3/7/2021. Arbitral award

Underlying facts of the award

1. In the Framework Services Contract (the "Contract") concluded by the Parties on 22 June 2017 the Claimant undertook to sell, install and provide telecommunication excess network elements for the benefit of the Respondent, including the manufacturing, delivery and installation of the necessary equipment in areas within Hungary. The Claimant argued that the present dispute has arisen due to the fact that the Respondent failed to fulfil its contractual obligation and refused to pay the invoices lawfully issued by the Claimant based on the Contract. The Claimant duly performed its obligations deriving from the Contract, however, the Respondent refused to settle the invoices issued by the Claimant regarding the services provided. Despite long and exhausting negotiations, the Respondent informed the Claimant that it was not willing to pay the invoices which are claimed in the Statement of Claim as well, as they had been issued without performance certificate, and terminated the Contract.
2. As ground for the termination the Respondent argued that in the light of the crucial changes affecting its business operation it was no more expectable to uphold the Contract. The Respondent referred to the allegedly rapid increase of the EUR/HUF exchange rate resulting in a heavy loss of its revenue. The Respondent also argued that it was planning to finance its payment obligations under the Contract through GINOP tender, the disbursement of which had slowed down. The Respondent referred to both circumstances as force majeure.

Declarations of the parties

3. In the Statement of Claim the Claimant requested the Court of Arbitration to order Respondent to pay capital amount of 278.092,64 and its default interest regarding unpaid invoices. Later the Claimant amended its claim and decreased the amount of claim as the Respondent settled the invoices and paid EUR 278,092.64. The payment was made by the Respondent after the due date of the invoices, so the Claimant’s claim for the payment of penalty remained unchanged. The Claimant modified the Statement of Claim to order the Respondent to pay contractor’s fee on the invoices unpaid in the amount of EUR 80.299,62.
4. The Claimant further requested the Court of Arbitration to order contractual penalty in the amount of 5 % of the total aggregate contract value and its default interest referring to the unlawful termination of the Contract by the Respondent.
5. The Claimant stated that the Respondent breached the Contract for two reasons. It did not fulfil its main contractual obligation to settle the unpaid invoices. The other reason is that the termination of the agreement was unlawful under Section 11.2.1.5 of the Contract. The Claimant duly performed its obligations under the Contract.
6. The invoices and technical handover and commissioning protocols prove each work, based on which the invoices were issued, had been approved by the Respondent. Under Hungarian law the issuance of performance certificate is not a prerequisite of the issuance of the invoices but rather an additional guarantee that the parties shall expressly agree on. The Contract does not contain any stipulation in this regard, the receipt of the performance certificate was not a precondition for the Claimant to issue its invoices. The Contract in Section 11.2.1.5 declares if the Respondent withholds or delays the issuance of such certificates despite the fact that the relevant works had passed the respective acceptance test, these works shall be deemed to have been accepted by the Respondent and the Claimant shall be entitled to invoice for them on this basis. The Parties mutually issued a performance certificate after receiving each invoice, therefore the works must have passed the above mentioned acceptance test.
7. The termination of the Contract was arbitrary and unlawful. The Parties expressly regulated the possible grounds for termination in Section 27 of the Contract. The Parties agreed that neither party is entitled to terminate the Contract for convenience. The termination letter of the Respondent dated 1 October 2020 referred to force majeure circumstances. The force majeure is regulated under Section 26 of the Contract and is not applicable to the termination but concerns the issue of the liability. Section 26.2 of the Contract provides that in case of force majeure neither party shall be liable to the other party for any delay or non-performance of its obligations under the Contract, except payment obligations.
8. Section 19.2 para (2) of the Contract provides that in the event the Respondent breaches its material obligation, inter alia to pay in accordance with the Contract or the Contract termination is due to the breach of Respondent, the Respondent is obliged to pay the penalty in the amount of five (5) % of the total aggregate contract value upon the first call of the Claimant. The Claimant called upon the Respondent to pay the contractual penalty referring to the unlawful termination of the Contract by the Respondent. The Respondent expressly refused to comply with its obligation to pay the contractual penalty arising from Section 19.2 para (2) of the Contract.
9. The Contract is a framework agreement between the Parties, within the frames of which specific services had been ordered and performed, within specific deadlines. Annex No. 7 of the Contract contains a "project implementation schedule" listing the services to be rendered and the corresponding deadlines in the form of a timeline. It means that upon the conclusion of the Contract, the Parties were aware of the specific deadlines of the performance of the services necessary for the completion of the project and, therefore, the Contract cannot be deemed to be an agreement concluded for indefinite term.
10. The parties are not excluded from restricting the general right for unilateral termination within the works contract. One form of the restriction of the general right for unilateral termination could be if the works contract stipulates that the right for unilateral termination could be exercised under material grounds. Therefore the validity of Section 27.1 and Section 27.2 of the Contract could not be questioned for the perspective of the inapplicable par of the Civil Code.
