CMS Guide to Consequential Loss in Hungary

The Hungarian Civil Code (“HCC”) does not explicitly use the term “consequential loss”, but regarding the amount of damages caused by breach of contract, it makes a distinction between “damages incurred in the subject of the service”, “other damages to the assets of the obligee”, and “loss of profit”. According to leading commentaries of the HCC, the expressions “other damage to the assets of the obligee” and “loss of profit” are synonyms of “consequential loss”. Meanwhile,  damage to the subject of the service that a party must provide for contractual performance is referred to as “adhesive damage”.

To illustrate this with an example, if a defective television set explodes, the loss of a functioning television set is the “adhesive damage”, while the damage to the apartment and its furnishings and equipment is considered as “consequential loss”. This example also shows that “consequential loss” cannot be repaired by a performance claim and subsequent undefective performance.

According to the rules on liability for damage caused by breach of contract, while damage incurred in the subject of the service as a consequence of breach of contract must be compensated for in its entirety, other damages to the assets of the obligee and loss of profit (i.e. “consequential loss”) must only be compensated for to the extent that the obligee proves that the damage, as a possible consequence of the breach of contract, was foreseeable at the time of concluding the contract. This rule differs from the general rules on extra-contractual liability, which require that the person causing damage compensates the injured party for the entire damage, with the reservation that no casual link shall be established in connection with any damage that the person causing the harm could not foresee and should not have foreseen at the time of causing damage.

An exception to the rule of foreseeability is the case of an intentional breach of contract, in which case the whole amount of “consequential loss” must be compensated, even if such damage was not foreseeable at the time of contracting. For this to happen, it is the breach of contract that has to be intentional and not the cause of harm. It is not necessary for the intent to extend to the damage occurring as a consequence of the intentional breach of contract.

Under Hungarian law, the parties may limit or exclude liability for damage caused by breach of contract with the exception of two cases. Under the HCC, clauses excluding or limiting liability (1) for intentional breach of contract and (2) for breach of contract harming human life, physical integrity and health are null and void.

Apart from the two exceptions, parties are free to include contractual exclusion of liability clauses, and such clauses may refer specifically to “consequential loss”.

As the rules establish that “consequential loss” is only recoverable to the extent that the party in breach had foreseen or should have foreseen the damage with due care, there is an incentive for a party potentially facing “consequential loss” to set forward any possibly arising damage that he/she may suffer and to allocate risks at the point of contracting. This ensures that the parties enter into the contract with awareness of the potential risks of damage and with an intention to undertake those risks specified in advance. Thus, a future dispute can be avoided regarding whether a “consequential loss” could or could not have been foreseen with adequate care.

An example for a contractual exclusion of liability clause for “consequential loss” from an EPC contract for the construction of a photovoltaic power plant:

“Unless expressly provided otherwise in this Agreement and except for the liability specified in the section on indemnification for Third Party Claims, neither Party shall be liable to the other Party, including its Affiliated Companies, officers, directors, employees, and contractors, for any special, incidental, or consequential losses arising out of or in connection with this Agreement, including, without limitation, damages for loss of profits, business interruption, or loss of data, even if the other Party has been advised of the possibility of such damages.”

In the context of contractual exclusion clauses, the umbrella term “consequential loss” can refer to anything from business interruption through default on related contracts to reputational damage. Usually, the contractual meaning of the term also includes loss of profit occurring as a consequence of a breach of contract, which is in accordance with the HCC. An example for this could be loss of profit from reselling goods that were eventually not delivered by the obligor under a sales and purchase agreement.

In commercial contracts, parties tend to include a non-exhaustive list of examples of “consequential loss”. On the one hand, such lists can ensure that liability for damages given as examples is explicitly excluded. On the other hand, the examples can also serve as reference when Courts adjudicate whether a party in breach should be liable for a type of damage which was not listed, but which might have been understood as “consequential loss” according to the parties’ intention under the exclusion clause.

Since “consequential loss” has a relatively wide meaning, it can cover almost any heads of loss, including loss of profit, loss of revenue, loss of business or contracts, loss of goodwill or reputation, loss of data, wasted expenditure, loss of use, and even third-party claims. Given this wide scope, it is not strictly necessary to include other types of indirect damage in a contractual exclusion clause that already excludes liability for “consequential loss”. However, listing the particular heads of loss that parties would like to exclude from liability is still recommended, because the term “consequential loss” is not explicitly used in legislation.

Contractual exclusion clauses including other heads of loss alongside “consequential loss” are interpreted in accordance with the whole contract.

Under Hungarian law, claims for compensation for damage and other types of non-damage claims are usually independent. For example, in the case of default, if the default by the obligor causes “consequential loss” to the obligee, the ogligee can claim specific performance no matter if they claim compensation for damage arising from the default or not. Therefore, by introducing a “consequential loss” exclusion clause in the contract, a party would not lose the right to claim specific performance in case of default, even if their right to claim compensation for the associated “consequential loss” would forfeit. Likewise, in the case of defective performance, the obligee does not lose its right to claim repair or replacement as a remedy for breach of warranty for material defects just because a clause limits the obligor’s liability for “consequential loss” which occurs as a consequence of defective performance.