Ukraine. Taras Dumych. Wolf Theiss Kiev. Law firm bio. Olena Kravtsova. Wolf Theiss Kiev
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1 Ukraine Taras Dumych Wolf Theiss Kiev Law firm bio Olena Kravtsova Wolf Theiss Kiev Law firm bio 1. What are the current challenges to enforcement of multi-tiered dispute resolution clauses? According to Ukrainian law and current court practice, Ukrainian courts are not entitled to reject a statement of claim (lawsuit) solely based on the fact that the parties did not follow contractual provisions in the alternative dispute resolution stage prior to commencing litigation. This is based on the following considerations. According to Article 124 of the Constitution of Ukraine, justice in Ukraine is administered by courts only. Delegation of functions of courts, and also appropriation of these functions by other bodies or officials is prohibited. The jurisdiction of courts covers all legal relationships which arise in Ukraine. The official interpretation of provisions of section 2 of Article 124 of the Constitution of Ukraine (a case on pre-trial settlement of disputes) was made by the Constitutional Court of Ukraine (the "CCU") in its Decision No.15-рп/2002 of 9 July 2002 (the "CCU Decision"). The Constitutional Court of Ukraine exclusively exercises the constitutional jurisdiction in Ukraine; it is entitled to consider cases connected with the interpretation of Ukraine's Constitution and laws (in particular, a law's compliance with Ukraine's Constitution). The CCU inter alia stated the following: 214
2 "[Provisions on] mandatory pre-trial settlement which exclude the possibility of accepting a claim for consideration and effectuation of justice by a court violate the right of a person to court protection. A possibility to use pre-trial dispute settlement may serve as an additional mechanism of legal protection provided by the state to the participants of legal relations. Given the need to increase the level of legal protection, the state may encourage the resolution of disputes through pre-trial procedures, however, their application is a right rather than an obligation of a person who needs such protection. The right to court protection does not deprive the participants of legal relations of a pre-trial dispute settlement option. Such option may be stipulated by a civil-law agreement when the participants of legal relations voluntarily choose a mechanism for protection of their rights. Taking into account the above provision of section 2, Article 124 of the Constitution of Ukraine, the expansion of court jurisdiction on all legal relations in the state, from the point of view of constitutional interpretation should be understood as follows: the right of a person (a Ukrainian national, a foreigner, a stateless persons, a legal entity) to turn to court for dispute resolution may not be limited by law [(i.e. statutes)] or by other legal acts. A provision on pre-trial dispute settlement based on free will of the participants of legal relations, stipulated by law or an agreement, does not limit jurisdiction of courts and the right to court protection." Based on this decision state courts in Ukraine consistently refuse to recognize and enforce obligatory pre-trial (or alternative) dispute settlement obligations provided in the relevant contractual clauses. Although agreements of parties providing for the alternative dispute resolution stage prior to commencing litigation are recognized as lawful and valid, Ukrainian courts, as a matter of practice and for the reasons mentioned above, ignore them. As a result, if a contractual party applies directly to the Ukrainian court skipping the pre-trial stage provided by the agreement, the court would accept the claim and consider it in any event (even if the other party insists on the application of the pre-trial procedure provided by the agreement). The court would not stay proceedings until the parties have completed the prior stages, unless both parties request the court to do so. The Ukrainian law provides that an international arbitration in Ukraine may be conducted either by a tribunal set up specifically for a given case (ad hoc arbitration), or by an arbitral institution. The Law of Ukraine "On International Commercial Arbitration" No 4002-XII dated 24 February 1994 (the "ICA Law") provides for the establishment of the following two permanent Ukrainian arbitral institutions: the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (the "ICAC") and the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry (the "MAC"). 215
3 Please note that access to the awards of ICAC and MAC is limited as such awards are considered private and confidential. However, from time to time, ICAC and MAC publish in their official publications some of their awards demonstrating their established practice with respect to particular issues. Based on the available decisions and unofficial information obtained from the above arbitral institutions, the following trends with respect to the enforcement of multi-tiered dispute resolution clauses should be mentioned: Around up to 2008, the Ukrainian arbitral institutions generally did not pay sufficient attention to contractual provisions on pre-trial procedures (especially if such provisions did not expressly set out terms and clear procedure for such pretrial procedures). The arbitral institutions accepted cases for consideration and ruled on the existence of their jurisdiction to consider the cases on their merits on the basis of the view that "the jurisdiction cannot depend on the defendant's wish to escape responsibility under pretence of non-compliance with the pre-trial procedure of resolution of the dispute". Moreover, at that time, there was no clear answer to the question of whether the CCU Decision was applicable to cases considered by the arbitral institutions. The abovementioned practice was changed after the Supreme Court of Ukraine, which is the highest instance court in Ukraine, issued its decision of 20 February 2008 in the case of International Port Services Ltd. v. SE "Odessa Sea Trade Port". The Supreme Court of Ukraine satisfied a claim of the SE "Odessa Sea Trade Port" on cancellation of the arbitration award of the ICAC on the basis that "the arbitration procedure was violated since the fact of compliance with the terms of arbitration agreement regarding pre-trial dispute settlement has not been verified. The evidence that the parties had bilateral negotiations on the subject matter of the dispute and that the dispute was resolved following such negotiations has not been submitted to the court by the claimant". From the point of view of international arbitral practice such an approach seems to be quite logical and consistent. At the same time, the position of the Supreme Court of Ukraine appears to contravene the above-discussed CCU Decision. This may be explained by the fact that international arbitral institutions, unlike state courts, are not qualified to exercise justice and do not serve as guarantors of the "right to court protection". The role of international commercial arbitration comes down to the creation of a method of dispute resolution as an alternative to adjudication by state courts. Courts of international commercial arbitration have wide discretion when considering disputes while the state has a limited control function in the form of recognition or revocation of arbitral awards and secondary measures taken by state courts in support of international arbitral proceedings (e.g. attachment of assets, etc.). In any case, the Supreme Court of Ukraine has endorsed a particular position and this position fully meets the principle of the freedom of contract. 216
