Lexology - COMMERCIAL CONTRACTS 2021

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Contract formation

Good faith in negotiating

Is there an obligation to use good faith when negotiating a contract?

The obligation to act in good faith is a cornerstone of Ukrainian private law, explicitly stated in article 3 of the Civil Code of Ukraine, dated 16 January 2003, as amended (the Civil Code). In addition, according to article 509 of the Civil Code, the contract shall be based on the principles of good faith, reasonableness and fairness, the meaning of which, however, is not specified by law. Although Ukrainian law does not contain special rules on good faith in negotiations, in practice a reference to the general principle of good faith can be used to protect the rights that may be violated during negotiations.

‘Battle of the forms’ disputes

How are ‘battle of the forms’ (ie, where the parties submit different contract forms) disputes resolved in your jurisdiction?

Due to the formalistic approach towards the conclusion of contracts, a ‘battle of forms’ situation is very unlikely to occur in Ukraine. According to article 642 of the Civil Code, the commitment to conclude an agreement must be complete and unconditional. Any response about consent to conclude an agreement upon other terms and conditions than were proposed shall be a refusal of the offer received and at the same time shall be a new offer to a person who made the previous offer.

Language requirements

Is there a legal requirement to draft the contract in the local language?

No, the parties are free to draft a contract in any language. However, to enforce the rights and obligations under a contract before a Ukrainian court, it may be necessary to have such a contract translated into Ukrainian.

Signatures and other execution formalities

In what circumstances are signatures or any other formalities required to execute commercial contracts in your jurisdiction? Is it possible to agree a B2B contract online (eg, using a click-to-accept process)? Does the law recognise the validity of electronic and digital contract signatures? If so, how are they treated in comparison to wet-ink signatures?

As a general Civil Code rule, the contract may be made orally or in writing (including electronically). The parties have the right to choose the form of the contract, unless otherwise provided by law. The contract shall be considered to be made in writing if its content is recorded in one or more documents (including electronic) – these may include letters, telegrams or emails exchanged by the parties.

The contract shall also be considered to be made in writing if the will of the parties is expressed by means of teletype, electronic or other technical means of communication.

According to article 208 of the Civil Code, contracts between (1) legal entities, (2) a legal entity and an individual (with some exceptions), and (3) individuals for an amount exceeding 20 times the non-taxable minimum income of citizens (approximately €10) shall be made in writing.

The use of facsimile reproduction of a signature by means of mechanical, electronic or other copying, electronic signature or other analogue of a handwritten signature is allowed in cases established by law, or if the parties have explicitly agreed to this in writing and attach the consent to do so with examples of their handwritten signatures.

Though some transactions are not legally prohibited from being signed using an electronic signature, this form of signature nevertheless cannot be used due to certain technical or practical limitations. For example, agreements on sale and purchase of real estate and agreements on lease of certain real estate for three and more years cannot be signed electronically because they require notarisation, and the notarial process in Ukraine is not yet compatible with the electronic signatures and electronic documents flow. (Civil Code of Ukraine, dated 16 January 2003, as amended; Law of Ukraine on Electronic Trust Services No. 2155-VIII dated 5 October 2017, as amended.)

Statutory controls and implied terms

Controls on freedom to agree terms

Are there any statutory or other controls on parties’ freedom to agree terms in contracts between commercial parties in your jurisdiction?

According to article 627 of the Civil Code of Ukraine, dated 16 January 2003, as amended (the Civil Code), the parties are free to conclude an agreement, to select a counterparty and to determine the provisions of the agreement. However, general limitations are imposed on the parties’ freedom pursuant to article 203 of the Civil Code:

the contract cannot contradict the legislation or moral principles of Ukraine;
a person who concludes a contract must have a required scope of civil capacity (eg, as a general rule, an individual who has reached the age of eighteen has full civil capacity, which is required for most contracts; as for the legal entity, its civil capacity is exercised through its governing bodies, which act in accordance with the constituent documents and the law);
the contract must be effected in the form established by law; and
the transaction must be aimed at realistic occurrence of legal consequences stipulated by it.

Standard form contracts

Are standard form contracts treated differently?

The rules applicable to standard form contracts are much the same as those regarding individually negotiated contracts. However, some aspects need to be highlighted.

Such a contract may be substituted or terminated upon the demand of the joining party, provided it is deprived of its usual rights and the agreement excludes or restricts the responsibility of the other party for violating an obligation or contains other provisions obviously burdensome for a joining party.

