Welcome to the jungle or What should be watched out in Ukraine

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It looks like Guns N' Roses created their eternal single with the exact purpose of displaying bothering cases usually lurking foreign investors in Ukraine.

The past decade has turned the country into a bonanza of IT developers for lots of global projects. As lawyers attending problem cases, we face daily what comes if customers neglect basic rules of the outsource partner selection.

With this regard we have tried to file each possible problem and divided them to the three main triggers causing difficulties in Ukraine if you look for ‘extra hands’ in our country.

Primarily we’d like to admonish that there is no intention to cast a slur on our own habitat. As to no extent possess we any moral right to tar all with one brush, moreover we know enough examples of real craftsmen and decent persons in the software field based in the Ukrainian territory. Therefore, our publication aims only at advising that in the mentioned situation a customer ought to check his contractors like in any other case, inasmuch as the jungle law could be rather atrocious for those behaving carelessly.

With all that said, here we are:

1) Verify your partners. We wish you had seen our eyes goggled out of surprise when we learned that a foreign investor had paid above two million USD for software development to a company which in fact wasn’t established in compliance with the law of Ukraine (and presumably with any other law in the world).

Should we say that the services finally failed to be rendered properly and to successfully return the funds that large we have to apply the most sophisticated legal techniques in Ukraine?

Hence, we suggest that you examine in detail the following conditions while chosing your contractors in Ukraine:

- the legal status of a start-up firm – is it really registered and in what legal form, or does it exist only in LinkedIn,

- the presence of bank details in the invoice on payment for a contractor’s services;

- the actual competency of employees you are going to hire as the out staff – you might pay to a junior developers team by the rates of seniors and subsequently hire the latter to salvage your investments;

- the availability of any property, real beneficiaries and the company’s goodwill at all in Ukraine.

 2) Formulate such a contract that would be applicable in Ukraine. Our other case concerned with the contract signed on software development regulated by the law of New York State. When the customer addressed us with a request regarding the contractor’s failure to meet his liabilities, we realised that the solution would be far from simple. We could only presume that the customer would go to the court in New York and win the deal, while then that verdict should be recognised in Ukraine and we would hope the perpetrator possesses any assets by grip upon which the customer’s losses could be returned at least by half.

Moreover, taking into account differences of the two legislations, the American verdict may remain not executed at all and the funds lost completely.

In order to avoid such long and expensive ‘America’s exploration’ we’d like you consider that your contract on software development which should be actually fulfilled in Ukraine must comply with the legal and business realia existing in Ukraine in fact.

3) Pay attention to the hardware’s actual placement. Unfortunately, Ukraine is still subject to some occasions of unlawful pressure by law enforcement authorities or open asset-grabbing.

In practice there are the cases implied when a customer takes risks of the information in fact lost along with the servers being in the territory of Ukraine. Which means that your developers might be decent persons and honestly aim at meeting all their liabilities, however a police search in their office where the servers are situated could result in the full collapse of all good intentions.

The grounds for such searches may be both some debts to tax authorities and presence of some mala fide subcontractors etc.

How to avoid such cases? Refer to para 1 above and check your contractors.

We do insist again that the preliminary compliance check can solve most of the problems as the legal due diligence should embrace the check of tax liabilities, presence of criminal procedures or any other problem issues that might enlighten potential risks.

In lieu of conclusion:

There is indeed everything in Ukraine a customer needs: qualitative and professional workforces at adequate costs yet please mind those diamonds have to be hunted for in the jungle. That’s why we urge you to invest in the Ukrainian market but remember the jungle’s basic law “everyone is for himself”, and there is no room for confidence!

Andrey Kaftanov, associate lawyer; Taras Dragan, lawyer.

Taras Dragan

dragan@interlegal.com.ua

Andrii Kaftanov

kaftanov@interlegal.com.ua