Introduction

As previously reported in this Bulletin,1 Hungary recently adopted Act No. LX of 2017 on arbitration (‘2017 Act’), which provides a new, modern, and stable framework for both domestic and international arbitrations conducted in Hungary.2 The 2017 Act incorporates many of the 2006 revisions to the UNCITRAL Model Law and provisions stemming from traditional Hungarian arbitral practice.3 Alongside its many welcome innovations and amendments, however, the 2017 Act contained a few provisions that attracted much criticism within Hungary and abroad. In the face of this criticism, the legislator amended two of the most problematic provisions shortly after the entry into force of the 2017 Act. Although those amendments reflect an effort to reassure the arbitration community, these steps do not go far enough in confirming Hungary as an attractive place of international arbitration.

1. Confirmation that arbitration proceedings seated in Hungary and administered by a foreign-based institution are governed by the 2017 Act

Over the past 20 years, 20 ICC Arbitration proceedings have been conducted with a seat in Hungary.4 In light of the initial wording of Section 1(1) of the new 2017 Act, however, the international and Hungarian arbitration community voiced concern about whether tribunals conducting arbitrations under the rules of a foreign institution will be able to continue to conduct such proceedings in Hungary or whether parties should avoid Hungary as a place of arbitration in arbitration proceedings administered by foreign institutions.5 Section 1(1) defined the territorial scope of application of the 2017 Act with respect to institutional arbitration as follows:

This Act shall apply to the arbitration if the headquarters of the permanent arbitral institution administering the proceeding … is located in Hungary.

Section 59(1) added that, for purposes of the 2017 Act, the permanent arbitral institution with headquarters in Hungary shall be the Permanent Arbitration Court attached to the Hungarian Chamber of Commerce and Industry (‘HCCIAC’).6

Section 1(1) thus meant that only those institutional arbitration proceedings (whether domestic or international) that were administered by the HCCIAC fell within the scope of application of the 2017 Act. Arbitration proceedings seated in Hungary but conducted under the auspices of ICC or other foreign arbitral institutions fell outside the scope of application of the 2017 Act.7 Therefore, arbitrations administered by foreign-based institutions in Hungary and the resulting awards existed in a legal vacuum. This had the potential to lead to problematic consequences, particularly at the setting aside and enforcement stages:

  1. Although rendered in Hungary, awards in arbitrations administered by foreign institutions could not be subject to setting aside proceedings in Hungary because they fell outside the scope of the 2017 Act, and therefore outside the jurisdiction of Hungarian courts.8 At the same time, because the place of arbitration was in Hungary, courts outside Hungary also lacked jurisdiction to hear any challenges against such awards that had not been made in their territory.9
  2. These awards could not qualify as ’award[s] made in the territory of a [Signatory] State’10 for purposes of recognition and enforcement under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’).11

Consequently, parties were indeed best advised either to choose a seat other than Hungary for their arbitration under the rules of a foreign arbitral institution or to opt for an HCCIAC arbitration seated in Hungary.12

The likely reason for the unfortunate initial wording of Section 1(1) of the 2017 Act lay in the legislator’s mistaken assumption – inherited from the previous 1994 Act13 – that in cases of institutional arbitration, the seat of an arbitral tribunal necessarily coincides with the location of the administering arbitral institution’s headquarters and, as a consequence, in its use of the location of the institution’s headquarters as a criterion for determining the territorial scope of application of Hungarian law. The criticisms voiced by the arbitral community prompted the Hungarian legislator to revise Section 1(1) with effect of 8 August 2018 to read:

This Act shall apply to the arbitration if the place of arbitration is in Hungary.14

The revised Section 1(1) makes clear that the 2017 Act will govern ICC proceedings as well as other foreign institutional proceedings seated in Hungary and that the resulting awards will qualify as awards made in Hungary for purposes of setting aside, recognition and enforcement.15

