New Guarantee Rules in Hungary

The new Hungarian Civil Code (hereinafter: new CC) has defined the stipulations regarding who is allowed to extend guarantees – a form of collateral – under Hungarian Civil Law. According to the new rules, it is clear, that all legal entities – except consumers – may offer guarantees. The new CC also lists and amends the rules for offering guarantees. These amendments are expected to increase the use of this form of collateral in the business world. Following is a summary of important points related to the new rules:

1. Guarantee as Independent Collateral

The most important quality of a guarantee is that it is an autonomous collateral (i.e. independent of the relationship between debtor and creditor). For this reason, the use of guarantees is more prevalent than suretyship. Under a surety the guarantor is not only entitled to raise his direct objections against the creditor, but also the ones that the original debtor is entitled to. For example, if a surety is given for payment of the purchase price under a sale and purchase agreement but the product that is the subject of the agreement is defective, the guarantor may argue the creditor’s defective performance upon drawdown of the surety. In such cases, the creditor may only be entitled to partial payment of the purchase price.

In contrast, a guarantee is an independent commitment free from the underlying contractual relationship. Therefore, in the case stated above, the guarantor would not be entitled to any objections arising from the relationship between creditor and debtor involving payment of the creditor. Therefore, if a product is defective, the guarantor may not refuse performance to the creditor.

Another aspect of the independence of the guarantee is that amendments to the underlying contractual relationship do not affect the obligations of the guarantor. For a surety, however, the obligations adjust to the obligations for which the surety has been given regardless of any amendments to the agreement between debtor and creditor.

Since a guarantee is an autonomous collateral, the invalidity of the underlying contractual relationship does not affect the enforceability of the guarantee. Therefore the debtor may assert its claims against the guarantor even if they are based on an invalid underlying contract.

2. Content of Guarantee

A guarantee may be established by unilateral statement or contract. Guarantees must be in written form, meaning that at least the main points of a guarantee shall be stated in writing. Under the new CC, the following points constitute such main points:

  • name of the guarantor
  • name of recipient/ obligor
  • commitment to perform under a specific payment obligation
  • duration
  • conditions for drawdown of guarantee

A guarantee may be established for a definite or indefinite period of time, however a guarantee for an indefinite period may be terminated with a three month notice period. In other cases the guarantee may only be terminated if the parties have agreed to a termination in writing in the initial guarantee agreement. The guarantee’s most important element is the precise definition of the conditions for drawdown. The parties to the guarantee are required to state in a clear, understandable and unequivocal manner in the guarantee statement or contract the required documentation (for example delivery note or invoice) and the manner of delivery (for example via mail or scanned) for drawdown requests under the guarantee.

Given the aforementioned reasons, we believe guarantees are the preferable type of collateral for any business. Please contact us for more information or if you require assistance concerning your business options for collateral.