Distribution law in Hungary

Hungarian law on Agency Agreements is set out in the Hungarian Civil Code, which, in section 6:288 and following, in particular implements the requirements of EU law on Commercial Agents.

Are there any formal requirements on concluding Agency Agreements?

Under Hungarian law, an Agency Agreement can be entered into both verbally or in writing. There are no special formalities to take into account. For evidentiary purposes, we recommend setting out the Agency Agreement in writing.

Are there any specific information obligations on concluding Agency Agreements?

Yes, the Commercial Agent is obliged to inform the Principal if it carries out agency activities on behalf of any third parties. Furthermore, the Principal is obliged to notify the agent without delay if the quantity for which the contract can be or intended to be concluded is significantly less than what the Commercial Agent has expected. The Principal shall also notify the Commercial Agent without delay on its decision to accept or reject the contract the Commercial Agent has negotiated, or if the contract concluded has not been performed.

Are there any specific pitfalls which need to be borne in mind when concluding Agency Agreements?

Hungarian law differentiates – also in b2b situations – between individually agreed agreements and standard terms and conditions.

Regarding standard terms and conditions, there are rules on the validity of contractual clauses. Regarding individually agreed contracts, generally, a vast freedom of contract exists. However, this freedom in the field of Agency Agreements is limited as many statutory rules are mandatory and cannot be deviated from contractually (neither in standard terms and conditions nor in individually agreed contracts). In any case, it is very important to bear the rules on standard terms and conditions in mind when drafting Agency Agreements under Hungarian law in order to avoid the invalidity of contractual provisions.

Standard terms and conditions are deemed to exist if (1) the contractual terms have been unilaterally drafted in advance by one of the parties for several transactions involving different parties, and (2) which have not been individually negotiated by the parties. This means that in particular standard Agency Agreements used by Principals are often likely subject to Hungarian law on standard terms and conditions.

Are the parties free to agree on the scope of the Commercial Agency?

The Principal and the Commercial Agent are free to agree on the scope of the Commercial Agency. In particular, the parties may decide on instructing the Commercial Agent (1) worldwide or for a certain geographic region, (2) for all or only for certain products of Principal, (3) for all or only certain customers of the Principal.

Hungarian law generally allows a restriction on the Commercial Agent's freedom to pick up Commercial Agencies for third parties. The Commercial Agent may even be obliged to solely represent the Principal.

The EU regulation on vertical restraints (Commission Regulation No 330/2010) only plays a limited role in the field of Agency Agreements (in the field of Distribution Agreements it plays a significant role, see below). However, whether it could apply to the Commercial Agent in the individual case should be assessed at the beginning of a cooperation and this could have significant legal implications.

What are the primary obligations of the Commercial Agent and the Principal?

As a general principle, the Commercial Agent has the following primary obligations based on statutory law:

• to provide the Principal with the opportunity to enter into contracts with customers or even conclude such contracts itself in the name of the Principal;
• to provide the Principal with relevant information regarding its activity;
• to diligently safeguard the interests of the Principal in all business respects; and
• to maintain confidentiality.

As a general principle, the Principal has the following primary obligations based on statutory law:

• to provide all information and support required for the Commercial Agent to perform its obligations under the Agency Agreement;
• to notify the Commercial Agent without delay on its decision to accept or reject the contract the Commercial Agent has negotiated, or if the contract concluded has not been performed;
• to pay commission to Commercial Agent (see below).

We strongly recommend detailing in the Agency Agreement the obligations of the Commercial Agent and the Principal. Although statutory rules in this regard exist, it is important to avoid a legal situation which the parties did not desire. When setting out the obligations in the Agency Agreement, the relevant case law and the applicable mandatory statutory provisions should be taken into account in order to avoid the risk of setting out invalid contractual provisions.

How is the Commercial Agent paid?

Generally, the Commercial Agent is entitled to commission for business transactions between the Principal and customers within the scope of the Commercial Agent's instruction.

During the contractual term, in the absence of a contractual agreement to the contrary, the Commercial Agent can claim commission if:

• the contract has been concluded as a result of its action; i.e. was acquired by it; or
• the contract has been concluded with customers that were assigned to the Commercial Agent (in such case even for business transactions concluded without the Commercial Agent's involvement).

The statutory rules on the Commercial Agent's remuneration are not mandatory. We recommend stipulating in the Agency Agreement the exact way the Commercial Agent's commission will be calculated in order to avoid statutory law leading to a result which the Principal and/or the Commercial Agent did not desire.

Term of the Agency Agreement

There are no statutory rules on the term of Agency Agreements. The parties are thus, as a general principle, free to set out the parameters of the contractual term, for example in agreeing on a fixed term or an indefinite term or a combination.

If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Agency Agreement, the Agency Agreement is considered to have been tacitly renewed for an indefinite term.

