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Alternative remedies at the international level for Hungarian banks in foreign currency loan related cases

 

Hungary: Before the economic crisis in 2008 foreign currency loans became widespread in Hungary. Banks typically provided long-term loans in Euros or Swiss francs but repayable in forints. As a result of the crisis the forint became significantly weaker and at the same time loan providers started raising their interest rates and other fees. These circumstances placed an enormous burden on the population entailing serious dissatisfaction within society.

As a solution to the problem the legislator regulated the issue of exchange rate calculation and unilateral amendment of contracts in a new act. The new law nullifies some methods of exchange rate calculation with retroactive effect and presumes the unfairness (voidness) of contractual terms allowing unilateral increase of interest rates and other fees. This is causing serious problems primarily to loan provider financial institutions with foreign shareholders.

The act allows banks to initiate lawsuits against the state in which they can counter-prove the fairness of their unilaterally increased interest rates and other fees. In these proceedings much shorter deadlines apply in comparison to the general rule in court proceedings, while remedies available to the parties are also restricted. Besides, the new law also sets the conditions under which a contractual provision is deemed to be fair thereby reducing the discretionary power of the judiciary.

Some financial institutions have already declared that having finished proceedings in Hungary they plan to turn to international forums to enforce their rights. For this reason we briefly present what proceedings are available in these cases.

European Court of Human Rights

The European Court of Human Rights (ECtHR) is a court seated in Strasbourg, established to supervise observance of the Convention for the Protection of Human Rights and Fundamental Freedoms signed on 4 November 1950 in Rome. The ECtHR primarily examines whether a state party has infringed a right invoked that is incorporated in the Convention. One of the preconditions of the procedure is the full exhaustion of domestic remedies. The ECtHR procedure can be initiated both by natural persons and by legal entities. The ECtHR is entitled not only to establish infringement of Convention rights but also to afford just satisfaction to the injured party. One of the rights promulgated by the Convention that may be violated in the above cases is the right to fair trial due to the extremely short deadlines. (According to the Convention everyone is entitled to a court hearing within a reasonable time. In our view the requirement of reasonable time also applies to short deadlines.) On the other hand the right to an effective remedy may also be violated due to the restricted alternatives as to remedies in contrast to other judicial proceedings.

The Court of Justice of the European Union (ECJ)

The ECJ seated in Luxembourg is the main judicial organ of the European Union. One of its tasks is to interpret the law of the European Union with binding effect. In its preliminary ruling procedure it can establish if Hungarian law complies with the law of the European Union. Therefore the banks affected may ask the court within the framework of the procedure to establish that the new law violates the provision on prohibition of discrimination articulated by the Treaty on the Functioning of the European Union considering that the banks involved are mainly Hungarian subsidiaries of foreign parent companies. The principle of legal certainty may also be infringed due to the legislation operating with retroactive effect.

Agreements on investment protection

Hungary has concluded a number of agreements on investment protection protecting foreign investors from the state of investment e.g. against expropriation or discriminatory treatment. Consequently, the banks involved can also turn to arbitration courts invoking infringement of the prohibition of discrimination on the basis of bilateral agreements signed by Hungary.