Source: https://iclg.com/practice-areas/investor-state-arbitration-laws-and-regulations/hungary
Timestamp: 2019-04-23 08:50:29+00:00

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As of October 1, 2018, Hungary has bilateral investment treaties with the following countries: the Republic of Albania; Argentina; Australia; the Republic of Austria; the Republic of Azerbaijan; the Kingdom of Belgium and the Grand Duchy of Luxembourg BLEU; Bosnia and Herzegovina; the Republic of Bulgaria; the Kingdom of Cambodia; Canada; the Republic of Chile (signed but not yet in force); the People’s Republic of China; the Republic of Croatia; the Republic of Cuba; the Republic of Cyprus; the Czech Republic; the Kingdom of Denmark; the Arab Republic of Egypt; the Republic of Finland; the French Republic; the Federal Republic of Germany; the Hellenic Republic; the Republic of India (terminated in 2017); the Republic of Indonesia (terminated in 2016); the State of Israel (terminated in 2007); the Republic of Italy (terminated in 2008); the Hashemite Kingdom of Jordan; the Republic of Kazakhstan; the State of Kuwait; the Republic of Latvia; the Lebanese Republic; the Republic of Lithuania; the former Yugoslav Republic of Macedonia; Malaysia; the Republic of Moldova; Mongolia; the Kingdom of Morocco; the Kingdom of the Netherlands; the Kingdom of Norway; the Republic of Paraguay; the Republic of Poland; the Portuguese Republic; the Republic of Korea; Romania; the Russian Federation; the Republic of Serbia; the Republic of Singapore; the Slovak Republic; the Republic of Slovenia; the Kingdom of Spain; the Kingdom of Sweden; the Swiss Confederation; the Republic of Tajikistan (ratified but not yet entered into force); the Kingdom of Thailand; Tunisia (signed but not yet in force); the Republic of Turkey; Ukraine; the United Kingdom of Great Britain and Northern Ireland (including the territories of Bermuda, Gibraltar, Guernsey, Isle of Man, Jersey, and the Turks and Caicos Islands); the Eastern Republic of Uruguay; the Republic of Uzbekistan; the Socialist Republic of Vietnam; and the Republic of Yemen.
Hungary is also party to the Energy Charter Treaty.
According to publically available sources of information, Hungary has signed, but has not ratified its bilateral investment treaties with Chile (1997) and Tunisia (2003). Presumably, these treaties have not been ratified as a result of Hungary’s accession to the European Union in 2004.
Hungary is actively negotiating treaties with non-EU countries, hence the conclusion of new treaties may be announced before the end of 2018.
Hungary has a model BIT which dates back to 2016.
Its provisions are rather modern and reflect Hungary’s experience as an open economy with a welcoming attitude towards foreign direct investment.
Hungary’s model BIT affords fair and equitable treatment (FET), full protection and security, national and most-favoured nation treatment (MFN) as substantive protections to investors.
The model BIT provides a narrow interpretation of the breach of the FET standard when it lists the following measures as potential breaches: (a) denial of justice in criminal, civil or administrative proceedings; (b) fundamental breach of due process, including a fundamental breach of transparency and obstacles to effective access to justice, in judicial and administrative proceedings; (c) manifest arbitrariness; (d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; or (e) harassment, coercion, abuse of power or similar bad faith conduct. It also declares that the breach of another obligation included in the treaty or another international obligation or the breach of domestic law in and of itself does not establish a breach of the FET standard. Nevertheless, it provides all parties with an opportunity to request a review of the content of the FET obligation.
Moreover, the model BIT restricts full protection and security provisions to “physical security of investors and investments”.
With respect to the MFN treatment, the model has a specific carve out concerning procedural rights when it declares that the resolution of investment disputes is not considered “treatment”.
On the issue of expropriation, Hungary’s model BIT lists the following factors to be considered during a “case-by-case, fact-based inquiry” into whether indirect expropriation has taken place: (a) the economic impact of the measure or series of measures; (b) the duration of the measures; and (c) the character of the measures, notably their object and content. In this context the model BIT specifically declares that “the sole fact that a measure or a series of measures of a Party has an adverse effect on the economic value of an investment does not establish that an indirect expropriation has occurred”.
