Hungary: Executive officer liability changed in modified Civil Code

Hungary

On 13 June 2016, the Hungarian Parliament adopted modifications to the Hungarian Civil Code which addresses, among other matters, the liability of executive officers of a company. The modification was necessary to clarify confusion regarding joint liability of executive officers towards third parties. It became effective on 1 July 2016.

The previous rules regulating the liability of executive officers towards third parties (outside liability) triggered frequent criticism and debate because the regulation originally stated that an executive officer is liable jointly with the company for all non-contractual damages caused to third persons by the executive officer in relation to its position as an executive officer. Most people understood this rule to mean that executive officers have a general joint liability for damages caused, either by the company or the executive officer, to third parties who are in a contractual relationship with the company, irrespective of whether the damage related to the contractual relationship. This unlimited liability on executive officers caused major consternation and confusion in business life.

Although, after the Civil Code was introduced, the legal literature clarified that the general interpretation of this rule differs from the original purpose of the legislator, it still did not resolve the uncertainty and confusion generated by the vague wording and the general misinterpretation of this rule by the business participants. Rather than waiting for the courts to clarify this issue, which could take years, the legislator revised the badly worded rule by modifying the Civil Code. The modified Civil Code now states, as a general rule, that the company shall be held liable for such damages and, as an exception, the executive officer is only liable for these damages jointly with the company if the damage was intentionally caused by the executive officer. According to this new rule the executive officer’s liability is now less burdensome and more precisely defined.

The success of the modification will be hopefully shown in future judicial practice.

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