- Licensing, Deposit, Distribution, License (Franchise) and Security Contracts in the New Civil Code
- June 13, 2014
- Law Firm: Dentons Canada LLP - Toronto Office
On 15 March 2014, the new Civil Code entered into force as the most important legislation governing the financial and personal relations of companies and persons. The new code has an increased commercial emphasis incorporating the results of legal developments of the past decades by adapting to the economic needs of our times. The new code takes into account the rules crystallized in the Hungarian trade of property and has regard to European legislation as well. The new act came with several new and completely or substantially reformed legal institutions. The changes concern the activity of enterprises widely, thus familiarization and appropriate preparation by business participants is fundamental. With our newsletters, we would like to provide support for your preparation.
In this newsletter we outline certain rules of the new Civil Code, i.e. Act V of 2013 (hereinafter: “New Civil Code”) regarding the rules on licensing, deposit, distribution, license (franchise) and security contracts that are new or different from the rules of the old Civil Code, i.e. Act IV of 1959 (hereinafter: “Old Civil Code”).
1. Licensing contracts
The New Civil Code does not alter significantly the structure of lease contracts, thus in respect of bearing costs, use, control of use, sub-leasing, rents and statutory lien it substantially upholds the rules of the Old Civil Code. However, the new act contains several important changes in respect of lease contracts, which are included in the New Civil Code under the heading of licensing contracts:
The rules applicable to the lease of assets shall govern the temporary assignment of the exercise of rights for consideration
The New Civil Code enables the lessee to terminate the lease of flats or other residential premises in a condition representing potential risks to health even if the lessee was or should have been aware of the condition of the flat or the premises at the time of concluding the contract or taking possession
Sub-lease or assignment of use of real properties and flats to third parties is subject to the permission of the lessor; the contracts concluded without such permission shall be null and void as violating legal provisions
The New Civil Code explicitly entitles the lessee to carry out the works for which the lessor is liable instead and at the expense of the lessor, if the lessor failed to perform them
The New Civil Code expressly entitles the lessor to terminate the lease contract not only in case of failure to pay rent but also if the lessee failed to pay costs or other charges
In case of termination with notice, the New Civil Code regulates the notice period taking into consideration whether the parties agreed to rent payable daily, weekly, monthly or of a longer duration
In case the title of the leased asset is transferred, the lessor and the new owner have joint and several liability towards the lessee for the obligations under the lease contract
The lessee is entitled to withhold the asset without using it also in case of lease of real property, if the lessor failed to settle the lessee’s claims; however, the lessee is obligated to pay rent for the duration of unlawful withholding.
With respect to residential lease contracts, the New Civil Code sets forth more detailed rules to the benefit of the tenant. Thus the courts may reduce the security prescribed by the lease contract, if it exceeds an amount equal to three months’ rent. The parties may only limit or exclude the tenant’s right of removal in exchange for an adequate settlement, and the refusal to grant right of removal to the tenant is subject to appropriate compensation by the landlord. The landlord may terminate the residential lease agreement in case of a breach of contract by the tenant after prior warning, with a notice period of 15 days, on the last day of the month following the delivery of the termination notice. If due to the material breach of contract, upholding the contract cannot be expected from the landlord, a prior warning is not necessary; however, the landlord is obligated to deliver the termination to the tenant within eight days after the landlord became aware of the breach of contract.
According to the New Civil Code, the conclusion of a leasehold contract is also possible in respect of profitable rights. Contrary to the regulation of the Old Civil Code, which prescribed mandatory written form only for the leasehold of agricultural land, the New Civil Code prescribes written form as a prerequisite of validity for all leasehold contracts. With respect to the general rules of the New Civil Code on contracts, this means that a written declaration is necessary in each case for the termination of leasehold contracts. Another change is that the prohibition of sub-leasehold of agricultural land is abolished since the New Civil Code does not contain this provision.
The rules of lending arrangement contracts remained essentially unchanged in the New Civil Code, extending the application of these rules to the temporary free-of-charge assignment of the exercise of rights.
2. Deposit contracts
According to the New Civil Code, only movable property may be deposited under a deposit contract. The depositary is obligated to record and safeguard the deposit separately and barred from using (exploiting) the deposit. However, in case of profitable assets, the depositary is obligated to collect the proceeds, to settle these with the depositor and is entitled to use the proceeds for the reimbursement of its costs. In case of free-of-charge deposit, the depositary is liable for the damages arising out of the loss, destruction or impairment of the deposit in accordance with the rules of non-contractual liability.
The New Civil Code regulates collective deposit contracts, which pertain to deposits that are substitutable, and the depositary is entitled to safeguard the deposit together with same kind and quality deposits, without having to separate or individually distinguish them. In this case, the several depositors become joint owners over the deposited substitutable assets of the same kind and quality. The depositary is obligated at the termination of the deposit to return same kind and quality assets in the amount according to the ownership ratio of the depositor.