Hungary’s model BIT offers five distinct mechanisms for investor-state dispute resolution: (a) domestic courts of the parties; (b) ICSID arbitration; (c) ad hoc UNCITRAL arbitration; (d) arbitration under ICSID’s Additional Facility Rules; or (e) any other form of dispute settlement agreed by the parties. The model contains a fork-in-the-road provision and stipulates a three-year limitation for investors to submit a dispute to arbitration from the date they first acquire knowledge of the alleged breach. Presumably, as a reflection on potential future developments in this area, the model BIT declares that its relevant provisions would cease to exist in the event “an international agreement providing for a multilateral investment tribunal and/or a multilateral appellate mechanism applicable to disputes under this Agreement” entering into force.
Hungary’s model BIT applies the UNCITRAL Transparency Rules to disputes.
Presumably, in response to the regulatory challenges faced during the recent global financial crisis, Hungary’s model BIT offers carve outs so as to enable contracting parties to adopt reasonable measures to safeguard the integrity and stability of financial institutions or a contracting party’s financial system.
Finally, the model BIT includes a denial of benefits clause.
Hungary does not officially publish such diplomatic notes. Nevertheless, the Ministry of Foreign Affairs and Trade offers assistance to anyone seeking to conduct research related to the preparatory documentation of treaties (provided they are not protected by confidentiality).
The Hungarian Government has not published any official treaty commentaries yet.
(1) Hungary acceded to the New York Convention on March 5, 1962 and its provisions entered into force on June 3, 1962 in respect of Hungary; (2) Hungary signed the Washington Convention on October 1, 1986 and its provisions entered into force on March 6, 1987 in respect of Hungary; (3) as of October 1, 2018 Hungary has not signed the Mauritius Convention yet.
The Act on the Investments of Foreigners in Hungary (Act XXIV of 1988) was introduced shortly before the 1989 collapse of the communist regime in Hungary. Tellingly, its introductory provisions declare that it aims to “facilitate the direct participation of foreign operating capital in the Hungarian economy”. Hungary has gone through many significant positive developments since the introduction of the act, such as becoming a Member State of the European Union in 2004. Although the act remains effective to date, about two-thirds of its early provisions, containing various administrative restrictions on foreign direct investment, have long been abolished.
Nevertheless, much like an investment treaty, the current version of the act grants substantive protections to investors, such as full protection and security or protection against expropriatory measures (as well as measures having an equivalent effect). It stipulates that any expropriatory measures may only be carried out upon the payment of prompt compensation at the actual value of the assets of the foreign investor. Compensation is granted through the competent administrative state agencies, in the same currency in which the investment was made. In the event of an alleged violation of the law, a competent domestic court may be seized to review the decision of the administrative agency on the issue of compensation.
There are no such formal requirements. As a Member State of the European Union, Hungary has a rather favourable attitude towards foreign investment, which is also reflected in the prevailing legal regime.
Hungarian courts have not had a chance to weigh in on investment treaty interpretation yet. However, given the potential implications of the preliminary ruling of the Court of Justice of the European Union in Slovak Republic v. Achmea BV (C-284/16), Hungarian courts may soon be seized by investors, affording domestic courts the opportunity to interpret Hungary’s investment treaties.
It can generally be stated that Hungary has shown a positive attitude towards investor-state arbitration. This is evidenced by the number of bilateral investment treaties it can pride itself with and its voluntary compliance with arbitral awards rendered against it.
Although there is no generally advocated uniform policy by the Government, during the course of the negotiations of the Transatlantic Trade and Investment Partnership (TTIP) and the Comprehensive Economic and Trade Agreement (CETA) Hungary, as an OECD country with an independent judiciary, has voiced its preference for a dispute resolution mechanism that differs from the investment arbitration model proposed at the time. While we have yet to see the Government’s official stance on the investment court system (or ICS) framework proposed under the CETA, some government officials referred to it as an “interesting development” in comparison to investment arbitration.
The Government has not yet issued a policy paper to the general public on its current or future stance regarding these issues in investment treaties.
