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Navigating the Ukraine. Court system.

02.03.07

The Ukrainian business is a blend of the Soviet legacy and Ukrainian entrepreneurial spirit put in a rather complex legal framework. Business in Ukraine continues to go ahead and often presents unprecedented opportunities. The country has a well-developed industrial base, rich agricultural resources and is close to existing unused markets. Many huge high-tech military and industrial plants of the USSR were situated in Ukraine which resulted in a highly skilled engineering work force and large capacities. Doing business in Ukraine is not easy but guaranteed to be exciting. But once you get past any initial barriers, you can conduct business here as you would in any other country in the world.


Due diligence
In such a climate where there is a certain risk to achieve good returns from contracts, an initiated due diligence can be a vital tool in succeeding. It is important to carry out the check prior to establishing any business or financial relationships. Prior to establishing a business relationship you need to define whether your prospective partner (a company or individual) is providing you with full and accurate information. The aim is to confirm the bona fides of your prospective partner.
Due diligence enquiries are essential today for a variety of reasons. At a very basic level it ensures that the person you are dealing with (or intend to deal with) actually exists. This may be a very fundamental matter. But we had a few occasions when the company turned to be a fiction. Second, even if the person exists, it is not reasonable to take what they say for granted. Without a due diligence, you run the risk of losing money and reputation. Just make sure you are not involved in relations with persons who could cause compliance problems and financial losses.
How a foreign entity can protect interests if the Ukrainian counterparty fails to fulfill obligations?
In our practice we faced some cases when just a claim drawn up competently and sent by fax to counterparty directly from our law firm office was sufficient for the Ukrainian party to fulfill its obligations.
Of course, sometimes, it doesn’t work and if there is no security upon the agreement, then, you should not waste time and bring the case before the competent court as soon as possible.
Usually parties agree what law shall be applied and what competent court or arbitration is. But the most ‘interesting’ is when there is no corresponding clause in the contract, and the claim shall be filed in Ukraine and mostly it is the commercial court depending on the place where the Ukrainian party has its registered office. Then, which law to apply is decided in each particular case.
In our practice we had a case when the Ukrainian commercial court decided the dispute using the Laws of the England. Of course, in this case it took time and extra funds to receive an official statement from the UK lawyers on the substance of the English law to be applied.
The useful thing envisaged by the Ukrainian legislation is filing an application to the court to take necessary precautions until the judgment will be executed. These can be: 
•    Attachment of the debtor’s funds, 
•    Attachment the debtor’s movable and/or immovable property,
•    Imposing a ban on doing some actions.
Another important matter to bear in mind is that the burden of proof of the case’s circumstances lies on the parties. So, the preliminary workout (before filing the claim) plays a significant role in the further course of hearing.
Court system in Ukraine
If you have no arbitration clause in your agreement with the Ukrainian entity you have a good chance to explore the local multi-level court system. Disputes with legal entities are considered by commercial courts, the system of which consists of:
1.    Regional courts of the first instance;
2.    Commercial courts of appeal;
3.    High Commercial court of Ukraine;
4.    The Supreme court of Ukraine.
Thus, the commercial court of the first instance accepts and considers almost all claims within its competency. The case shall be decided within two months and such a term can be prolonged by the head of the court for not more than one month. So, the maximum possible term of consideration is 3 months.
The next is the court of appeal. The appeal shall be filed within 10 days since the first instance court proclaimed its judgment; otherwise the decision comes into force. The court of appeal shall decide the case in the term and in the order envisaged for the consideration in the first instance. So, the real maximum term can be 2 months also.
After that we have High Commercial court of Ukraine which shall proclaim its decision within 2 months since the receiving of the cassation appeal along with the case from the court of appeal (usually it takes 2 weeks for the case with your appeal to be delivered from the court of appeal).
So, as you see all your challenge starting from the filing of the claim and up to the decision of the court of cassation will take maximum 7 months. Of course it can easily take less time, and of course sometimes it takes more. It depends…
Regarding the very procedure of consideration within all court instances it should be also mentioned here, that Ukraine made a major step toward fair justice by adopting the Law On enforcement of the judgments and application of the practice of the European court of human rights of February 23, 2006. Now, it is strictly stipulated that not the very text of Convention but the practice of the European court of human rights shall be applied by the Ukrainian courts as a source of law when considering cases.


How to recover the debt from a Ukrainian debtor?
To receive the judgment is only the first step. Obtaining a writ of execution and its lodging at the special State Enforcement Service of Ukraine is the next stage and a separate procedure.
If a Ukrainian debtor is not willing to pay the debt, the enforcement of the judgment is the perfect stage to postpone the payment using formalities. For example, we had a case, where it was said in the writ of execution - ‘to recover from A Ltd the debt in the amount of USD 100 000’.
After it was lodged for execution the debtor filed an appeal to the court asking the court to consider the actions of the state executor illegal and to release the bank accounts because the official attached an arrest not only onto the account in USD but also on the accounts in UAH and EUR. So, it is seen clear that such an appeal was of just formal character in order to slow down recovery. It illustrates that in Ukraine even a letter in the judgment text can be essential and crucial.


Arbitration
To avoid the court litigation you may envisage a contractual reference of any dispute for consideration to arbitration. In Ukraine there are two permanent arbitration institutions – International Commercial Arbitration Court and Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry. They are independent tribunals like the ones in Stockholm or Paris. By the way, the arbitration fees are much lower. The above institutions have their own model wordings of the arbitration clause which contain the name of the arbitration tribunal, procedural rules, applied law and language. Here is an example:
“Any dispute arising out of the present contract or in connection with it is to be referred for consideration and final settlement to the International Commercial arbitration Court at the Ukrainian Chamber of Commerce and Industry.
The parties agree that as to the consideration and settlement of the dispute the Rules of the International Commercial arbitration Court at the Ukrainian Chamber of Commerce and Industry shall apply. 
The present agreement shall be regulated by the substantive law of Poland. The Arbitration Court shall be composed of three arbitrators/. Place of the Arbitration Court meeting shall be Kiev. Language of the Arbitration Court proceedings shall be English.”
Often the above arbitration institutions are mentioned as a more reasonable way of dispute resolution than regular commercial courts. At least you can choose an arbitrator and there are no upper instances. The arbitration award can be annulled only in case of procedural drawbacks, for example, if the dispute was resolved in absence of one of the parties and there are no evidences that such a party was duly informed about the hearings, etc.


How to enforce a foreign judgments in Ukraine
Ukraine is a signatory to the New-York Convention On Recognition and Enforcement of Arbitration Awards (1958) that gives an opportunity to recognize and enforce the foreign arbitration awards in Ukraine. Another case is decisions of foreign regular courts. In this case recognition and enforcement of such awards depends on the existence of a relevant bilateral agreement between Ukraine and the country where the award was pronounced. So, in each case you should check whether there is an agreement allowing the decision to be enforced in Ukraine.

So, doing business in Ukraine, it makes sense beforehand to spend money on consulting lawyers and experts. In the long run this will save you money. The bureaucratic process can be complicated, so make sure your contracts are simple, straightforward and comply with the Ukrainian standards. The more complex you make them the easier it will be for someone to find a way to break them.

Author: Arthur Nitsevych