Following we would like to provide an overview of significant rules on executive officer liability towards third parties. The topic is currently hotly debated due to recent changes. Not everyone agrees on how the new regulations should be interpreted and applied and therefore further changes should be expected as court decisions and additional legislation clear up the ambiguity.

New Regulations

According to the New Hungarian Civil Code, if an executive officer of a legal entity such as the managing director, a CEO, a member of the board, or trustees of foundations in his/her capacity as executive officer causes damage to a third party, the executive officer can be held liable for the damages severally or jointly with the company. This means that the aggrieved party can file damage claims against the executive officer, against the company or against both.

One way of interpretation

According to some interpretations and the Code’s preamble, the aim of the amendment was to increase executive officer liability. The legislator has established direct liability of executive officers. Some opinions emphasize that alongside company liability provisions, executive officers and other executives mentioned also can be held liable. Professional discussions on how to interpret the New Code include debates on whether or not, according to the new provisions, the executive officer can be held liable (together with the company or independently) for acts such as stealing the pen or cell phone of another party at a business meeting. Besides the fact that such situations seem completely out of touch with the reality of everyday corporate life, such banter begs the question whether or not an independent regulation was necessary for the cases stated. Furthermore, the provisions are not clear regarding who is actually liable for whom. Maybe the question does not really concern why an executive officer can be held directly liable for such actions, but rather why the company should be held liable for the executive officer’s extreme behavior. Is this act attributable to the company at all (which could make the liability of the company rightfully founded)?

What Kind of Acts or Defaults are in capacity of the Executive Officer?

In their capacity as executive officers, the managing directors and other executive officers take management decisions, enforce decisions and perform duties in relation to third parties in representation of the company. These are in fact the acts of the company itself and the company can be held accountable for these acts. Under the new law, the executive officer can be held directly liable as well. However, it would be difficult to apply the new law to cases such as an executive officer stealing another party’s pen since such unusual behavior does not involve decision making, enforcement or representation.

If not pen theft, then what?   

Based on its inclusion under tort provisions, some have interpreted the new regulation to apply to cases involving liability for damages in which no contract exists between the company and the aggrieved party. In such cases, no contract exists between the executive officer and the aggrieved party though a contract may exist between the aggrieved party and the company. Only the damage causing action establishes a legal relationship between the executive officer and the aggrieved party. Yet whether this provision enables a contractual aggrieved party (e. g. a supplier or an employee) to enforce his damage claim directly against the executive officer remains unclear.

In general, unlike the example described, classic tort cases usually tend to involve environmental pollution, cartels, malicious slander, infringement of trademark and intellectual property. In such cases, direct liability of the executive officers can become an important issue. Some interpretations aim to differentiate between the damages caused by the executive officer in his capacity as executive officer and the damages caused by the company itself. (The executive officer is not liable for the latter towards third parties according to these views). But since it is impossible for the company- as a legal entity- to act without its executive officer, we believe that it is equally impossible to make such distinctions in practice. For this reason, one can conclude that the executive officers can be held liable for tort damages caused by the company see also at who is responsible for whom.

Transfer of Liability

Others interpret the new regulations as applicable to situations in which, formerly, the executive officer could not be held directly liable for damages to third parties caused by executive officer abuse of power. Such cases concern damages which may appear to have been caused in the name of the company, but actually stemmed from the executive officer acting on his own behalf and in his own interest.

From the placement of the provisions in the Civil Code and from the general wording (that does not include limitation concerning the willfulness and the abuse of the separate liability of legal persons) it is impossible to determine with certainty whether or not  direct actions against the executive officers are only possible in these extreme cases.

Overall, court decisions, amendments, legislation and legal practice will eventually rectify the current ambiguities inherent in the latest provisions concerning executive officer liability. Until then, keep a close eye on your pens, while the debates continue.