Hungary’s most recent, publically accessible treaties are the 2016 BIT with the Kingdom of Cambodia and the 2017 BIT with the Republic of Tajikistan. These treaties both remain silent on the issues of corruption, transparency and climate change. They both contain an identical MFN clause and an identical general exception that an investor-state dispute settlement “shall not be considered as treatment, preference or privilege”. Accordingly, these treaties follow a more modern approach in that they exclude these procedural rights from the scope of MFN treatment. Finally, both of these treaties contain quite a broad denial of benefits clauses. Benefits under both treaties may be denied in circumstances where investors of a third state own or control the given investment and either the investor (i) has no substantial business activities in the territory of the contracting party under whose law it is constituted, or (ii) a measure with respect to the given third state adopted by the denying party would be violated or circumvented if the benefits of the treaty were accorded to these investments.
For a glimpse on how Hungary’s 2016 model BIT addresses some of these issues please refer to question 1.3 above.
Hungary has not yet terminated a BIT on its own initiative. There have been four instances in the past when Hungarian BITs were terminated. In three instances BITs were unilaterally denounced by the other contracting state, such as India (2017), Indonesia (2016) and Israel (2007). Hungary agreed to terminate the BIT upon mutual consent with Italy (2008).
Hungary has been involved in a total of 17 investor-state arbitrations to date. 15 of these cases have been administered by ICSID, one under the UNCITRAL Rules and one under the ICC Rules.
Out of the 17 known investment claims made against Hungary, so far a total of four have been successful. Hungary has voluntarily complied with three of these awards rendered against it (ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary; EDF v. Hungary; Edenred S.A. v. Hungary). In respect of the latest award against it (Dan Cake (Portugal) S.A. v. Hungary), Hungary has sought both revision and annulment under the ICSID Convention and filed for the stay of the enforcement of the award.
Yes. Hungary has sought the annulment (and the revision) of two ICSID awards against it (Edenred S.A. v. Hungary and Dan Cake (Portugal) S.A. v. Hungary). All of these challenges are pending. As reported in the press, one of the grounds for these challenges is the implications of the preliminary ruling issued by the Court of Justice of the European Union in Slovak Republic v. Achmea B.V. (C-284/16).
For the sake of disclosure, the authors of this chapter are counsel to Hungary in both of these cases.
There has not been any satellite litigation related strictly to the arbitration proceedings against Hungary.
However, in three recent interrelated ICSID cases the claimants had launched complaints with the European Commission, as a result of which, infringement proceedings were initiated by the Commission against Hungary. This infringement proceeding culminated in a ruling unfavourable to Hungary, by the Court of Justice of the European Union.
Some of the cases brought may be grouped based on the government measures they relate to. Three cases were launched by three investors as a result of the termination of long-term power purchase agreements by the state due to mandatory rules related to EU state aid. Moreover, two claims were filed by two media broadcasting enterprises related to the same tender for nationwide radio frequencies. Finally, three French investors filed claims in connection with certain amendments in the Hungarian tax laws and rules governing so-called fringe benefits.
Although Hungarian law does not have a specific legal provision dedicated to the issue of third-party funding yet, under the prevailing sentiment, there are no legal obstacles to third-party funding.
Given the relatively novice nature of the issue of third-party funding on the Hungarian market, we are not familiar with any publically accessible Hungarian court decision or arbitral award on the issue.
Although the issue provokes an increasing interest, particularly amongst potential claimants in international arbitrations, third-party funding is not used widely.
It can generally be stated that this issue is in the center of attention as oftentimes claimants are tempted to try to override decisions of domestic courts by turning to international tribunals for relief. This is particularly true in the investment arbitration context.
The question may be answered by looking at the underlying arbitration agreement that forms the basis of the jurisdiction of the given arbitral tribunal and the general principles of international law.
Some of Hungary’s earlier investment treaties grant jurisdiction to international tribunals to decide claims of expropriation only. Hungary’s bilateral investment treaties entered into as of the second half of the 1990s also grant jurisdiction to international tribunals over claims of alleged violations of various other substantive treaty protections, such as national treatment, fair and equitable treatment or full protection and security. Typically, these treaty protections afford limited room for tribunals to look at decisions of domestic courts or other. Nevertheless, tribunals in the past have in general insisted that although they are not necessarily bound by decisions of domestic courts, they cannot second-guess the interpretation or application of local laws carried out by domestic courts, hence any such review is usually very narrow in scope.
