1 How does an individual become taxable in your jurisdiction?
According to Ukrainian law, an individual can be considered a tax resident of Ukraine if he or she meets the Ukrainian tax residency criteria, which
are as follows:
• if the individual has a domicile in Ukraine;
• if the individual also has a domicile in another country, the individual is deemed a resident of Ukraine provided he or she has a permanent place of residence in Ukraine;
• if the permanent place of residence is also available in another country, the individual is deemed resident of Ukraine provided his or her centre of vital interests is situated in Ukraine (eg, the place of the permanent residence of the members of an individual’s family or the place of an individual’s registration as a business entity);
• if it is not possible to determine the actual centre of vital interests, or if the individual does not have a permanent place of residence in any country, the individual is deemed to be tax resident of Ukraine if he or she stays in Ukraine in excess of 183 days during a tax (calendar) year;
• if it is impossible to determine tax residency on the basis of the above provisions, then the individual will be a tax resident of Ukraine if he or she is a Ukrainian citizen;
• a person who fails to qualify as a Ukrainian tax resident will be considered a ‘non-resident’ for purposes of the Tax Code;
• the Tax Code also provides for a self-recognition procedure, according to which an individual can voluntarily elect to be a Ukrainian tax resident; and
• in conflict cases, the rules of the relevant double taxation treaties may be applied.
2 What, if any, taxes apply to an individual’s income?
In Ukraine, individuals are subject to personal income tax, regardless of whether they are tax residents or not. Individuals as tax residents of Ukraine are taxed on their worldwide income, while non-residents are taxed on their Ukraine-sourced income only. Ukrainian laws determine Ukraine-sourced income as income derived by an individual as a result of any business activity performed in Ukraine, which, inter alia, includes remuneration for work performed in Ukraine, whether paid by a Ukrainian
or a foreign company.
Both resident and non-resident individuals are taxable at the same tax rates, being 15 per cent and 20 per cent applied as follows:
• the 15 per cent rate applies to monthly income up to a threshold of 10 minimum wages per month (since 17 September 2015, 13,780 hryvnas);
• the 20 per cent rate is applicable to monthly income in excess of a threshold of 10 minimum wages per month.
The individual’s income is taxable whether it was obtained in cash or in kind. Taxable income includes employment income (with in-kind benefits), income from trading or professional activities (including operations with intellectual property), income from the alienation of property, winnings and prizes, insurance payments, interest and dividends, investment income and contributions to unqualified pension plans made on behalf of a taxpayer by another person or employer.
3 What, if any, taxes apply to an individual’s capital gains?
The general rate applied to employment income is 15 per cent (to monthly income not exceeding 10 minimum wages) and the 20 per cent rate applies to monthly income exceeding that threshold.
All passive income (including royalties, bank deposit interest, but excluding dividends, except for those paid out by joint investment institutions), and investment income is taxed at a 20 per cent rate. Dividends, paid out by resident CPT payers are taxed at a 5 per cent rate, and those paid out by non-residents at 15 per cent. Winnings and prizes are subject to 30 per cent tax by both residents and non-residents, except winnings in the state lottery and those received from a gambling organiser. As an exception, cash winnings in sports (other than remuneration to athletes) are subject to the standard 15 per cent and 20 per cent tax rate.
Gains derived from the sale of a real estate are not subject to tax if the sale takes place once during the year, provided the owner has held legal title for at least three years before the sale (the three-year ownership period does not apply to inherited property). The rate is 5 per cent if the taxpayer makes more than one sale per year. Gains derived from the sale of moveable property by a resident are subject to a 5 per cent rate; gains derived by a non-resident are subject to a 15 per cent or 20 per cent rate. As an exception, income derived by the taxpayer from the sale (exchange) during the year of one of the objects of personal moveable property, such as a car or motorcycle, is not subject to taxation. Sale of two or more motor vehicles by the same person during the year will be taxed at rates of 5 per cent for residents, and 15 per cent and 20
per cent for non-residents.
4 What, if any, taxes apply if an individual makes lifetime gifts?
In Ukraine, funds, property or property rights, and the cost of work or services presented to the taxpayer as a gift shall be taxable in the same way as inheritance.
Inheritance (real estate, chattels, securities, corporate rights, cash, insurance, etc) and gifts are taxable at the following rates:
• zero per cent if the recipient is a resident defined as a close relative (parent, spouse, children, etc);
• 5 per cent if the recipient is a resident not qualified as a close relative; and
• 15 per cent (or 20 per cent on income which exceeds 10 minimum wages per month) if the recipient (non-relative) is a nonresiden but the testator was a resident (or vice versa).
Please find the full chapter by clicking on the link below.
International disputes in the agrarian sector have always developed as a separate legal service segment. The international rules and institutions governing this area enjoy an incredible level of credibility and enforcement. Recent political changes affect agrarians and the nature of disputes that are unusual for Ukraine. Disputants expect and demand more from their legal advisors, especially when it comes to unsuspected difficulties and consequent losses. The UJBL tackles the recent state of play with arbitration challenges with AGA Partners, a bright Ukrainian team focused on sectoral legal assistance. What does the firm face in its client workflow, and how does it respond? We asked three partners:Aminat Suleymanova, Ivan Kasynyuk and Irina Moroz. This is what they told us.
UJBL:You are known for your sharp focus on international arbitration, especially soft commodities arbitration practice (agrarian sector). Can you tell us about recent developments in such arbitrations?
Aminat Suleymanova: AGA Partners has always occupied a unique niche in the legal services market. Indeed, we focus mainly in the agrarian industry, advising Ukrainian and international grain traders in the course of exporting agricultural commodities and resolving disputes that arise under sale contracts. In the last few years we have noticed a rise in the number of more complex cases in the agricultural sector, which entails a high standard of legal services and specific requirements to the role of legal adviser in resolving international disputes. The types of claims have also been in a state of flux: earlier, cases mostly concerned non-delivery or short delivery of goods, which are seen as quite common, and currently, cases have become more intricate, that is predetermined by recent legislative and geopolitical changes. Along with Ukrainian integration into the EU, agribusiness should satisfy high requirements to the quality of exported commodities, which often causes disputes. There are also a growing number of cases based on force majeure clauses, that arose after occupation of the Crimean Peninsula, introduction of restrictions on import of soft commodities to the Russian Federation, hostilities in the eastern part of our country. Moreover, the geopolitical situation in the world is unstable and a great number of sanctions introduced by the USA, the EU, Switzerland and other European countries cause complications in executing sale contracts and international money transfer. As a consequence, this gives rise to new types of disputes that arise under legislation on sanctions. Therefore, we can notice new categories of cases unusual for our jurisdiction, like peculiar force majeure, related to military conflicts and constant unpredictable political and economic changes in Europe and Asia. As a result, legal advisors should go in step and broaden their knowledge in order to comply with recent developments in the field of international trade and arbitration and be more flexible.
UJBL: What are the most typical requests made by your clients in this regard?
A. S.: Cases on non-delivery, short delivery and non-payment for the delivered goods remain the most common ones. The growing number of companies working in the international field of agribusiness causes an increase in supply and demand and huge market competition. Consequently, when traders are not satisfied with the initial contract price, they have more options in reselling the goods to the other party, and this leads to disputes. We have to point out that Ukrainian agricultural market players become more familiar with the principles of English law, which is most commonly applied in international trade and, consequently, it leads to an increasing number of more complicated disputes. The wide range of inquiries relate to whether a contract was actually concluded, as it might be concluded even without the signing of a single document by the parties. Moreover, we are often approached by our clients to give our opinion on whether the complicated political situation in Ukraine and hostilities in the eastern part of the country can be considered as force majeure. Of course, each such case has its peculiarities and each contract should be analyzed separately. The reasons for relying on force majeure regarding hostilities in Ukraine are very constrained. The trend shows that clients, while submitting cases to GAFTA and FOSFA arbitration, want to have constant legal advice of the highest quality.
UJBL: Does the current situation in Ukraine affect the number of applications to GAFTA and FOSFA arbitration institutions? What kind of challenges did the annexation of Crimea and occupation of the East bring to arbitration practice?
