Business life gives birth to a variety of contracts which are not regulated by the Civil Codes in continental jurisdictions. In cases the parties conclude such a so-called “atypical contract”, it is for the judge to decide whether the default rules of a nominated contract regulated by the Civil Code can be applied in gap-filling function. A recent decision of a Hungarian appellate court in a case, where our law firm represented the defendant tells, whether a work force supplier can invoke the rules of the agency contract to support his damage claim under Hungarian law. This landmark decision has been published in the prestigious Hungarian law journal, the Collection of Court Decisions.
The claimant („Claimant”) as workforce supplier provided temporary work agency services to the defendant („Defendant”) to support the operation of the Hungarian factory of the Defendant. The last time the parties regulated their legal relationship in 2019 by a temporary work framework agreement (“Agreement”).
The Agreement was concluded for an indefinite period, however the Parties defined the temporal scope of the annex to the Agreement which governed the service fees from 1st October 2019 to 30th September 2021. According to the Agreement the Defendant could terminate the Agreement in writing at any time with or without justification with a notice period of one month.
The Agreement did not contain any provision based on which the Claimant was entitled to any damages or fees in relation to the termination of the Defendant. In fact, the Claimant undertook to take measures to ensure that upon the termination of the Agreement, the employment of the temporary employees at the Defendant continues and based on the Agreement he was not entitled to any additional fees or expenses relating to his above obligations.
In August 2020 the Defendant terminated the Agreement without justification providing a notice period of one month. The Claimant acknowledged the termination and in accordance with his contractual obligations he provided 70 employees to the new temporary agency partner of the Defendant.
2. The Claimant’s claim
The Claimant started a litigation and claimed compensation in the order of HUF 191 million and late interest.
He based his claim on the section 6:278 (2) of the Hungarian Civil Code (CC)[i] governing agency contracts, which sets forth that in case the agency contract is unilaterally terminated by the principal, it shall compensate the agent for the damage caused by the unilateral termination, except if the contract has been terminated due to the breach of the contract by the agent.
Indeed, in the Claimant’s view, the Agreement was an atypical contract not namely designated by the CC, which shall be governed by the most similar contract governed by the CC, which is the agency contract.
According to the Claimant, considering that the parties defined the scope of the annex on the remuneration until 30th September 2021, he could reasonably expect that the Defendant would use his services at least until this date. Given that the Agreement was terminated by the Defendant, the Claimant lost his expected revenue starting from September 2020. Based on this, in the litigation the Claimant wanted to enforce his lost income resulting from the lost fees.
3. The defence of the Defendant
The Defendant presented a multi-directional defence[ii], its cornerstone was that the rules of the CC governing the agency contracts, so section 6:278 (2) of the CC could not be applicable for more reasons.
According to the Defendant, the application of the rules of the agency contract is excluded primarily, because the Agreement is not a mixed contract but an innominated atypical contract, therefore there is no need for gap-filling and the application of further contractual background rules.
If gap-filling was still necessary, instead of the absorption theory[iii] invoked by the Claimant, based on the analogical theory[iv], only the https://www.ilflaw.com/publications/can-you-terminate-a-long-term-atypical-contract-without-compensation-in-hungary#_edn3rules on obligations and the general rules on contracts of the CC could apply, but the application of the rules governing nominated contracts (e.g. the agency contract) shall be excluded.
Further, in the Defendant’s view the Agreement contains heterogeneous services, not only services that are typical of an agency contract, that is why it is also not possible to apply the rules on agency contracts. Moreover, the parties referred to the rules of agency contract as background rules neither explicitly, nor in a tacit way.
The Defendant also claimed that in case the termination is based on a contractual provision, section 6:278 of the CC is not applicable.
4. The first instance judgement and the appeals of the parties
The first instance court rejected the Claimant’s claim. The main legal reason of its decision was that the Defendant’s termination was based on a contractual provision, on the express term of the Agreement and not on the law, thus the termination based on the law as provided in the section 6:278 of the CC is not an option.
According to the first instance court the provision of the Agreement, which sets forth that the Claimant undertook without any renumeration or reimbursement to take measures to ensure that upon the termination of the Agreement, the employment of the temporary employees at the Defendant continues, confirms that the parties did not want to entitle the Claimant to claim any cost or compensation in relation to the termination of the Agreement.
