Hungary: Litigation Funding Comparative Guide

1 Commercial legal finance basics

1.1 How is commercial legal finance defined in your jurisdiction?

Legal finance is not defined under Hungarian law. If the parties opt for this form of financing, the contractual framework will be determined by the Civil Code (Act V/2013) and/or other laws on financial services. However, it is unclear:

• whether the litigant can agree on specific terms regarding procedural rights (eg, veto rights, obligatory instructions from the investor/creditor) which are important elements of litigation finance agreements; and
• how these conditions could be enforced through court procedures in case of a breach.

1.2 How does commercial legal finance differ from consumer litigation finance and contingency agreements?

Given the lack of specific regulations, this question cannot be answered at the moment.

1.3 What are the major legal finance products/solutions in your jurisdiction? (a) Single case fees and expenses; (b) Portfolio fees and expenses; (c) Monetisation of claims; (d) Monetisation of judgments and awards and (e) Other

In the few cases that we are aware of, single case fees and monetisation of judgments were agreed upon.

1.4 In what areas of law is litigation finance most prevalent in your jurisdiction (eg, competition, insolvency, patents, contracts)?

Litigation finance is not yet prevalent in Hungary. The few cases that we are aware of have involved competition law claims and damages claims.

1.5 Who are the major players in the industry (eg, pure players, multi-strategy firms, start-ups)?

There are no major players in Hungary; multi-strategy firms and consultancy firms participate in litigation financing on a case-by-case basis.

2 Legal framework

2.1 How mature is the market for legal finance in your jurisdiction? What types of commercial litigations and/or arbitrations may be funded by a third party?

No official or other comprehensive reports on market activity have been published as yet; and scientific and other publications (eg, blogs or practice guides published by legal practitioners) are limited in number. While in recent years we have seen a higher number of cases that fit within the concept of third-party funding (eg, competition damages claims), an emerging trend of the use of such financial solutions cannot be established.

2.2 Is there a dedicated legal finance regime in your jurisdiction? What other laws and regulations have relevance to legal finance in your jurisdiction?

There is no specific regulatory regime on this matter; at present, legal finance is more or less the exclusive preserve of a few advisory and investment firms. In general, Act CCXXXVII/2013 on credit institutions and financial enterprises regulates the institutional framework for the provision of financial services. There are several other legal instruments on financial services – such as decrees of the president of the National Bank and specific regulations on costumer protection – which play an important role in the provision of financial services. If the market matures, these regulations may apply to service providers whose main business activities involve the provision of financial services (including potentially litigation funding) as understood under these regulations. For the moment, however, in the absence of specific regulations, the financial structures chosen by litigants are subject to contractual agreements only and are thus governed by the Civil Code.

2.3 Which public sector bodies and authorities are responsible for enforcing the applicable laws and regulations? What powers do they have?

The main regulatory institution for financial service providers is the National Bank. The National Bank – as the financial authority – monitors the application of mandatory regulatory requirements and has the right to initiate an investigation if necessary. As a result of an investigate, it may – depending on the severity of the violation of laws – issue instructions and fines. Decisions of the National Bank can be challenged before courts of law.

2.4 Do the rules and codes of any self-regulatory organisations or professional associations have relevance to legal finance in your jurisdiction? What powers do such organisations and associations have?

As yet, no local organisation has been registered for this purpose.

2.5 What is the general attitude towards legal finance in your jurisdiction among the courts and other relevant bodies?

In the absence of specific regulations, the means of financing a lawsuit are not disclosed to the court; and the courts do not – and cannot – issue any cost order (or other decision) that in any way reflects the fact that the procedure was financed by a third party. The court cannot refer to third parties in the judgment for the purposes of cost allocation. Therefore, under the current laws, legal finance transactions remain contractual matters outside of the scope of lawsuits.

2.6 Is legal finance considered consumer credit and is it captured by the relevant protective regulations in your jurisdiction?

As legal finance does not yet have its own legal regime, the general consumer protection and other protective rules apply. It remains to be seen whether financial activities pursued as litigation finance would fall under any specific category of the Act CCXXXVII of 2013 on credit institutions and financial enterprises.

3 Other risk-sharing models available to litigants and law firms

3.1 Are conditional (contingent or success) fee agreements permitted in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?

