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Hard times for Hungarian general managers?

Hard times for Hungarian general managers?

The new Civil Code of Hungary entered into force on 15th March 2014, replacing the former Civil Code and the Companies’ Act, and among other rules, introduced a new system of liability that affects general managers in Hungary in several ways.

Contrary to the unified liability system of the previous Civil Code – the new Civil Code established a dual system that differentiates between contractual and non-contractual liability.

The liability of GMs could arise in two directions: towards the company and towards third persons.

The newly introduced stricter rules of contractual liability shall apply to any damage caused by GMs towards the company and such rules create an almost entirely objective measure where liability could only be excluded by fulfilling three conjunctive conditions:

According to clause 6:142 of the new Civil Code the breaching party shall prove that (i) the breach of contract was caused by circumstances unforeseeable at the time of entering the contract and (ii) that it was beyond his sphere of control, and (iii) that it could not have reasonably been expected of the breaching party to avoid the circumstances or prevent the damage occurring.

According to the new Civil Code the above rules of liability towards the company shall only apply when the relationship of the general manager and the company is based on an assignment contract and not on an employment relationship. In the event the GM is an employee of the company his liability will be regulated by the Labor Code that applies the rules of non-contractual damages for the liability of employees towards their employers.

The liability of GMs towards third parties is regulated by the rules of non-contractual damages that have not been changed much in the new Civil Code: non-contractual liability of is still based on culpability that means “a person who causes damage to another person in violation of the law shall be liable for such damage unless s/he proves that s/he has acted in a manner that can generally be expected in a certain situation”.

One of the most controversial innovations of the new Civil Code can be found here under the rules of liability of GMs toward third parties.

Pursuant to the former Companies’ Act only the company was held liable for any damage of third parties caused by the general managers in connection with their office. The new Civil Code changed this principle and established the joint and several liability of GMs with the company:

According to clause 6:541 of the new Civil Code: “The executive officer may be held liable jointly and severally with the company, if the executive officer causes any damage in connection with his/her office.

This new provision caused great anxiety in the business community, as it seems to establish the opportunity for any third parties to bring an action directly against general managers in connection with any kind of damage caused by the company.

Since the entry into force of the new Civil Code both practitioners and academics have argued whether this recently introduced form of liability shall be interpreted strictly or whether there is a possibility of a broader understanding, and specifically which conduct shall be covered by the joint and several liability of executive officers.

This question after all could only be resolved by the practice of courts. Until then, in the absence of satisfactory jurisdiction or a common interpretation, general managers of Hungarian companies are advised to pay extra attention to compliance.

By Ágnes Balassa

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