Paid on the nail?

Despite all the current geopolitics, trade goes on in Ukraine, but what if you are an exporter and have concerns about repayment? Oleg Dorofeev suggests some practicalities to improve debt recovery prospects.

When Moody’s downgraded Ukraine’s sovereign credit rating from Caa2 to Caa3 in April 2014, the rating change took the country from the category of “extremely speculative” to “default imminent with little prospect for recovery”. Deteriorating relations with Russia – including the suspension of Russia’s financial support – were cited as the main concern.

However trade continues to flow and foreign sellers of goods and services from Ukraine can ensure they get paid within an applicable legal framework. So how should exporters manage a situation where there is a risk their Ukrainian counterparty may not be able to pay under the contract? This article looks at the practicalities collecting cross-border Ukrainian debt.

Before the contract is signed

Any contract covering exports to Ukraine needs to provide for debt collection from the buyer at anytime in the future and the contract should be negotiated at the outset on this basis.

Know your trading partner

To make sure your trading partner in Ukraine is reliable, ask them to provide statutory documents translated into your language. Check:

• who are the founders of the company;

• what is the amount of the charter capital;

• how many people are employed with the company; and

• if the company is in liquidation.

Already at this stage it is possible to detect indicators of reliability - or lack of it. If the company has one employee (general manager), or even two or three of them, ask why this is. And if the charter capital of the company is not significant (in Ukraine limited liability companies can be registered when having charter capital starting from as little as €100), this should alert you to a possible debt collection case in the future. So you should raise the question about the company’s charter capital amount. It is also recommended to ask for further information on the company assets as an extra check.

It is also important to ensure before any contracts are concluded that the general manager who represents the company is officially registered as the general manager in the Unified State Register of Companies in Ukraine.

Check court disputes history of your partner

In Ukraine, the court disputes history of any company in most cases is openly accessible online via a special government resource at www.reyestr.court.gov.ua. Before concluding a contract with Ukrainian partner it is recommended to check its debt collection history in the Ukrainian courts – which provides necessary insights into your customer’s reliability. It is sensible to take advice from a local Ukrainian lawyer on what sort of risks any court appearances may present.

The contract - compliance with debt collection procedures

Practice of cross-border contracts conclusion in Ukraine is stricter than the one used in European countries. For instance, in the EU you can simply send an invoice with certain payment and delivery conditions and its acceptance by your partner would be considered as a contract. This is not so simple in trade with Ukraine.

Include all details of the deal

Ukrainian legislation sets out certain legal requirements to a cross-border contract. In particular, it should be made in writing, with signatures of both parties, preferably concluded in the languages of both parties. The contract should contain:

• details on its subject matter;

• terms of delivery and payment;

• price of the contract (goods or services);

• terms of their acceptance, contract validity terms;

• regulations on force-majeure circumstances;

• provisions on possible sanctions for undue execution of the contract; dispute resolution matters; and details of the parties.

If it is not possible to include all of these items in the contract itself, ensure they are included in the contract annexes signed by both parties. All the items do need to be included they are essential for facilitation payments by a Ukrainian bank and they will also be checked by Ukrainian customs during the import of the goods into Ukraine.

Dispute resolution

One of the most significant mistakes foreign exporters make when concluding the contract with a Ukrainian partner is that they forget to specifiy the place and procedure of possible dispute resolution. In our practice we have had cases where foreign exporters include in the contract dispute resolution in their local courts of general jurisdiction (for instance, provision that all the disputes should be resolved in one of the local courts in Germany with application of the local legislation). While dispute resolution under these sorts of terms is be possible, it is unlikely to result in successful debt collection.

This is because jurisdiction of foreign courts in Ukraine can only be accepted in Ukraine if it is specifically provided for by particular agreements between Ukraine and the country nominated to host that particular dispute resolution jurisdiction.

Given how limited the list of countries is where such agreements are in place, this does create difficulties.

Resolving disputes in Ukraine

There are situations where the foreign exporter accepts, in a contract with a Ukrainian party, the jurisdiction of the Ukrainian commercial court (for example, the contract could specify that all disputes are to be heard in the Commercial Court of in the City of Kiev). In these circumstances, the court dispute review would take place in the Ukrainian court and a decision on satisfaction of exporter’s debt claim could be obtained. This kind of resolution would be useful for the claimant (even if they are a non-resident of Ukraine). In Ukraine the court ruling would be duly executed, but a debtor would still need to appoint a local representative who could conduct all the necessary local procedures.

In practice debt collection cases are reviewed in the court of first instance (the local commercial court) up to two months from the date the claim was accepted by that court. Further hearings in the Court of Appeal and the Higher Commercial Court of Ukraine are also possible if one of the parties to a court dispute is not satisfied with the court ruling. In these situations, hearings could take from four to six months.

International arbitration

The recommended and most acceptable means of resoloving disputes between a Ukrainian resident and non-resident is through international arbitration, which can be conducted by any arbitration court in any country chosen by the contract parties.

The respective arbitral award can be accepted and executed in both countries of the debtor and the creditor under the New York Convention On Recognition and Execution of Foreign Arbitral Awards (1958). But if you include in the contract possible dispute resolution in international arbitration court, it is vital to include the following provisions on the arbitration:

• the place of the arbitration (for example, Kyiv, Ukraine);

• the rules under which the arbitration will take place (for example, arbitration rules of the International Chamber of Commerce);

• number of arbitrators who will review the case; and

• the language of the arbitration and the applicable legislation.