Ivan Kasynyuk: The current situation in Ukraine has no direct influence on the number of applications to the mentioned arbitration institutions, but we noticed a spike in the number of cases immediately after the annexation of Crimea in 2014. The general position under GAFTA and FOSFA contracts is that despite the difficulties in political and economic situation in Ukraine, changes in exchange rate, difficulties with the Ukrainian banking system, contracts shall be fulfilled and the parties should keep to their bargain. The parties can be discharged from their contractual obligations in very limited situations and under exceptional circumstances. Therefore, GAFTA and FOSFA arbitration institutions do not afford easy relief and/or remedy just because of the difficult current political and economic situation in Ukraine.
Irina Moroz: However, we have to point out that the annexation of Crimea imposes new challenges to resolution of investments disputes. We had a number of inquiries from clients that lost their assets in Crimea after its occupation, and we are pursuing new and efficient mechanisms of investment dispute resolution related to the compensation of financial losses sustained by legal and natural entities after expropriation of property in Crimea.
We expect the number of claims to investment arbitration institutions to rise, as it is obvious that there are a significant number of investors who suffered huge damages after the annexation of Crimea and many of them are now in the process of drafting claims to submit them to international arbitration institutions.
UJBL: Which cases have been the most significant for your firm to date, and why?
A. S.: We have no particular case we consider the most significant, as all our clients and all cases we had are very important to us, but we can provide two examples to illustrate the importance of our legal role on the market. The first is the contract with an overall value of USD 26.5 billion between the State Food Grain Corporation of Ukraine (SFGCU) and China National Machinery Industry Complete Engineering Corporation (CMCEC) on cooperation in agriculture. Our company advises SFGCU, the largest state-owned company, under the contract of inter-government significance. The contract was concluded with the approval of the Chinese and Ukrainian governments to guarantee food security of the Republic of China and it is one of the most important contracts for the Ukrainian government.
The second one is the High Court of Justice case in a dispute between PC Rise and Nibulon S.A. The majority of grain industry players in Ukraine remember late 2010 well, when the Ukrainian Government introduced grain export quotas and subjected grain export to licensing. The quota allocation rules and procedures were changing on a daily basis, often at the last minute and in a very impracticable manner for business. As a result, only a few companies were able to obtain export licenses; the majority, including the largest international trading houses, were unable to do so and could not perform their contractual obligations, which led to a wave of terminations and cancellations of contracts.
A case arose at GAFTA where Nibulon S.A. claimed damages for non-delivery of corn due to prohibition of export from Ukraine. The GAFTA Award was reviewed at the High Court of Justice, where the relevant judgment was issued in 2015. The importance and the high role of this case is due to the fact that this matter has fundamentally influenced trading practice in the Black Sea region and we are proud to be involved in such a significant case.
UJBL: It is known that the arbitration award not always guarantees it will be executed. What experience do you have in the recognition and execution of arbitration awards?
I. K.: From the initial stage of our engagement, we think on the process of award execution, as we clearly understand that obtaining an arbitration award does not always mean real refunding to our client’s bank account. In this regard, our legal support always consists of a detailed action plan, including seeking of preliminary measures aimed at securing a claim where it is available and handling the arbitration process in a manner that guarantees unimpeded execution of arbitration award in any jurisdiction. As our experience shows, in 80% of cases companies voluntarily execute GAFTA and FOSFA arbitration awards. Besides, we have experience of successful recognition and enforcement of arbitration awards in Switzerland, Germany, Poland, Turkey, Russia, Ukraine and other jurisdictions.
UJBL: Your firm has considerable practical experience in the field of arbitration. Do you take part in the development of new legislation or new trade rules?
I. M.: Yes, we understand we should use our experience to help develop and improve the legal regulation of the agricultural sphere. Accordingly, we actively participate in enhancing trade rules and developing national legislation. For instance, our partner Ivan Kasynyuk is a member of the GAFTA Trade Committee and participates in elaboration of new legislation on cargo quality standards. Moreover, recently he became a member of the working group of the Ukrainian Ministry of Agrarian Policy and Food with the primary task to make improvements to Ukrainian legislation on transfer pricing.
I. K.: Our firm regularly participates in enhancing international trade rules and their unification at the request of international trade associations, in particular GAFTA, as well as at the request of our clients, who use these rules in their daily work.
UJBL: Currently Ukraine is on its path to integration with the EU, which opens up new markets for Ukrainian business and introduces new standards for producers of agricultural commodities. What are the most typical requests made by your clients in this regard?
A. S.: Ukraine’s integration into the EU poses new challenges for both the Ukrainian authorities and the agriculture business. We are constantly improving and deepening our knowledge of legislation on European integration and establishment of free trade zone, new quality requirements to exported goods, new standards and technical regulations. Our company shares its cumulative experience with its clients in order to make Ukrainian agribusiness meet EU standards and make their daily work in entering European markets easier.
UJBL: How do global arbitration developments affect Ukrainian cases? How did they shape your practice?
I. K.: It is an international trend to resolve international disputes that arise from the contracts of agricultural commodities at London-based arbitration institutions. Despite this, we can notice that resolution of disputes in other spheres tends to be replaced with arbitration institutions in Asian countries, which is explained by the growth of Asian economy and rising number of contracts for import and export of commodities concluded with Asian companies.
I. M.: While earlier London, Paris and Stockholm arbitration institutions were the most commonly pursued in the event case of international disputes, now we can see the tendency for contracting parties to refer disputes to arbitration institutions in Singapore and Hong Kong.
Our company supports the trend to meet the new needs of our clients in expanding their trade with Asian countries, and that is why we have started to step up our presence in this region.
UJBL: In September 2015 AGA Partners celebrated its 10th anniversary. What are your team’s main achievements?
A. S.: AGA Partners law firm has been included in the list of the leading companies in its practice fields from the moment of its establishment. We have had many achievements over the course of 10 years. We have significantly expanded the number of our clients, increased the number of our employees, and with their help, got into gear and work with a larger number of cases. We have carried out the restructuring of our company and changed the partnership structure. Our firm has also expanded by having a presence in new jurisdictions.
We are proud of the fact that the biggest Ukrainian based agribusiness companies are among our clients, and it is great achievement for AGA Partners to be the first Ukrainian law firm to be invited as speakers to GAFTA training courses.
I. K.: Moreover, Aminat Suleymanova, ma- naging partner, is acknowledged and recommended as one of the leading Ukrainian lawyers in agriculture and land legal practices. She was also named by the annual legal rating Ukrainian Law Firms. A Handbook for Foreign Clients among notable practitioners in the field of agribusiness, international arbitration and international trade. The firm is invariably ranked among the leading Ukrainian law firms in the areas of International arbitration, International trade and agribusiness.
AGA partners has been constantly developing not only its practice in GAFTA and FOSFA arbitrations, but also in other professional arbitrations. We recently expanded our activity with a private clients’ practice advising on international business structuring and taxation.
I. M.: Besides, the recognition of our firm’s legal practice in the field of international family law can also be considered a big achievement. Aminat Suleymanova was the first member of IAML (International Academy of Matrimonial Lawyers) from Ukraine. She is currently an active member of this organization. Besides, the our firm’s lawyers are often asked to contribute to the world’s leading legal editions on private clients’ practice and international family law. Notably, AGA Partners team has contributed to the Ukrainian jurisdiction in Private Client 2015, prepared in cooperation with the acknowledged foreign publication Getting the Deal Through, published by Law Business Research, to the Ukrainian jurisdiction in Family Global Guide, to the Ukrainian and Russian jurisdiction in IBA Surrogacy Newsletter, and Jurisdictional Comparison on Children Relocation covering Ukrainian and Russian jurisdictions.
UJBL: What is the strategy of AGA Partners for tomorrow?
A. S.: We now live in time described by many as a crisis, but we believe it’s a time for opportunities. The crisis is a challenge, which we are happy to accept. Perhaps those law firms that previously specialized in almost all areas of law, must now identify the main specialization in order to convince a client in their exceptional services. We think that the company’s development strategy now should be clearly defined and more than ever bold and innovative.
