L a w F i r m

NEWSLETTER

www.balazshollo.hu

September – December 2013no. 26

The question of vis maior and defective performance in the

case of applying the terms and conditions of the FIDIC contract and Hungarian law

Amendments of the law in 2013 for the

prevention of circular debts regarding the

construction industry

FOUNDATION MEMBER OF EAST LEGAL TEAM EEIG AN INTERNATIONAL ASSOCIATION OF EASTERN-EUROPEAN LAW FIRMS

SPECIAL EDITION – Construction Law

How to finance construction

industry projects in the CEE region?

High time to grab the forgotten

construction tools

trange as it is, I have never been involved in court cases concerning construction but still, con-struction and I walk through life hand in hand.

My father used to be a construction entrepre-neur, purchasing, building and selling apartments one after the other. As an adult, I could not avoid a full renovation of my own house, and now we are

on the verge of deciding on the fate of some real estate recently inherited by my husband, not to mention the impending housing needs of our children.

At the office I work with Dr. Tamás BALÁZS who has been a leading construction law expert in Hungary since 1995, and we have cooperated in numerous real estate transactions including due diligence reports, construction projects, sales and litigations. Any time I seek advice I can turn to him with confidence, and I always use the drafts prepared by him as the basis of my private affairs in real estate.

Recently, there have been a lot of changes in the legislation regulating construction in Hungary, and the structure of the con-tractual basis has changed significantly.

Real estate and their management is an integral part of our lives, and we have to be aware of the relevant regulations. This is why we have prepared this volume of our Newsletter series on the new construction law rules. We are confident that they will help you understand the gist of your own real estate affairs.

Good luck ☺Dr. Dóra HOLLÓ

Partner, attorney at law

Dear Readers,

SNEWSLETTER

2

3

The question of vis maior and defective performance in the case of applying

the terms and conditions of the FIDIC contract and Hungarian law

FIDIC contracts provide a detailed definition for the concept of vis maior and its consequences (Article 19). Although essentially familiar with the legal institution of vis maior, Hungarian law does not go into detail about

the cases of vis maior, it does not define its concept, it does not even use its name, therefore in Hungarian law the term “unavoidable external cause” is

closest to the concept of ‘vis maior’ in the FIDIC contracts.

Dr. Tamás BALÁZS Managing partner, attorney at law, Dr. Dániel GULYÁS Senior lawyerBALÁZS & HOLLÓ Law Firm

4

NEWSLETTER

t follows from the above that the detailed provisions of the FID-IC contracts concerning vis maior are in harmony with Hungarian law, they expound the details of vis maior with

respect to the given contract.

In case of contract violation by the Con-tractor, Article 11 of the terms and condi-tions of the FIDIC contract include detailed rules (“Defects Liability”), including, among others, what is regarded as defective perfor-mance, what constitutes the notification obligation of the Contractor, what is the scope of responsibility, etc. These rules can be applied when choosing Hungar-ian law; at the same time, certain man-datory provisions of Hungarian law should be taken into consideration, although similar provisions can also be found in the terms and conditions of FIDIC contracts. According to Hungarian law, contractual provisions are null and void that exclude or restrict liability for de-fective performance if caused wilfully, through gross negligence or crime, or harm was done to life, body or health.

In connection with defective performance, the institutions of warranty and guarantee should be addressed which are very clearly sep-arated in Hungarian law and in judicial practice in relation to liability for latent defects. In the case of guarantee obligations, the Contractor can only be exempted from its obligation if it can prove that the defect arose after the perfor-

mance of the contract. In the case of warranty, the Employer should prove that the latent defect existed at the time of taking over. A government decree mandatorily calls for 3 years of guarantee obligations by the Contractor in the case of con-structing dwellings. Guarantee obligations in the case of non-dwellings can be stipulated un-der contractual provisions and the duration of

the guarantee obligation should also be specified therein. In case of

warranty, the claim can be enforced within 6 months from performance; if, however, the Employer was unable to enforce its claim within this period

due to an excusable rea-son, three years are available

to it in the case of construction contracts, and this period may be 5

or 10 years in the case of building components for which a mandatory period of suitability is specified by legislation. When enforcing war-ranty rights, the Employer may demand repair and replacement in the first place, or if it is not possible, a reduction of the fee or it may cancel the contract if there is some major defect. These rights also show significant similarity with the terms and conditions of the FIDIC contact. Generally speaking, the Parties may deviate from most of the provisions of Hungarian law applicable to warranty in their contract; how-ever, this possibility does not exist if the person on the Employer’s side qualifies as a consumer (under the Hungarian Civil Code, a person who enters into the contract outside the scope of his economic or professional activities).

