held that the Defendant’s request for reduction of the penalty had been introduced lately, only in the trial phase of the litigation. Since in the trial phase, the statement of defence can be modified only in exceptional circumstances, which was not the case, the Defendant could not introduce a request for reducing the penalties.
Request fort judicial review
The Defendant submitted a request for judicial review against the final judgment, arguing that according to the Civil Procedure Code (“CPC”), the request for the reduction of the penalty could not be regarded as an amendment of the statement of defence, but a "different legal argument" which could be submitted at any time during the procedure.
Hungarian Supreme Court
The Supreme Court rejected the Defendant’s requests for judicial review.
According to the Supreme Court, the request for a reduction of the penalty shall be considered as an additional substantive law objection which is considered as an amendment of the statement of defence.
The Supreme Court pointed out that, while the Defendant's defence of the Plaintiff's intermediate breach of contract would have excluded entirely the right enforced by the Plaintiff, the reduction of the penalty was intended only to (partially) terminate the right asserted by the Plaintiff. For this reason, these substantive law objections were different.
However, during the trial phase of the proceedings, the Defendant can modify its statement of defence under exceptional circumstances, which were not met in this case, consequently, the Defendant’s request for the reduction of the penalties was not admissible. Therefore, the Supreme Court upheld the final judgment in its part challenged by the judicial review.
The new Civil Procedure Code has significantly modified the rules governing Hungarian litigations, sanctioning severely the delays of the parties. Hungarian Courts tend to interpret these provisions strictly; therefore, Defendants should carefully consider the proper timing of introducing penalty reduction claims in Hungary.
By Richard Schmidt, Partner, and Peter Korozs, Attorney-at-law, SmartLegal Schmidt & Partners