REALWorld Law

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

The main source of law is the Hungarian Civil Code (Act V of 2013) which contains the general provisions regulating contracts for the design and carrying out of building works (and contracts in general). As a main rule, these provisions are permissive, so the parties (such as the employer, contractor etc) are free to deviate from the rules contained in the Civil Code.

There are several other statutes directly governing and regulating construction law in detail. The most important of these include the Construction Act (Act LXXVIII of 1997), also known as the Formation and Protection of the Built Environment Act, Government Decrees Nos. 191/2009, 194/2009, 312/2012, 266/2013 and 143/2018.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

There are several official permissions, licences and consents to be obtained to carry out construction work, for example:

• Environmental impact assessment (EIA): in certain cases, where the construction project is likely to have a significant impact on the environment, an EIA must precede the construction works.
• Preliminary building permit: this is a preliminary permission to ascertain the main requirements and conditions applicable to the projected building works. The preliminary building permit is valid for one year.
• Building permit: in most cases, this is required for construction work to start. As a rule, the construction works must start within four years from the date when the building permit became final and binding. The works must be completed in a ‘ready-for-occupancy’ condition within six Such deadlines may not be extended.  If the works are not started or completed within the applicable deadlines then the building permit becomes ineffective and a new building permit must be obtained.

It should be noted that for special building projects additional permits may be required (eg permits for power plants and industrial facilities).

In the case of certain retail buildings or units with a gross floor area of over 400 square meters special licensing procedures apply.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

There are several statutory regulations relating to health and safety in the workplace and on construction sites, including provisions relating to protective clothing and equipment, maintenance of a safe working environment, mandatory training and fire protection rules etc. Certain construction activities require the presence of professionals qualified in fire protection.

The parties usually agree in the construction contract that the (main) contractor will be the person liable to ensure that the health and safety regulations are complied with on the construction site. Furthermore, one of the main roles of the technical manager (who coordinates and manages the construction works) employed by the main contractor is to ensure that the works are in full compliance with the applicable laws and regulations, including health and safety regulations.

Following completion and takeover, liability shifts to the employer (or owner) and in practice transforms into a liability to maintain and repair the building and to keep it in a proper condition which does not endanger health and safety.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

The main legislation in this regard is the Environmental Protection Act (Act LIII of 1995). There are several other statutory regulations in relation to air and water protection and the disposal of waste, including construction waste.

In Hungary, the ‘polluter pays’ principle applies. The owners and, if different from the owners, possessors (users) of land have joint and several liability for environmental damage or the endangering of the environment on that land. The owner may only be relieved of environmental liability if it is able to prove that it did not itself cause the damage and names the person actually liable for the pollution.

In certain cases, where the construction project is likely to have a significant impact on the environment, an environmental impact assessment must precede the construction works.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

It has become rather common in recent years for developers to sign a community development agreement with the local municipality, in which the developer undertakes to finance the rezoning costs of the development area, to carry out certain public works, such as landscaping or the construction of roads, public parking spaces or pavements. The works and structures so constructed would thereafter be handed over to the local municipality free of charge.

In the case of substantial greenfield developments local municipalities may participate in, and partially finance, the costs of creating the necessary utility connections.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

In general, the parties to a contract for the design or carrying out of building works are free to contract as they wish. There are, however, certain provisions that are mandatory. Such mandatory requirements include (among others):

• The construction contract must be in writing
• Liability may not be validly excluded for breach of contract for damaging life, physical integrity or health, and for damages caused by wilful misconduct or a criminal act
• Statutory warranties for specified periods apply to certain construction works and structures and must be provided by the contractor to the developer
• Certain construction projects are subject to ‘project fund management’ where the funds covering the costs of the construction works are deposited into a separate account accessed exclusively by the project fund manager

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

Although the method of payment is subject to the parties’ agreement, the most typical scenario is that payment is made after completion of each milestone.

Fixed-price contracts are common in Hungary, although other payment and calculation methods are also in use, including prime cost and cost plus fee arrangements. The contractor may become entitled to additional payment(s) if variations to the original technical specifications are requested by the employer.

To ensure that the funds earmarked for certain construction and building activities are used for the purposes specified in the construction contract, the Construction Act, requires the employment of a project fund manager for construction works exceeding the value of EUR5,382,000. The most important aspect of ‘project fund management’ is that the funds to cover the costs of the construction works must be deposited into a separate account accessed exclusively by the project fund manager who is responsible for the distribution of these funds to the contractor and sub-contractors. Construction concessions and works awarded through public procurement are not subject to ‘project fund management’.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

The parties are free to agree on a fixed completion deadline.