I

5

Ivan GYURÁCZ NÉMETH, PartnerM27 ABSOLVO Consulting

How to finance construction industry projects in the CEE region?

The question raised in the title has been on the table at least since 2008. Let us take a look what is the situation today. In general we can state that

we don’t see any major difference between the countries of the region, most countries are still far from the pre-crisis conditions, only Poland

managed to generate more interest among investors, but it is also doubtful how long it will last. If we look deeper into the various sectors, we see

more differences, mainly depending on the source of financing:

basic infrastructure pro-jects such as roads, high-

ways, sewage, etc. are mainly financed through local and EU funds. Member States are right now in the phase of developing their concept of how to spend the EU funds in the next financial period (2014-20), most-

ly they are negotiating the first draft of their development plans with Brussels. Therefore it is worth keeping an eye on these develop-ments.

However, based on the past and the already available information, the following can be ex-pected: in this respect Croatia or even Hun-

0ı

6

NEWSLETTER

gary is comparatively less an opportunity as they have relatively well-built infrastructures. Hungary claims that she wants to lay more emphasis on SME-development between 2014 and 2020, while in Romania lots of basic in-frastructure investments are foreseen. Interest-ing projects currently underway or approved in Croatia include the Zagreb Airport, waste water treatment plants and railway repair and renovation.

As per public financing, this often depends on the ability of the local institutions to file/pre-pare project documentation that match and re-spect EU requirements. This also varies between countries and even locally between the different institutions or authorities and therefore should be treated as a potential risk.

renewables are worth being treated separate-

ly, as they have a big potential in the region. However, here are more significant differenc-es between the countries, as well. In almost all CEE countries, renewable energy projects are subsidized as without this they have a questionable ROI. However, in Romania, due to the failure of the respective grant scheme, projects are financed either from the market or partly through the World Bank and EBRD. In other countries (e.g. Czech Republic or Hungary) available grants resulted in a situ-ation where many were developed just to get these grants. In Hungary the situation is even more difficult due to the lack of tariff rates and pricing regulations. In Croatia power projects are planned, but it’s not clear how long it will take to get them going.

real-estate projects are generally financed through banks (or through

the investors themselves directly – either pri-vate or institutional investors). As far as bank financing is concerned, the situation is the same that we have experienced in the past few years: banks are more and more cautious and are reluctant to even finance projects where they only get an asset/collateral as a guarantee (e.g. sometimes some real estate projects won’t even get financing at low leverage, unless the

02

03

7

investor has a track record). This is because in real estate investors finance based on the cash-flow of projects!

A major development in office, residential in the following years cannot be expected in any of the countries – there are many available right now; maybe only regarding some new plants opened by multinational companies or in some less developed areas. However, in general experts agree that these sectors will not recover for many years. Most real estate funds want to sell rather than invest.

Industrial investments: in the region these mostly depend on grants and in most cases deci-

sions are made by mother companies. There will be some industrial construction due to business relocation to Croatia as a result of the country’s joining the EU, but there will not be as large a wave of such construction, as was the case in, for example, Slovakia and Hungary when they joined the EU: the EU economy is still depressed and Croatia is not attractive enough as a location for investment.

tourism is considered to be one of the highest risk investments. Therefore here

only subsidized projects could be interesting, we have seen many of these for instance in Hungary recently as a result of which there are many hotels for sale at the moment. In Croatia there are no projects foreseen, while in other countries such as Romania only the rehabilitation of the existing facilities (financed by private capital and banks) and maybe some new investments (international chains) in some major cities are expected.

All in all, the construction industry will not experience significant changes compared to the previous years and is likely continue to face chal-lenges if it comes to financing of projects.

Further information:ivan.gyuracz@m27.hu

www.m27absolvo.hu

Ivan GYURÁCZ NÉMETH, PartnerM27 ABSOLVO Consulting

04

05

High time to grab the forgotten construction tools

Resulting from the amendment of the construction law’s provisions right at the beginning of the year 2013, it became less complicated to carry out any maintenance, repair, dismantling or construction related work. Our present

article provides you with the most important changes in relation to the construction permits and displays the several types of permits that have to be

considered as you go on planning your dream house.

8

NEWSLETTER

9

Dr. Anna DOSZPOTH lawyerBALÁZS & HOLLÓ Law Firm

1. System of construction permitsAfter the 01 January 2013 only two legal categories remained in connection with the construction related activities: activities subject to construction permit and activities that can be carried out without permission of the construction authority. The government order No. 312 of 2012 (XI.8.) includes a list of 34 different activities, which may be carried out without permission. To among others reconstruction belong this category, reparation or modernization of buildings (except scheduled monuments), construction of pools or ponds with a maximum capacity of 50 m³ that are designed solely for private purposes, construction of statues, memorials with a maximum height of 6 meters.

