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Bilateral Investment Treaty Overview — Hungary

Dr János Katona

Signed BITs

History of BIT development

A1.  The birth of Hungary´s bilateral investment treaty programme is connected to the last years of the socialist era when, in the spirit of the economic reforms and because of the country’s need for FDI, the communist government decided gradually to increase the flow of investment from Western, mainly European countries. The first BITs were signed in 1986 with France, Germany, and Belgium and entered into force in 1987 or later. By the time of the fall of socialism in 1990, Hungary had a BIT with most of the Western-European countries. This initiative was complemented as from 1988 by internal legislative measures promoting investment and also creating the legal foundations for the replacement of the socialist planned economy with a market economy (Corporate Law, Tax Laws, and so on). Hungarian BITs have been inspired by the 1967 Convention on the Protection of Foreign Property (12 October 1967), not yet entered into force

A2.  In the early period until the beginning of the 1990s, dispute resolution clauses covered only disputes arising out of or relating to expropriation, nationalization, or similar measures. This was later replaced by a much broader type of dispute resolution clause.

A3.  Otherwise, the more recent Hungarian BITs are more detailed and longer than the early BITs although the core provisions (expropriation, transfers, fair and equitable treatment, MFN) are substantially similar. Also, BITs entered into after the accession of Hungary to the EU contain provisions destined to ensure the compatibility of the provisions of the BITs with the EU law obligations of Hungary.

Current BIT policy and trends

B1.  Hungary has an extensive network of BITs consisting of 59 agreements (however, the agreements with Chile and Tunisia have not been promulgated in Hungary). Hungary recently concluded an agreement with Cambodia that entered i into force very recently (August 2017), and, to according to press sources, further agreements are being negotiated or has already been paraphed. The BITs with Italy and Israel are no longer in force.

B2.  The BIT policy of Hungary will nevertheless be substantially influenced by the fact that since 2009, following the entry into force of the Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community (European Union) (13 December 2007) [2007] OJ C306/1, entered into force 1 December 2009, the conclusion of future investment treaties belongs to exclusive EU competence. In accordance with Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, Official Journal L 351, 20/12/2012 P 0040–0046, 12 December 2012) the EU is likely exercise a certain degree of control over the BIT policy of the member states.

Main features of BIT programme

C1.  The Hungarian BITs generally consist of a preamble and 10–14 articles.

C2.  The structure of Hungarian BIT is as follows:

  • •  Preamble

  • •  Definitions

  • •  Substantive provisions (admission, FET, expropriations, transfers, national treatment, MFN)

  • •  Subrogation (optional)

  • •  Settlement of interstate and investor-state disputes

  • •  Other optional provisions: scope of application in time, ‘Other provision-clause’

  • •  Final provisions relating to entry into force, termination survival of rights.

C3.  The Articles of the BITs are generally preceded by titles except in the early BITs.

Analysis of BIT programme

(a)  Preamble

D1.  The preamble in Hungarian BITs does not have a standard format. Some are longer, consisting of 4–5 phrases, while others are simpler. Generally, they refer to the advantages of creating an investor-friendly climate and mutual advantages of increasing the flow of investment between contracting states including cooperation between the enterprises of the contracting states. Some BITs concluded with EU member-states in the 1990s contain references to cooperation with the European Communities (for example, the Agreement between the Republic of Hungary and the Portuguese Republic on the Promotion and Reciprocal Protection of Investments (Hungary/Portugal BIT 1992) (28 February 1992); IC-BT 1566 (1992), entered into force 8 September 1997).

(b)  Definitions

(i)  Definition of ‘investment’

