Problems with banking documentation

Author: | Published: 1 Jul 2006
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BC Toms & Co

Address

1 Laboratornyi Side Str, Office 509 Kyiv 01133, Ukraine

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+38 044 4906000

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+38 044 2786508

Although with its recent recodifications Ukrainian law has developed into a generally satisfactory legal system, some significant problems remain. In particular, Ukrainian law imposes a number of drafting requirements applicable for loan, credit and similar agreements between foreign lenders and Ukrainian borrowers (hereafter, loan agreements) that are unusual and that, unless satisfied, risk causing the invalidation of loan agreements with foreign lenders. Two such important special requirements are that an agreement between a foreign lender and a Ukrainian borrower must be in the Ukrainian language as well as the language of the lender, and any such agreement must contain an express clause on its duration.

This article is written to call attention to these requirements that have been ignored in some loan documentation between foreign lenders and Ukrainian borrowers. Presumably, this resulted from a belief that so long as there is a foreign governing law clause, such non-compliance with Ukrainian law requirements should not matter, at least so long as under Ukrainian law, the execution of the agreement by the Ukrainian borrower was properly authorized and it was properly signed.

In fact, however, a failure strictly to comply with such Ukrainian law requirements as those on the duration clause and an agreement's language may result in a loan agreement being unenforceable against a Ukrainian borrower, irrespective of any foreign governing law. This is a genuine problem for many reasons.

To begin with, there is no developed Ukrainian private international law (conflicts of laws) on this point. Conflict of laws is a relatively new subject for Ukraine. The 2005 Ukrainian Law on Private International Law provides that "imperative norms" of Ukrainian law apply despite any different provisions under any foreign law having a "close connection" to a matter. However, "imperative norms" are not defined.

In some analogous situations, prior to the passage of the Law on Private International Law, Ukrainian courts have strictly applied Ukrainian statutory requirements to invalidate contracts despite foreign governing law clauses. Ukrainian courts will probably continue to approach cases with this strict statutory enforcement policy.

Even where a foreign arbitral award is obtained under a loan agreement, there is a risk that the same issues will arise when the award is enforced in Ukraine. Ukrainian courts may apply the duration clause and Ukrainian language requirements as matters of "public order" under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (to which Ukraine is a party) and the Ukrainian statutes on enforcement of arbitral awards. On this basis, an agreement together with its arbitration clause might be invalidated by a Ukrainian court, and therefore an arbitral award under it might not be enforced in Ukraine. (In the past, as a matter of practice because of such problems, relatively few foreign arbitration awards have in fact been enforced in Ukraine.)

Turning to the specific requirements cited above, the first, obliging all agreements between foreign persons or entities with Ukrainians to be in the Ukrainian language as well as the foreign party's language, is provided by Article 24 of the Law On Languages in Ukraine of October 28 1989 (the Law on Languages). This Soviet-era law still applies according to the Law On the Succession of Ukraine of September 12 1991, which provides that all laws of the USSR remain in effect in Ukraine unless contradicted by legislation enacted by Ukraine after its independence in 1991. No Ukrainian legislation passed so far conflicts with this provision of the 1989 Law on Languages.

It seems likely that a Ukrainian court would hold that this Soviet legislation on languages was intended to protect Ukrainians from language problems in their commercial dealings with foreigners and creates an imperative norm that cannot be undone by a foreign governing law clause included in a contract written in a foreign language. The Law on Languages was adopted at a time when relatively few Ukrainians spoke English or other foreign languages other than Russian.

Although today most significant Ukrainian borrowers can conduct any business in English among other foreign languages, Ukrainian courts have traditionally strictly applied legal norms the same for all, rather that trying to adapt laws to particular factual situations to try to do justice as some common law courts might. A defence that the Ukrainian party fully understood the foreign language of a contract, so that the absence of a Ukrainian version should not matter, may be unlikely to succeed.

For example, in the late 1990s Ukrainian courts in a number of cases (including the Ukrainian Constitutional Court in a case against the US multinational Armour decided on November 26 1998 and the Ukrainian Supreme Court in a later case involving a foreign property developer) voided contracts of foreign companies executed with Ukrainian companies where they were only signed for the Ukrainian company by its chairman or general director without the signature of someone appointed by the respective chairman or general director to countersign, as was then required. The Ukrainian courts so ruled despite clear evidence of proper corporate authorization and subsequent performance by the Ukrainian parties.

The Ukrainian courts took the position that if a second signature was required, it had to be provided, and its absence could not be cured, even by long term performance and corporate ratification (and despite other legislation giving a chairman or general director virtually unlimited corporate powers). It is worth noting that, in so ruling, these courts made no provision for restitution, leaving such issues for separate proceedings (that could take years to resolve). These decisions are typical of the strict constructionist attitude of Ukrainian courts.

The other legal requirement that is being ignored in some loan agreements involving foreign lenders in Ukraine is the requirement for an express duration clause. Article 180 of the Ukrainian Commercial Code requires, as an essential term of any agreement, "a provision on the term for a contract's duration".

The National Bank of Ukraine (NBU) in its published letter 18-111/3249-8378 of August 18 2004 confirmed that a provision on the duration of the agreement is an "essential term" of any loan or credit agreement. Although this NBU letter did not address any conflicts of laws issues (and it was written before adoption of the Law on International Private Law), one can argue that the Ukrainian law rules on the essential terms for a contract constitute imperative norms under the Law on International Private Law that define what constitutes a contract that can be entered into by a Ukrainian person or entity, irrespective of any foreign governing laws.

Most leading law firms in Ukraine have understood this requirement for a duration clause as not being satisfied by loan agreement provisions for a fixed date for full repayment of principal and payment of interest and fees. Instead, a special clause is normally inserted expressly providing for termination of the agreement following the performance by the parties of all obligations or by a certain date.

In view of the past practice of Ukrainian courts to void contracts that do not strictly comply with Ukrainian law, and the lack of legislative and judicial guidance on the application of conflicts of laws rules, no foreign lender should take any such risks in respect of Ukrainian law. All loan agreements between foreign lenders and Ukrainian borrowers should be in a Ukrainian language version (as well as a version in the lender's language – usually such loan agreements provide that the foreign language version will prevail in the event of any conflict with the Ukrainian), and contain an express duration clause.

B C Toms