Termination of the Agency Agreement

If the Agency Agreement has been entered into for a fixed term, as a general principle, the Agency Agreement may only be terminated extraordinarily for good cause. During a fixed contractual term, no termination for convenience is admissible. Hungarian case law has not established a clear-cut rule upon which the duration of a fixed term may be considered as an invalid constraint on the parties' freedom. As a rule of thumb, to be on the safe side, all fixed terms which exceed five years should be thoroughly assessed.

If the Agency Agreement has been entered into for an indefinite term, it may be terminated extraordinarily for good cause and for convenience by complying with certain minimum notice periods. Hungarian statutory law sets out the following minimum notice periods (depending on the actual duration of the Agency Agreement in question):

• during the first contractual year, a minimum notice period of one month with effect to the end of the month must be complied with;
• during the second contractual year, a minimum notice period of two months with effect to the end of the month must be complied with; and
• during the third and consecutive contractual years, a minimum notice period of three months with effect to the end of the month must be complied with.

The notice periods may not be shortened. The notice periods may be extended by contractual agreement, provided, however, the notice period for the Commercial Agent is at least of the same length as the notice period of the Principal.

Hungarian statutory law does not provide for a written form requirement with respect to the termination notice. For evidentiary purposes, we recommend setting out such requirement in the Agency Agreement and in any case terminating the Agency Agreement in writing with confirmation of receipt.

The indemnification claim as main consequence of the Agency Agreement's termination

The main consequence of the Agency's Agreements termination under Hungarian law is that – unless there are certain precluding circumstances – it triggers the Commercial Agent's entitlement to financial compensation in the form of an indemnification claim (this means that out of the two possible consequences EU law on Commercial Agents allows Member States to adopt – i.e. indemnification claim model or compensation claim model – Hungary opted for the indemnification claim model).

The Commercial Agent is, upon the Agency Agreement's end, entitled to an indemnification claim, if:

• payment of indemnity is equitable having regard to all the circumstances of the individual case and, in particular, the commission lost by the Commercial Agent, provided that
• during the contractual term, the Commercial Agent has acquired business with new customers or significantly increased business with existing customers of the Principal and the Principal continues to derive substantial benefits from such business; or
• the Commercial Agent completed its assignment for setting up a long-term relationship, but he is prone to lose regular income due to the termination of the Agency Agreement.

The calculation of the indemnification claim according to the above principle is subject to a case-by-case analysis. In any case, however, the amount of the Commercial Agent's indemnity is capped: it may not exceed the Commercial Agent's average annual remuneration over the preceding five years (or the actual term, if it was less than five years). The cap may be used as an estimate figure for Principals to assess the financial risk of a termination of the Agency Agreement.

The indemnification claim is precluded, if:

• the Agency Agreement was terminated by the Commercial Agent (unless the termination is justified by circumstances attributable to the Principal or the continuation of the Agency is unreasonable to the Commercial Agent due to its age or an illness);
• a third party succeeds to the Commercial Agent and after the Agency Agreement's end all three parties (i.e. Principal, Commercial Agent and the third party) enter into an agreement setting out the succession; or
• the indemnification claim was not invoked as against the Principal at the latest one year from the Agency Agreement's end.

The rules on the Commercial Agent's indemnification claim are mandatory and may not be contractually excluded. However, there are certain ways to at least influence the risk of an indemnification claim and its quantum which makes it worth including provisions in this regard in the Agency Agreement.

Other consequences of the Agency Agreement's termination

In the absence of a contractual agreement to the contrary, Hungarian law does not stipulate a post-contractual non-compete obligation of the Commercial Agent. Hungarian law, however, allows an agreement on such post-contractual non-compete obligation of the Commercial Agent for a period of maximum two years calculated from the end of the Agency Agreement. Such agreement on such post-contractual non-compete obligation must be in writing.

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Hungarian law on Distribution Agreements is set out in the Hungarian Civil Code in section 6:372 and following.

Are there any formal requirements on concluding Distribution Agreements?

Under Hungarian law, a Distribution Agreement can be entered into both verbally or in writing. There are no special formalities to take into account. For evidentiary purposes, we recommend setting out the Distribution Agreement in writing.

Are there any specific information obligations on concluding Distribution Agreements?

Statutory law does not provide for any specific information obligations regarding Distribution Agreements.

Under Hungarian law, a general obligation exists for the parties to cooperate and inform each other of any relevant circumstances related to the agreement during the negotiations prior to concluding the agreement, in the course of concluding the agreement, during the term and after the termination thereof (doctrine of culpa in contrahendo).

Are there any specific pitfalls which need to be borne in mind when concluding Distribution Agreements?

Hungarian law differentiates – also in b2b situations – between individually agreed agreements and standard terms and conditions.

