Ukraine's court system: "the court of contracts" (02/16/97)

Ukraine's court system: "the court of contracts"

by Roman Woronowyc
Kyiv Press Bureau

The Ukrainian court system, unlike its economic system, has seen little restructuring since Ukraine achieved independence in 1991. Just prior to independence, the court system was redefined, but it remains for the most part structured as it was under the Soviet Union, with the centrally important difference that all authority now lies in Kyiv.

The Verkhovna Rada has put a review of Ukraine's Criminal Code and Civil Code on its 1997 agenda. However, that review will be geared more toward a review of laws rather than a restructuring of the court system.

Today Ukraine's jurisprudence system is organized into three major court systems: the Constitutional Court, which is responsible for issues involving the Constitution; the General Court of Competence, which deals with civil and criminal matters, and at the top of which stands the Supreme Court of Ukraine; and the Court of Specialization (commonly known as the arbitration court), which, basically, handles contractual conflicts and is overseen by the High Court of Arbitration.

To give our readers a closer look at how the three separate courts of Ukraine function, The Ukrainian Weekly begins a series on Ukraine's courts, which will highlight each court separately. In this issue we concentrate on the arbitration court system.

KYIV - To put it simply, the arbitration court of Ukraine is a court of contracts. Its function is to settle disputes between parties over disagreements on contractual responsibilities, payment of debts for products, services or properties. With Ukraine's push to open capital markets and stimulate business growth and investment - central to which is the closing of contracts between parties - the arbitration court system has moved from the periphery of Ukraine's still Soviet-based court system to a central position with an ever-increasing docket.

Today it consists of 25 oblast arbitration courts, and separate courts for Crimea, and the cities of Sevastopol and Kyiv. Under them fall municipal courts (both city and raion). All answer to the High Court of Arbitration. The system involves 1,052 arbitration judges.

The new Ukrainian Constitution passed last July refers to the arbitration system as the Court of Specialization, but in Ukraine it is still routinely referred to as the arbitration court.

The court is an independent body responsible for reviewing and settling contractual disputes among legal entities, government bodies and other official organs. Essentially, its job is to determine whether terms exist for breaking a contract and what they are; to decide whether a contract exists and what are the promises offered by the parties to the dispute; and then to rule in favor of one of the parties. In an arbitration proceeding the court does not dole out punishment, it upholds the remedy offered by the winning party.

Today a typical case before the arbitration court is a disagreement over the terms of lease contracts for buildings and apartments. As the rent for lease space has skyrocketed in the last four years, too often landlords have attempted to throw out businesses and individuals to make room for tenants who are willing to pay more. In Ukraine the length of a lease contract cannot be changed, so the arbitration courts have regularly analyzed contracts to determine the actual length of the agreements, and determine their effect, according to Liudmilla Panova, owner and director of the legal firm Modul.

She explained that in Ukraine contracts are often poorly written because the parties to the contract are not aware of what a legally enforceable contract must include, which leaves it up to the arbitration court to untangle the mess that can result. "The contract makers too often do not engage the expertise of lawyers, which would make the whole process simpler," she said.

Therefore, the court, which was established during Soviet times, has a much expanded responsibility. In the "old times," as many today refer to the Soviet era, when all property was state-owned, all transfers of property or government contracts were handled with the same document. "If there were disagreements, they were over what factory was owed what," said Ms. Panova.

Ms. Panova, whose firm specializes in arbitration cases, mostly handles disagreements between private businesses. However, she said the court also continues to deal with matters of controversy between various government bodies and administrative levels.

"After the division of government property [with independence] many disputes occurred regarding true ownership of various pieces of property. These were especially prevalent between city and raion (district) administrative bodies," explained Ms. Panova. "Today it happens less, but in 1992-1993 they were very common."

The court also rules on disputes between government administrative bodies and legal individuals. An oblast or raion administrative head may issue a decree that a legal individual, whether a business or a person, believes is contrary to or not in compliance with a law of Ukraine. The issue can be brought before an arbitration judge to settle the matter.