2. Persisting uncertainties: Costs of fresh proceedings following the setting aside of awards rendered in Hungary

The revision of the territorial criterion in the 2017 Act brought arbitral proceedings seated in Hungary and administered by foreign institutions within the scope of application of the Act. It thus made applicable Section 57(2) of the 2017 Act, which initially required arbitrators and institutions to forego their fees in the event the Hungarian courts set aside the award and the parties initiated fresh proceedings:

If the arbitral award is annulled, no arbitrator fee shall be due in respect of the arbitral proceeding that resulted in the annulled award and the members of the arbitral tribunal that rendered the annulled award shall not be entitled to arbitrator fees. In the fresh proceeding following annulment, the parties shall not be required to pay administrative fees.16

Section 57(2), which was rooted in Hungarian arbitral practice,17 was meant to increase the accountability of arbitrators and to enhance the attractiveness of arbitration in the eyes of users by ensuring that parties would not have to pay twice to obtain a single enforceable award.18 Unsurprisingly, however, it came under heavy criticism, especially with regard to the requirement that arbitrators forego (de facto reimburse) their fees, which was seen as an unfair and impracticable sanction mechanism that would lead to due process paranoia and threaten arbitrator independence vis-à-vis the Hungarian courts.19

With effect on 10 July 2019, the Hungarian legislator therefore removed the requirement that arbitrators reimburse their fees should their award be set aside. However, the 2017 Act still provides that parties cannot be required to pay arbitrator and administrative fees twice for a single enforceable award. The revised Section 57(2) reads:

If the arbitral award is annulled, the parties shall not be required to pay arbitral fees and administrative fees in the fresh proceeding conducted following annulment.

With respect to HCCIAC-administered proceedings, the Hungarian legislator tasked the Presidium of the HCCIAC with establishing a separate reserve fund to finance the arbitrator and administrative fees where fresh HCCIAC proceedings are conducted.20 In respect of ICC and other foreign institutional proceedings seated in Hungary, however, the legislator has offered no such ‘solution’. It thus remains unclear whether parties whose ICC or other foreign institution award is set aside in Hungary could invoke Section 57(2) to argue that they cannot be required to pay arbitrator fees and ICC administrative fees in the fresh proceeding.

Concluding remarks

The fact that awards are rarely set aside by the Hungarian courts so that Section 57(2) will consequently seldom apply in practice is only partially reassuring.21 Therefore, a further amendment to the 2017 Act will be necessary – one restricting the application of the revised Section 57(2) to arbitrations administered by the HCCIAC.

By promptly revising the problematic provisions of the new 2017 Act in the face of legitimate criticism voiced both in Hungary and abroad, the Hungarian legislator would send another clear signal of encouragement to parties, tribunals, and foreign arbitral institutions to select Hungary as a place for arbitration. Given the responsiveness of the Hungarian legislator thus far, it can be hoped that the necessary narrowing of Section 52(7) to HCCIAC arbitrations will be adopted in the not-so-distant future to allow Hungary to secure a place within the ranks of recommended seats for ICC and other foreign institutional arbitration.


1
Marianne Kecsmár, ‘A Welcomed and Debated Arbitration Reform’, ICC Dispute Resolution Bulletin, 2018/3, https://library.iccwbo.org.

2
The 2017 Act was adopted with the aim of increasing Hungary’s competitiveness both as a place for foreign investment and as a place of arbitration for domestic and international commercial disputes by reaffirming arbitration as an efficient and effective alternative to state courts. The 2017 Act entered into force on 1 Jan. 2018. The English translation of the 2017 Act (as in force on 8 Aug. 2018) can be found on the website of the Hungarian Chamber of Commerce: https://mkik.hu/en/act-lx-of-2017-on-arbitration. The previous arbitration act, Act No. LXXI of 1994, was modelled on the 1985 UNCITRAL Model Law (‘1994 Act’).