In the first instance court’s view, in addition, section 6:278 of the CC cannot be applicable, because the rules on termination of the agency contract is not relevant. Provided that the services of the atypical innominate Agreement are complex and contain elements having characteristics similar to agency, in relation to those elements maybe the provisions on agency contracts could be invoked by analogy, however the whole legal relationship which contains service elements having other nature could not be terminated fully based on the rules on agency contracts.
Both parties filed an appeal against the first instance judgement. The Claimant primarily requested the modification of the judgement claiming that the Agreement is in fact of an agency type, thus in relation to its termination the provision of the CC, based on which the principal shall compensate the agent for the damage caused by the principal’s termination, shall apply.
The Defendant attacked the justification of the judgement, amongst others he contended the finding of the judgement that the provisions of the CC on agency contracts could be applicable to the elements of the Agreement having agency characteristics.
5. The final judgement
According to the Győr Regional Court of Appeal, acting as second instance court, the first instance court has rightly ruled on the merits, thus he upheld the first instance judgement, but modified the justification of the decision.
The second instance court stated that based on its main character the Agreement was designed to make available the appropriate workforce by the Claimant to the Defendant to carry out the work according to the latter’s needs, the objective of the Agreement was to establish employment with the workers. Undoubtedly, the parties had other secondary obligations compared to the specificities which give character to the Agreement and in this regard elements similar to the agency could be identified.
In case of an agency contract (section 6:272 of CC) the service of the agent is to carry out the task assigned to him by the principal, usually a personal task, the result of which is doubtful. In comparison, in the present case the substantive obligation of the Claimant was to let the employees employed by him through to the Defendant to carry out work, that means that based on its main specificity the aim of the legal relationship was not to carry out personal activities by the agent.
In the second instance court’s opinion the Agreement is an innominate atypical contract which seamlessly regulated the rights and obligations of the parties in relation to the Defendant’s termination without justification based on the Agreement, thus the Claimant cannot establish rights to the section 6:278 (2) of the CC.
According to the correct interpretation of the Agreement the parties did not want to give the right to the Claimant to enforce claims for loss of revenue (loss of income) and nor did they.
This is confirmed by the fact that the parties regulated their legal relationship in detail, and they set forth that the Claimant is not entitled to additional fees or expenses in relation to the performance of his obligations in case of the termination of the Agreement.
It does not follow from the fact that the Agreement is silent on the issue of loss of profit that its enforceability was allowed; on the contrary, the fact that the Claimant cannot claim actual damage of the type of costs incurred in the property suggests that they did not want to give right to the Claimant in relation to further damages such as loss of profit.
Thus, the second instance court found that the claim of the Claimant is unfounded because he concluded an innominate atypical contract with the Defendant, in which the right to compensation was not expressly provided to him and in the absence of an explicit provision the section 6:278 (2) of the CC cannot be applicable as “background law”.
6. The analysis of the final judgement
The decision of the Győr Regional Court of Appeal is a significant milestone in Hungary, because in the domestic judicial practice so far there is some uncertainty in relation to the classification of atypical contracts.
This uncertainty stems from the fact that even regarding the basic issues of atypical contracts a common understanding lacks in the Hungarian legal doctrine: while certain authors consider the mixed and the innominate contracts as the subcategory of atypical contracts[v], others classify neither the mixed nor the innominate contracts as atypical contracts[vi].
Further to the categorization, the most important question for the practice is whether the provisions of the Civil Code shall apply to an atypical contract in gap-filling function, and if yes, to what extent?
In relation to the above question more views showed up in the Hungarian legal theory and case law:
- according to the absorption theory to matters not regulated by the atypical contract the provisions of the express and namely designated contract of the Civil Code which is most similar to the atypical contract can be applicable as background rules;
- the combination theory allows the application of the provisions of more contracts regulated in the Civil Code to the atypical contract,
- based on the analogical theory only the common provisions on obligations and the general rules on contracts of the Civil Code may by applicable to the atypical contract.
The Claimant basically proposed the application of the absorption theory because in his opinion the Agreement was most similar to the agency contract regulated by the CC.