In our work, we abide by several of our fundamental principles, including the principle of pragmatism, — law for the sake of the client, rather than law for law’s sake. Moreover, our specialists are always concerned about the long-term consequences of the solutions that we propose, which is one of the key rules for a modern lawyer. AGA Partners has been guided by these rules without fail ever since it was established.
Talking about our self-improvement, we can mention that providing high quality services was always the core of our company’s strategy. We believe that our employees’ high level professionalism is a guarantee of the company’s successful development. For this reason, we have strict requirements of our employees’ education and are continually trying to provide them with opportunities to broaden their knowledge by participating in internship programs, attending international training courses.
We truly believe that it is this practice that underlies the high esteem and appreciation in which our company is held by our clients and all participants of the legal services market. In our view the rules underlying our operations are a direct reflection of our success and never-ending development.
We are pleased to announce the release of a new edition of IBA Surrogacy Newsletter that is focused on the legal aspects of surrogacy in the world's major jurisdictions. It’s also worth mentioning that partner of AGA Partners Law Firm Irina Moroz, who is an expert in the field of family law, has contributed to this edition by describing peculiarities of surrogacy in Ukrainian and Russian jurisdictions.
Ukraine must not be mistaken for a surrogacy haven
Ukrainian legislation regulating assisted reproductive technologies (ART) favours the individual’s reproductive rights and is considered to be one of the most tolerant in Europe. At first sight, there is nothing to be worried about. A married couple (either Ukrainian or foreign) applies for ART treatment to the clinic of their choice. Once the clinic and the method is approved they enter into a binding agreement with the surrogate mother, a woman aged 20–40, in good physical and mental health with at least one child of her own. The surrogate mother is delivered of a child and the intended parents’ names appear on the child’s birth certificate.
Thus, at first sight, Ukrainian jurisdiction might seem to be a surrogacy haven, but once you take a closer look, you will see a number of traps the intended parents should keep their eye on.
Pitfalls of surrogacy regulation in Ukraine
To be legally recognised as the parents and proceed with a child’s registration, the couple must comply with the basic requirements of Ukrainian Law. Pursuant to the Order of the Ministry of Health of Ukraine No 787 dd. 09.09.2013 (‘Order No 787’), ART is defined as a method of infertility treatment, whereas the intended parents are regarded as patients of ART treatment. In accordance with Article 123 of the Family Code of Ukraine, only married couples may be recognised as a child’s parents and shall proceed with the child’s registration. It means that cohabiting couples, single people and same-sex couples are prohibited from undertaking ART. Furthermore, to be registered as a child’s parents in Ukraine, at least one of the spouses shall contribute his/her genetic material along with the donor’s gametal cells. Donors may be known or unknown.
Before the ART treatment begins, commissioning parents and the surrogate mother enter into a surrogacy and childbearing agreement that stipulates their rights and obligations. Ukrainian legislation does not provide for a specific form of the agreement. Many issues, such as refusal to accept the child and terms of payment, fall outside the scope of the regulation; therefore, the terms of the surrogacy agreement are agreed at the parties’ discretion.
As was mentioned above, the intended parents are deemed to hold the legal status of the child’s parents from the very moment of conception and their names are listed on the birth certificate of the newborn baby. However, so as not to mislead foreign couples, their trespass towards exercising parental rights does not end up with receipt of the child’s birth certificate listing their names in Ukraine. The commissioning parents shall recognise their parental rights in the country of their residence and comply with the legislative requirements of their country in order to bring their child home.
Given what is set out above, Ukrainian legislation requires a number of improvements. In particular, there is a need to provide legal regulation of the surrogacy and childbearing agreement that will cover relations deriving from surrogacy arrangements and will comply with international surrogacy standards. There is also a need to find a solution to the problem of surrogacy treatment for foreign couples who come from countries where surrogacy is prohibited.
Absolute discretion of the surrogate mother to leave the child or hand him or her over to the intended parents
One of the major controversies of Russian surrogacy law is that the surrogate mother holds exclusive power whether or not to give her permission to the intended parents to register a child under their names. The commissioning parents might find themselves in a vulnerable position, being dependent on the surrogate mother’s decision.
Article 51 of the Family Code of the Russian Federation1 explicitly states that the registration of a child by the commissioning parents shall be accompanied by the written permission of the surrogate mother of a child. Furthermore, according to Article 16 of the Law on Acts of Civil Statuses, such permission shall be given only after the child’s birth and certified by the medical institution. In other words, the surrogate mother’s permission given on the child’s birth is a necessary condition for the child to be registered under the names of the commissioning parents. Any other documents, including the surrogacy contract, signed and given by the surrogate mother before the child’s birth, are not acceptable. Intended parents should not be tricked with promissory notes of any kind, even if they explicitly state the surrogate mother’s permission. However, once the permission that complies with the requirements of Article 16 of the Law on Acts of Civil Statuses has been given by the surrogate mother, the spouses’ parental rights may not be contested.
It should be noted that there are no legally binding instruments that might force the surrogate mother to give her permission. If she decides to register the child under her name, the Russian authorities will not prevent her from doing so.
The couple may seek remedy in court, but in the majority of cases, courts are reluctant to award the parental rights over the child to the commissioning parents. In this regard, we would refer to Order No 880-0 of the Constitutional Court dated 15 May 2012, where the court refused to admit the petition of the commissioning parents for recognition of their parental rights, prioritising the rights of the surrogate mother as a woman that gave birth to a child. In this course, the legislators should be guided by the principle of the best interests of the child and amend current laws by putting the rights of the commissioning parents above the rights of the surrogate mother.
Russian law, unlike legislation in the majority of European countries, allows single women and cohabiting couples to undertake a surrogacy programme on the same basis as married couples.5 Furthermore, the costs are comparably reasonable and procedures are simplified. Therefore, notwithstanding the potential risk that the surrogate mother might leave the baby, the Russian jurisdiction is known as being favourable for assisted reproductive technology (ART) treatment.
Irina Moroz, Partner in AGA Partners Law Firm
Contracts and background facts
The dispute arose out of three separate contracts for the sale of 158,000 mt of Ukrainian feed corn CPT Nikolayev with delivery pe-riods from September to Decem- ber 2010 (Contracts). Each contract obliged the sellers to obtain “at his own risk and expenses any export license [sic] or any other official document” (Clause 11.3) and in-corporated the terms of GAFTA 78, where such terms were not in con-tradiction with the above. In turn, GAFTA 78 included the so-called GAFTA Prohibition Clause (Clause 17) whereby the contract could be deemed as cancelled in case of “any executive or legislative act done by or on behalf of the government […] restricting export” provided that such restriction prevented per-formance of the contract. Custom-arily for all GAFTA contracts, the contract was subject to English law and GAFTA arbitration in London.
Most grain industry players in Ukraine remember late 2010 well, when the Ukrainian Government introduced grain export quotas and subjected grain export to licencing. The quota allocation rules and pro-cedures were changing on a daily basis, often at the last minute and in a very impracticable for busi-ness manner. As a result, only a few companies were able to obtain export licences; the majority, in-cluding most international trading houses, were unable to do so and could not perform their contractual obligations, which led to a wave of terminations and cancellations of contracts. Unfortunately, sell-ers fell under the unsuccessful category and aimed to cancel the contracts pursuant to Clause 17. The buyers treated the sellers’ ac-tions as a repudiation of contract, held the sellers in default and referred the case to GAFTA arbi-tration in London claiming some USD 26 million in damages.
Arbitration awards and issues for the court
The first-tier GAFTA Tribunal found that the events of Ukraine did fall under Clause 17 and sell-ers could potentially be relieved from liability for non-performance; however, on the facts, the Tribunal had not seen evidence of sellers’ reasonable efforts to perform the Contracts and eventually found for the buyers.
The sellers appealed and took that opportunity to furnish the previously omitted evidence of their best efforts in performing the Contracts to the GAFTA Appeal Board. Consequently, from the Ap-peal Award issued on 23 April 2014 (Award) it followed that the Board of Appeal was obviously satis-fied with the sellers’ evidence of their efforts but made some quite surprising findings on law and construction of the respective con-tractual clauses. Consequently, the Board found for the buyers again, but reduced the sellers’ liability to about USD 17.5 million.