D2.  Hungarian BITs do not use a standard definition of investment, however, all BITs contain a definition that is broad in scope and is not a ‘closed’ list. For example, one of the first Hungarian BITs, the Agreement between the Government of the Hungarian People's Republic and the Government of the Kingdom of Sweden for the Promotion and Reciprocal Protection of Investments (Hungary/Sweden BIT 1987) (21 April 1987) IC-BT 1571 (1987), entered into force 21 April 1987) and the newest one, the Agreement between the Republic of Hungary and the Hashemite Kingdom of Jordan for the Promotion and Reciprocal Protection of Investments (Hungary/Jordan BIT 2007) (14 June 2007) IC-BT 1552 (2007), entered into force 9 March 2008 contain a very similar definition of investment referring to ‘every kind of asset invested in connection with economic activities by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter and shall include, in particular, though not exclusively: a) movable and immovable property as well as any other rights in rem such as mortgages, liens, pledges and similar rights; b) shares, stocks and debentures of companies or any other form of participation in a company; c) claims to money or to any performance having an economic value associated with an investment; d) intellectual and industrial property rights, including copyrights, trade marks, patents, designs, rights of breeders, technical processes, know-how, trade secrets, geographical indications, trade names and goodwill associated with an investment; e) any right conferred by law or under contract and any licenses and permits pursuant to law, including the concessions to search for, extract, cultivate or exploit natural resources’. The definition itself is followed by a list of examples. Some BITs do not include the phrase ‘in accordance with laws and regulations’ in the definition (for example, the Agreement between the Federal Republic of Germany and the Hungarian People's Republic on the Promotion and Reciprocal Protection of Investments (Germany/Hungary BIT 1986) (30th April 1986) BGBl II 1987, 438; IC-BT 077 (1986), entered into force 7 November 1987) but provide for this requirement elsewhere in the agreement.

D3.  Also, the various forms of assets listed as examples for investments vary from treaty to treaty. It can be stated however, that the latest treaties contain a more detailed list of such assets.

(ii)  Definition of ‘investors’

D4.  The term investor includes both natural persons and corporate entities. Some of the early BITs (for example, the Germany/Hungary BIT 1986) adopted a ‘separate approach’, defining investors from the two contracting parties separately.

D5.  In general, nationality is the relevant factor for ‘investors’ who are natural persons. For corporate entities, place of incorporation or sometimes also ‘central administration’ and ‘principal place of business’ are the main factors for determining the nationality.

(iii)  Other terms defined in the BITs

D6.  Most of the BITs define the term ‘returns’ as amounts yielded by an investment and list as examples profits, interest, capital gains, dividends, royalties, or fees. Interestingly enough, the language used in the Hungarian versions of these treaties has been changed in the past 20 years.

D7.  The majority of the BITs contain a definition of the ‘territory’ to which the treaty applies, which is in general defined separately for the two Contracting States. For example ‘The term "territory" shall mean: a) in the case of the Republic of Hungary, the territory over which the Republic of Hungary exercises, in conformity with international law, sovereignty, sovereign rights or jurisdiction; b) in the case of the Hashemite Kingdom of Jordan: The territory of the Hashemite Kingdom of Jordan, as well as, those maritime areas adjacent to the outer limit of the territorial sea, including the seabed and subsoil, over which the Hashemite Kingdom of Jordan exercises, in accordance with the international law, sovereign rights and jurisdiction’. (Hungary/Jordan BIT 2007, Agreement between the Republic of Hungary and the Republic of Azerbaijan for the Promotion and Reciprocal Protection of Investments (Hungary/Azerbaijan BIT 2007) (18 May 2007) IC-BT 1540 (2007), entered into force 26 February 2008.)

D8.  Some BITs define ‘freely convertible currency’ as the currency that is widely used to make payments for international transactions and widely exchanged in principal international exchange markets provided it is not contrary to the regulations of either of the Contracting Parties. (Hungary/Jordan BIT 2007, Hungary/Azerbaijan BIT 2007.)

c)  Temporal application

D9.  The BITs stipulate that the treaty shall enter into force within a defined period of time after both contracting parties have notified each other in writing that the treaty was duly ratified in accordance with the international procedures/constitutional requirements of each party. Most of the treaties provide for a definite period of duration, in general 10–20 years, that shall be renewed for an additional period or that will become a treaty of indefinite duration unless any of the Parties notifies the other Party before the date of expiry, that it wants to terminate the treaty.

D10.  The agreements are applicable to investments which are a) either made prior to its entry into force without any limitation (for example the Hungary/Jordan BIT 2007, Hungary/Azerbaijan BIT 2007; b) or were made after a given date (15, sometimes 40 years prior to the entry into force of the agreement, for example January 1, 1973 in case of Germany/Hungary BIT 1986 or Agreement between the Government of the Kingdom of Denmark and the Government of the Hungarian People's Republic for the Encouragement and the Reciprocal Protection of Investments (Denmark/Hungary BIT 1988) (2 May 1998) Lovtidende, Section C (1989) No 4; IC-BT 876 (1998), entered into force 1 October 1998; and c) made after the entry into force of the BIT for example, Agreement between the Government of the Hungarian People's Republic and the Government of the Republic of Cyprus on Mutual Promotion and Protection of Investments (Hungary/Cyprus BIT 1989) (24 May 1989) IC-BT 1546 (1989), entered into force 25 May 1990. The BITs applicable to investments made prior to the entry into force exclude their applicability to ‘disputes that arose before its entry into force’.