In the Hungarian judicial practice, there are more examples of the application of the absorption theory, which is incorrect in our opinion. For example, in a case the court applied the provisions of the escrow contract to a mixed atypical agency contract which also contained the elements of escrow[vii]. In another case the court ruled in relation to a contract for catering services based on the rules of sale and purchase which in the court’s opinion was the most similar contract[viii].
While rejecting the absorption theory, the first instance court in fact applied the combination theory, that has the effect that the judge fragments the contract and applies the rules of the agency contract to its agency-like elements, which attitude is also rightly criticised by the legal doctrine[ix].
Finally, the Regional Court of Appeal followed the progressive analogical theory, by excluding the application of the provisions of the Civil Code on agency contracts to the Agreement as a gap-filling measure and the possibility for the Claimant to claim compensation based on these rules.
The decision of the appellate court is also to be welcomed, because the private autonomy of the parties and the contractual freedom is best served by an attitude where the parties to an atypical contract are not artificially „brought” by the judge under legal norms which the parties did not expressly or implicitly intend to apply to their legal relationship.
It is also worth to mention that the decision of the second instance court is in line with the judicial practice in the sense that in relation to the classification of atypical contracts the dominant factors are the presumed will of the contracting parties and nature of the contractual service[x].
In fact, the Regional Court of Appeal analysed the heterogenous services of the Claimant in detail and concluded that the personal activity which is typical in case of the agency contract is not the specificity of the Agreement, thus the provisions of the agency contract cannot be applied to it.
Further, the appellate court also attached particular importance to the fact that the Parties explicitly excluded in the Agreement the right of the Claimant to claim any cost or expense in relation to his obligations upon the termination of the Defendant.
The above let the second instance court to conclude that the Parties’ intent was to also prevent the Claimant from bringing a claim for damages in connection with the Defendant’s termination. The application of the provisions of the Hungarian CC on the agency contract would therefore be contrary to the presumed will of the parties.
The importance of this landmark decision of the second instance court is shown by the fact that the appellate judgment has been included in the prestigious Hungarian law journal, Collection of Court Decisions.[xi]
It is clear from the final judgment that under Hungarian law, in case the parties enter into an atypical contract and wish to grant themselves an additional right (e.g. right of termination, claim for damages), they must explicitly regulate this in their contract.
In case of atypical contract governed by Hungarian law, the judge will not apply the default rules of the Hungarian Civil Code in a gap-filling function in order to establish a right, which is not expressly regulated by the parties.
Based on the final judgment, in case of atypical contract governed by Hungarian law, the judge will not apply automatically the default rules of the Hungarian Civil Code in a gap-filling function in order to establish a right, which is not expressly regulated by the parties
For this reason, in case the parties enter into an atypical contract under Hungarian law, and they wish to grant themselves an additional right (e.g. right of termination, claim for damages), the best is to explicitly regulate this in the contract, itself.
[i] Act V of 2013 on the Civil Code
[ii] For reasons of space, we only present the parts of the Defendant’s defence that are relevant to the final judgment and the interpretation of the law in the final judgment in relation to the innominate contrhttps://www.ilflaw.com/publications/can-you-terminate-a-long-term-atypical-contract-without-compensation-in-hungary#_ednref2acts.
[iii] According to the absorption theory the provisions of the express and namely designated contract of the Civil Code which is most similar to the atypical contract shall be applicable as background rules.
[iv] According to the analogical theory the atypical contracts are a qualitatively new type of contract compared to certain nominated contracts, so that the special rules applicable to typical contracts do not apply, but only the provisions on obligations and the general contract rules.
[v] Tőkey Balázs in Fuglinszky Ádám –Szerződési Jog – Különös rész, Eötvös, Budapest, 2018. 37-38.
[vi] Papp Tekla: A közbeszerzési szerződés tipizálása, forrás: https://antk.uni-nke.hu/document/akk-copy-uni-nke-hu/Opuscula_Civilia_2020_Papp_Tekla.pdf
[vii] decision No. Gf.20079/2014/4. of the Győr Regional Court of Appeal
[viii] decision No. G.40117/2012/7. of the Szeged Regional Court
[ix] Papp Tekla: Atipikus szerződések; HVG-ORAC Lap- és Könyvkiadó Kft., 2019
[x] Papp Tekla: Atipikus szerződések; HVG-ORAC Lap- és Könyvkiadó Kft., 2019
[xi] The number of the decision is BDT2022. 4510.