Firstly, in the Board’s view, the sellers’ obligation to obtain export licences under Clause 11.3 was ab-solute, and Clause 11.3 overrode Clause 17, except in the event of a total ban; on the facts, there was no such ban. In support of its conclu-sion, the Board relied on the case of Pagnan v Tradax (1987),2 where the factual matrix was substantially similar to the present case.
Secondly, the sellers could not rely on Clause 17 since they were not “prevented” but were merely “restricted” in making the ship-ments to the buyers.
Thirdly, having reached the above conclusions, the Board nevertheless recognised the ex-treme difficulties, under which the sellers were operating, and stated that if the Board was to have de-cided whether the sellers had dis-charged their duties of best or rea-sonable endeavours in obtaining export licences, the Board would have unhesitatingly decided that the sellers had.
Naturally, the sellers disagreed with the Board’s findings on law and in May 2014 sought permis-sion to appeal from the High Court in respect of the following ques-tions of law:
(1) whether Clause 11.3 over-rode Clause 17 or was qualified by the same;
(2) whether Clause 17 applied exclusively in circumstances of a “total ban”; and
(3) whether the sellers could rely on Clause 17 if they were merely “restricted” rather than “prevented” from shipment.
On 25 September 2014 the per-mission to appeal was duly granted in respect of all three sellers’ ques-tions with the court agreeing that “the Award was open to serious doubt” and the main hearing of sellers’ appeal was subsequently fixed for 4 March 2015.
The matter was heard by Mr. Justice Hamblen, who, by coin-cidence, also appeared as a counsel for the winning party in Pagnan v Tradax, the authority at the core of the appeal from the sellers.
As to question (1), the buy-ers’ main argument was that the two clauses were inconsistent as Clause 17 contradicted the spe-cially agreed terms of Clause 11.3. Hamblen J disagreed. According to the normal principles of contractu-al construction under English law, there is no inconsistency between the contractual clauses unless they cannot be sensibly read together. Pagnan was directly relevant be-cause the Court of Appeal had to deal with the same question of con-sistency between the two clauses, and found that the GAFTA clause simply qualified the obligation to provide an export licence. Moreo-ver, in the judge’s view, the proviso “at their own risk” did not mean the clause could not be qualified by the other contractual terms. Conse-quently, the judge concluded that Clause 17 qualified Clause 11.3, but was not overridden by it.
As to question (2), the judge pointed out several references to “partial restriction” in the word-ing of Clause 17, and found that it plainly applied to a qualifying event “partially restricting” export and, as such, to a partial prohibition or other qualifying event which had a like effect. He also referred to the case of Bunge v Nidera3 where the Court of Appeal made exactly the same observation and concluded that the relieving effect of Clause 17 was not limited by circumstances of a “total ban”.
As to question (3), and in line with previously decided authori-ties, Hamblen J emphasised that the Prohibition Clause requires both proof of a qualifying event (i.e., “an executive or legislative act done by or on behalf of the Government” which had the ef-fect of “restricting export, whether partially or otherwise”) and evi-dence of its restricting effect on the seller’s total or partial ability to perform. On the specific point of prevention versus restriction, the judge made the following observa-tion: “In so far as the Appeal Board are… saying that it is necessary to establish a qualifying event which prevents export that is not correct. What needs to be established is a qualifying event which restricts export. The word “prevent” appears as part of the deeming provision in the clause. It is not part of the definition of the relevant qualify-ing event. However, if the Appeal Board are saying that it is neces-sary to show that the qualifying event prevented performance in the sense that it caused inability to perform then that would be a cor-rect approach.”
Finally, in the view of the judge, the Board had not specifi-cally addressed the critical causa-tion question (i.e., whether the ex-port restrictions in fact prevented the sellers from performing), and, on the basis of the findings in the Award, the judge could not confi-dently conclude what the Board’s answer to that question was. Con-sequently, he remitted the matter to the Appeal Board for further consideration and the parties are currently awaiting the revised ar-bitration award from the Appeal Board.
Ukrainian side of the coin
In the meantime, the real drama was unfolding in a totally different place. On 18 September 2014, just a few days short of the sellers’ per-mission to appeal, the buyers filed an application for recognition and enforcement of the Award to the Svyatoshyn district court in Kiev. On 13 November 2014 the sellers provided their objections empha-sizing, in particular, that the High Court in London allowed the sell-ers’ appeal and considered the Award to be open to serious doubt. However, on 30 January 2013 the Kiev district court decided to sat-isfy the buyers’ application for enforcement and issued respective order. Apparently, the Kiev district court was unimpressed by the fact that the high specialized court (Commercial Court of the HCJ) in the most impartial dispute resolu-tion jurisdiction (England), which was the only judicial body statuto-rily authorized to consider appeals from arbitration awards (akin to the Ukrainian concept of a cassa-tion instance), unequivocally rec-ognized that the Award had a flaw and required reconsideration.
Naturally, the sellers immedi-ately challenged the first instance court decision and appealed to the Kiev Court of Appeal, hoping for a more reasonable approach of the appeal judges. Yet, within just over a month, on 5 March 2015, the Kiev Court of Appeal re-confirmed the decision made by the court of first instance. The appeal court was very brief in its analysis of Mr Jus-tice Hamblen’s findings relating to the Award being open to “serious doubt” and effectively ignored the point, calling the sellers’ argu-ments to that effect “unfounded”. One can only speculate as to the reasons why this matter received such speedy consideration and why the decision coincided almost to the day with the hearing of the sellers’ appeal by the High Court, which, for technical reasons, was shifted from 4 March to 6 March 2015. However, from the conduct of the proceedings by the judge at the hearing one could already sensibly see that the sellers’ position ap-peared to be more persuasive. At the end, judge Hamblen promised to deliver his judgment within the “next week or two”; and, at it hap-pened, the proximity of the final decision in this matter had a magi-cal effect on the speed, at which further developments unfolded.
To prevent the decision of the Kiev Court of Appeal from be-coming final and enforceable, on 10 March 2015 the sellers applied to the last resort — the High Spe-cialized Court of Ukraine (HSCU), which had statutory powers to stay enforcement proceedings com-menced pursuant to decisions of lower courts. Indeed, on 17 March the HSCU ordered such a stay. One can just imagine the surprise of the sellers when, three days lat-er and with no trace of compli-ance with the HSCU’s order, on 20 March 2015 the Kiev district court issued a writ of execution al-lowing collection of the full amount of USD 17.5 million against the sellers’ funds and assets.
At the same time, on 24 March 2015, judge Hamblen finally announced his judgment and answered all questions of law in the sellers’ favor, as described above. From that moment the Award was formally remitted for reconsideration to the Board and could no longer be enforceable against the sellers. All would be well if not for a minor detail: on the same day, 24 March 2015, just as the judgment of Judge Ham-blen was being announced, the State Execution Service (Bailiffs) was arresting all sellers’ bank ac-counts and assets pursuant to the execution proceedings initiated on the same day, 24 March 2015.
Eventually, the execution pro-ceedings were suspended as per the HSCU’s order of 17 March 2015 until the HSCU’s final determina-tion in this matter. However the sellers’ funds remain attached to date, irrespective of the fact that (1) the actual Award is currently being reconsidered; and (b) there is a clear order within the Ukrainian judicial system to stay any and all execution proceedings that might have been commenced to date.
The story is notable in three respects. First of all, it shows how (still) remarkably different are the approaches of English and Ukrainian courts when it comes to the administration of justice and dealing with specific issues in the same matter and factual sce-nario. Secondly, it flags the problem of “selectivity” in the Ukrain-ian system of justice, which picks only favourable or suitable legal principles to justify certain deci-sions and completely ignores the obviously relevant concepts, sim-ply because they do not fit the re-quired position. Thirdly, and most importantly, it raises the question as to whether it is worth seeking justice in jurisdictions with strong rule of law, if one is bounced back to the system described by one re-nowned English commercial QC as the “Wild, Wild East”? It is, of course, our choice as both mem-bers of the legal profession and users of the system on whether to keep it as is, run from it or reshape its future. However, it is at least hoped that with the current wind of changes stories like this will slowly but inevitably sink into ob-livion. As they should.