Implied terms

What terms (particularly any warranties around the quality of products or services supplied) are implied by law into the contract? Is it possible to exclude these in a commercial relationship?

The rules of the Civil Code on sales apply to supply contracts. According to these rules, the supplier or seller is liable to the buyer for any breach of quality warranted as well as for any defects that would negate or substantially reduce the value of the product or its designated purpose. However, the parties are free to exclude these rules, but an exclusion would be void if the supplier or seller has concealed the existence of the defect intentionally.

Vienna Convention

Is your jurisdiction a signatory to the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention)?

Yes, Ukraine is a signatory to the Vienna Convention.

Good faith in entering and performing

Is there an obligation to use good faith when entering and performing a contract?

Yes. The obligation to act in good faith is a cornerstone of Ukrainian private law, explicitly stated in article 3 of the Civil Code. In addition, according to article 509 of the Civil Code, the contract shall be based on the principles of good faith, reasonableness and fairness, the meaning of which, however, is not specified by law.

Limiting liability

Prohibition on exclusions and limitations

What liabilities cannot be excluded or limited by a supplier in a contract?

According to article 614 of the Civil Code of Ukraine, dated 16 January 2003, as amended (the Civil Code) and based on the freedom of contract principle, a limitation of liability is valid except for damages caused by wilful intent, for which a waiver would be null and void.

Financial caps

Are there any statutory controls on using financial caps to limit liability for breach of contract?

Due to the principle of freedom of agreement, the parties are free to limit liability for breach of contract. Nevertheless, it is not possible to limit the compensation of damages caused by wilful intent.

Indemnities

Are there any statutory controls on indemnities used to cover liability risks in contracts?

Ukrainian law provides no general statutory controls for indemnification clauses to cover liability risks in contracts. However, analogous to article 614 of the Civil Code, such an indemnification clause would not be considered applicable in the case of wilful intent of the indemnified party.

Liquidated damages

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

Ukrainian law does not explicitly provide for the possibility of liquidated damages, but does provide, in article 549 of the Civil Code, the possibility of a fine, which involves practically the same principle. The difference between the two concepts is that a fine is to be paid due to the simple fact of breach of the contractual duty, not the damages suffered. The parties are free to determine the amount of the fine to be paid in case of breach of duty. However, under article 551 of the Civil Code the amount of the fine may be decreased by the court decision if it significantly exceeds the amount of losses, and against other essential reasons.

Payment terms

Statutory time limits on payments

Are there statutory time limits for paying invoices? Is it possible to agree a different payment period?

The parties are free to agree the time limit for payment, in line with the freedom of contract. Where no time for payment is stated in the contract or evident from the nature of the legal relationship, the obligation may be discharged or called in immediately.

Late payment interest

Is statutory interest charged on late payments? Is it possible to agree a different rate of interest?

According to article 625 of the Civil Code of Ukraine, dated 16 January 2003, as amended (the Civil Code), a debtor that fails to fulfil the monetary obligation will have to pay the debt amount taking into account the established rate of inflation for the whole term of delay plus 3 per cent annual interest on the late amount upon the creditor’s claim, unless another percentage interest is established by the agreement or the law. However, under article 551 of the Civil Code the amount of the fine may be decreased by the court decision if it significantly exceeds the amount of losses, and against other essential reasons.

Civil penalties

What are the civil penalties for failing to comply with statutory interest rate or late payment of invoices?

Failing to comply with statutory interest rate or late payment of invoices may lead to claims for damages. After a reasonable deadline for payments, the other party has a right to terminate or withdraw from the contract.

Termination

Implied terms

Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?

As a general rule, which applies to all types of contracts, the agreement may be amended or cancelled by the court decision on the request of one of the parties in case of significant violation of the agreement by the other party and in other cases established by the agreement or the law.

Special rules applied to supply contract terminations are among the rules established regarding the purchase and sale agreement under article 712 of the Civil Code of Ukraine, dated 16 January 2003, as amended (the Civil Code). Hence, the buyer has a right to terminate the supply agreement and claim the money paid for the goods back in case of significant violation of the requirements concerning the quality of goods under article 678 of the Civil Code. Such right of the buyer cannot be limited by the agreement. Similar provision applies in case of incompleteness of goods according to article 684 of the Civil Code, unless otherwise established by the agreement.

