Freedom of contract limited by obligation to negotiate with good faith and decency

In a recent case, the Arbitration Court attached to the Hungarian Chamber of Commerce has ruled that a surety agreement is null and void under the Civil Code where it conflicts with good morals.

When a man borrowed HUF 800,000 (c. €3,250) from a bank, he persuaded his friend to stand surety for the loan. When the man failed to repay the loan, the bank brought proceedings to recover it in the Arbitration Court against both borrower and surety.

The borrower admitted the debt but claimed that his business was bankrupt and that he couldn't repay it. The surety defended the claim on the grounds that she had agreed to stand surety as a favour to the borrower and had not studied the wording of the suretyship agreement before signing it. She couldn't afford to repay the debt in any case: she had to raise a child by herself and pay the rent for their home on an income of HUF 70,000 (c. €284) a month.

The Arbitration Court decided that the provisions of the Civil Code stating that agreements which conflict with good morals are null and void also required contracting parties to act with good faith and decency during negotiations leading up to an agreement.

The surety could not afford to repay the debt without significant damage to her own and her young child's financial position. The bank had not enquired into her financial situation with sufficient care during the negotiations and was more concerned with the formalities of the agreement than with the obligations it imposed. The essential rule of money lending was to make sure before agreeing loans that borrowers and their sureties had the means to repay them. To order the surety to repay the loan would create unacceptable living conditions for her and her child, which would be in conflict with fundamental social and moral norms.

However, the Arbitration Court ruled that the original loan agreement was valid and that the borrower's lack of funds could only affect the way the loan agreement was enforced against him.

If you have any questions, please contact Dr. Árpád Lantos via email ([email protected]) or telephone (+36 1 4834823).