Ivan Kasynyuk, Partner of AGA Partners law firm
Ivanna Dorichenko, Consultant with Clyde&Co
The article is available in Ukrainian only.
1. Can we start with an introduction of yourself and an overview of your company?
My name is Aminat Suleymanova, I am a lawyer. My professional career in law started almost 20 years ago. I have been practicing law since I was a student, combining my studies at a law academy with a legal position in a law firm.
We are happy to announce that this year AGA Partners is celebrating its 10-year anniversary.
The basic idea when I started the firm was to make a boutique law firm, that supports companies engaged in international trade activity with their outbound transactions and investments overseas. Recently we expanded our activity with a private clients’ practice.
Today the legal market is saturated with a number of law firms, which I would refer to as “legal supermarkets”. So you can be offered any kind of legal service within one firm. But we have a different concept in the course of rendering legal services. We limited our activities to 3 practices - international trade, arbitration, and family law. To meet the needs of our client, we engage with reputable law companies in England on a cooperative basis. It is worth mentioning that our legal expert report on Ukrainian family law issues was cited in a judgment of the English High Court.
Our primary rule is to approach each client individually. Clients can address any partner at a time of their convenience. For us, legal practice is not just another business, but an opportunity to assist clients in their business or private issues. The greatest reward for us is the loyalty of our clients; we have some clients who have been with us for almost a decade. We are proud to be referred to by our clients as the one who is “always oriented to our main interests.”
We do everything that could be possibly done in every case, and that’s why we can be sure that we are the best in this area.
2. AGA Partners was ranked by Legal 500 as being among the leading law firms of Ukraine in the area of dispute resolution. How did you gain this success?
The thing I like about that is that we weren’t only mentioned in the area of dispute resolution, but we were the only one highly praised for GAFTA arbitration practice (the Grain and Feed Trade Association, a London-based trade organization). Ukraine is one of the biggest exporters of grains on the global level and we have been occupying a special niche in terms of providing legal support to outborder grain traders. That is another reason why this acknowledgment is so valuable to us.
By the way, it was for the first time we’ve been nominated for this kind ranking
3. What law services have been the most in demand over the last year?
Actually it's hard to say because we don't practice everything. Still from year to year we are becoming stronger, more professional and better. Along with rapid professional development of the firm you can witness an increase in the number of our clients every year. And I don’t think that decrease or increase in any particular area of the economy is the main reason for this, it is rather because clients get to be more careful about who they employ for assistance. Clients are always looking for someone, the person who is the best in a particular area of practice.
Let’s use a hypothetical: if you are fond of tea, you are trying to buy it, you will not go to the supermarket, but to the special tea shop, where you will have a possibility to smell it, and ask the seller from where this tea leaves come from.
(P.S.: I chose this example because I am a tea fan myself.J)
We do not assist each and every client who addresses us, we provide our services to those who share our values and our style of work.
4. If you look ahead five years, how do you see the future of AGA Partners?
In a couple of years we are planing to open an office in London, due to the close relation of our practices in both family law issues and international trade, due to the London activities of our clients. At the moment our partners are flying to London at least once per month, so I think in 5 years we shall open a little office in London.
Also we will definitely expand the number of employees, though by not more than 3 -5 more people. But we don’t want to become a big law firm. Personally I want to know everyone in person. We never seek people out, we grow them.
5. Do you believe that "honesty is the best policy?"
What I don't believe in - is lies. I believe that in a particular situation everybody may just say: “I’m not ready to discuss that or those issues…/ It’s too personal for me…”. I feel comfortable with people saying that. If you say it in a soft way, people will understand, they might be a bit shocked at first, because in our mentality it’s not usual, but still it’s a better option.
6. What has been the most important management lesson you have learned?
1) You can't force a person to be happy if they don’t want to be
2) Being a manager myself, I can tell that you don't have the luxury of not being in a good mood. Try to control yourself, even if you are in a bad mood. Remember that people can take it personally.
3) You are not God to judge. You can just make your own choice but must be frank to yourself, and say: “it’s personal”.
Very important - I treat everyone as an equal person, it’s just that we may have different positions.
7. What is your management style? And what qualities do you appreciate the most in people?
I try to make the people around me feel comfortable.
Usually a person straight from the university joins our firm but it’s essential that everyone likes the new person in the company, as we will work together for 8 hours a day. I take into consideration the point of view of every member of our team. I may not always agree but I will definitely listen to what a person has to say. You always need to remember that the look from the outside is important; it can show you something new, something you haven’t seen before and can even help your personal growth. There is always a tutor available from the partners to help the new associate or young lawyer. And you can discuss everything, even personal issues. If needed, they can work from home.
What I appreciate the most in people is a good family background and education. We have to speak the same language and understand each other.
8. How do you keep a healthy balance between your family and career?
My own priority is family. We will always assist on different issues. And everybody in my firm, including myself, can say: “Ok, guys, I need some time for my family. This week I will be out of the office”.
If you have responsibility, you can keep that balance. If all members of the team are honest with each other, we will not have to lie to each other and keep family as a priority. Every year we have our vacations, we don’t hold some corporate meeting for 3 days outside without families, it’s not our style. I think that the best corporate event is to give more time to people to spend time with their families. Family is the priority and I do underline that.
Our working day starts at 10 and lasts till 6. Certainly emergencies can happen, but it doesn’t have to be a rule.
The right manager has to organize an 8-hour working day . Otherwise, you don't organize your job well. Also someone is important for me, in most cases I will make some allowances for them and follow their suggestions. You can ask for respect.
The essence of fraud
It has become a part of common practice in international transactions, when trading companies, due to their own negligence, become victims of fraud. The present scheme of deception is as follows: the buyer, having received a bill (invoice) for payment of the goods delivered by the seller and being sure of its (invoice) authenticity - conducts the appropriate payment as specified in the account details.
At the same time, there may be cases where the buyer sent SWIFT message as proof of payment to the seller. In turn, the seller, having received a confirmation of payment from the buyer, acts in accordance with the contract and releases the original documents proving ownership of the goods.
Thus, the transaction took place, the bill is paid, the buyer confirmed payment in the SWIFT message, and original documents were "released" in favor of buyers. However, in the end, the money for the goods has not been transferred to the seller’s account. So what is the catch?
The answer is simple. Parties to the transaction have become victims of fraudsters, who illegally got the information about the transaction (by hacking mailboxes) and faked account. As a result, fraudsters got money, and parties to the transaction - losses and months and even years of criminal litigation and arbitration processes around the world. The reason for that - the lack of minimum precautions during the transaction, and the payment procedure, in particular. Meanwhile, by compliance with those precautions you would significantly reduce the chances of fraud.
Firstly, always check with the buyer, whether he had received the right banking requisites. Make sure where and to whom the buyer paid. If you are a buyer - verify the accuracy of the account details for payment of goods, accuracy of information about payee. Pay attention to the suspicions and inaccuracies in the invoice, contact with the bank and the beneficiary before you make payment, be vigilant and inform your counterparty about all your intentions and actions.
Secondly, we recommend that sellers always "release" all original documents for the goods, especially bills of lading, only upon the actual receipt of money to your account. For this purpose, the contract must prescribe the appropriate provision, which can be formulated as follows: "The original documents, including bills of lading shall be dispatched by the Seller upon the actual receipt of full payment by the Buyer."
If you trade on a FOB basis, do not allow the vessel to leave the port of loading until payment is received.
Thus, guarantee of the buyer’s security – reassurance in correct payment details, as for the security of the seller - safeguarding of the title documents for goods until the actual cash is deposited. By following these precautions, both sides of the transaction – the buyer and the seller - will minimize the risks of fraud and ensure the safe performance of the transaction for the mutual benefit.
Be careful, and remember: the devil is in the details!
