Is the penalty for delayed performance is enforceable, in case the purchaser fails to reserve its rights immediately? Or only the express waiver of right of the purchaser excludes the enforceability of the penalty? In this article we analyse the recent judgment of the Hungarian Supreme Court delivered in a construction dispute, where the highest judicial body seems to maintain its “estoppel”-based practice, despite the recent legislative changes in Hungary.
1.Facts
In the underlying case, a German company delivered building blocks to a Hungarian city, as purchaser, within the framework of the flood prevention project of latter. According to the contract, concluded in January 2013, under the temporal scope of Former Civil Code of Hungary[1] the German supplier undertook to use steel stocks for the storage of the blocks. The parties stipulated penalty in case of any delay of contractual obligations of the supplier.
As often happens in construction industry, the supplier delivered the blocks in instalments, lately. The purchaser accepted the delayed delivery, and although complained about the lack of steel stocks, it did not make a statement of reservation of rights to enforce penalty due to the delay.
Finally, the supplier delivered the steel stocks too, and after that the purchaser brought a penalty claim referring to the delay.
2. First instance procedure
In the litigation, the purchaser claimed the contractual penalty, referring to the missed deadline laid down in the contract.
The supplier contested its obligation to provide steel locks, and highlighted that his delay did not impede the completion the whole project. The supplier also raised as a defence, that the purchaser, despite being aware of the delay, failed to make a statement of reservation of rights, therefore it cannot claim penalty later.
The Regional Court of Szeged, acting at first instance, awarded the penalty claim, holding that the building permit submitted by the supplier, being part of the contract, stated that it delivers the building blocks in steel stocks. Due to the failure to deliver these stocks, the suppler breached the contract, therefore the penalty claim is justified.
3. Second instance procedure
The Regional Court of Appeal of Szeged, acting as second instance court, uphold the decision of first instance, underlining that according to the rules of the previous Civil Code (“old Civil Code”) the purchaser did not have to make a statement of reservation of rights to enforce the claim arising from the breach of contract later. [2]
According to the Regional Court of Appeal, there is an inverse legal situation: in the absence of express waiver of the right, the penalty can be enforced.
It must be noted that the Regional Court of Appeal assessed the relation of the parties as a long-term contractual legal relationship, lasting for several months, in which they settled account with each other at the end, so there it had no significance, that he purchaser have not made a statement of reservation of rights at the takeover.
4. Decision of Curia
The supplier pursued an extraordinary remedy against the second instance decision, by submitting a request for review to the Supreme Court of Hungary (“Curia”).
The Curia found the request for review of the supplier well-founded. According to its view, the lawmaker, by demanding the reservation of rights in the Former Civil Code, intended to attain that only those breach of contract should lead to detrimental legal consequences, which are considered sufficiently substantial and serious by the parties.
Therefore, in the absence of prior reservation of rights, the purchaser shall refrain from referring to conducts of the other party, which can be characterised only formally as breach of contract, but which in fact do not impede the fulfilment of the aim of the contract. Gaining unfair advantages in this way would be contrary to the principle of mutual cooperation and good faith, which are applicable during the fulfilment of the contract.
In the current case, the purchaser has lost its opportunity to apply sanctions against the supplier because of the delay, since despite being aware of that, he failed to expressly reserve its rights.
5. Legal analysis – the principle of “estoppel”
It is interesting that the basic problem in the above case is very close to the common law device of “estoppel”. Based on the doctrine of estoppel, the court may prevent or "estop" a person from making assertions or from going back on his or her word.
In one of the leading English cases of “promissory estoppel” which involved a contract of sale of coffee beans, to be payable in pound sterling, yet the purchaser paid in in Kenyan Shillings based on a wrongly issued invoice, the English court ruled that purchaser cannot challenge the performance based on the payment in wrong currency, since he failed to raise an objection immediately.[3]
While similarly to the “estoppel”, the Former Civil Code expressly required the obligee to make a statement of reservation of rights to enforce rights referring to a known breach of contract, the New Civil Code[4], entered into force in March 2014, is silent on the matter, and does not contain such provision.
Despite the fact that the underlying case was governed by the Former Civil Code because of the date of contracting, the first and second instance courts tried to interpret the old provisions in the light of the New Civil Code, when they did not require a statement of reservation of rights from the purchaser to enforce the penalty.
However, the Curia has drawn a sharp line of demarcation between the old and the new regime, maintaining the case law related to the Former Civil Code, according to which in case of the purchaser is aware of the breach of contract, but accepts the performance, making a statement of reservation of rights is a precondition to enforce any further claims arising from breach of contract.
This approach of the Curia based on the Former Civil Code is better compatible with the requirement of foreseeability and the business reasonableness, as it prefers the transparent communication, which also lies behind the “estoppel” of common law.
6. Future Directions
However, it can be seen already that in those cases, where the New Civil Code is applicable, a completely different case law is developing in the level of first and second instance courts, which is totally contrary to the “estoppel” principle.
According to this, only the express waiver of rights deprives the purchaser from submitting further claims in case of breach of contract, while “accepting performance and remaining silent” does not.[5]
It is a question, whether in the future, when a case will be brought before the Curia in which the New Civil Code will be applicable, it maintains the sharp line of demarcation between the old and new regime, by upholding the case law developing in first and second instance.
In this case, the foreseeability and business reasonableness would be undermined, and the law would support the non-transparent communication.
Indeed, who would expect that the other party enforces further claims, if he accepts the performance and remains silent on consequences of contract breach?
For this reason, we hope that the Curia will maintain its “estoppel”-based jurisprudence by providing a “praeter legem” interpretation of the New Civil Code.
[1] Act IV of 1959 on the Civil Code (“Former Civil Code”)
[2] Section 316 (1) of Former Civil Code
[3] WOODHOUSE A.C. ISRAEL COCOA LTD V NIGERIAN PRODUCT MARKETING CO LTD [1972] AC 741
[4] Act V of 2013 on the Civil Code. In force since 15th March 2014.
[5] Decision No. BDT2020.4416.
