Levente Bihari

The Performance Certification Expert Board (PCEB) is playing an increasingly important role in disputes between construction-industry firms. Nevertheless, a few legal questions relating to the PCEB remain to be clarified, including that of for how long an expert opinion issued by the organisation can prevent the enforcement of contractual security (e.g. a bank guarantee). Until this issue is resolved, a party to the dispute that would otherwise possess legitimate security could be put at a disadvantage.

The stated purpose of establishing the PCEB was to protect small and medium-sized firms in the construction industry and to put an end to circular debt, by providing effective assistance to construction businesses in the enforcement of their fee claims, and ensuring a quicker conclusion to legal disputes relating to contractual performance. And it has clearly been successful, as the demand for the involvement of the PCEB in dispute resolution is growing: since its establishment, the board has issued expert opinions in more than 750 cases, and the number of requests is constantly growing. Although the vast majority of individual cases relate to the enforcement of claims amounting to HUF 1-10 million, (approx EUR 3,000-30,000) annually the PCEB decides on the fate of contractors’ fee claims totalling several billions of forints.

The primary means of achieving the objectives set by the legislature is the use of expedited procedures to hear lawsuits in which the contractor already has an expert opinion from the PCEB. In these cases, the court proceeds in accordance with the rules on lawsuits of key importance; that is, in an expedited procedure with shorter procedural and administrative deadlines, while the judgment passed in the lawsuit may be enforced immediately (regardless of any appeal).

Does the PCEB negate security?

Another important element of the system of certifying contractual performance is that the client is not entitled to enforce the performance security if the PCEB takes the position that the client’s claim is unfounded. It makes no difference that the client holds a valid bank guarantee or declaration of suretyship; if the PCEB states in its expert opinion that there is no justification for enforcing the security: then the bank is obliged to refuse to make payment. In this way, without any legal action or the involvement of a court, the PCEB can essentially prohibit the client from enforcing the security at its disposal (e.g. bank guarantee).

It is important to bear in mind, however, that the PCEB cannot issue an expert opinion on the enforceability or prohibit enforcement in the case of all types of security; it only has such powers with regard to guarantees, pledges and suretyship. The widely used institution of liquidated damages, for example, continues to be a form of security that the PCEB is not entitled to investigate in terms of its legitimacy, and thus the organisation has no power to prevent its enforcement.

But how far does the protection go?

The PCEB has become a formidable weapon in the hands of contractors, because an expert opinion by the body in favour of the contractors can essentially overwrite the system of securities elaborated between the contracting parties, and, consequently, the rules of the Civil Code. This is what gives rise to the questions: how long is the expert opinion prohibiting enforcement binding? How and when could the performance obligation of the security provider be revived? The legislature has yet to provide the answer to these questions.

The PCEB’s opinion is not a judgment or official decision – it is still just an expert opinion, which does not bind the court and could be disproved. This begs the question of whether a decision by the court of first instance that disagrees with the PCEB’s expert opinion automatically restores the payment obligation of the provider of the security. Or is a legally binding decision, that is, a decision from the court of appeal, necessary for this? Or, conversely: is the presentation of a judicial expert witness who opposes the PCEB’s position during the litigious proceeding sufficient for the restoration of the security? The answers to these questions cannot currently be inferred from the law, and this puts not only the client, but also the provider of the security (e.g. the bank providing the guarantee) in an exceptionally uncertain situation.

Another matter of principle that cannot be ignored is the question of who is entitled to dispute the PCEB’s expert opinion prohibiting the enforcement of security, and within what constraints they may do so. Although an expert opinion with such content has serious financial and legal implications, under the present procedural rules there is no opportunity for external legal remedy, and it is not clear precisely whom, and on what grounds, a client who has been left in the lurch needs to sue in the interest of restoring the enforceability of his security in a judicial proceeding. Therefore, if the PCEB expert opinion states that a client is not entitled to enforce the security in connection with a given claim, then he is put in a highly vulnerable position, even with a carefully worded and well-structured contract.

The other extreme?

The PCEB has clearly become a useful, and increasingly commonly used institution in the course of construction projects. However, until certain procedural issues relating to the revival of securities are resolved, for the time being it puts parties who otherwise have legitimate security into a far more vulnerable position.