Ivan Kasynyuk, Partner
Dmitry Koval, Junior Associate
AGA Partners Law Firm
1 How does an individual become taxable in your jurisdiction?
According to the Ukrainian law, an individual can be considered as a tax resident of Ukraine if he/she meets the Ukrainian tax residency criteria, which are as follows:
- An individual is considered a Ukrainian tax resident if he/she has a domicile in Ukraine;
- If the individual also has a domicile in another country, the individual is deemed resident of Ukraine provided he/she has a permanent place of residence in Ukraine;
- If the permanent place of residence is also available in another country, the individual is deemed resident of Ukraine provided his/her center of vital interests is situated in Ukraine (for example, the place of the permanent residence of the members of an individual’s family or the place of an individual’s registration as a business entity etc.);
- If it is not possible to determine the actual center of vital interests, or if the individual does not have a permanent place of residence in any country, the individual is deemed to be tax resident of Ukraine if he/she stays in Ukraine in excess of 183 days during a tax (calendar) year;
- If it is impossible to determine tax residency on the basis of the above provisions, then the individual will be a tax resident of Ukraine if he/she is a Ukrainian citizen;
- A person who fails to qualify as a Ukrainian tax resident will be considered a ‘non-resident’ for purposes of the Tax Code;
- The Tax Code also provides for a self-recognition procedure, according to which an individual can voluntarily elect to be a Ukrainian tax resident;
- In conflict cases, the rules of the relevant double taxation treaties may be applied.
2 What, if any, taxes apply to an individual's income?
In Ukraine, individuals are subject to Personal Income Tax (hereinafter - PIT), regardless of whether they are tax residents or not. Individuals – tax residents of Ukraine are taxed on their worldwide income, while non-residents are taxed on their Ukraine-sourced income only. Ukrainian laws determine Ukraine-sourced income as income derived by an individual as a result of any business activity performed in Ukraine, which, inter alia, includes remuneration for the work performed in Ukraine, whether paid by a Ukrainian or a foreign company.
Both resident and non-resident individuals are taxable at same tax rates being 15% and 17%:
- the 15% rate applies to monthly income up to a threshold of 10 minimum wages per month (in 2014, UAH 12.180, circa USD 940)
- the 17% rate is applicable to monthly income in excess of a threshold of 10 minimum wages per month.
The individual’s income is taxable whether it was obtained in cash or in kind. Taxable income includes employment income (with in-kind benefits); incomes from trading or professional activities (including operations with intellectual property); incomes from the alienation of property; winnings and prizes; insurance payments; interest and dividends; investment income; and contributions to unqualified pension plans made on behalf of a taxpayer by another person/employer.
3 What, if any, taxes apply to an individual's capital gains?
The taxation of an individual’s capital gains depends on the source of the gains.
The general rate applied to employment income is 15% - to monthly income not exceeding 10 minimum wages and the 17% rate applies to monthly income exceeding that threshold.
Interest income is taxed at a 15% rate. Dividends, including foreign dividends are taxed at a 5% rate. Winnings and prizes are subject to 30% tax, except winnings in state lottery and received from the organizer of gambling by both residents and non-residents. As an exception, cash winnings in sports (other than remuneration to athletes) are subject to standard 15%/17% tax rate.
Taxation of royalties and investment income is at 15% rate (if such income exceeds 12 180 UAH. The amount of such excess is taxable at rate of 17%).
Gains derived from the sale of a real estate are not subject to tax if the sale takes place once during the year, provided the owner has held legal title for at least three years before the sale (the three-year ownership period does not apply to inherited property). The rate is 5% if the taxpayer makes more than one sale per year.
Gains derived from the sale of movable property by a resident are subject to a 5% rate; gains derived by a non-resident are subject to 15% or 17% rate. As an exception, income derived by the taxpayer from the sale (exchange) during the year, of one of the objects of personal movable property such as a car or motorcycle is not subject to taxation. Sale of two or more motor vehicles by the same person during the year will be taxed at rates of 5% and 15%/17% for residents and non-residents respectively.
4 What, if any, taxes apply if an individual makes lifetime gifts?
In Ukraine, funds, property or property rights, the cost of work or services presented to the taxpayer as a gift shall be taxable in the same way as inheritances...
Thus, more relevant for us becomes a question of efficiency and legal security of international trade operations, including those in the agricultural sector - the driving force of Ukrainian exports. When we talk about international trade, each lawyer would primarily rise a question of law, which should be applied to the agreement of the parties. Recently, more and more we get used to the fact that one or another agreement is a subject to the provisions of countries with the most sophisticated and effective legal system by far. The most striking example is the above-mentioned trade in agricultural products in general, and trade in grains and oilseeds in particular. Thus, 80% of world trade and, in my estimation, 95% of trade in grains and oilseeds from Ukraine are subject to English law, by the incorporation of standard contract terms of GAFTA and FOSFA.
Therefore, in this article I would like to touch directly upon the issues of international trade agreements that in its essence constitute the basis of relations between Ukrainian exporter and the foreign buyer or customer of goods and services in accordance with the rules of English law. In particular, narrowing the topic, I think it necessary to give an example of when this or that international agreement can be invalidated on the grounds of its conclusion under the influence of economic duress.
Although at first glance, this question is quite simple, wherein specific criteria of such duress may be distinguished and analyzed without much difficulty, in fact, recent case studies show the opposite. Anyone can become a victim, or without even realizing it, the initiator of such economic duress.
First, when exploring this subject, we are talking about legal actions made under the influence of duress, which limits true will and internal intentions of innocent person concerning the terms of the concluded agreement, which could eventually become a reason for cancellation of the contract and substantial losses and damages.
Ukrainian law at glance.
For comparison, it is especially interesting to see how Ukrainian Law explores issues of economic duress, what approach Ukrainian practice and doctrine have taken in this issue.
In this regard, it should be noted that the civil law provides a definition of economic duress, describing it as psychological or physical pressure and recognize it as violence (see Art. 231 of the Civil Code). The notion of violence should be understood as any pressure that limits the freedom of one of the parties, aiming at inducement to commit certain actions, particularly in order to increase or decrease the price of goods, agree more favorable for the "aggressor" terms of delivery and other.
Giving analysis of modern Ukrainian court practice regarding the annulment of agreements concluded under the influence of violence, I conclude that the current understanding of Ukrainian judges is quite straightforward and provides limited opportunities for enforcement of Article 231 of the Civil Code, on assumption of the realities of modern trade relations particularly in an international context. This approach makes it impossible to protect fully the rights of persons affected by the pressure of its counterparty. Ukrainian court sets extremely high criteria for recognition of the agreement invalid. As a rule, it is a direct and real threat to human life and/or health, threat of dismissal, threat of financial and other sanctions.
The question arises how to deal with a situation when your counterparty requires, for example, reconsidering of the prices of goods under the contract, by threatening that otherwise he would have to cancel the contract or delivery of the goods? Will you be entitled to recognize additional agreements as null and void in future, including the price increase, even if you have agreed and signed them?
There are extremely serious doubts that under such conditions the innocent party will have real prospects in the Ukrainian court, initiating a claim for recognition of the transaction invalid.
Let us go ahead and presume that you have a similar foreign economic agreement you knowingly subjected to English law, such as it happens in contracts for the supply of agricultural products from Ukraine. You have faced with a same pressure, when the counterparty is threatening not to fulfil the contract and you are forced to agree to the proposed terms. Is it possible to challenge such a contract, by recognizing it invalid?
The continental system of law perspective.
The doctrine of economic duress has formed in continental legal system a long time ago. For example, major court cases in England dated by the late 70's, early 80-ies.
Historically, until the formation of the current system, the practice of economic duress in England was similar in some ways, to the modern Ukrainian approach that defines duress as a violence and direct threats of physical or psychological pressure and as a rule, was qualified as a criminal offense. However, over time, the threat of violence in the continental system has been reformed into economic duress, acquiring more sophisticated meaning that makes it possible to recognize the agreement as invalid in the presence of, for example, the threat of not to deliver the goods or terminate the main agreement.
Thus, we approach to the key features and criteria of economic duress in the continental system. In general, the overall vision is to be formed as follows. If there is a threat in respect of a contract that can cause financial loss and there was no reasonable alternative actions for innocent party, such agreement shall be deemed invalid, for example:
Company A entered into an agreement to sell the Company B and further threatened to refuse delivery of the goods, if the latter will not agree to increase the price. Company B has no reasonable alternative in the market to buy a similar product. Having no other choice, Company B agrees to sign an additional agreement to increase price. Thus, the actions of the company A will be qualified as economic duress, and additional agreement to increase price shall be subject to invalidation.