Also, the seller (supplier) has the right to terminate a contract if the buyer refuses to accept and pay for the goods according to article 692 of the Civil Code.

Notice period

If a contract does not include a notice period to terminate a contract, how is it calculated?

It appears there is no general rule establishing notice periods. The notice period to terminate a contract depends on the contract type and the specific circumstances of the case.

For example, under article 763 of the Civil Code either party to an indefinite lease agreement may terminate the agreement at any time by a written one-month notification of the other party thereof; and in case of a real property lease, a three-month notification.

Automatic termination on insolvency

Will a commercial contract terminate automatically on insolvency of the other party?

The insolvency of, or the opening of bankruptcy proceedings over, a contractual party does not apparently automatically lead to the termination of a contract.

Termination for financial distress

Are there restrictions on terminating a contract if the other party is in financial distress?

Generally, there are no legislative restrictions on terminating a contract if the other party is in financial distress. However, it is possible to include restrictions on terminating a contract if the other party is in financial distress as a separate clause into the contract. Also, a contract party will be able to terminate the contract where there is a continued violation of the contract, for example in the case of payments delay.

Force majeure

Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?

Force majeure is recognised under Ukrainian law.

The general principle established in article 617 of the Civil Code provides that a person who violated the obligation is released from responsibility for its violation if he or she proves that this violation was due to a contingency or force majeure.

In addition, force majeure suspends a limitation of action under article 263 of the Civil Code.

Subcontracting, assignment and third-party rights

Subcontracting without consent

May a supplier subcontract its obligations under the contract without seeking consent from the other party?

The general rule established by article 528 of the Civil Code of Ukraine, dated 16 January 2003, as amended (the Civil Code) determines that the debtor can assign fulfilment of his or her obligation to another person, unless the contract conditions, legislation or the essence of the obligation result in the debtor’s responsibility to fulfil this obligation himself or herself.

Statutory rules

Are there any statutory rules that apply to subcontracting in your jurisdiction?

The most relevant rules on subcontracting under Ukrainian law apply to the liability of the supplier for any damage caused by the subcontractor. Article 618 of the Civil Code contains the basic rule that the debtor is responsible for the violation of the obligation by other persons who were entrusted with its fulfilment.

This general rule applies to all types of contracts for which no specific provision to the contrary is provided by law. However, it is possible to limit or exclude such liability in advance.

Also, special provisions on subcontracting for certain types of contract exist in the statutory rules. These are, for example, the provision on subcontractor under contractor's agreement (article 838 of the Civil Code), sub-commission (article 1015 of the Civil Code), sub-licence (article 1108 of the Civil Code) and commercial sub-concession (article 1119 of the Civil Code).

Assignment of rights and obligations

May a party assign its rights and obligations under the contract without seeking the other party’s consent?

The general rule, established by article 516 of the Civil Code, provides that the creditor in obligation is replaced without the consent of the debtor unless otherwise is provided by law or by the contract. On the contrary, a general rule concerning the debtor in article 520 of the Civil Code prohibits replacement of the debtor without the creditor's consent.

What statutory controls apply to the assignment of rights or obligations under a supply contract (for example, in relation to the assignment of receivables)?

The general rules provided by the Civil Code apply to the assignment of rights or obligations under a contract unless otherwise is provided by law or by a contract itself. The new creditor receives all the rights of the original creditor for the obligations that existed at the time of transfer of these rights (article 514 of the Civil Code).

The contract on assignment of the right to claim is concluded in the same form as the original contract (article 513 of the Civil Code).

Enforcement by third party

How may a third party enforce a term of the contract?

A third party may only enforce a term of a contract to the extent such contract is structured as a true contract in favour of the third party. Under article 636 of the Civil Code, the third party may claim fulfilment of the agreement to the third person’s benefit, unless otherwise is established by the agreement or the law or results from the essence of the agreement. From the moment a third person expressed its intention to exercise its right, the parties may not terminate or amend the agreement without the third person’s consent, unless otherwise is established by the agreement or the law. However, the existence of an enforceable third-party right is not presumed, and the burden of proof in respect of the existence of such right lies with the third party claiming such direct right of enforcement.

Disputes

Limitation periods

What are the limitation periods for breach of contract claims? Is it possible to agree a shorter limitation period?

