British-Ukrainian Chamber of Commerce

Recommendations to Resolve Key Problems and Protect Investors in Ukraine

The British-Ukrainian Chamber of Commerce (“BUCC”) seeks with this article to address a number of problems currently under discussion that discourage the investment needed for Ukraine.

1. The Judicial Ombudsman Proposal: Ukraine Needs Real Judicial Reform to Fight Corruption – Not Another Bogus Reorganisation

Recent statements published in the KyivPost by a number of political science and economics (but not legal) experts have called for another reorganization of the Ukrainian court framework in response to accusations of court corruption. While Ukrainian courts still have some problems, the last thing the judiciary needs is yet another attempt to revise the number of courts and judicial positions, as apparently one elite tries to replace another, moving positions around without any meaningful systemic reform to actually address corruption. As we earlier predicted, many of the reforms previously adopted to supposedly fight court corruption were superficial and generally unsuccessful – it is time for a different approach.

What is needed instead is true systemic reform that actually addresses the key issue – which is the content of judicial decisions affecting litigants. The BUCC’s proposed solution is to create a Ukrainian judicial ombudsman (sometimes referred to as a “legal ombudsman”) to respond to the critical problem facilitating corruption in Ukraine, which is the total absence of any independent systematic outside oversight over what courts actually do, i.e. of the quality of their decisions. The judicial ombudsman is a “silver bullet” solution that should be relatively simple to implement and that would fundamentally forever improve the Ukrainian judicial system. By creating a judicial ombudsman similar to that in Sweden to investigate decisions that are claimed to not be properly based on applicable law, either due to corruption or incompetence, litigants would be protected from much of the gross corruption of the sort used to dispossess investors in Ukraine, that has resulted in so many bilateral investment treaty (“BIT”) arbitrations for Ukraine. In the early 1900s, Sweden courts were also perceived as being among the more corrupt in Europe, but their judicial ombudsman put their courts onto a completely different course. Ukraine has the potential now to develop, as Sweden has, into a model country, both for commerce and for justice, which are, of course, somewhat linked.

Are court decisions properly decided in accordance with law, or do they constitute “denials of justice” (defined, inter alia, as whenever a court fails to observe its duty to decide a case in accordance with law, and instead renders a decision for which there is no reasonable legal basis)? While this standard is applied for Ukraine with respect to foreign investors under the typical BIT, our proposed judicial ombudsman would apply this standard to all litigants, based also on the Ukrainian judicial oath of office under Article 126 of the Constitution that a judge may be dismissed for failing to “objectively, impersonally, impartially, independently and fairly administer justice, complying only with the law, to honestly and faithfully perform the duties of a judge”.

The BUCC has several variations for this judicial ombudsman proposal (which we will elaborate on in subsequent articles) – the critical decision now is to adopt the principle for the creation of such an ombudsman to be available to review judicial action in response to complaints by litigants. The ombudsman we propose should be able to: (1) send decisions that he or she finds constitute denials of justice, at any judicial level, back for reconsideration by different judges, and (2) recommend that those judges adopting such denial of justice decisions be investigated and possibly lustrated for cause (i.e. for breach of their oath of office, rather than dismissed because of some criterion not relevant to judicial performance).

The proposed judicial ombudsman would therefore provide for a relatively quick review at any judicial level. It would not act like another court to decide cases itself – but rather would provide an independent outside review of the legal basis for a judgment and, where appropriate, recommend a rehearing. This is similar to how BIT arbitration tribunal functions, but a BIT tribunal cannot act until all domestic court appeals are exhausted, which can take two or more years, and the full arbitral process itself to render a final award can take a further three to four years.

For most investors, such a full BIT arbitration process takes too long to protect their investment and costs too much, typically many millions of US dollars. Usually, even where eventually a denial of justice is found in a BIT cases, it is too late for the authorities to discipline the judge for improper behaviour. The BUCC’s proposed judicial ombudsman would be available to react quickly to decisions at any court level at the request of any litigant (foreign or domestic) in time to save the litigant’s property before it is sold on or otherwise destroyed in value. This ombudsman’s decision would function, in effect, only as an interim review to safeguard the litigant’s position, and not as a definitive judgment, with the courts then reviewing in detail the problems identified by the ombudsman.