Yes, they are permitted.

There are no explicit limitations on contingency fees. However, the terms of such agreements must be found to be valid under the general contractual rules of the Civil Code. The market standard is around 10% to 20%.

Success fees are also permitted; however, success fees exceeding two-thirds of the legal fees incurred are not enforceable before the courts.

Success fee agreements are usually proposed if:

• the case is complex but, considering the claimed amount, the legal fees would be disproportionate; or
• the claimed amount is extremely high. In this case, firms typically offer discounted rates for the possible future profits.

Success fee agreements pose higher risks for law firms as the client may terminate the mandate once the outcome of the case becomes more predictable and engage another firm. It is difficult to handle this risk under the terms of the Civil Code.

3.2 What is the maximum contingency that is permitted (ie, up to 100% of hourly fees or something less)? Is there a cap on the amount of success fees lawyers can receive under such arrangements?

In general, no limitation applies; however, success fees exceeding two-thirds of the legal fees incurred are not enforceable before the courts.

3.3 Are damages-based agreements permitted in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?

No limitation applies specifically on such terms. Otherwise, see question 3.1.

3.4 What other funding and/or risk-sharing options are available to litigants in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?

Success fees are the most commonly used risk-sharing tool by law firms; other options are not widely utilised.

3.5 Are law firms in your jurisdiction allowed to have non-lawyer owners or non-lawyer shareholders?

No.

3.6 How do the available funding and risk-sharing options impact on the attitudes of corporate litigants about affirmative recovery programmes or the pursuit of high-value commercial claims more generally?

There has not been sufficient practice to draw any conclusions.

3.7 How do the range of funding and risk-sharing options available impact on the attitudes of law firms about their own business?

There are no comprehensive reports on the subject.

4 Collective actions

4.1 Is it possible to bring collective actions in your jurisdiction? If so, can they be funded by third parties? In those circumstances, how is the amount of the funder's return determined? Are there caps or other restrictions? Do such agreements require court approval?

In addition to procedures initiated to protect the public interest, the Civil Procedure Code introduced the category of class actions. Class actions may be initiated for claims arising from:

• consumer agreements (ie, agreements between a legal entity and a person);
• employment contracts; and
• damages caused by environmental pollution.

Lawsuits brought in the public interest may only be initiated upon specific statutory authorisation for the protection of rights (eg, human rights) of a determinable group of people. Class actions are different in nature and require at least 10 plaintiffs, without a special type of contract or legal institution. An agreement between the plaintiffs is necessary, which must set out the rules on the allocation of costs. There is no reason to conclude that funders would be not permitted to enter into such financing arrangements.

4.2 How significant is the funding of collective actions in your jurisdiction relative to the use of legal finance by individual commercial litigants?

At the moment, the number of collective actions (class actions and actions brought in the public interest) is limited. We are not aware of any case in which third-party funding has been used.

5 Securing financing

5.1 What factors will a funder generally consider when evaluating whether to fund a case?

There are no guidelines or codes of conduct published in Hungary on the subject. If litigation finance is used, the firms will decide on a case-by-case basis.

5.2 What should a litigant or litigant's counsel look for in a legal finance partner?

The Hungarian Bar Association has not yet published any guidelines on the subject. The topic is not widely discussed at public forums and conferences. Knowledge of the local market is definitely a plus in terms of selecting litigation funding service providers.

5.3 What is the typical process for concluding the legal finance agreement?

Legal finance agreements are not addressed in the Civil Code or other laws on financial services; therefore, there are no model rules for these agreements. The parties may use their own terms within the limitations of the general contractual rules; consequently, such arrangements may vary significantly.

5.4 What terms does the legal finance agreement typically include?

Agreements vary on a case-by-case basis. The Civil Code and the relevant laws on financial services contain no rules on these specific agreements.

5.5 Do any caps apply to the funder's fees?

Hungarian law does not regulate this issue, as there are no specific regulations on litigation finance.

5.6 Can the funder terminate the legal finance agreement before the litigation has ended? If so, under what circumstances and what are the implications?

Hungarian law does not regulate this issue, as there are no specific regulations on litigation finance.

5.7 Under what circumstances (if any) must funding be approved by the court in advance?

Hungarian law does not regulate this issue, as there are no specific regulations on litigation finance.