Within the framework of the rules on extraordinary deposit contracts, the New Civil Code amends the provisions on the deposit of money or other substitutable assets. The depositary acquires ownership over the deposit, e.g. money, if the deposit is a substitutable asset, and the depositary may use or dispose over the asset in accordance with the contract. The depositary is obligated at the expiration of the deposit to return same kind of assets in the same amount to the depositor.
3. Distribution and license (franchise) contracts
The New Civil Code introduces distribution and license (franchise) contracts as new types of contracts.
Under a distribution contract the supplier undertakes to sell specific movable property to the distributor, and the distributor undertakes to purchase the product from the supplier and to sell it in his own name and on his own behalf. The rules on distribution contracts are also applicable to the supply of services. The New Civil Code prescribes the protection of the good reputation of the product as the obligation of both parties. The supplier is obligated to inform the distributor about the advertising of the product and to provide the distributor with the advertisements necessary for the distribution of the product in exchange for a fee. The supplier has instruction rights in connection with the appropriate distribution of the product. In case of unreasonable or unprofessional instructions, the distributor is obligated to warn the supplier, however, the distributor may only refuse the instruction if it would result in the violation of laws or administrative decisions, or it would jeopardize the person or assets of third parties.
Franchise contracts applied widely in practice are regulated by the New Civil Code as license contracts. The franchisor undertakes to grant rights of use, utilization and exploitation rights relating to assets protected by copyright or industrial property rights, including know-how, and the franchisee undertakes to produce and supply goods and/or services on its own behalf and for its own benefit through the use, utilization or exploitation of such assets protected by copyright or industrial property rights, including know-how. The franchisor shall warrant the continuous and uninterrupted exercise of the licensed rights, the franchisee is obligated to protect the provided know-how. Both parties shall protect the good reputation of the network established with the license, the products or the services. The parties may agree that the franchisee shall acquire products or raw material necessary for its production from the franchisor or a person determined by the franchisor. The franchisor enjoys wide instruction and supervision rights. The New Civil Code provides for a notice period dependent on the duration of the legal relationship, which becomes longer with the lapse of time.
4. Security contracts
The New Civil Code removed the rules on suretyship from the rules on contractual securities and regulates it as a separate type of contract, suretyship contract, also, it regulates guarantee contracts as a separate type of contract.
The new act provides for the explicit obligation to conclude the suretyship contract in written form, unlike previous regulation, which only required the written form of the statement of suretyship. The obligations, which may be secured by a suretyship, are determined in more detail: one or more, existing or future, unconditional or conditional money claims in a specific amount or an amount, which can be determined or other obligations having a monetary value. In connection with the accessory nature of suretyship, the New Civil Code sets forth further rules; thus, it states that the obligation of the surety extends to the consequences of a breach of contract by the principal debtor. The surety is entitled to set off its own claims and enforce its own objections against the creditor. The moratorium provided by bankruptcy proceedings does not affect the obligation of the surety, while the settlement achieved in bankruptcy or liquidation proceedings does not affect the obligation of the surety only if the creditor informs the surety in advance about the conditions of the settlement. In the absence of such information, the obligation of the surety is reduced to the amount set forth in the settlement. The New Civil Code also amends the rules on fall-back. The surety may refuse performance if the creditor failed to verify that it attempted recovery and recovery was unsuccessful within a reasonable time. The statutory cases of first-loss suretyship were also reformulated. In case of a significant impediment to the recovery of the claim, unsuccessful enforcement procedure for the recovery of other claims, payment moratorium in bankruptcy proceedings or commencement of liquidation proceedings against the principal debtor the surety may not exercise a fall-back option. The New Civil Code enables the undertaking of a so-called secondary suretyship. Another important deviation from previous regulation is that according to the New Civil Code the surety is exempted from its liability if the significant impediment to the recovery of the claim is attributable to the creditor.
The New Civil Code burdens the creditor with a wide information obligation in case of suretyship undertaken by a consumer, failure to perform this obligation may lead to the cancellation of the suretyship at any time by the consumer. The act prescribes that the contract shall set forth the highest amount of the suretyship if the consumer undertakes suretyship for all existing obligation towards a specific creditor or under a specific legal relationship.
The Old Civil Code regulated as bank guarantee the undertaking of a bank regarding a payment obligation subject to certain conditions. However, according to the New Civil Code, within the framework of a guarantee contract not only banks but any guarantor may undertake a guarantee. The statement of guarantee and the guarantee contract is valid only in written form. Unlike the suretyship with an accessory nature, the liability of the guarantor is independent from the obligation, for which the guarantor undertakes the guarantee, i.e. the guarantor may not exercise the objections of the principal debtor against the creditor. The guarantor is obligated under the contract to perform if the creditor requested performance in a written notice and met all conditions set forth in the statement of guarantee. The guarantor is not obligated to perform in case of a manifestly abusive or bad faith exercise of the draw-down rights of the creditor. According to the New Civil Code, if the guarantor is a consumer, the statement of guarantee is valid as a first-loss suretyship.