4 To our knowledge, currently ICAC and MAC have a rather stable practice as to the enforcement of multi-tiered dispute resolution clauses. In particular, in case an agreement between the parties contains clear provisions on the pre-trial dispute resolution procedure(s), ICAC and MAC do not initiate arbitration proceedings until the claimant provides evidence that a pre-trial dispute resolution procedure has been duly complied with. 2. What drafting might increase the chances of enforcement in your jurisdiction? As mentioned above, the state court of Ukraine consistently refuses to acknowledge and enforce pre-trial (or alternative) settlement obligations even if they are expressly stipulated in the dispute resolution clauses. Therefore, in our view, no drafting suggestions would increase the chance of enforcement of multi-tiered dispute resolution clauses, unless the court's approach fundamentally changes. Notwithstanding the fact that generally Ukrainian arbitral institutions tend to enforce multi-tiered dispute resolution clauses, enforceability of each such clause will, in our view, largely depend on its wording. Please note, that the ICAC and MAC web-pages do not contain any recommended wording for multi-tiered dispute resolution clauses (that would be deemed acceptable and enforceable by the arbitral institutions). Due to the absence of access to all awards of ICAC and MAC, we are not able to comment on the position that the arbitral institutions might take with respect to drafting suggestions. At the same time, below are our recommendations on the preferred wording for multi-tiered dispute resolution clauses that we usually provide to our clients. As a general rule, contractual parties should do everything possible to avoid the risk of ambiguity in construction of a dispute resolution clause. Unclear wording causes uncertainty and delay and might hinder or even compromise the dispute resolution process. When incorporating a multitiered dispute resolution clause into their contract, the parties are advised to take account of any factors that may affect enforceability of such clause under applicable law. From the Ukrainian law and practice point of view, we recommend that multi-tiered dispute resolution clauses be based on the following main principles: Certainty of procedure. Terms and provisions regarding negotiations, mediation and/or any other pre-trial procedure should be sufficiently detailed and certain to eliminate the possibility for parties to argue that their obligations are unclear. For example, a mediation procedure should refer to a particular mediation process or a specific mediation services provider. The clause should not leave key procedural issues unspecified (such as the manner in which the mediator is selected and appointed, etc.). 217
5 Mandatory language. In our view, if the parties intend for the pre-trial procedure(s) to be mandatory and a condition precedent to arbitration, the relevant provisions should be drafted in a way that makes such conditions compulsory (for example, the verb must should be used instead of may ). By employing noncompulsory language ("may"), the parties only acknowledge that the pre-trial proceedings are available to them at any time, even though they are not obliged to initiate such proceedings. Deadlines. We recommend setting a clear time period, during which the pre-trial stage (or each of the prior stages) should take place and before the end of which the arbitration may not be initiated. Fair behaviour of the parties. The multi-tiered dispute resolution clauses should identify a standard of parties' behaviour, namely, fairness, honesty and open negotiations aimed at resolving a dispute. If a claimant, acting in good faith, informs its counterparty about the claim and takes all reasonable action for the initiation of pre-trial procedures, but the counterparty (as the case may be) ignores this initiative, the claimant should not be deprived of the opportunity to use the arbitration mechanism. Connection to arbitration clause / arbitration agreement. We recommend the pretrial dispute resolution provisions should be part of the arbitration clause / arbitration agreement agreed by the parties or clearly refer to it. In such a case the possibility and the right to initiate arbitration will be clearly conditioned on prior pre-trial actions which, arguably, become a biding contractual obligation of the parties. 3. If your courts have enforced such clauses, how have they done so? As mentioned above, the state courts of Ukraine consistently refuse to recognize and enforce pretrial (or alternative) settlement obligations (even obligatory) provided by the parties in dispute resolution clauses. Therefore, if a contractual party applies directly to the Ukrainian court skipping the pre-trial stage provided by the agreement, the court would accept the claim and consider it on the merits in any event (even if the other party insists on application of the pre-trial procedure provided in the agreement). In case an agreement between the parties contains a clear provision(s) on commencement of a pre-trial dispute resolution procedure(s), the major Ukrainian arbitral institutions ICAC and MAC do not initiate arbitration proceedings until the claimant provides evidence that the pretrial commitments were duly complied with. 218
6 4. Please give an example of a clause that has been found to be, and remains, enforceable in your jurisdiction. Not applicable for the reasons discussed above. Please find below an example of the multi-tiered dispute resolution clause providing for the pretrial mediation procedure. The proposed clause creates an obligation for parties to first refer a dispute for resolution by the Ukrainian Mediation Center (UMC) under its Rules. In addition, the clause provides that the arbitration proceedings may not be commenced until the agreed 45-day period (or other period that the parties may additionally agree on) has expired following the filing of the Request for Mediation. The clause also establishes the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry as the forum for final settlement of disputes. "In the event of any dispute arising out of or in connection with the present contract, or the interpretation, execution, breach, termination or invalidity thereof, the parties, acting in good faith, must first refer the dispute to proceedings under the Rules of Ukrainian Mediation Center (UMC). Only in case the dispute has not been settled pursuant to the said Rules within [45] days following the filing of a Request for Mediation or within such other period as the parties may agree in writing, such dispute must thereafter be finally settled by the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry in accordance with its Rules." 219
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