All other activities not included in the above mentioned government order, are subject to construction permit.

2. Types of permits

2.1 Construction permitIn case of all activities, which are not freed from the obligation of construction permit, the competent authority has to be contacted in order to acquire the construction permit. The construction authority issues the permit within 15 days after the application’s delivery, if it contains all the necessary data and documents. Beside the construction permit, it is required

to get all other permits from further special authorities if necessary (i.e. from traffic authority, conservation authority).

2.2 Consolidated procedureConsolidated procedure consists of two phases: a preliminary framework permit and an actual construction permit. The preliminary framework phase clarifies the essential requirements related to the construction. The consolidated procedure is more comfortable for the applicant, since upon launching the procedure, only those documents

and annexes have to be submitted to the competent authority which are required

during the preliminary framework permit procedure.

2.3 Use permitBefore the use of the buildings

or building sections subject to construction permit can be started,

a use permit has to be acquired or the completion of the building has to be reported

to the competent authority. The construction authority is obliged to issue the use permit in case the building has been constructed according to the construction permit.

2.4 environmental permitIn case of some buildings (mostly by industrial premises) it is necessary to acquire a special permit from the environmental authority before the start of the construction work or before the use of the building. Experts have to prepare a preliminary study on the environmental impacts of the construction, the study must be submitted to the environmental authority.

10

NEWSLETTER

Amendments of the law in 2013 for the prevention of circular debts

regarding the construction industryIn the construction industry of Hungary the issue of circular debts has long been an unsolved problem. The Government decided to alter the regulations of the constructional law, since too many of the construction companies were

already suffering under the pressure of insolvency.

Expert Body for Certification of PerformanceAccording to the Act No. XXXIV of 2013 on the prevention of circular debts, a new body the so-called Expert Body for Certification of Performance (hereinafter referred to as “EBCP”) started its operation as of 1 July 2013, with the goal of combating the evolvation of circular

debts. The expert opinion of the EBCP may be requested by the customer, sub-contractor, architect, or the contractor, if a certification of performance has not been issued, the issuance is disputed, or despite of the issuance no payment has taken place. In addition to this, the expert opinion may be requested for the enforcement of collaterals securing a contract between the parties.

11

Dr. Péter MÉSZÁROS lawyerBALÁZS & HOLLÓ Law Firm

The EBCP operates independently but along the Hungarian Chamber of Commerce and Industry. If the request of the party complies with the provisions of the new laws, the EBCP cannot deny to proceed.

After the EBCP examined the performance of the contract, the issued expert opinion will contain whether the performance of the contract has been done, and what part of the consideration stipulated in the contract shall be paid. An important rule is that the parties to the contract are not allowed to exclude or to limit the procedure of EBCP. The litigation procedures initiated on the ground of this expert opinion are subject to preliminary enforcement, which aims to make the procedures faster. The goal of the procedure of EBCP is for the courts to have an expert opinion on which their ruling can be based upon. This means basically the speeding up of the litigation procedures.

Deadlines for repayment of debtsAccording to the new regulations of the Civil Code of Hungary, if the parties do not agree otherwise, the payment deadline of the debt is 30 days after the takeover of the invoice. If this date cannot be determined properly, the 30 days period shall start on the date of performance. Nevertheless, the agreement of the parties regarding the deadline shall not exceed 60 days.

If the contract is concluded between business

entities, provision which stipulates a longer period than 60 days concerning the repayment for lack of evidence shall be considered as an unreasonable derogation to the other company, and may be challenged in court.

Calculation of interests in case of overdue paymentsPreviously, when calculating the interests in case of overdue payments the base interest of the last day of the previous half-year has been taken into consideration. From now on, the interest applicable on the first day of the effected half-year shall be applied.

The rate of the late payment increased as well: In case of contracts between companies the applicable base rate of the Hungarian National Bank plus 8 percent shall be paid as interest.

***

The information in the present article is for general purposes and guidance only and should not be used as a substitute for obtaining legal advice from a licensed attorney. The effectiveness of any legal advice rendered by an attorney should depend on the attorney’s familiarity with the underlying facts and all circumstances of the case.

For specific legal advice, please contact any of our attorneys.

BALÁZS & HOLLÓ LAW FIRM H-1066 Budapest, Teréz krt. 46., Mark Center 4th floor.Tel/Fax: (36-1)302-5697; (36-1)302-7938; (36-1)312-1103 E-mail: office@balazshollo.hu; www.balazshollo.hu

Contact Persons:Dr. Tamás BALÁZS

Attorney at Law, Senior PartnerDr. Dóra HOLLÓ

Attorney at Law, Partner