5.8 Have there been notable disputes arising from legal finance agreements, and if so, what can a litigant or counsel do to avoid such disputes?

As yet, there are no available decisions on litigation finance.

5.9 Is the funder bound to fund any counterclaims arising from the funded litigation?

Hungarian law does not regulate this issue, as there are no specific regulations on litigation finance. The general rules of the Civil Code do not seem to impose any limitations on such terms.

6 Purchasing a litigation claim, judgment or award

6.1 Can the funder purchase legal claims?

Yes, through assignment of the claim.

6.2 How does a funder purchase a claim out of an insolvency?

The rules on the sale of company assets by public offering are set out in Government Decree 237/2009 (X.20.). The call for proposals on the assets to be sold are published by the insolvency administrator and purchasers (assignees) can submit bids electronically. If an offer has been submitted, a deposit must be provided and the agreement on assignment must be concluded within the deadline specified in the call for proposal.

6.3 Are final judgments and/or mere causes of action assignable in your jurisdiction and is there a regulatory framework governing this?

There are no limitations on assignment, so we must conclude that claims arising from final judgments or contractual as well as other pre-litigation claims are assignable under the Civil Code.

7 Role of the funder

7.1 Can the funder influence the litigant's choice of counsel?

Given the lack of specific laws on litigation finance, questions regarding the funder's rights to influence the lawsuit in any way – and the validity and enforceability thereof – cannot be answered with certainty. Under Hungarian law, only the plaintiff has legal standing to pursue a claim. Without assignment of the claim, the funder has no procedural rights regarding the claim. This is a firm principle of Hungarian civil procedure law and – in our opinion – this question will require the utmost attention of the legislature when drafting any future regulations on litigation finance.

7.2 Can the funder attend and/or participate in the court proceedings?

Only to the extent that such court proceedings are public, as a member of the ‘audience'; otherwise no.

7.3 Can the funder influence the acceptance or terms of a proposed settlement agreement?

The enforceability of such contractual terms is uncertain. There have been no legal cases with a similar background.

7.4 In what other ways can the funder participate in, and exert influence on, the litigation?

The general contractual rules provide efficient tools for funders, such as provisions on liquidated damages should the debtor fail to comply with the agreement. However, the applicability of such terms in the context of litigation finance has not yet been tested before the courts of law.

8 Ethical considerations

8.1 In what circumstances (if any) is it necessary to disclose a legal finance agreement to the court or to the opposition? What specific information must be disclosed?

No such requirement applies under Hungarian law.

8.2 Are communications between the parties to the legal finance agreement subject to privilege in your jurisdiction?

This is not specifically regulated; the contractually agreed framework, as well as the

EU General Data Protection Regulation, will apply.

8.3 Does the rule of attorney work product apply to documents generated for the purposes of securing legal finance in your jurisdiction?

Yes.

8.4 In what circumstances (if any) do rules about fee-splitting impact on the use and practice of legal finance?

There are no comprehensive reports on the subject.

8.5 Do the doctrines of champerty and maintenance apply in your jurisdiction?

Given the lack of specific regulations, these doctrines are not specified by law.

8.6 Are there any types of proceedings (family, private prosecutions) for which funding is not permitted?

There are no specific laws on this subject. Under the current rules, a party may opt for third-party funding regardless of the subject of the lawsuit.

9 Proceedings

9.1 What is the typical timeframe for first-instance proceedings in your jurisdiction?

The expected processing time at first instance varies from six months to 1.5 years, depending on the subject matter of the case and the seat of the given court. In general, the Civil Procedure Code – to achieve the legislature's aim of expediting procedures – contains several mechanisms that facilitate the adjudication of claims at a faster rate. For example:

• the parties must present their evidence at the earliest point that seems reasonable; and
• the statement of claim must clearly delineate the request and the relating legal arguments.

It is also important – and to some degree helps to ensure an efficient procedure – that the parties cannot (as a general rule) submit additional legal arguments or evidence after closing of the preparatory phase.

