13 November 2012

Ukrainian National Court System

Frishberg & Partners


Frishberg & Partners
Like all of its legislation, Ukraine inherited its court system structure from the Soviet Union. Only recently the court system has begun undergoing reforms with the passage of a number of laws
Ukraine Litigation, Mediation & Arbitration
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Like all of its legislation, Ukraine inherited its court system structure from the Soviet Union. Only recently the court system has begun undergoing reforms with the passage of a number of laws. The initial steps were made on June 1, 2001, with the passage of amendments to various laws, including Law No. 1789-12 "On the Prosecutor's Office," Law No. 1142-12 "On Arbitration Courts," Law No. 2862-12 "On the Status of Judges," etc.

Reforms continued in 2010 with the complete revamping of the court system in the Law of Ukraine No. 2453-VI "On the Court System and the Status of Judges," dated July 7, 2010 ("Law No. 2453").

In general, Law No. 2453 provides the overall structure of the new judicial system after August 3, 2010. It defines the legal bases for the organization of the judiciary branch of power and the service of justice in Ukraine, the system of general jurisdiction courts, the basic requirements in the forming of the professional judges' corps, the system and procedure of carrying out of judicial self-regulation, etc. Law No. 2453 also legalizes the relations, which already exist between the branches of the executive and judicial powers. Related amendments were also introduced to the Civil, Commercial and Criminal Procedural Codes.

Under the reformed judicial system, there is the constitutional court and a system of general jurisdiction courts based on the principles of territoriality, specialization and instances. The currently effective, unified system of general jurisdiction courts is as follows:

1. Local courts of first instance (regional, city, inter-regional, etc.);
2. Appellate courts which may consider civil, criminal, commercial and administrative cases. Commercial appeals are considered by commercial appellate courts created in appellate circuits pursuant to presidential decrees;
3. Highest specialized courts (cassation courts); and
4. All of the above are subordinate to the Supreme Court, which is the highest judiciary authority in the system of general jurisdiction courts.

A major novelty in this hierarchy is the introduction of specialized courts, which consider matters in specialized fields (i.e., civil, criminal, commercial, administrative, etc.). Administrative courts and courts that review specific categories of cases (such as land, family, tax and intellectual property matters, among others) may be established in the judicial system. As a result of the reclassification, commercial courts (formerly known as arbitration courts) have also been subordinated to the Supreme Court, subjecting their decisions to reconsideration by the Supreme Court as is the case with any other court of general jurisdiction. Local commercial courts are located in the Autonomous Republic of Crimea, regions and the cities of Kiev and Sevastopol.

All foreign investors, as well as Ukrainian resident companies (such as joint ventures and wholly-owned foreign subsidiaries), have the right to submit their disputes with other Ukrainian entities to commercial courts. In fact, unless a provision in an international agreement specifically defers arbitration to take place elsewhere (e.g., the Ukrainian Chamber of Commerce and Industry), then national commercial courts have jurisdiction. While many foreigners may be skeptical of their efficiency and fairness, both the Ukrainian Chamber of Commerce and Industry and the national commercial courts are surprisingly good choices of forum because they are comparatively inexpensive and efficient, handling many international cases per year.

Although impartiality and predictability are not the strongest features of Ukrainian judicial system, the local commercial courts can be occasionally fair, as demonstrated by various rulings. For instance, a German company "Vero Handels GmbH" applied to the then High Court of Arbitration to settle its dispute with the Ukrainian joint venture "Minolta Trading." In its complaint, Vero Handels alleged that Minolta Trading failed to pay 68,680 US Dollars, due after Vero Handels' delivery of goods. In the course of the proceedings, the High Court of Arbitration determined that the joint venture underwent reorganization during the time of payment by separating into two companies. One of the resulting companies, "Ukrinvaluttorg," was ultimately held liable for payment.

The Highest Commercial Court of Ukraine is the highest body for resolving economic disputes. The Highest Commercial Court of Ukraine supervises the lower courts' judgments and exercises control over their activities. The Highest Commercial Court of Ukraine is also responsible for the preparation and selection of candidates for judgeships, the improvement of the qualification of the commercial courts' employees, among other functions.

In the past, submitting a case to arbitration required the plaintiff to undergo a fairly simple administrative or so-called "pre-trial" dispute resolution procedure. In fact, this "pre-trial" procedure was mandatory for all disputes considered by arbitration courts. Today, as a result of changes to the Commercial Procedural Code, the unreasonably long and highly bureaucratic "pre-trial" procedure is strictly voluntary in all cases (i.e., only if the parties to a dispute previously agreed to apply the "pre-trial" procedure).

Under the "pre-trial" procedure, the plaintiff must first send a written letter, which also serves as a complaint, by confirmed or registered mail, return receipt requested, to the respondent. According to the Commercial Procedural Code, this letter must contain information on the plaintiff, the grounds for the complaint, confirmation of the circumstances under which the complaint arose, the demands of the plaintiff, the amount in controversy, various documents which confirm the complaint, among others.