11. Para 6:213 (3) of the Civil Code prohibits the total exclusion of the right for unilateral termination in case of permanent legal relationship only: restriction of right for unilateral termination is permitted. The Contract does not preclude any form of right for unilateral termination but only restricts the parties right for unilateral termination for convenience. The Contract itself contains an overall termination regime including multiple options for unilateral termination (Sections 27.1, 27.2 and 27.7).
12. The parties are entitled to agree on the restriction of the right for unilateral termination in a flexible manner, ensuring the required freedom for the parties.
13. The indicated exculpation reasons do not exclude the Respondent's liability for penalty.
14. The Respondent requested the Arbitral Tribunal to reject the Statement of Claim. The Respondent argued that the capital amount of EUR 278,092.64 was paid to the Claimant on 7 December 2020.
15. The Respondent further claimed to reject the Statement of Claim concerning the payment of EUR 80,299.62 and its default interest, as well. The Respondent argued that the Claimant failed to state the facts concerning the work performed underlying the invoices. Therefore, the Respondent fully disputes the invoiced items. These invoices were issued mostly for unfounded amounts and the management of the Respondent is aware of the performance of disproportionately less work. The Respondent did not make any statement of acceptance even in part. The Respondent further raises a plea of prematurity with respect to the invoice claim in view of the fact that at the time of the submission of the Statement of Claims, the Respondent was not in delay with the payment, regardless of whether the invoice amounts correspond to the amount of work performed by the Claimant or not.
16. According to the Respondent the invoices submitted by the Claimant do not cover performance by the Claimant. The basis of the legal relationship is the general contract for works concluded between the Respondent and the K.Kft. according to the tender No. GINOP-X for the planning and licensing of the districts won by the Respondent. The Claimant stepped into this contract and the respective parties modified the general contract insofar on 20 December 2017 that the Claimant also became its subject as general contractor.
17. The Claimant entered into the contract as a general contractor beside the Respondent under the condition that the Claimant was allowed to exercise the rights and complete the obligations only in concert with the Respondent.
18. The K.Kft, the contractor shall fulfil towards the Respondent through the general contractor, the Claimant, who is obliged to pay the contractor If the Respondent accepted the contractor's fulfilment as fulfilment by the Claimant primarily, in writing as per the original general contract for works . The Respondent undertook payment liability to the Claimant in relation to all financial performances which the general contractor fulfils to the contractor pursuant to the performance certificated by the Respondent.
19. The para 6:213 (3) of the Civil Code has a binding force. Section 1 of 6:249 of the Civil Code does not contain any difference. This para reads that the client is entitled to terminate the contract at any time until the completion. The Respondent argues that the Claimant is wrong when it states that the contract does not exclude the right of termination as it is the Claimant who refers to the fact that the Respondent violated point 27.2 of the contract according to which neither of the parties is entitled to terminate this contract at their discretion. What is prohibited by law is the exclusion of the right of termination.
20. The penalty claim is unfounded in its entirety. The Contract was lawfully terminated by the Respondent on 1 October 2020. The Respondent did not breach its contractual obligations by terminating the Contract. The Contract was concluded for an indefinite period of time containing permanent legal relationship. According to para 6:213 (3) of the Civil Code unless otherwise provided in the Civil Code, contracts giving rise to a permanent legal relationship and concluded for an indefinite period of time may be unilaterally terminated by any of the parties while applying an appropriate notice period.
21. The exclusion of the right of unilateral termination shall be null and void. Section 27.2 and 27.1 of the Contract are in conflict with the provisions of the above cited civil law sections. For the reasons set out above the Respondent raises a plea of invalidity regarding the provisions of Sections 27.1 and 27.2 of the Contract.
22. Section 37 of the Contract provides that if any provision of the Contract is declared or found to be invalid by a court, the remaining provisions of the Contract shall remain in full force and effect. Consequently, the penalty claim needs to be dismissed. The Respondent further argued that the grounds for termination and the reasons given in the notice of termination were equivalent to a force majeure event because due to the coronavirus pandemic the drastic change of the EUR-HUF exchange rate could not be foreseen at the time of the conclusion of the Contract. It could also not be foreseen that the Respondent would be forced to finance from its own resources the work intended to be financed mostly from public funding (funds from won tenders). At the time of the conclusion of the Contract both Parties were aware of the fact that 80% of the funds required for financing the work would come from the financial ground awarded through the GINOP tender invited by the Ministry of National Economy. The disbursement of the public funding to the Respondent slowed down during the performance of the work, then virtually stopped despite the fact that the Respondent had proper grant agreements signed with the Hungarian State for the districts specified in the Contract of the Parties.

The arbitral award

23. The issue the Arbitral Tribunal has to decide is whether

• under the facts of the case, the Claimant is entitled to request payment of the unpaid invoices or not;
• the Claimant is entitled to claim penalty and its interests or not; and
• the Claimant can claim default interest after the capital amount settled during the proceedings or not.