3
Explanatory Note, T/15361 Draft Act on Arbitration, 26 April 2017. See also O. Lautenbach, ‘Introduction to Act LX of 2017 on Arbitration’ and B. Bodzási, ‘Az új választottbírósági törvény néhány újdonságáról’ in A kereskedelmi választottbíróság évkönyve 2018 (ed.: János Burai-Kovács) (HVGOrac Budapest 2019), at pp. 367-372 and pp. 96-104. The new 2017 Act is part of a larger re-codification and modernisation campaign launched by the Hungarian government with a view to strengthening Hungary’s legal and economic competitiveness. This campaign led to the adoption of a new Civil Code in 2013, a new Civil Procedure Code in 2016 and a new Law on Private International Law in 2017.

4
Over the course of the past 20 years, Hungary has been chosen as a place of arbitration for ICC-administered arbitration proceedings 16 times by parties and 4 times by the ICC International Court of Arbitration; see ICC Statistical Reports for the years 1998-2018.

5
The initial wording of Sect. 1(1) of the 2017 Act was for instance criticised as unnecessarily paternalistic, limiting of party autonomy, and irreconcilable with the very spirit of arbitration; see e.g. Sarolta Édua Szabó, ‘Az új Választottbírósági törvény tárgyi hatályával kapcsolatos koncepcionális és gyakorlati problémák’, Polgári Jog 2018/7-8, pp. 1-20; István Varga, ‘A választottbírósági eljárásjog újraszabályozása Magyarországon’, Eljárásjogi Szemle 2018/1, pp. 2-4; Miklós Boronkay, Arbitration reform in Hungary, in: Austrian Yearbook of International Arbitration 2019, MANZ Verlag Wien 2019, fn. 28

6
The 2017 Act reformed the landscape of arbitral institutions active in Hungary by abolishing with effect of 1 Jan. 2018 the Permanent Arbitration Court of Financial and Capital Markets and the Permanent Arbitration Court of Energy and by reaffirming the HCCIAC as the single permanent arbitration institution administering commercial arbitration proceedings, including in the case of financial and energy-related disputes; see Sect. 67 of the 2017 Act. Besides the HCCIAC, the Permanent Arbitration Court for Sport and the Arbitration Court attached to the Hungarian Agricultural Chamber continue to operate as distinct arbitration institutions; see Sect. 59(2) of the 2017 Act.

7
Explanatory Note to Sect. 1, T/15361 Draft Act on Arbitration, 26 April 2017.

8
Sect. 1 and 47 of the 2017 Act. The judgment of the Supreme Court of Hungary No. Gf.VI.30.842/1997 of 1997 (BH 1998.11.550) confirmed that the Hungarian courts do not have jurisdiction to hear setting aside applications against arbitral awards that have not been rendered in Hungary and are not otherwise governed by Hungarian law.

9
See Art. 34 read in conjunction with Art. 1(2) of the UNCITRAL Model Law, which provides that the courts of a given state have jurisdiction to hear applications for the setting aside of awards only if said awards were rendered in the territory of that state. See e.g. Art. 1494 and 1519 of the French Code of Civil Procedure.

10
Art. 1(1), New York Convention.

11
The New York Convention entered into force with respect to Hungary on 3 June 1962; see Decree Law No. 25 of 1962.

12
Art. 2(1) of the HCCIAC Arbitration Rules provides that ‘if the proceedings of the Arbitration Court [i.e. the HCCIAC] are stipulated, the place of arbitration shall be Hungary’. Therefore, HCCIAC arbitrations cannot be seated outside Hungary.