D11.  The protection granted by BITs is applicable to investments made prior to the termination for an additional period of 5–20 years after termination.

D12.  The provisions relating to the terminal application of the BITs are generally contained in or closed to the final provisions of the treaties (although some elements are contained in the definition of the ‘investment’, that is, investments made after January 1, 1973—see for example, Denmark/Hungary BIT 1998).

(d)  The admission and encouragement of investments

D13.  The article on definitions is followed in most BITs by a general ‘obligation’ of the contracting parties to promote investments and an undertaking that each contracting state shall admit such investments in accordance with its laws and regulations. In the BITs where articles are titled this article is entitled ‘Promotion and Protection of Investment’ and it also contains such substantive standards as the fair and equitable treatment or full protection and security.

(e)  Standards of treatment

(i)  Fair and equitable treatment

D14.  As mentioned above, fair and equitable treatment is provided for in Hungarian BITs. This appears generally in Article 2 in a separate sub-section. In some cases this provision also contains a ‘full protection and security clause’. The language of these provisions is consistent with BIT practice worldwide and normally does not define the fair and equitable standard of treatment or link it to the customary international law minimum standard.

(ii)  National (‘NT’) and most favoured nation (‘MFN’) treatment

D15.  National Treatment and Most Favoured Nation Treatment are generally provided for in Article 3 of the Hungarian BIT entitled (if there are titles in the treaty) ‘National and Most-Favoured-Nation Treatment’. It consists of generally one or two subsections (plus the ‘exceptions clause’): a) NT and MFN applicable to the activities of investors in connection with investment in general and the return of investment, and b) MFN and NT (whichever is more favourable to the investor) sometimes together with fair and equitable treatment are applicable to the management, maintenance, use, enjoyment, or disposal of their investment

D16.  As is typical in most MFN and NT provisions there are certain important exceptions the language and scope of which, however, varies slightly. For example, in the early Germany/Hungary BIT 1986 MFN and NT shall not apply to rights grated in the framework of a customs and economic union, common market or free trade area and also to any favourable treatment granted by any tax treaty. The recent Hungary/Jordan BIT 2007 for example, provides more detailed language and extends the exceptions to monetary union and rights granted under any multilateral investment agreements.

(iii)  Expropriation

D19.  All Hungarian BITs contain an expropriation clause that covers not only actual expropriation but also measures tantamount to expropriation. Such clauses contain the classic requirements for a lawful expropriation: existence of public interest, due process, non-discrimination, and compensation. Early BITs, however, are less explicit on the requirement of due process (for example, the Germany/Hungary BIT 1986 provides for ‘the possibility of the review of the legality of expropriation’ and these early BITs do not always contain explicitly the requirement for ‘adequate, prompt and effective compensation’.

(iv)  Free transfer of payments

D20.  Hungary’s BITs generally contain a provision on monetary transfer that guarantees the free transfer of the investor’s investments and returns (sometimes making reference to the local laws and regulations of the host state or the compensation paid in case of expropriation and also, the residual value of the investment.)

(v)  Compensation for losses due to armed conflict or internal disorder

D21.  Hungarian BITs generally have an article dealing with compensation for losses due to armed conflict or internal disorder.

(vi)  Subrogation

D22.  Hungarian BITs generally contain a subrogation clause providing that the parties will recognize any assignment of rights or claims by investors.

(f)  Other relevant provisions

D23.  Most of Hungary’s BITs contain an article on consultation between the Parties. Also, according the standard BIT practice, the BITs contain a list of exceptions allowing the non-application of certain provisions in case of war, national emergency or financial imbalances. The language used in the most recent BITs in this respect is generally more detailed than in the early BITs. Also, recent BITs allow explicitly the application of the exception in connection with measures taken by the EU.

D24.  The most recent BITs of Hungary contain provisions intended to avoid any conflict between the obligations of Hungary under the BIT and its obligations under EU law. For example, Article 14.1 of the Hungary/Jordan BIT 2007 provides that: ‘This Agreement shall apply without prejudice to the obligations deriving from the membership in the European Union, and subject to those obligations. Consequently the provisions of this Agreement may not be invoked or interpreted neither in whole nor in part in such a way as to invalidate, amend or otherwise affect the obligations of the Republic of Hungary arising from the Treaties on which the European Union is founded as well as from the primary and secondary law of the European Union’.

