Supreme Court rules on unilateral amendment of loan contracts

Background 
Lower court decisions
Supreme Court decision
Comment

Background

In recent years the right of financial institutions to amend certain contractual terms unilaterally has increasingly been challenged in Hungary. The credit crisis drew attention to the broad discretion of such institutions to amend their contracts; as a result, this right was restricted, first in August 2009 and again in January 2010 (for further details please see "Act restricts unilateral amendments by banks"). In line with these legislative changes, a self-regulatory instrument for financial institutions, in the form of a code of conduct on retail lending activities, was created in 2009 (for further details please see "Leading banks sign retail lending code").

This update summarises the guidelines issued in a recent case in which the Hungarian courts, for the first time, examined in detail whether a contractual term that gives a financial institution the right to amend a consumer loan contract unilaterally is consistent with Hungarian law. The case has already received much attention; it may serve as precedent for future cases and financial institutions are already revising their lending practice and contractual terms as a result.

Lower court decisions

The first instance and appeal courts both declared null and void certain stipulations in a consumer loan contract that gave the financial institution a right of unilateral amendment. However, the appeal court unexpectedly chose to disregard both the code of conduct and the specific legislation on the unilateral amendment right of financial institutions.(1) Instead, it considered the issue in general, as it might relate to any contract. The court declared that unilateral amendments to a contract may be made only in accordance with the general provisions of the Civil Code, which set out the circumstances in which a court may amend a contract.(2) On this analysis, a contract could be unilaterally amended only:

• in the context of an ongoing contractual relationship;
• if the change of circumstances is essential;
• if the change of circumstances could not have been anticipated; and
• if the change of circumstances causes considerable harm to one of the parties' interests.

Supreme Court decision

The Supreme Court restricted the scope of its review to consumer loans. It emphasised that in this case the right of unilateral amendment should be considered according to the rules stipulated by specific legislation, not on the basis of general law. As the case in question related to a consumer loan contract, to which special provisions of the Credit Institutions Act applied, the Supreme Court ordered the first instance court to reconsider its decision on the basis of the relevant legislation as interpreted by the Supreme Court.(3)

The Credit Institutions Act provides for two levels of regulation. In general, a financial institution may unilaterally amend a contractual term in a financial services contract only if the preconditions of such an amendment are unambiguously set out in the contract itself. In addition, the act allows a financial institution to amend the interest rate, costs and fees in a consumer loan contract if the parties have previously agreed on the circumstances in which the institution may do so, in line with the detailed requirements of the act.

In interpreting the requirements of the act, the court established further conditions for such an agreement. In considering the circumstances in which financial institutions may alter certain contractual conditions, it stated that:

• the circumstances which give rise to the amendment must be such that none of the parties has any influence over them;
• the circumstances must be specified in the agreement - circumstances that are not explicitly mentioned do not entitle the financial institution to amend the agreement;
• a circumstance that justifies an amendment must have been taken into account at the time of concluding the contract;
• the change in circumstances must go beyond the scope of normal business risk; and
• the financial institution must have been unable to anticipate the material effect of the change at the time of concluding the contract.

Comment

In reviewing the decisions of the appeal court and the Supreme Court, one thing seems certain: the law is tending towards a strict interpretation of the right of unilateral amendment. Further clarification may yet be provided, but in the meantime the guidelines given by the Supreme Court will serve as guiding precedence in connection with consumer loan contracts. However, the position is less clear outside the scope of consumer loans, in respect of contracts to which no special regulation applies. One possible interpretation is that these contracts may be amended unilaterally only in accordance with the rules of judicial amendment under the Civil Code.

As a result of these recent rulings, financial institutions would be well advised to adapt their contractual terms and practice in line with the judicial guidance; however, in order to do so, they must interpret the correct meaning of such guidance.

For further information on this topic please contact Gabriela Gubik at Gárdos, Füredi, Mosonyi, Tomori by telephone (+36 1 327 7560), fax (+36 1 327 7561) or email (gubik.gabriella@gfmt.hu).

Endnotes

(1) Credit Institutions Act (112/1996).

(2) Article 241 of the Hungarian Civil Code.

(3) In the repeated procedure the first instance court again declared the provisions in question null and void.