Regarding standard terms and conditions, there are rules on the validity of contractual clauses. Regarding individually agreed contracts, generally, a vast freedom of contract exists. However, this freedom in the field of Agency Agreements is limited as many statutory rules are mandatory and cannot be deviated from contractually (neither in standard terms and conditions nor in individually agreed contracts). In any case, it is very important to bear the rules on standard terms and conditions in mind when drafting Agency Agreements under Hungarian law in order to avoid the invalidity of contractual provisions.

Standard terms and conditions are deemed to exist if (1) the contractual terms have been unilaterally drafted in advance by one of the parties for several transactions involving different parties, and (2) which have not been individually negotiated by the parties. This means that in particular standard Agency Agreements used by Principals are often likely subject to Hungarian law on standard terms and conditions.

Are the parties free to agree on the scope of the Distribution Agreement?

There are statutory limits to the Principal's and the Distributor's freedom to agree on the scope of the Distribution Agreement (mainly based on EU Competition law).

In particular when it comes to limiting the geographic region in which the Distributor may (or may not) sell the products and the customers to which it may (or may not) sell them, the EU regulation on vertical restraints (Commission Regulation No 330/2010) plays a significant role: such limitations are admissible only under specific requirements which need to be assessed in the individual case. 

Furthermore, also agreements with respect to the amounts of products the Distributor must source from the Principal is subject to EU Competition law: contractual provisions which require the Distributor to source 80% or more of its demand in products solely from the Principal may only be agreed for five years.

Non-compete obligations may be agreed, however, as a general rule based on EU Competition law, only for five years (for a post-contractual non-compete obligation, see below). The five-year period may be extended by mutual agreement for a further five years.

The Principal is generally not allowed to influence the Distributor's resale price of the products. The Principal may only once per year send a list with price recommendations to the Distributor. Principals should take great care when performing any activities which could be construed as an attempt (even an indirect) to influence the Distributor's freedom to determine the resale price.

What are the primary obligations of the Distributor and the Principal?

As a general principle, it is assumed that the Distributor has the following primary obligations:

• to purchase the affected products from the Principal and sell them in its own name and for its own account;
• to safeguard the reputation of the products;
• to follow the Principals instructions in connection with the way of distributing the products; and
• to maintain confidentiality.

As a general principle, it is assumed that the Principal has the following primary obligations:

• to sell the affected products to the Distributor;
• inform the Distributor of advertisements on the products, and shall - for a fee - make available to the Distributor promotional material for marketing the product).

We strongly recommend setting out in the Distribution Agreement the obligations of the Distributor and the Principal to avoid disadvantages. When setting out the obligations in the Distribution Agreement, the relevant case law and the applicable mandatory statutory provisions should be taken into account in order to avoid the risk of setting out invalid contractual provisions.

How is the Distributor paid?

As a general principle, the Distributor is not entitled to a specific remuneration for its distribution activities. The remuneration of the Distributor consists in the profit it generates in purchasing the Principal's product with a rebate and selling them to its customers at a higher price. The parties may, however, following the principle of freedom of contract, agree on additional remunerations such as minimum monthly payments. 

Term of the Distribution Agreement

There are no statutory rules on the term of Distribution Agreements. The parties are thus, as a general principle, free to set out the parameters of the contractual term, for example in agreeing on a fixed term or an indefinite term or a combination.

If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Distribution Agreement, the Distribution Agreement is considered to have been tacitly renewed for an indefinite term.

Termination of the Distribution Agreement

If the Distribution Agreement has been entered into for a fixed term, as a general principle, the Distribution Agreement may only be terminated extraordinarily for good cause. During a fixed contractual term, no termination for convenience is admissible. Hungarian case law has not established a clear-cut rule upon which the duration of a fixed term may be considered as an invalid constraint on the parties' freedom. As a rule of thumb, to be on the safe side, all fixed terms which exceed five years should be thoroughly assessed.

If the Distribution Agreement has been entered into for an indefinite term, it may be terminated extraordinarily for good cause and for convenience by complying with the notice period set out in the relevant Distribution Agreement (there is no statutory provision on the notice periods applicable to Distribution Agreements).

Hungarian statutory law does not provide for a written form requirement with respect to the termination notice. For evidentiary purposes, we recommend setting out such requirement in the Distribution Agreement and in any case terminating the Distribution Agreement in writing with confirmation of receipt. 

Consequences of the Distribution Agreement's termination

Under Hungarian law, there is no statutory indemnification claim for the Distributor as a consequence of the Distribution Agreement's termination.

Statutory law does not provide for a post-contractual non-compete clause. EU Competition law, as a general principle, considers a post-contractual non-compete clause as invalid and only allows for such under certain exceptional circumstances.

The Distributor under certain conditions may request that the Principal purchase back products it has in stock upon the Distribution Agreement's end. To avoid discussions in this regard, the Distribution Agreement should address this matter.

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