13
Sect. 1(1) of the 1994 Act provided that ‘this Act – unless it provides otherwise – shall apply if the place (seat) of the ‘ad hoc’ or institutional arbitral tribunal is in Hungary”; Sect. 46(3) added that “in international cases, the Institutional Arbitration Court attached to the Hungarian Chamber of Commerce and Industry shall act as institutional arbitral tribunal’. The unclear and seemingly overly restrictive territorial scope of application of the 1994 Act was heavily criticised at the time by the Hungarian arbitration community; see Kinga Tímár, ‘A választottbíráskodással kapcsolatos, aktuális szabályozási szükségletek és javaslatok a polgári perjogi kodifikáció során’, in Egy új polgári perrendtartás alapjai, János Németh-István Varga (eds.) (HVGOrac, Budapest, 2014), pp. 654-655; Miklós Boronkay/György Wellmann jr, ‘A választottbíráskodás helyzete Magyarországon’, MTA Law Working Papers 2015/12, pp. 15-17; Tamás Éless, ‘Adalékok a választottbíráskodásról szóló törvény hatályának helyes értelmezéséhez’, Magyar Jog 2015/4, pp. 240-244; Andrea Csőke, ‘Választottbírósági „senkiföldje?”’, Magyar Jog 2014/12, pp. 721-724. Nevertheless, it would seem that the conduct of ICC proceedings with a seat in Hungary between 1998 and 2018 and the recognition and enforcement of the resulting award did not give rise to any problems under the 1994 Act.

14
See Sect. 44(1) of Act No. LIV of 2018. The new Sect. 1(1) of the 2017 Act has thus been aligned with the recommendation in Art. 1(2) of the UNCITRAL Model Law.

15
Explanatory Note, Draft Bill T/386 on the protection of business secrets, dated July 2018. See also Balázs Bodzási, ‘Az új választottbírósági törvény néhány újdonságáról’, in A kereskedelmi választottbíróság évkönyve 2018, in Op. cit. supra note 3, at pp. 102-103.

16
As per Sect. 2 of the 2017 Act, Sect. 57(2) is mandatory and cannot be derogated from.

17
Art. 20(7) of the previously applicable 2011 version of the HCCIAC Arbitration Rules provided that, following the setting aside of the award, the dispute must be re-submitted to the arbitral tribunal that rendered the annulled award and that this tribunal shall not be entitled to fees in respect of the fresh arbitration proceeding.

18
In the view of the Hungarian legislator, the grounds for setting aside awards are largely aimed at sanctioning egregious irregularities in the conduct of the proceedings and in the rendering of the award by the arbitral tribunal; see Explanatory Note, T/15361 Draft Act on Arbitration, 26 April 2017. The previous 1994 Act did not contain any provisions on arbitrator liability, and the Hungarian courts refused to admit liability claims against arbitrators, which they considered an unacceptable attempt to revisit the merits of an award; see Róbert Szakál, ‘Állami bíráskodás és választottbíráskodás’, Európai Jogi Fórum 2017/2, p 15. By contrast, Sect. 57(3) of the new 2017 Act provides that ‘[t]he rules of the permanent arbitration court or, in ad hoc arbitration, the agreement between the arbitral tribunal and the parties may exclude or limit the liability of the permanent arbitration court, the arbitral tribunal and the arbitrators, except for liability for damage caused intentionally or due to gross negligence’.

19
Marianne Kecsmár, supra note 1; Philippe Cavalieros, ‘Le nouveau droit hongrois de l’arbitrage sous le prisme de la responsabilité de l’arbitre’, Revue de l’arbitrage 2018, No. 3, p. 539-559; Ioana Knoll-Tudor, ‘The 2018 Hungarian Arbitration Act: Implications of the New Setting Aside Provisions’ (Kluwer Arbitration Blog, 15 July 2018); Tamás Sárközy, ‘A választottbíráskodás státuszkérdéseiről az új választottbírósági törvény alapján’ and Róbert Szakál, ‘Gondolatok a választottbíráskodás felelősségi kérdéseiről’ in op. cit. supra note 3, at p. 92 and p. 154.

20
See the revised Sect. 62 of the 2017 Act, which also tasks the Presidium with the creation of detailed procedural rules for the remuneration of the second arbitral tribunal and the payment of the institutional fees from the separate reserve fund. Finally, the revised Sect. 62 provides that where the funds available in the separate reserve fund are insufficient to cover the arbitrator and institutional fees, such fees shall be borne by the Hungarian Chamber of Commerce and Industry.

21
Over the past 20 years, fewer than 20 awards have been set aside by the courts in Hungary. All of these were rendered under the auspices of the HCCIAC, see Ádám Boóc, A választottb