REALWorld Law

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

No Hungarian standard form contracts exist. In recent years, FIDIC and FIDIC-based construction contracts have become more common and are now quite widely used, especially for construction works awarded through a tender and/or public procurement.

The form of construction contract to be used is based on the parties’ agreement. However, in certain cases, such as public procurement-based construction projects, the use of a standard form contract may be required by the employer.

Last modified 22 Mar 2024

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

The typical parties are:

Employer or client

The party procuring the works being either the owner of the real property or a developer.

Contractor

The party engaged by the employer/client to carry out the works. In practice, the contractor (also known as the main contractor) usually engages sub-contractors.

Sub-contractors

The parties engaged by the (main) contractor to carry out separate parts of the works.

Architect/engineer

A professional consultant who is sometimes appointed to act as a third-party certifier in relation to completion of the works.

Project manager

Usually involved in more complex projects where his main tasks are to coordinate all parties involved and enter into contracts on behalf of the developer.

Technical manager

Employed by the Contractor, his or her main roles are to coordinate and manage the construction works on site and to ensure that the works are in full compliance with the applicable laws and regulations.

Financing bank

Banks or other financial institutions providing finance to any of the parties.

Project fund manager

Involved if the works are subject to ‘project fund management’ under the Construction Act (Act LXXVIII of 1997), the project fund manager distributes the funds provided by the client to the contractor, monitors the invoicing and payment of contractors’ fees within the subcontractor chain and through various tools ensures that all subcontractors are paid for approved performance.

Last modified 22 Mar 2024

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

The contractor is responsible for the construction of the works, including pre-financing the project milestones (though sometimes employers/clients agree to pay an advance amount), health and safety on the construction site and property protection etc. In design and build projects, the contractor is not only responsible for the construction, but also for the design of the works.

In relation to force majeure, if the contractor is unable to perform its obligations (eg completion by a specified date) under the construction contract because of unforeseeable events outside its control, this might result in the extension of the original time for completion.

Last modified 22 Mar 2024

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

The use of public-private partnerships (PPP) used to be widespread until 2010. The government and particularly municipalities did encourage PPP projects as such projects allowed them to focus on delivering the core services they are required to provide. Since 2010 virtually no new PPP projects have been started.

Last modified 22 Mar 2024

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

Yes, it is possible to enter into a fixed price construction contract. In fact, fixed price construction contracts are rather common in Hungary. In such cases, the contractor is not entitled to any additional money for works included in the design and the technical specifications.

Nevertheless, if there are any variations to the works instructed by the employer, the contractor may request compensation for such extra works.

Last modified 22 Mar 2024

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

There are no insurances required by law as a general rule (nevertheless, in case of certain type of construction works, the relevant legislation prescribes obligation to obtain and maintain required liability insurance). Nevertheless, pursuant to the construction contract, contractors may be obliged to take out, at their own expense, certain insurances relating to the works to be carried out. Such insurances typically include:

• Construction all risk (CAR) insurance to insure the construction works that are being undertaken
• Liability insurance to cover losses, damages, injuries etc caused to:
  • the employees of the contractor; and/or
  • third parties (eg owners of the adjacent buildings)
• Professional indemnity insurance to cover losses and damages arising from errors or omissions committed by the contractor during the conduct of its business activities

Last modified 22 Mar 2024

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

In Hungary, it is not usual to provide other security documents in addition to the construction contract, although sometimes parent company guarantees are provided by the employer if the employer is a special purpose vehicle.

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’.

The employer and the contractor might agree in the construction contract that a certain part of the contract price will not be paid at completion, for example 5% of the contract price is withheld until the occupancy permit relating to the works to be carried out becomes final and non-appealable, and an additional 5% is withheld until the expiry of the guarantee period. It is also common that the parties agree on the provision of a bank guarantee covering the potential warranty and guarantee claims of the employer during the guarantee period.

Last modified 22 Mar 2024

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

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