The Hungarian Metropolitan Court of Appeal rejects follow-on damages claim on the basis of the passing-on defence
August 2012 – The Hungarian Metropolitan Court of Appeal handed down two judgments that ruled that the passing-on defence applies to damages claims made under Hungarian law. According to the court, the plaintiff is not entitled to compensation for costs that have been recovered from elsewhere. Therefore, loss that was passed on by the plaintiff to the other parties will not be deemed as loss for the purposes of calculating damages.
Two judgments of the Hungarian Metropolitan Court of Appeal handed down in March 2012 should be taken into account in the planning of litigation strategy for parties in follow-on litigation claims.
The first judgment (published) was adopted in relation to a cartel that concerned road construction projects linked to the construction of the metro line 4 in Budapest. In 1999 the Municipality of Budapest and the plaintiff in the litigation (the “Plaintiff”) concluded a contract on the basis of which the Plaintiff undertook to carry out all works necessary for the construction of the first section of the new metro line 4 in Budapest. These included, inter alia, the preparation of the works, the publication of construction tenders, the conclusion of contracts, and the payment of the contractors' fees. The Municipality of Budapest undertook to supply to the Plaintiff with the necessary funds, which were to be used solely for financing the metro construction project, and any unused funds were required to be returned.
In 2002 the Plaintiff published several road construction tenders for road works relating to the metro construction, in which the defendants (“Defendants”) and others submitted bids. The Hungarian Competition Office (“HCO”) opened an investigation against the Defendants and other companies in the same year and found the Defendants guilty of bid rigging in a tender that was won by a third bidder.1 The HCO's decision was upheld by the Hungarian courts, including the Hungarian Supreme Court.
Following the adoption of the Supreme Court's judgment, the Plaintiff brought an action against the Defendants on the basis of non-contractual liability for damage caused by the Defendants' cartel activity. The Plaintiff alleged that the cartel did in fact increase prices, as in the absence of the Defendants' competitive bids, the bid that won was more expensive than the bid that would have won under competitive circumstances.
The first instance court rejected the Plaintiff's claim and ruled that the Plaintiff had no standing to sue. The funds provided by the Municipality to the Plaintiff for the road construction project fully covered the construction costs and had the tender price been higher, the Municipality would have provided more funds and vice versa. Therefore, the actual financing entity of the road construction was the Municipality of Budapest and not the Plaintiff. Consequently, it is ipso facto impossible that the Plaintiff suffered loss as a result of the bid-rigging. In addition, the first instance court also ruled that the causal link between the unlawful behaviour (the Defendants' cartel) and the alleged damage (a higher-priced winning bid) was missing. According to the court, the Plaintiff should have proven that in the absence of a cartel, it could have concluded a construction contract at a lower price. However, this was not proven as the winning bidder in that tender was not found guilty of bid-rigging by the HCO in that tender.
On the basis of the appeal of the Plaintiff, the second instance court upheld the first instance judgment. The second instance judgment was reviewed by the Supreme Court upon the application of the Plaintiff. The Supreme Court annulled the second instance judgment and ordered the second instance court to repeat its proceedings. The Supreme Court ruled that the second instance court erred when it rejected the claim purely on a procedural basis. Indeed, the Plaintiff did have the standing to sue the Defendants on the basis of the contract concluded with the Municipality of Budapest. Therefore, the second instance court was instructed to assess the damages claim on the merits.
In the repeated proceedings, the Metropolitan Court of Appeal upheld the first instance judgment. It ruled, inter alia, that the first instance court was right to reject the claim of the Plaintiff because due to the provisions of the contract between the Plaintiff and the Municipality of Budapest, the costs of the road construction project had no effect on the assets of the Plaintiff. The only entity that could potentially have suffered loss as a result of the cartel was the Municipality of Budapest, which financed the project.
Two weeks later, the same panel of the Metropolitan Court of Appeal came to a similar conclusion when reviewing the first instance judgment in another follow-on damages lawsuit (not published). This lawsuit related to damages allegedly caused by bid-rigging during motorway construction tenders in 2002. The Metropolitan Court of Appeal ruled that the plaintiff (the entity that contracted the bid-rigging defendants) had not suffered loss because the defendants proved that the construction was ultimately financed by the Hungarian State. In its judgment the Metropolitan Court of Appeal expressly ruled that the passing-on defence is valid under Hungarian law, and the plaintiff is not entitled to compensation for costs that have been recovered from elsewhere. Therefore, loss that was passed on by the plaintiff to their parties will not be deemed as loss for the purposes of calculating damages.
The second judgment reinforces the position of the Metropolitan Court of Appeal as regards the acceptance of the passing-on defence in follow-on damages claims. It remains to be seen whether these judgments will be appealed to and upheld by the Hungarian Supreme Court.
Source: e-Competitions, N°48224, www.concurrences.com
1 On the HCO decision see eCompetition Article Ádám Máttyus, Eszter Ritter, The Hungarian Competition Office fines road constructors for concerted practices during road construction projects in Budapest (Alterra Kft.), 18 March 2004, e-Competitions, N°25321, www.concurrences.com