Based on this example, we have an opportunity to outline two key criteria of the presence of economic duress in the actions of the seller:
First, there is a real threat to terminate the main agreement for the supply of goods;
The main reason for the conclusion of a supplementary agreement to increase price is a threat. It is necessary to establish a clear causal link between the threat and signed supplementary agreement. In addition, this threat must have additional features such as illegality and lack of principle of honesty in the actions of a person who is threatening. That is necessary to distinguish between illegal extortion and actual circumstances. For example, if the seller got in trouble and asks the buyer review the price, economic duress will not take place.
Secondly, the lack of alternative options, including the possibility of selling or buying a product on the market;
The court must examine whether the real alternative actions exist, including effective possibility of recourse to a competent court for a recovery of losses.
Of course, it would be irrational to provide a party with possibilities to avoid liability for default of contract at the slightest chance when the agreement was disadvantageous to the party. Therefore, particularly English courts treat such claims with a high degree of caution and often apply additional criteria confirming fact of economic duress existence.
Existence of parties’ objection on the proposed terms of the supplemental agreement shall be determined.
If the party voluntarily accepts the terms of the additional agreement on a price increase, without objection, the court may have questions about the true intention of the party. Has the party signed the agreement forcibly or voluntarily?
The theoretical approach is undoubtedly needed for a common understanding of the criteria and conditions of duress, but only practical experience provides us with real examples of enforcement. In reality, things could be different.
Based on the above criteria, it may seem that it is rather difficult to satisfy these conditions. How to distinguish normal trade from economic duress? How these criteria are applied in practice?
The answers to those questions can be found in the case, which was recently reviewed by the Tribunal of GAFTA (Grain and Feed Trade Association) in London, which incorporates and subordinates, by an arbitration agreement, the aforementioned trade-related disputes in grain around the world and in particular with Ukraine.
The essence of the dispute was as follows. Seller signed a contract for the supply of goods on FOB, which presume the duty of the buyer to provide a vessel for loading. In due time for delivery, the seller states the buyer as follows:
"Our supplier refuses to deliver the goods, if the price will not be revised upward. Accordingly, we ask buyers to review the price of the contract between the seller and the buyer in order to be able to perform the contract”
Buyer, in its turn, not objecting to raise the price, gave their consent to increase the contract price, and therefore signed the additional agreement. Once the goods have been loaded on the ship, the buyer refused to perform the contract at the new price, paying only the price stated by the main contract. The seller, of course, being dissatisfied by shortfall of funds requested in GAFTA arbitration, requiring appropriate surcharge for delivered goods.
Buyer has given his objection to arbitration, arguing that additional agreement to increase the contract price was signed under the influence of economic duress and asked the Tribunal to recognize it invalid.
At first glance, seller’s actions comply with usual behavior in such situations. Thus, the seller did not require the buyer to increase price and not threatened to break the contract for failure to fulfill his requirements. The essence of the seller’s letter was simply to ascertain the fact of provider’s refusal to supply in case the price will not be revised. For its part, the buyer agreed to terms on a price increase without claiming any protests. In addition, under normal conditions, barriers to purchase alternative products on the market usually should not exist and if the conditions for price increase would not suit the buyer, nothing prevented the latter to "go to market" and purchase similar product.
However, GAFTA Tribunal came to the opposite conclusion, finding, in these conditions, the actions of the seller the presence of economic duress, satisfying the requirements of the buyer and finding additional agreement invalid.
The Tribunal’s motivation was the following. The Seller’s message requesting a review of the price of goods should be interpreted in conjunction with the supplier’s refuse to delivery. The Tribunal concluded that the seller used illegal duress of supplier in its favor, since the buyer realized that if the price is not raised, he could ultimately remain with no goods. That is, if the price of the contract were not increased, the goods would not be loaded. Thus, the seller’s letter was an act of unlawful pressure.
As to the possibility of buying an alternative product on the market, the tribunal decided that the evidence, including such from trading brokers, is not sufficient for the quick acquisition of goods, especially when it was determined that the product was needed in the short term.
Despite the lack of protest, the tribunal concluded that this criterion is not "vital" in the circumstances of this dispute, therefore it should not be used because the illegal pressure on the buyer and the lack of real alternatives is sufficient to declare the agreement invalid. Thus, the Tribunal accepted the seller’s position and satisfied the requirement for an additional contract cancellation and leaving for claim at its initial stage.
It can be assumed that majority of Ukrainian lawyers may be at least surprised by similar solutions, but as we see from the above example, despite the relatively high level of proving the criteria for recognition of the agreement invalid on the grounds of economic duress, in a real international trade disputes, arbitrators satisfy these claims easily.
Of course, it is necessary to take into account the fact that in essence the decision was made not by professional judges but trade arbitrators, which usually have only basic legal skills necessary for the highly specialized cases, particularly in the agricultural sector. However, in any case, such a case is an example of a common approach, used in continental system of law in matters of economic duress in contractual relations.
Partner, AGA Partners Law Firm
 Dimskal Shipping Co Ltd v I.T.W.F ; Occidental Worldwide Investment Corp v Skibs A/S Avanti ; North Ocean Shipping Co Ltd v. Hyundai Construction Co Ltd ; Pao On v Lau Yiu Long 
International arbitration and bankruptcy are frequently encountered in practice, but in their essence, it is very different legal processes, with its own goals, objectives and underlying principles. Relations of these processes are rather difficult mostly because of their competing goals.
This article explores the complex process of coexistence of international arbitration and bankruptcy particularly in the process of arbitration. Given the magnitude of the issue, the paper focuses on the most problematic issues, such as establishing jurisdiction in disputes involving the bankrupt company and possible consequences of the bankruptcy of one of the parties to the dispute on arbitration that has commenced. In addition, through the example of the well-known case, we will explore a number of jurisdictions approaches when addressing these problematic issues.
When one of the parties to the arbitration process goes bankrupt, there are a number of important issues appear - whether the relevant provisions of national laws on bankruptcy of country of insolvency (or decisions of state courts) are binding on arbitration tribunal? Can arbitral tribunal ignore bankruptcy or should the arbitration be paused or stopped at all? Who decides when and whether to continue the arbitration or the bankruptcy should be simply ignored - the arbitral tribunal or national court?
The answers to these questions are ultimately determined by a number of national laws that apply to the concrete arbitration proceeding, given the diversity of national laws and lack of uniformity from state courts and arbitration tribunals. Thus, in order to answer these difficult questions, some general legal principles must be considered.
Bankruptcy and arbitrability of the disputes
The term "arbitrability" in this article is used to refer to the ability of a dispute to be submitted to arbitration in order of resolving it, i.e., to determine jurisdiction. Arbitrability of dispute determines what types of questions may or may not be submitted to arbitration.
International arbitration is based on the ability of the parties to grant jurisdiction to arbitrators to resolve disputes. Such jurisdiction is meaningful only if it is recognized by states, and the arbitration decision rendered pursuant to this jurisdiction will be further smoothly executed in judicial system of a country.
Herewith, the state reserves the right to prohibit the authorization of certain categories of disputes outside of its national courts. These categories are recognized by the court as non-arbitrable disputes and arbitration agreement concluded to address this category of dispute will be declared null and void by the court.
The legislator of each country determines the extent to which the arbitrability of the dispute is limited by national legislation. Neither 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), nor any other international instrument contains substantive provisions concerning arbitrability of such disputes. These international instruments always pass the question of arbitrability to the relevant national legislation.
That is, each country can usually determine the question of dispute jurisdiction in accordance with its own national policy.
Thus, arbitrability is a condition validity of the arbitration agreement and therefore the existence of the jurisdiction of arbitration court. A bankruptcy, in turn, is an area in which the state may, in its sole discretion limit arbitrability of certain categories of disputes.