Under article 257 of the Civil Code of Ukraine, dated 16 January 2003, as amended (the Civil Code) a general limitation of action shall be established for three years.

A one-year limitation of action shall apply to claims:

for recovery of a forfeit (penalty, fine);
for transfer of the buyer’s rights and obligations to a co-owner in case of violation of a preferential right to buy a share in the joint shared ownership right;
in connection with defects of sold goods;
for cancellation of a contract of donation; and
in connection with freight or mail transportation.

A five-year limitation period shall apply to claims for invalidation of a transaction concluded under the influence of violence or deceit.

A ten-year limitation period shall apply to claims for application of consequences of a void transaction.

A limitation period established by law cannot be reduced by agreement of the parties – it may only be increased.

Choice-of-law clauses

Do your courts recognise and respect choice-of-law clauses stipulating a foreign law?

The Law of Ukraine on International Private Law No. 2709-ІV dated 23 June 2005, as amended (Law of Ukraine on Private Law) allows the choice of a foreign law if:

there is a foreign element in the relationship characterised by one or more of the following:
at least one participant in the legal relationship is a citizen of Ukraine residing outside Ukraine, a foreigner, a stateless person or a foreign legal entity;
the object of legal relations is located on the territory of a foreign state;
a legal fact that creates, changes or terminates legal relations has taken place or takes place on the territory of a foreign state;
such a choice of law is allowed by the Law of Ukraine on Private Law. For example, article 38 of the Law of Ukraine on Private Law establishes that a court shall apply the law of Ukraine to relations concerning immovable property in Ukraine despite the choice of law made by the parties.

In addition, the court has a right to reject the use of a foreign law if its application leads to consequences that are clearly incompatible with the principles of law and order of Ukraine (the principle of public order).

Do your courts recognise and respect choice-of-jurisdiction clauses stipulating a foreign jurisdiction?

Ukraine has entered into various bilateral and multilateral international agreements concerning the recognition of choice-of-jurisdiction clauses. If the case falls out of the scope of these agreements, Ukrainian law applies.

A general rule under article 22 of the Civil Procedural Code of Ukraine, dated 18 March 2004, as amended states that in cases established by law a dispute falling within the jurisdiction of a general court may be transferred by agreement of the parties to a court of another state. However, Ukrainian courts have exclusive jurisdiction over the cases mentioned in article 77 of the Law of Ukraine on Private Law (eg, if the case concerns the issue of securities issued in Ukraine; cases concerning adoption that has been or is being carried out on the territory of Ukraine).

Efficiency of local legal system

How efficient and cost-effective is the local legal system in dealing with commercial disputes?

The Ukrainian court system is considered to be less expensive and more time-saving, especially after the civil procedural reform of 2017, compared to the common law countries' system.

Nevertheless, considering a complex legal case can take two or three years in the first instance court. In general, consideration of a case takes from six to 12 months regarding a decision in the court of first instance.

New York Convention

Is your jurisdiction a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Which arbitration rules are commonly used in your jurisdiction?

Ukraine is a signatory to the New York Convention.

The International Commercial Arbitration Court (ICAC) at the Ukrainian Chamber of Commerce and Industry (UCCI) is the most popular arbitral institution in Ukraine. The most commonly used arbitration rules are the rules of the ICAC.

Remedies

Available remedies

What remedies may a court or other adjudicator (eg, arbitral panel, mediator – avoid discussing sectoral or industry-specific adjudication) grant? Are punitive damages awarded for a breach of contract claim in your jurisdiction?

When issuing judgments on the merits, the court can issue judgments for specific performance, compensation, declaratory judgments and cease-and-desist orders, changing a legal right or status.

Punitive damages are not awarded, unless the parties included a provision on penalties in the contract. However, the amount of the forfeit may be decreased by the court decision if it significantly exceeds the amount of losses, and against other essential reasons. (Civil Procedural Code of Ukraine, dated 18 March 2004, as amended.)

Update and trends

Key developments of the past year

Are there any other current developments or emerging trends that should be noted?

There are no notable current developments or emerging trends in the contractual sphere in Ukraine.

Coronavirus

What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

Please see certain amendments to commercial and civil codes following the covid-19 pandemic via the following link: https://www.asterslaw.com/press_center/legal_alerts/amendments_to_commercial_civil_and_administrative_codes/.

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Lexology - COMMERCIAL CONTRACTS UKRAINE 2021