Hungary’s Accession to the Unidroit Convention on International Financial Leasing

Hungary’s accession to the Unidroit Convention on International Financial Leasing has recently been announced. On 7th May 1996 Hungary deposited its accession to the Convention which took effect on 1st December 1996. The Convention applies to financial leasing transactions where on the specifications of the lessee, the lessor enters into an agreement (the "supply agreement") with a third party ("the supplier") under which the lessor acquires equipment on terms approved by the lessee, and the lessor subsequently enters into a leasing agreement with the lessee, granting to the lessee the right to use the equipment in return for the payment of rentals.

In order for the Convention to apply the leasing transaction must have the following features:

• the lessee must have specified the equipment and selected the supplier without relying primarily on the skill and judgement of the lessor,
• the equipment must have been acquired by the lessor in connection with a leasing agreement which, to the knowledge of the supplier has been made or is to be made between the lessor and the lessee, and the rental payable under the leasing agreement must have been calculated so as to take into account the amortisation of the cost of the equipment.

The Convention applies whether or not the lessee subsequently acquires the option to buy the equipment. It applies where the lessor and the lessee have their places of business in different states and:

• those states and the state in which the supplier is resident are contracting states, or
• both the supply agreement and the leasing agreement are governed by the law of a contracting state.

The Convention lays down detailed regulations in relation to such financial leasing transactions. Essentially, the lessor’s title to the equipment is valid against the lessee’s trustee in bankruptcy and creditors, but where by the applicable law this is only the case if rules as to public notice are complied with, such rules must be satisfied. Furthermore, the lessor is not liable to the lessee in respect of the equipment except to the extent that the lessee has suffered loss as a result of its reliance on the lessor’s skill in selecting the supplier, and the lessor is not liable to third parties for death, personal injury or damage to property caused by the equipment. The duties of the supplier under the supply agreement are also owed to the lessee as if it was a party to that agreement.

If the lessee defaults, the lessor may recover accrued unpaid rentals, interest and damages. In case of material default, the lessor may require accelerated payment of future rentals or may terminate the leasing agreement.

Clearly, by ratifying the Convention, the legislature recognised financial leasing transactions as a method of investment and the provisions underline the lessor’s position in such transactions as primarily a financier rather than the equipment’s owner.