End Of Back-To-Back Construction Contracts? – Growing Subcontractor Protection In Hungary

Author:Dr. Richard Schmidt and Péter Korózs
Profession:SMARTLEGAL Schmidt&Partners

The case law of Hungarian construction disputes in the last years sheds light on the intention of courts to protect the "weaker party". The Supreme Court has already started to protect subcontractors by declaring certain contract terms invalid, and its recent decision even places more risks at general contractors. How to cope with these challenges in Hungary? We address this question in our article.

  1. "Back-to-back" contracting as industrial practice

    In the construction industry, it is well-known practice, that the vast majority of contractual conditions of the Employer are inserted into the contracts of the whole contractual chain.

    Therefore, the essential provisions of the main contract between the Employer and the General contractor are replicated in the subcontracts between the General contractor and the Subcontractor.

    The "back-to-back" contracting guarantees, that in case of a legal dispute, any member of the contractual chain can enforce the same rights, which can be enforced against him. It is also frequent that the enforceability of subcontractor's claim is linked to the performance or approval of Employer in the Employer - General Contractor relationship.

    However, in the last years the Hungarian Supreme Court (Curia) has started to restrict the freedom of the contracting parties in order to protect the Subcontractors by putting the General contractor at significant risk.

    1.1. The 2015 decision - General contractor runs the risk of employer's insolvency

    For the first time the Curia declared the contractual term, making the payment from the General contractor to the Subcontractor dependent on the payment of the Employers is contrary to good morals and therefore shall be null and void in 2015. 1

    According to the court, this kind of risk reduction of the General contractor is a disadvantageous condition to the Subcontractor, which can cause that the latter cannot have the payment of his finished work, even if he performs it in accordance with the contract.

    The above decision of the Curia, in which the risk of insolvency of the Employer was placed at the General contractor, is understandable to a certain extent, as it can be expected from a General contractor to finance the performance of the Subcontractors, even in the case, when he is not paid by the Employer temporarily. In the contrary case, the role of General contractor would become meaningless.

    1.2. The 2019 decision - General contractor runs the risk of items missing from...

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