Not everyone has access to the arbitration court. The court will only review applications by "legal persons," that is, entities that have a registered status as such with the Ukrainian government. They can be individuals, organizations, businesses or government administrative bodies. They must fulfill government requirements as specified by the laws of Ukraine and must report their dealings in Ukraine, which includes financial reports, on a regular basis.

If one of the parties to a dispute is not a registered legal person, the matter can be referred only to the Court of General Competency, which handles civil and criminal matters.

Typically, a matter that ends up in arbitration court begins when an individual asks a lawyer (or "yurist," as they are referred to in Ukraine) to file documents on his behalf to register a complaint.

First, the lawyer determines whether the complainant is a legal person before the state, which determines whether it is a matter for the general court or for the arbitration court. Then, according to Ms. Panova, notice is sent to the individual being charged with breach of contract to present the evidence. This does not always result in a court appearance.

"We often write into the notification a way in which the matter can be resolved out of court, and a timetable for resolution if it involves money, which usually it does," explained Ms. Panova. If both sides agree, a new contract to satisfy both sides is drawn up and the matter goes no further.

If the other party does not reply within a month in a manner agreeable to the complainant, documents are prepared by the lawyer and application is made to the arbitration court to hear the dispute.

The court clerk, who works for the head judge much as in the United States, sets the matter for hearing. At the hearing only lawyers are present along with the judge. "My client is never present," said Ms. Panova. He gives me power of attorney and all powers needed to get the matter resolved." After the hearing the judge has five working days to hand down a decision, which includes the terms and the timetable for resolution.

The judges are guided by two laws in handing down their decision: the law on arbitration courts and the law on procedure of the arbitration process. The former defines the responsibilities of the judge and the court; the latter explains the procedures for resolving disputes.

The decision can be appealed to the High Court of Arbitration, whose presidium is the highest court in the arbitration system, but suits are rarely accepted unless they involve unusual circumstances or "government interests," as Ms. Panova explained.

If the ruling imposed by an arbitration judge is not complied with, the other party still has means by which to achieve equity. If it is a money or property matter, which is, again, the overriding concern of those involved in arbitration suits, the party seeking the remedy can turn to the arbitration court again after a month to seek relief.

The court can then order liquidation of bank accounts and assets, and even declare the party bankrupt. When arbitration court orders are not followed the matter becomes one for the general court's criminal division.

One of the more interesting aspects of this system is the degree to which the lawyers who bring suits for clients before the arbitration court are held liable when they lose. It also shows to what extent they must be assured of their clients worthiness before they accept a case. "If we lose the case because it is our fault," explained Ms. Panova, "we are financially responsible for what our client owes." This is due in part to the overriding power of attorney granted them.

She said it is the lawyer's responsibility to determine the facts, properly prepare the documents, and be aware of applicable laws, which she said today is a major headache. "The law-making process in Ukraine is such that laws are made and then changed overnight. It is absurd and unheard of in other countries."

She said three criteria exist that determine whether the negative outcome of an arbitration suit was the fault of the attorney: whether the lawyer chose the right tactic to get to the core of the disagreement; whether the lawyer was ignorant of a law that ruled in the case; and whether the lawyer was responsible for missing a hearing, that resulted in forfeiture of his client's rights and a ruling for the other party.

Ms. Panova said the system is far from perfect. She complained that the lack of a court reporter at hearings allows for misunderstandings to occur, and that the lack of a process of fact determination left too much discretion with the judge.

However, she leveled her strongest criticism at a policy of altering contracts because they are in the government's interest. "Today our biggest problem is that government interests take precedence over contracts."

She gave a personal example of how this works. In a case she was handling, she represented a Latvian oil firm that in 1993 had sold gas to a Ukrainian state farm and never received payment after making delivery. A suit was brought before the arbitration court that decided for her client. Payment never followed and the suit finally ended up in the High Court of Arbitration. That court ruled for the state farm based on an edict by President Leonid Kuchma that certain interests must be defended because they are state interests, explained Ms. Panova. "I do not know of a single country, which calls itself a free market, that uses state interests as an excuse to cancel a contract," she said.

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