If a party to the arbitration claims that the dispute is not arbitrable due to the bankruptcy of the other side, there is a general rule is that the tribunal should, in principle, resolve the issue with reference to the law applicable in the jurisdiction of arbitration (seat of arbitration or lex arbitri). For example, arbitration tribunals usually do not claim that the dispute shall be settled by arbitration, if such arbitrability is contrary to the rules of international public policy at the location of the arbitration. In some cases, arbitration tribunals determine arbitrability of dispute as to the basis of the provisions applicable in the place of arbitration (place of arbitration).
The arbitral tribunal shall consider the other following sources when determining arbitrability, namely the laws applicable to:
• the arbitration agreement;
• merits of the case (lex causae and lex contractus); and
• place (-s) of possible award execution.
In state court
If the party to arbitration proceeding believes that the dispute is not arbitrable due to insolvency of the other party, and thus represents its complaint to the court in the country of insolvency proceedings, court usually applies its national legislation on bankruptcy because its provisions are mandatory and replace the provisions of the relevant tribunal’s provisions. If insolvency procedure has started in the place of arbitration, then to the extent necessary and permitted by its national law, the court shall have the right to suspend the arbitration. If insolvency proceedings instituted in another country, any foreign court orders are not necessarily paralyze arbitration. When such issues arise before the court outside the "country of insolvency", the application of insolvency legislation depends on the relevant conflict rules applicable to the court. Generally, courts will not apply foreign law on insolvency.
Ultimately, the national court may cancel the arbitration award at the place of execution and may refuse to enforce an arbitral award if, under the laws of the court’s jurisdiction the dispute lacks arbitrability due to the bankruptcy of one of the parties.
Influence of place of arbitration
As mentioned above, the arbitral tribunal shall endeavor to ensure that its decision would be valid at the place of arbitration. Arbitration tribunals usually consider themselves "bound" by provisions of bankruptcy law, in fact, where: (a) the law of the place recognizes them as binding law and/or part of the international public policy of the country of arbitration; and (b) bankruptcy procedure was (or could be) recognized in the country of arbitration.
Some scholars believe that the main provisions of bankruptcy law (in particular those designed to ensure equal treatment of creditors and proper disposal of property of the bankrupt company) are bound by the provisions of domestic law and sometimes are part of domestic and international public policy.
Since arbitration tribunals do not have lex fori, it is assumed that they should not be "concerned" about the national laws or internal public policy of the country of arbitration. Such provisions shall be binding only on the arbitral tribunal, where they form part of international public order recognized by law of the place of arbitration. Further, the existing arbitration case law shows that the courts indeed consider where exactly the bankruptcy takes place- at the seat of arbitration or abroad.
Elektrim against Vivendi: The story of two jurisdictions
A good example to illustrate the "genetic" difficulties when trying to define the correct law that determines the impact of insolvency on arbitration is a dispute between Elektrim and Vivendi. In this case, England and Switzerland were able to form its position on this conundrum and their conflicting results emphasize the need to investigate the matter promptly.
Elektrim is a Polish company and at one time the owner of a significant stake in the PTC, a large Polish mobile company. Vivendi - a French company, has signed a contract with Elektrim, known as the Third Investment Agreement (TIA). TIA contained an arbitration agreement providing that the dispute should be resolved by the London Court of International Arbitration (LCIA) in London. In addition, English law governed the arbitration agreement itself, even though Polish law governed the rest of the TIA.
In August 2003, the dispute arose under this Agreement, and Vivendi began arbitration in LCIA. Vivendi announced that Elektrim had violated its contractual obligations under the TIA. In 2006, Vivendi began the second arbitration against Elektrim regarding the foreseeable peace agreement between the parties. The second dispute was under the Arbitration Rules of the International Chamber of Commerce (ICC) in Geneva.
In early 2007, LCIA Court scheduled a hearing on liability on 15-19 October the same year. However, August 2, 2007, Elektrim was declared bankrupt by Warsaw district court decision, and thus became "bankrupt" within the meaning of Polish law, according to which:
Any arbitration agreement concluded by bankrupt becomes invalid on the date of bankruptcy and all arbitration proceedings shall be terminated. "
Elektrim claimed that, through its bankruptcy, and as evidenced by the Polish bankruptcy law, arbitration agreement contained in TIA should be terminated, thereby the jurisdiction of the Tribunal should be cancelled. However, despite the objections of Elektrim, the October hearing planned before was held in London, and LCIA tribunal heard both sides on jurisdiction and responsibility on key issues.
Subsequently, LCIA issued interim decision accepting jurisdiction over the dispute and ruled in favor of Vivendi on the merits. Elektrim appealed the decision of the Tribunal, referring to s.67 of the Arbitration Act 1996 (England) on the grounds that the Tribunal was deprived of its primary jurisdiction over the dispute because of the bankruptcy of Elektrim. The main issue concerned the interpretation of the phrase "lawsuit pending" provisions of 4.2 (F) and 15 EU Regulation on insolvency (EU Regulation), which is directly applicable in the UK.
Accordingly, Elektrim argued that the phrase "lawsuit pending" was limited by executive process of the debtor's assets, and that it cannot apply to arbitration, since arbitration is not an instrument of execution. The High Court of England ruled (later confirmed by the Court of Appeal) that the phrase "pending lawsuit" was broad enough to include a reference to arbitration for the purposes of Articles 4.2 (F) and 15. Therefore, the English courts have rejected arguments and Elektrim refused to cancel or modify the decision of LCIA tribunal.
The significance of these British courts’ decisions confirms that when the company was the subject of bankruptcy proceedings in Poland, but was involved in arbitration proceedings in London before the commencement of bankruptcy procedure, then it is the law of England (the law of the seat), which must determine the impact of the bankruptcy process on arbitration. In addition, the court held that there was nothing in the domestic English law that could stop the arbitration proceedings, despite the bankruptcy process in Poland. On the other hand, if arbitration had not started before the bankruptcy, then the Polish bankruptcy law would determine the effect of the bankruptcy process on the future possibility of initiating arbitration, and any suspension or cancellation of arbitration under Polish law would have effect in England.
ICC decision (Switzerland)
In the second arbitration in Geneva, Vivendi argued that the law of the place of arbitration should determine whether the Tribunal has retained its jurisdiction over the dispute, regardless of whether Elektrim in bankruptcy process or not. However, since Switzerland is not a member of the European Union, Vivendi failed to refer to EU Regulation as it was in English decisions. Accordingly, the central issue in ICC tribunal was to determine whether Elektrim has the right to be a party arbitration, as soon as he became bankrupt in the light of Polish law on insolvency (art.142).
After hearing the parties on this issue, ICC Tribunal issued an interim solution, which explained that the purpose of art.142 is deprivation of arbitration courts’ jurisdiction over the Polish bankrupt parties. The court ruled that the party's ability to participate in the Swiss arbitration is governed by the conflict provisions of Swiss law on private international law.
These rules provide that companies governed by the State in which they are created, and "shall manage, in particular: ... (c) capacity and capability." And if so, ICC tribunal, and then the Swiss Supreme Court should apply the Polish bankruptcy law (art.142), which abolishes the Elektrim’s ability to participate in the arbitration. Under this approach, when Elektrim became bankrupt, any arbitration clause concluded by it are no longer valid and all arbitration processes such as the Geneva arbitration have been discontinued.
In view of the above, it should be concluded that there is no single approach to decide "the destiny" of insolvent party after arbitration proceedings began. What arbitrators and practitioners have learned from Elektrim against Vivendi is that they must be prepared in advance to the effects of the bankruptcy of one of the parties to the arbitration process. As shown above, the impact of the bankruptcy of one of the parties on unresolved disputes can vary considerably, depending on the national legislation, which varies between jurisdictions and in most cases can be unpredictable.
Parties should carefully consider any potential jurisdictional issues that may arise at the conclusion of the arbitration agreement. In particular, in light of the global financial crisis and its ongoing consequences, the parties should closely analyze:
• laws of the State in which bankruptcy can potentially be launched;
• laws of the place of arbitration; and
• any other laws that are likely to be applied by the court (eg EC Regulation and the Model Law).
Taking these into account, the parties may minimize the risk of negative impact of bankruptcy in the arbitration proceedings.