Hungarian profile - agency, distribution and franchise agreements


If it is not possible, or desirable, to set up a corporate presence in Hungary a foreign company may still wish to market its goods in the country. Usual methods of doing this include setting up a distribution network or appointing an agent or agents. Both of these methods of doing business are possible and are used in Hungary, as is the setting up of a franchise (a method of selling that has become more popular in recent years).

Agency Agreements

The agency relationship is subject to Sections 219-223 of the Civil Code. Under the Civil Code, agency is a personal relationship between two or more persons or persons and firms. The relationship may be established by contract, law, the deed of association of a company or by a judicial order. An agency relationship may be terminated by the express declaration or death of either party. An agency relationship may be expressly established by a declaration to the agent or to third parties by way of a power of attorney under Hungarian law. Unless the law requires personal performance, contracts may be concluded and legal declarations may be made by agents. The agent acquires rights and undertakes obligations on behalf of the principal who is generally bound by the acts of the agent. Third parties may assume that the power of attorney is valid until otherwise notified by the principal.

Foreign Trade Agency Agreements

Foreign trade agency agreements, where a Hungarian principal appoints a foreign agent to act on its behalf, form a special type of agency agreement. If such an agreement is made under Hungarian law it is governed by the Act No. CXVII of 2000 on the Commercial Representation Contract of Self-employed Commercial Agents ("Agency Act"). Under such a foreign trade agency agreement, the agent agrees to mediate foreign trade contracts on behalf of the principal, and to carry out marketing and promotional activities and other related matters. The agent must not conduct activities competing with those of the principal and must not provide agency services to rival third parties without the principal's prior consent.

The Agency Act

The provisions of the Agency Act are of special importance for contracts with agents and applies to all contracts signed after 1 February 2001 which fall under the scope of it. From 1 January 2003 the Agency Act has applied to all contracts in force which fall under the scope of the Agency Act irrespective of when they were signed. The Agency Act applies to contracts between a principal and an agent on a long term contractual basis which allow commercial agents to negotiate the sale and purchase of goods or other contracts relating to goods between the agent and other parties, including, in both cases, contracts which authorise agents to enter into contracts which the agents negotiated on their principal's behalf. The Agency Act also applies to contracts between principals and agents which relate to the negotiation of contracts between the agent and other parties for the provision of services, rights which confer economic benefits, contracts for the sale and purchase of securities, and stock exchange transactions.

Franchising and distribution agreements

In Hungary there are no specific regulations on franchising and distribution agreements (other than the competition law regulations explained below), which, in consequence and like many other contracts, are drafted and interpreted according to the Civil Code. The Civil Code provides general direction about how contracts should define the contracting parties and their relationships, the contractual terms and conditions, the means of implementing the contract and consequences of breaches. The following sections of the Civil Code are particularly applicable to a franchise agreement: Sections 86(3) and (4) provide the only definition in Hungarian law for the concept of know-how, an important element in a franchise system. Knowhow is comprised of the definition of the system to be franchised and the description of the rights granted; and Section 4 defines the general criteria for executing the franchise agreement, for example displaying good faith, fairness and a commitment to cooperation. The parties must also display, beyond the notion of fairness and co-operation, diligence, attention and professional knowledge which must be periodically renewed. This section calls for contracting parties to fulfil moral obligations as well as legal ones. Pursuant to Act LVII of 1996 on Prohibition of Unfair and Restrictive Market Practices ("Competition Act") both exclusive distribution agreements and franchisen agreements are primarily unlawful unless certain exemptions apply. There are governmental decrees detailing the block exemptions in relation to both franchise agreements and exclusive distribution agreements. Provided that a franchise agreement or an exclusive distribution agreement is covered by the conditions of these decrees, it may be freely concluded without breaching the Competition Act.

For further information please contact Gabriella Ormai.