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Many transactions with the participation of western businesses in Ukraine would involve a non-resident company as one of the parties to contractual relations.

Many transactions with the participation of western businesses in Ukraine would involve a non-resident company as one of the parties to contractual relations. And the real estate sector is not an exception with regard to offshore arrangements being particularly widely spread in lease contracts, relating to both commercial and residential properties. Regarding leases, landlord-tenant disputes are not rare. And if the parties do not very often bring legal actions against each other, they often prefer to discuss with their lawyers their chances to win a case in court.

As we always do, we would like to bring to light an issue we come across in our practice and of which we think there is a general lack of knowledge on the part of those who should be aware of the issue.

Normally, the western form of property leases involves at least one non-resident legal entity. Usually such leases include a clause referring disputes to a foreign, i.e. non-Ukrainian court. This is not always justified considering the cost involved. Depending on the type of legal suit, sometimes it is quicker, simpler and cheaper to sue in the Ukrainian court. Knowing this, a lot of Ukrainian companies, including western businesses operating as Ukrainian legal entities, provide a Ukrainian court jurisdiction clause or presume that in the absence of a foreign jurisdiction clause they can sue in the Ukrainian court if they wish to do so. But there are a few points one should take into account.

In the following article we would like to draw your attention to the issue of jurisdiction.

Under the current Arbitration Proceedings Code of Ukraine of 06.11.91, legal disputes between legal entities are considered by arbitration courts of Ukraine. Regarding territorial jurisdiction, relevant provisions of article 15 of the Code read as follows:

disputes relating to conclusion, amendment and abrogation of business contracts, disputes relating to invalidation of contracts are considered by the arbitration court at the place where the party responsible for performance - transfer of assets, execution of works, provision of services, payment of money - is located; disputes relating to the execution of business contracts, disputes based upon other grounds, as well as cases relating to invalidation of acts are considered by the arbitration court at the place where the defendant is located; disputes relating to the right of ownership to assets, disputes relating to return of assets from adverse illegal possession, disputes regarding prevention of hindrance to the use of assets, are considered by the arbitration court at the place where the assets are located, these disputes being subject to exclusive jurisdiction of arbitration courts of the Autonomous Republic of Crimea, regions, Kyiv and Sevastopol. The above is a set of relevant general rules relating to jurisdiction of the Ukrainian arbitration courts.

Under articles 1, 12-17 of the Arbitration Proceedings Code of Ukraine, foreign business entities are subject to the national regime of business disputes resolution. So, if, for example, a Ukraine-based tenant wishes to instigate legal proceedings against a non-resident landlord, it would be natural for the former to bring an action in the Ukrainian arbitration court. The same would apply if a local landlord wishes to sue a non-resident tenant.

The Supreme Arbitration Court of Ukraine issued its Explanation #01-6/1459 of 03.12.92, whereby disputes involving foreign business entities were subject only to jurisdiction of the Supreme Arbitration Court if:

relevant contract contains jurisdiction clause referring disputes to the Supreme Arbitration Court of Ukraine; there is an international agreement that provides for relevant disputes to be considered by the Supreme Arbitration Court of Ukraine; a defendant is situated in Ukraine, and there is no contractual jurisdiction clause, arbitration arrangement or international agreement. Thus, under the above Explanation of 03.12.92, if one of the above conditions is met, it was possible to sue a non-resident company in the Ukrainian arbitration court, although only in the Supreme Arbitration Court of Ukraine. Particularly, we would like to draw your attention to the point that if, say, a lease contract comprises a jurisdiction clause referring to the Supreme Arbitration Court of Ukraine, the latter would entertain a suit. In our view, even if the clause mentioned "Ukrainian court" without specifying the Supreme Arbitration Court, the latter would still hold itself competent to consider a case.

Later on, the Supreme Arbitration Court cancelled the above Explanation #01-6/1459 and issued Explanation #01-6/1025 dated 21.09.93, whereby disputes involving foreign legal entities in the absence of international agreements may be considered by arbitration courts of Ukraine subject to a proviso that enforcement abroad is not guaranteed.

On 18.11.97, the Supreme Arbitration Court issued Explanation #02-5/445 that introduced changes to the above Explanation #01-6/1025. In accordance with these changes, the current Explanation #01-6/1025 as amended reads that arbitration courts of Ukraine shall not entertain legal suits against non-resident legal entities unless otherwise provided by international agreements of Ukraine. This means to say that the Ukrainian arbitration court will entertain a suit against a non-resident company only if there is an international agreement between Ukraine and the country where this foreign entity is resident, and under this international agreement the Ukrainian arbitration court is considered to be a competent court due to agreement between the contractual parties or due to other reasons. Primarily, what is meant by international agreements is so-called legal assistance agreements, the number of which is very limited, comprising mainly former socialist countries. Ukraine does not have such agreements with developed western countries, to say nothing about offshore zones. Therefore, presently, unless there is a relevant international agreement, it is not possible to sue a non-resident company in a Ukrainian arbitration court. Also, one should note that the above Explanation would override a contractual jurisdiction clause, i.e. a Ukrainian arbitration court would not entertain a legal suit even if there is a jurisdiction clause in a contract referring disputes to Ukrainian arbitration court.

On 08.02.96, the Supreme Arbitration Court issued Explanation #02-5/62 that reaffirmed the above rule that Ukrainian arbitration courts are to hold themselves incompetent to entertain legal suits against non-resident legal entities unless there are applicable international agreements.

Therefore, the conclusion is that a legal entity, whether Ukrainian or foreign, cannot bring a legal action against a foreign legal entity in a Ukrainian arbitration court. The exception would be a rather limited number of countries with which Ukraine has so-called legal assistance agreements. This should be taken into account by those making international contracts as for some companies the above is beneficial, and for some it is not so good; but in any event, both the former and the latter should be aware for to be forewarned is to be forearmed. In our practice, we came across a number of companies which learned that they cannot sue a foreign entity in a Ukrainian arbitration court only from the arbitration court’s ruling declining a suit; and that was a surprise for them too. Although to get to know such matters is a thing to be done before a contract is made, not when you are preparing to sue.

If parties wish a dispute to be considered in Ukraine, the only alternative to arbitration courts would be ad hoc international commercial arbitration or International Commercial Arbitration Court, or Marine Arbitration Commission under the Chamber of Commerce and Industry of Ukraine. To provide for the jurisdiction of the above arbitration bodies, the parties have to specifically stipulate relevant arbitration arrangement either in the business contract or in a separate agreement.

The key difference is that the above mentioned arbitration bodies operate according to arbitration procedures; also the case is submitted to them subject to mutual agreement of the parties, whereas arbitration courts operate as normal state court bodies.

In the light of the above, we would recommend those making international leases in Ukraine to pay special attention to the issue of jurisdiction in case of a dispute. Although this would apply to any international business contract in Ukraine.

© 2000 Peter Hackett and Partners (05.08.2000)

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