(g)  Dispute settlement clauses

(i)  Disputes between Contracting Parties

D25.  Hungary’s BITs contain substantially similar provisions on the settlement of state-to-state investment disputes, that is, disputes between the Contracting Parties regarding the interpretation and application of the BIT concerned. If an amicable settlement cannot be reached within six months, then the dispute may be submitted to a three member ad hoc arbitral tribunal. The provisions vary as to the details regarding the appointment of the arbitrators and the arbitral procedures.

(ii)  Disputes between the host state and the foreign investor

D26.  The BITs concluded by Hungary until the early 1990s limited investor-state dispute settlement to disputes arising out of expropriation. After this period, Hungary agreed to a broad dispute settlement clause, that is, ‘any dispute which may arise between an investor of one Contracting Party and the other Contracting Party in connection with an investment”’. Some BITs, however, contain a much narrower dispute settlement clause usually upon the insistence of the other party to the BIT (see for example, Agreement between the Republic of Hungary and the People's Republic of China concerning the Encouragement and Reciprocal Protection of Investments (Hungary/China BIT 1991) (29 May 1991) MOFCOM, Collection of International Investment Treaties (Jingguan Jiaoyu Press 1998) 560–571; IC-BT 435 (1991), entered into force 1 April 1993), allowing arbitration only in order to establish the amount of compensation in cases of expropriation.

D27.  Both of the above types of dispute resolution clauses generally require such disputes to be settled amicably through negotiations between the parties to the dispute within a 3–6 month period. If no settlement can be reached within six months the dispute may be submitted to international arbitration. Some of the BITs contain, as an alternative dispute resolution forum, the courts of the host state.

D29.  Most the Hungarian BITs neither contain an obligation to exhaust local remedies nor a ‘fork-in-the road’ clause except, for example, the Agreement between the Republic of Hungary and the Republic of Bulgaria on Mutual Promotion and Protection of Investments (Hungary/Bulgaria BIT 1994) (8 June 1994) IC-BT 1542 (1994), entered into force 7 September 1995, Agreement between the Republic of Argentina and the Republic of Hungary for the Promotion and Reciprocal Protection of Investments (Argentina/Hungary 1993) (5 February 1993) IC-BT 1030, entered into force 1 October 1997, Agreement between the Republic of Hungary and Bosnia and Herzegovina for the Promotion and Reciprocal Protection of Investments (Hungary/Bosnia and Herzegovina BIT 2002) (26 September 2002) IC-BT 1541 (2002), entered into force 31 August 2005 excluding international arbitration if the investor has had recourse to the courts of the host state or, for example, the Agreement between the Republic of Hungary and the Republic of Turkey for the Reciprocal Promotion and Protection of Investments (Hungary/Turkey BIT 1992) (14 January 1992) IC-BT 1575 (1992), entered into force 1 November 1994, Agreement Between the Republic of Hungary and the Republic of Paraguay for the Encouragement and Reciprocal Protection of Investments (Hungary/Paraguay BIT 1993) (11 August 1993) IC-BT 1565 (1993), entered into force 1 April 1995, and Hungary/Portugal BIT 1992 requiring that the dispute be brought before the courts of the host state.

Status of BITs in national law

Pursuant to Article Q.3 of the Hungarian Constitution 25 April 2011 (Hungary): ‘Hungary shall accept the generally recognised rules of international law. Other sources of international law shall be incorporated into Hungarian law upon their promulgation by laws’. Based on the above, Hungary is a dualistic type of system and international treaties need to be transformed (promulgated) in national law in order to have effect. Also, according to International Law Act, Act L of 2005, 2005 (Hungary), an act of the parliament or the government is required in order to create an international law obligation for Hungary. These two steps are generally taken in one act, that is, in the Act of the parliament or the decree of the government promulgating the treaty.

Except for the first 10–15 BITs adopted in the late 1980s that were promulgated in a government decree, the valid BITs of Hungary are promulgated by a law enacted by parliament. International treaties duly promulgated are a part of the Hungarian legal order. It is the task of the Hungarian Constitutional Court to monitor the compliance of Hungarian legal rules with international law.

Country contact

  • Dr János Katona

Footnotes:

1  Applicable to the protected investments untill 26 June 2027.

2  Applicable to the protected investments untill 1 October 2013.