The respondent then has one month to consider the letter (complaint) from the day it is actually received, which period can be suspended if any necessary supporting documents are absent from the letter. In case the parties agreed to review any issues (for instance, review of defective goods by the manufacturer) the resulting complaints may be further considered over a two-month period. The respondent must provide a written answer regarding its consideration of the complaint. The response must indicate the full information concerning the respondent, the acceptance or rejection of the plaintiff's demands, any necessary documents proving the respondent's position, etc.

Further, if the respondent admits to allegations contained in the letter/complaint, it must indicate the amount of the claim it is prepared to repay. If such admission (together with the transferred amount) is absent, the plaintiff may appeal to the respondent's bank seeking a so-called "indisputable debit" of the relevant funds from the respondent's account.

If the respondent's response calls for dispute resolution, the plaintiff may initiate proceedings in a commercial court at the location of the party at fault or in an ad-hoc (arbitration) court. One party may also propose to introduce amendments or terminate the commercial agreement in question. In this case, such party must send to the other party a proposition, which must be answered by the recipient within 20 days. If the parties do not come to an agreement regarding the proposed amendments or termination, only then may the claim be submitted to a commercial court.

As a side matter, foreign investors should note that unpredictable financial issues will most certainly arise unless they are specifically addressed in the claim. Thus, the claim should state both the amount in controversy and the currency of payment. For instance, if foreign currency is involved in a given transaction, the complaint must state its equivalent at the official National Bank exchange rate as of the date of submission of the application. Further, the complaining party should specifically seek remuneration in foreign currency in order to avoid problems associated with repatriation under currency regulations and the risk of loss due to hyper-inflation if forced to accept the award in Hryvnia with a view to subsequently convert it into foreign currency for ultimate transfer abroad.

Upon receiving the claim, the judge of the commercial court will decide whether to proceed with the case. Generally, disputes under commercial agreements must be considered by the commercial court at the place of the party which is obliged to perform certain actions in favor of the other party under the underlying commercial agreement (e.g., transfer property, perform works, provide services, make payments, etc.) or at the respondent's place of location in case of a demand to perform obligations set forth in a commercial agreement. The claim must contain detailed information about the parties, the amount of the claim, the circumstances surrounding the claim, "pre-trial" dispute resolution (if applicable), security measures, etc.

If the commercial court has jurisdiction and decides to hear the claim, the plaintiff must send copies of the claim and all supporting documents to the respondent(s) and all interested third parties. This is especially important in bankruptcy cases, as the court may refuse to hear the claim if the plaintiff is unable to find all interested third party creditors. The plaintiff also retains this obligation even if the commercial court calls other respondents to participate in the proceedings.

The respondent may either send a response to the claim and/or submit a counterclaim after receiving a copy thereof. A response must be sent to the commercial court with a copy to all other participants in the proceedings. If a response is signed by an authorized representative, then the power of attorney or other document evidencing the representative's authority must be sent along with the response. Counterclaims must be jointly considered and directly connected with the plaintiff's initial claim.

In preparation for the case consideration, the court will determine whether other respondents should be included in the court hearing or whether the respondent should be replaced by another respondent. The judge will also call the representatives of the parties to the court, if possible, to ascertain the facts of the case and the need for additional case materials, documents, evidence, etc. At this point, the judge may also require the parties to take certain actions, such as verify settlements, review evidence or appoint court expert examinations. The judge will also review the written and oral evidence of the parties, hear explanations of the case facts, resolve to apply security measures and take any other actions required for the correct, timely and fair consideration of the matter.

The judge may decide, either at its own initiative or based on the plaintiff's petition, that security measures are indeed necessary at any stage of the case. These security measures may include the arrest of property or cash funds, a ban on certain actions by the respondent or third parties, and a suspension of collection actions or property arrest. Note that security measures may not include a ban on convening a general meeting of shareholders and its decisions, a ban on participation of shareholders in a general meeting of shareholders, a ban on determining the legality of a general shareholders meeting, etc.

In most cases, the commercial court must resolve disputes within two (2) months from the date of receiving a claim, unless both sides ask for an extension. An extension, however, may only be granted for a further fifteen days. During the two-month term, the judge may determine the need to set up video conferencing to resolve the matter, to suspend the consideration for a certain amount of time, to terminate the proceedings if a settlement agreement is reached by the parties, etc. In the end, the commercial proceeding results in a written decision and, if applicable, an order to execute such decision. For example, the court may recognize an agreement to be fully or partially invalid, to decrease the penalties and fines under an agreement, to delay the execution of the decision, etc.

In contrast to the finality of international arbitration, any litigant can appeal the final decision of a Ukrainian national commercial court within ten (10) days from the date of a decision. Appeals are submitted via the commercial court that issued the final decision. If the parties to the dispute are not satisfied with the decision at the appellate level, they may further appeal the decision to the Highest Commercial Court, whose decision may only finally be appealed to the Supreme Court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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