If there is a delay in completing the works by the date specified in the construction contract, the employer may bring a claim against the contractor for general damages for late completion. In addition, construction contracts usually include liquidated damages provisions (a liquidated damages clause) in which an amount or a percentage of the contractor’s fee is set forth as applicable for each calendar day of the delay until the maximum amount, also defined in the contract, is reached. It is important to note that excessive liquidated damages may be reduced by the court.

As to late payment by the employer, the contractor may become entitled to late payment interest.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

As a general rule, the employer may instruct the contractor and request variations to the construction works. If the requested variations affect the original technical specifications, the contractor may become entitled to additional fee(s) and extra time for completion.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

The building works are taken over by the employer when completion of the works has been reported by the contractor to the employer. In certain cases, a trial operation lasting for at least 30 days is also required. As part of the takeover procedure, the employer inspects the works and any deficiencies, defects and warranty claims are recorded. Minor defects not affecting ordinary use usually do not entitle the employer to reject taking over the works.

For the purpose of issuing the occupancy permit the representatives of the relevant authorities also conduct a site visit in order to determine whether the works have been carried out and completed in compliance with the applicable laws, regulations and the building permit and whether the works are suitable for the intended use and occupation.

The parties may also agree that the certification of completion is referred to a third-party certifier, such as an architect or engineer. This is also common in FIDIC (and FIDIC-based) construction contracts.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

The general limitation period, including the period available to file claims for damages, is five years.

Guarantee claims can be made within the deadline set forth in the construction contract. In certain cases, the (minimum) guarantee period is prescribed by law.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

Provided that the developer and the end user have contractual relationship, the developer is liable for any physical damage or economic loss suffered by the end user in accordance with the general liability rules for breach of contract. Limitation (including exclusion) of developer’s liability for the construction of the works may only be possible if there is an adequate compensation (eg a price reduction) for such limitation. In certain cases however, the developer’s liability may not be validly excluded including bodily injury damage to health, and for damages caused by wilful misconduct or a criminal act.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

Due to the lack of contract between the architect/designer/(sub-)contractor and the end user, the latter may enforce its claims against the architect/designer/(sub-)contractor for damages in accordance with the general tort liability rules, pursuant to which a person causing damage to another person in violation of the law shall be liable for such damage and may only be relieved of liability if he is able to prove that he has acted in a manner that can generally be expected in the given situation. The period of limitation for such claims is, as a general rule, five years.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

Due to the lack of contract between the designer/contractor and the purchaser/tenant/bank as affected third party, the latter may enforce its claims against the designer/contractor for damages in accordance with the general tort liability rules, pursuant to which a person causing damage to another person in violation of the law shall be liable for such damage and may only be relieved of liability if he is able to prove that he has acted in a manner that can generally be expected in the given situation.

Additionally, developers tend to assign all rights under design/construction contracts to the end users, allowing them to sue the designers/contractors for breach of contract directly.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

The general ordinary courts deal with construction disputes as no specialized courts exist. However, technical experts/consultants are often involved, including the Performance Certification Expert Board, which at the request of the parties (eg the contractor or designer) will deliver an expert opinion as to whether the contractor’s performance complied with statutory requirements and the conditions of the construction contract.

Claims of lesser value will start in a district court, whilst more substantial claims will be heard in a regional court (in Budapest, this is the Metropolitan Court). First instance decisions of the ordinary courts can be appealed either to the regional court (Metropolitan Court) or the Regional Court of Appeal depending on which court acted as the court of first instance. The ultimate court of appeal through the supervisory proceedings is the Curia (Supreme Court of Hungary).

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

It is quite common in Hungary that construction disputes are referred to arbitration. The Court of Arbitration attached to the Hungarian Chamber of Commerce and Industry is a popular arbitration court. The use of arbitration is always based on the decision of the contracting parties and their choice must be included in the construction contract.

The advantage of the use of arbitration as a method of dispute resolution is that it is significantly faster than the ordinary litigation proceedings and, unlike the decision of an ordinary court, the decision of an arbitration court cannot be appealed. One drawback is that arbitration is considerably more expensive than litigation through the ordinary courts.

Last modified 22 Mar 2024

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

The contracting parties are free to refer their construction dispute to ADR. Expert determination is typical where resolving the issue in dispute requires special skills and expertise. Experts are usually appointed by the mutual agreement of the parties and, similarly, the related costs are borne equally. To avoid any doubts and interpretation conflicts, the provisions for expert determination (if applied) should be included in detail in the construction contract.

Mediation is a relatively new form of ADR in Hungary and has a growing popularity. As a related obligatory requirement, legal entities must first attempt an out-of-court settlement of their dispute before filing a claim with the court.

Last modified 22 Mar 2024