24. In connection with the payment of the unpaid invoices the Arbitral Tribunal decided, as follows. The Claimant stated that it had performed all services ordered by the Respondent in compliance with the Claimant's obligations deriving from the Contract concluded by the Parties on 22 June 2017 as duly evidenced by way of the corresponding invoices, protocols and performance certificate minutes attached to the Statement of Claim Therefore, the Claimant is entitled to claim the payment of the unsettled contractor's fee.
25. The Respondent argued that the documentation on the formal acceptance of performance had not been issued by the Respondent, the services were actually performed by way of the involvement of the sub-contractor (K.Kft.) and the Claimant has not paid the invoices issued by the sub-contractor, which constitutes an obstacle to any payment obligation of the Respondent. Section 23 of the Contract clearly states that the contractor, the Claimant may involve sub-contractors to the fulfilment of the Contract. Both Parties confirmed that K.Kft. has become a sub-contractor under Section 23 of the Contract, therefore, the Arbitral Tribunal resolved that it has jurisdiction to adjudicate provisions arising out of the amendment of the framework contract dated 20 December 2017.
26. The Arbitral Tribunal has come to the conclusion that the Claimant could not prove that it had paid K.Kft. according to the agreement of the parties and therefore the claim is premature. The Arbitral Tribunal therefore rejected this claim of the Claimant.
27. As to the claim penalty the Arbitral Tribunal decided pursuant to para 6: 186 (1) of the Civil Code. Section 19.2 para (2) of the Contract provides that in the event the Respondent breaches its material obligation, including to pay in accordance with the Contract or the Contract termination is due to the breach of the Respondent, then the Respondent is obliged to pay the penalty in the amount of 5% of the total aggregate contract value upon the first call of the Claimant. It was clear and evident from the facts of the case that the Respondent did not pay in accordance with the Contract. The Claimant had to amend its Statement of Claim two times because the Respondent has remitted invoices, which have become due and payable already on 22 November 2020, after the first Statement of Claim was filed. Therefore, it is also acknowledged by the Respondent itself that it failed to pay the contractor's fee within the performance deadline. The second prerequisite of penalty payment according to Section 19.2 para (2) of the Contract is if the contract termination is due to the breach of the customer, i.e. the Respondent. In its letter dated 1 October 2020 the Respondent terminated the Contract and in this letter it referred to the occurrence of force majeure circumstances serving as exculpation grounds from contractual liability for penalty under Section 26 of the Contract. The reasons, circumstances of the termination grounds it referred to was the drastic change (15%) of the EUR/HUF rate and the financial difficulties arising from the late performance of grant agreements concluded by the Respondent with third parties. The Arbitral Tribunal is of the opinion that though the Respondent referred to circumstances which would qualify as impossibility of performance its reasoning concentrated on termination grounds. The Arbitral Tribunal resolves that the circumstances raised by the Respondent cannot be considered as force majeure grounds according to Section 26.1 of the Contract. The Arbitral Tribunal states that it could be reasonably expected from a professional business entity as the Respondent to foresee the risks of potential currency rate changes and ensure continuous financial background of its payment obligations under the Contract. If the Respondent felt that the change of circumstances led to impossibility of performance, it could have initiated proper amendment of the Contract, which is not the case in this proceeding.
28. The Respondent also filed an objection based on the invalidity of Section 27 of the Contract alleging that the Contract concluded for an indefinite period of time and establishing a lasting legal relationship contradicts the mandatory provision of the Civil Code by excluding the Parties' right for unilateral termination for convenience. This reasoning was not accepted by the Arbitral Tribunal either because the Contract was not concluded for an indefinite period of time but for the turn-key completion of a specific work. The Parties further did not exclude their right for unilateral termination for convenience in full but restricted to exercise this right to certain cases as specified by the Contract. Therefore, the Arbitral Tribunal could not come to the conclusion that para 6:213 (3) of the Civil Code was violated.
29. In conclusion the Arbitral Tribunal resolved that the claim for penalty payment is well founded. The Respondent breached the Contract and could not provide any evidence on which ground it could be exempted from the liability for the breach of contract and therefore, it shall be obliged to pay the contractual penalty. Section 15.2 of the Contract contains that in case of late payments the Claimant is entitled to enforce an interest according to the Hungarian Civil Code. Under para 6: 189 of the Civil Code after the due date of the contractual penalty the Respondent shall pay default interests.
30. The Arbitral Tribunal found that it was an undisputed fact of the proceeding that the first amendment of the Statement of Claim submitted on 27 November 2020 contained the claim for unpaid invoices and the payment of these invoices were settled on 8 December, during these arbitration proceedings. As already referred to by the Arbitral Tribunal, Section 15.2 of the Contract contains that in case of late payments the Claimant is entitled to enforce an interest according to the Hungarian Civil Code. Under para 6:189 of the Civil Code after the due date of the contractual penalty the Respondent shall pay default interests. Pursuant to para 6:151 of the Civil Code for contracts between undertakings the rate of default interests shall be the base rate applicable on the first day of the semester affected by the default; for a pecuniary debt denominated in a foreign currency for the central bank base rate of the European Central Bank as of the first day of the semester affected by the delay increased by 8 percentage points. In our case the issuing central bank is the European Central Bank. This interest rate is not disputed by the Respondent and as it was calculated pursuant to the applicable Section 6: 155 (l) of the Civil Code the Arbitral Tribunal concludes that the Claimant is entitled to default interest claim.

(Vb/20078)