9.2 What are the opportunities in the litigation process for a case to be struck out prior to a trial?

The Civil Procedure Code sets out several formal requirements regarding the statement of claim. The code was amended in this respect (partly due to the dysfunctionality of certain formalities) at the beginning of 2021, but the main requirements remained the same. If the plaintiff fails to adhere to these rules and submits a statement of claim with incomplete information, the judge may reject the document and order the plaintiff to resubmit it. If resubmission is unsuccessful, the judge will reject the statement and close the case accordingly. Formal requirements include, for example:

• a specified request;
• reference to the violated laws; and
• coherent legal argumentation.

The evidence supporting the plaintiff's claim should also be submitted together with the statement of claim; if this is missing, the statement cannot be adjudicated.

9.3 How much party discovery of evidence is permitted in your jurisdiction? Are there procedures for seeking or compelling evidence from non-parties?

Discovery is not institutionalised in Hungarian civil procedure law. All of the evidence to be presented in the trial (as a general rule) is presented by the interested party. If the party does not have the necessary evidence to support its claim, the other party might be ordered by the court to hand this over, if the requesting party has demonstrated that it is probable that:

• the information is available only to the counterparty and it has made every reasonable step to obtain it; or
• it is not possible for it to prove the facts but it can be expected from the other party to prove the opposite; and
• the taking of evidence has been prevented by the bad-faith counterparty.

This is an important procedural tool for parties and is frequently requested.

9.4 Are interlocutory appeals (appeals of non-final judgments) permitted during proceedings in the first instance?

Interlocutory appeals are allowed against:

• partial and interlocutory judgments where:
• • the plaintiff submits various claims in the same statement of claim which can be adjudicated separately; or
  • the court decides on the legal basis and the amount of the claim separately; and
• certain court orders rendered during the procedure (eg, an order imposing a fine on one of the parties).

9.5 Are first-instance decisions commonly appealed in your jurisdiction? What is the typical timeframe for appeal proceedings?

There are no published national statistics on this question. In general, the more complex the case, the more probable that an appeal will be filed. The appeal may be brought before district courts or tribunalsm depending on the claim value and the subject matter. The more sophisticated cases are usually initiated before tribunals (which act as second-instance courts in simpler cases), but judgment is still rendered by a judge. At second instance, a council composed of three judges delivers the judgment in the regional courts. In complex matters, the parties often find it necessary to have the case heard by a forum composed of more judges.

The procedure at second instance is significantly faster than at first instance as the procedural framework is narrower. The parties – as a general rule – cannot submit additional argumentation or evidence; and the court is strictly bound by the appellate request. Typically, regardless of the complexity of the case, the court either holds a hearing (if requested or found necessary) or decides in a closed session within two to three months.

9.6 How are decisions typically enforced in your jurisdiction? What is the typical timeframe for enforcement proceedings?

If the party fails to comply with the judgment, the counterparty may initiate a judicial enforcement procedure. The bailiff may apply a wide range of injunctions and measures to facilitate compliance with the judgment, including fines, seizure of assets and so on. The timeframe varies according to:

• the willingness of the parties to perform their obligations;
• the types of measures that the bailiff applies; and
• the type of claim (eg, a monetary claim or a claim for performance of a specified action, such as an apology).

9.7 Is there an automatic stay on enforcement pending appeal or under what circumstances is one granted? Are appeals from first instance granted as of right?

A stay on enforcement is automatic until the judgment becomes binding and final (ie, at the end of the second instance procedure). As a general rule, if a petition for Supreme Court review is requested, it does not affect the binding nature of the second instance decision; however, the petitioner may request a stay on enforcement. The Supreme Court will consider whether:

• the original state can be restored following enforcement; or
• the potential damage caused by the stay on enforcement would outweigh the losses that the other party may suffer.

In practice, in commercial lawsuits it is difficult to prove that compliance with the judgment would cause disproportionate harm. For example, financial statements can be used as evidence.

10 Costs and insurance

10.1 Will the court order the losing party to pay the costs of the winning party? How else might costs be allocated between the parties and under what conditions?

The costs incurred in relation to the lawsuit include:

• procedural fees;
• lawyers' fees;
• the costs of evidence-taking (eg, experts); and
• any other costs such as translation costs.