It is also possible that the parties to a contract choose exact arbitration court and name it (i.e. the International Arbitration Court at the Chamber of Commerce and Inductry of Ukraine). In such case it is vital to name the court exactly. Failure to do so – and mistakes do happen – render the chances of successful debt collection close to zero.

We had a case in our practice when a foreign exporter could not apply against Ukrainian buyer to any of the arbitration courts, because the arbitration court mentioned in the supply contract actually did not exist – the name of the court was misleading. Nor could the exporter to apply to a Ukrainian commercial court because Ukrainian Commercial Procedural Code bans a review of court claims in Ukrainian commercial courts if the contract presupposes dispute review in international arbitration (even if the name of the arbitration court is mentioned in the contract incorrectly).

A big disadvantage of international arbitration is that the cost going down this road is two or even more times higher than paying court fees to resolve disputes in Ukrainian commercial courts.

Valid confirmation of the contract execution

What is also important for successful debt collection from your Ukrainian trading partner is valid confirmation of deliveries of goods or services to that partner. This means getting signatures and stamps on the receipt documentation – which would need to be produced as evidence in a dispute.

It also goes without saying that your carrier should provide documentary evidence that the counterparty has received the goods – for example in the form of a bill of lading. Also, the documents on the customs clearance of the delivered goods would suffice as are valid confirmation of delivery to the buyer.

Some exporters in dispute resolution cases try to use emails received from representatives of the buyer as a valid confirmation of goods delivery or other arrangements regarding the deal with the buyer. This would suffice in the international arbitration, but not in case with Ukrainian commercial courts, as Ukrainian procedural legislation does not accept emails as confirmation.

Ensuring your rights in a possible debt collection case

Despite all of this, a correctly drafted contract itself is not an absolute guarantee of a successful debt collection should a dispute arise. While the future potential debtor may be in a good financial condition when the contract is signed, they could they run into financial problems or even become insolvent. To mitigate this risk, it is best to use collaterals wherever possible.

For example, when supplying valuable goods to a Ukrainian purchaser on a deferred payment basis, it is possible to include into the wording of the contract a provision that the supplier’s right of ownership of the goods being delivered belongs to that supplier until the goods are fully paid for by the buyer. If this approach is followed, it is advisable for the supplier to set up an encumbrance on the goods supplied. This means the goods will:

• Remain the property of the seller until they are fully paid;

• Be banned for resale to third parties by the buyer until the encumbrance is in force.

Ukrainian legislation specifies that encumbrances are officially registered by the departments of the Ministry of Justice of Ukraine and, from the moment of registration in the Ukrainian State Register of Movable Property Encumbrances, the respective goods cannot be re-sold to third parties until the encumbrance is cancelled by the supplier. Use of such legal action gives significant privilege to the supplier of the goods in a court case as that supplier will be sure that the encumbranced goods are still in his property and can be returned to him upon court decision.

In cases when the encumbrance is not possible, but the buyer requires deferment of payment, it is recommended to use suretyship of a reliable third party (an individual or legal entity), which possesses property value of which could cover the amount of the debt in a case of non-payment. Suretyship agreements are usually concluded by all three parties: the seller, the buyer and the surety.

Collecting the debt

If you are already in a debt collection process with your trading partner, but you have the right contract at place and all the documents confirming the goods or services have been delivered to your Ukrainian counterparty – and their acceptance, the chances for successful debt collection are quite high either in Ukrainian commercial court or in international arbitration.

Try the amicable approach first

In our experience 40% of Ukrainian debt payment disputes can be actually resolved before taking further action and going to court. This might include sending a debt payment claim, reviewing repayment schedules or engaging the services of a debt collector or a mediator. Whatever legal means is chosen, it is recommended to try these before applying to court or arbritration – in other words you need to have tried the amicable route first, as in most cases it appears effective. But do not wait too long if this approach does not work. If you go for debt collection in Ukraine, the statute of limitations in Ukraine allows three years from the date the entity was made aware of the breach.

Precaution measures in a court dispute

When applying to Ukrainian commercial court or international arbitration it is recommended to appeal for precaution measures (such as arrest of debtor’s assets or bank account). The respective application can be brought to the dispute resolution authority before the actual claim is submitted or at the same time you make the claim. However, you need to be clear that you can substantiate that application of such measures is necessary. For example, there are official records in the Ukrainian Companies Register that the debtor applied for liquidation or bankruptcy after the court claim was submitted. In this case you would have good reasons for applying the precaution measures by court.

Do your homework

Dealing with foreign partners always has certain peculiarities and dealing with Ukraine right now given its current country risk perception can seem particularly daunting, but adherance to basic groundrules will help ensure that your business will have legal protection from unpaid debts.

In summary, always check the financial strength and business integrity of your prospective counterparty. You also need to set out the respective goods or services supply contract in as much details as possible as this is your protection in any future debt collection case.

Failure to grasp these two basic principles can result in attempts to recover a future debt becoming too expensive in terms of opportunity cost and advisory fees or, in some case, a waste of time because the elements needed to enable the system to work are simply not there.

Summary of key points

• Perform company checks on the people and financial strength

• Ensure the contract covers all the details of the deal

• Specify the place and procedure of possible dispute resolution

• Consider emcumbrances if the deal is on a deferred payment basis

• Try the amicable approach before going to court

• Don’t’ bother going to court if you have done none of the above

Oleg Dorofeev, is an attorney-at-law (Ukraine) and a partner in the LEGITEAM Law Agency