Yes. If the seat of arbitration is in Hungary, Hungarian courts may grant interim measures, injunctive relief, or order protective measures. Hungarian courts may also assist the arbitral tribunal in taking evidence (such as preserving evidence or applying coercive measures to ensure witness appearance).
The recently introduced new Arbitration Act (Act LX of 2017) specifically stipulates that irrespective of the venue of an arbitration proceeding, Hungarian courts have the power to order the taking of preliminary evidence (i.e. even before the commencement of the arbitration), to order interim measures or protective measures, to issue writs of execution, or to order the provision of a security. Hungarian courts proceed on the basis of and within the restrictions stipulated in the Hungarian Civil Procedure Code (Act CXXX of 2016) when taking these measures.
Hungary has recently introduced a completely revamped Arbitration Act, which entered into force on January 1, 2018. It is based on the UNCITRAL Model Law on International Commercial Arbitration as amended in 2006.
The Arbitration Act (which applies if the seat of the arbitration is in Hungary, or in certain instances if the venue of the proceeding conducted by a permanent arbitration court seated in Hungary is outside of Hungary) stipulates that the rules and regulations of a permanent arbitration court or, in the case of an ad hoc arbitration, the agreement of the arbitration panel and the parties may exclude or limit the liability of the permanent arbitration court, the arbitration panel and the arbitrators. Limitation of liability for damage caused intentionally or by gross negligence is prohibited.
This generally depends on the particular rules that apply to the arbitration proceedings. If the seat of the arbitration is in Hungary, the Arbitration Act lists specific criteria which prohibits anyone from serving as an arbitrator. These are the following: (i) any person under the age of 24 years; (ii) any person barred from participation in public affairs by a final court ruling; (iii) any person sentenced to imprisonment by a final court ruling (until he or she regains a clean criminal record); (iv) any person under guardianship; (v) any person barred from practicing a profession requiring a university degree in law; or (vi) any person under probation under the final order of a court (during the course of the probationary period).
This generally depends on the particular rules that apply to the arbitration proceedings. If the seat of the arbitration is in Hungary, save for an agreement to the contrary between the parties or if the arbitration rules applicable to the dispute provide otherwise, the Arbitration Act affords the opportunity to either of the parties to turn to the Metropolitan Court of Budapest for the appointment of the remaining arbitrator(s).
Please refer to question 6.6.
Hungary has been signatory to the New York Convention since 1962. When acceding the New York Convention, Hungary made a reciprocity reservation and a commercial reservation. Accordingly, Hungarian courts only apply the New York Convention to arbitral awards rendered in the territory of another New York Convention contracting state, and only to awards related to disputes that concern legal relationships that are commercial in nature under Hungarian law.
In addition to Law Decree 25 of 1962 implementing the New York Convention, the party wishing to enforce a foreign arbitral award in Hungary must also comply with the requirements stipulated by the relevant provisions of Act III of 1994 on Judicial Enforcement. For recognition and enforcement by Hungarian courts foreign arbitral awards must: (i) contain a ruling against the debtor; (ii) be final and binding (non-appealable); and (iii) the deadline for their voluntary performance must have passed when the request for recognition and enforcement is submitted to the competent court.
As noted above, Hungary is also party to the ICSID Convention. At present the Metropolitan Court of Budapest is the designated court for the recognition and enforcement of ICSID awards in Hungary under Article 54 (2) of the ICSID Convention.
Given that Hungary is a signatory to the New York Convention, in the case of non-ICSID awards, the party against whom enforcement is sought may resist enforcement under the grounds listed in Article V (1) of the New York Convention.
Hungarian courts may refuse to recognize and enforce foreign arbitral awards on the grounds stipulated in Article V (2) of the New York Convention.
Hungary has recently introduced a new Act on Private International Law (Act XXVIII of 2017) which devotes a specific title (Title 34) to the issue of sovereign immunity. Hungary adheres to the so-called “restrictive immunity” principle and modeled the relevant provisions of the Act on Private International Law on the United Nations Convention on Jurisdictional Immunities of States and Their Property of 2004 (Hungary is not party to the convention).
There are no publically available Hungarian court decisions over these issues.
There are no publically available Hungarian court decisions over these issues in the context of sovereign assets. All known cases deal with the liability of controlling shareholders whose intentional or grossly negligent acts contribute to loss-generating operations.

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