The court will allocate all costs in proportion to the part of the claim that was awarded to the winning party. For example, if 60% of the original claim amount was awarded to the plaintiff, the defendant will be obliged to pay 60% of all costs arisen on the plaintiff's side while the plaintiff will pay 40% of the defendant's costs. However, state courts have a tendency to award significantly less costs than are actually incurred by the parties. It is important that the parties file a specific form on their expenses after they arise; costs not included in these forms cannot be taken into account before the judgment is delivered. There are also some correction mechanisms – for example if the expense was caused unreasonably by one of the parties, it must bear that expense irrespective of the final decision. There are also various cost allowances based mainly on social background; and specific regulations apply to state-related parties which can modify the sum of the incurred costs (depending on the type of allowance).

10.2 Are some or all of the costs of funding recoverable by the winning party?

As the courts cannot take into account the source of funds of the respective party, the costs of acquiring litigation funding (eg, the administrative costs of applying for funding) are not considered when the costs are allocated by the court.

10.3 Can the court order costs against the litigation funder?

No, the court can render a decision (including the procedural costs) only in relation to the parties of the lawsuit; apart from rare instances when, for example, the court may impose a fine on a witness or expert.

10.4 Can the court order security for costs? If so, in what circumstances will it generally do so and how is this calculated and provided?

The plaintiff must give security for procedural costs if it does not reside in Hungary and the defendant so requests. Exceptions apply:

• if an international agreement requires otherwise;
• if the court grants the plaintiff a full cost exemption; or
• in some specific lawsuits.

The court will specify the amount of security primarily by considering:

• the defendant's foreseeable procedural costs; and
• the amount of the claim already acknowledged by the defendant.

The other case in which a plaintiff may be required to provide security is when it submits a request for an interlocutory injunction and the counterparty demonstrates that it probable that ordering the injunction would influence its position, potentially giving rise to a damage claim, should the plaintiff be unsuccessful. The plaintiff also has a right to offer security to facilitate the ordering of an injunction. In any case, the amount of the security must be approved by the counterparty; and the security may be provided in the form of:

• cash;
• securities or non-cash instruments; or
• bank guarantees.

10.5 Is security for costs commonly ordered in funded litigation?

There is no data available specifically on funded litigation. In general, security can be ordered in a limited number of cases. It is a special procedural measure and is not commonly used under the Hungarian civil procedure regime.

10.6 Is after-the-event (ATE) insurance allowed in your jurisdiction? If so, how mature is the market?

In general, the Civil Code does not prohibit ATE insurance. However, insurance packages offering coverage for legal costs arising in relation to a lawsuit are generally limited to certain activities or life situations, such as disputes concerning employment contracts.

At the moment, based on the published general terms of Hungarian insurers, the market for ATE insurance is insignificant. There is no published information on the occurrence of ATE insurance in corporate relations where personalised insurance terms are more frequently applied.

10.7 In what circumstances is ATE insurance typically used? What are the advantages and disadvantages?

ATE insurance is not commonly used in Hungary; and no published data or professional materials are available.

10.8 What other types of insurance are available for litigants in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages?

Most of the publicly available insurance policies covering litigation costs are strictly limited to:

• a predetermined activity or event, such as car accidents (in this case legal expenses insurance is linked to a liability insurance); or
• certain types of disputes, such as employment litigation.

General legal expenses insurance on its own without any limitation on the scope is not widely offered to smaller market actors or persons.

11 Trends and predictions

11.1 How would you describe the current legal finance landscape and prevailing trends in your jurisdiction?

Given the lack of specific laws, the possibilities for the parties are endless, but uncertain. There are no answers to important questions such as the grant of procedural rights to funders. In light of the introduction of rules on class actions by the Civil Procedure Code of 2016 and the growing interest in this form of financing, the legislature's attention may turn to this issue in future. Specific regulations would greatly facilitate the application of, and drive demand for, such services.

11.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

No, we are not aware of any proposals. However, Hungarian law has become very fast paced and changes can occur in as little as a week.

12 Tips and traps

12.1 What would be your recommendations for the smooth progress of funded litigation in your jurisdiction and what potential pitfalls would you highlight?

A litigation specialist should be involved in the preparation of litigation funding agreements, as a number of terms (eg, the timeline) may diverge from the usual financing (loan) agreements. Given the lack of specific laws, funders have no direct power over the lawsuit, which would be instrumental to third-party funding as ultimately it is a form of investment. Other legal tools to force the litigant to comply with the terms of the agreement have not been tested yet and their efficiency is thus debatable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.