Such judicial ombudsman review should effectively block corporate raiders from quickly using the Ukrainian courts to effectively steal investor property based on claims made without any genuine legal basis – the most serious court corruption problem currently for the members of the BUCC and other international chambers that invest in Ukraine. For this proposal to work, of course, the person selected to be the ombudsman needs to be someone universally respected as an incorruptible legal expert at the highest level. As for the very effective Ukrainian Business Ombudsman, the appointee might be an eminent foreign legal authority (like the former judges and other legal experts typically appointed to BITs arbitration tribunals), which should help, in particular, to restore foreign investor confidence in the Ukrainian courts.

Thus, rather than needlessly take apart and reorganise the existing Ukrainian judicial system, that will take many more years, will slow down the disposition of existing cases harming litigants while this is on-going and is unlikely to help fight corruption (as the previous reorganisation reform has shown), Ukraine needs systemic reform that addresses the lack of any independent outside oversight of the Ukrainian judiciary to remedy denials of justice that result from corruption or incompetence – i.e. a reform that focuses on what courts actually do in actual cases, and responds to denials of justice for actual litigants, in reality rather than only in theory. This is currently done for foreign investors by the BIT arbitration process (and sometimes by the European Court of Human Rights), but as noted, only after exhaustion of remedies in Ukrainian courts, so it typically takes five to eight years, which is too late to help most investors, and the process is very expensive, so only very large litigants can ordinarily afford to use such BIT arbitration. Consequently, the BIT protections do not sufficiently encourage most potential investors that they will be adequately protected legally in Ukraine.

Instead, Ukraine needs a reform to provide judicial oversight by allowing the rapid review of judicial decisions in response to complaints by litigants made to an independent legal authority, the judicial ombudsman, so that neither corruption nor incompetence can have a decisive influence on the decisions of judges to deprive investors of property – the critical problem presently. The judicial ombudsman that we propose should block court decisions effectively dispossessing investors and others of property without a genuine legal basis.

(Previous articles on the BUCC’s Ombudsman proposal can be found at:  https://www.kyivpost.com/article/content/business-wire/the-proposal-for-a-legal-ombudsman-to-end-abuses-of-justice-by-ukrainian-courts-by-bate-c-toms-411404.html; https://www.kyivpost.com/article/content/business-wire/the-proposal-for-a-legal-ombudsman-for-ukraine-to-combat-and-further-the-rule-of-law-384652.html; https://www.kyivpost.com/article/content/legal-quarterly/toms-promotes-legal-ombudsman-as-a-fix-to-ukraines-justice-system-399814.html

2. Some Solutions to Other Important Problems

(1) Political Risk Insurance

Despite what some have recently suggested in the KyivPost, court corruption, while an important issue, is certainly not the principal deterrent to investment in Ukraine. Most foreign investors operate in Ukraine without material legal problems. The principal impediment to investment in Ukraine is from the war in Donetsk-Luhansk, the occupation of Crimea and the continuing threats made against Ukraine. The best response to this problem to encourage investment is by greatly increasing the availability of political/conflict risk insurance from the World Bank’s MIGA and other western sources, so that investor risk from conflict in Ukraine can be covered by reasonably priced insurance (please see the proposals on this made by the ICBAC (the International Council of Business Associations and Chambers in Ukraine) and the BUCC at https://www.kyivpost.com/business-wire/the-resolution-of-icbac-the-international-council-of-business-associations-and-chambers-of-commerce-in-ukraine-on-the-need-for-the-ukraine-reform-conference-on-2-to-4-july-2019-to-agree-on-providing.html)

(2) Irrigation Farming

Another serious problem, due apparently to climate change, is that Ukrainian agriculture in the south is suffering from increasing draught – but there are no major active irrigation projects. The BUCC has for 10 years been suggesting that new irrigation is needed to respond to this threat to the economy. Something now needs to be done quickly, bearing in mind that irrigation projects typically take a long time to complete.

The BUCC is currently developing a model pilot irrigation project based on contractual arrangements, as is used in the American west, as presently there is no regulatory framework in Ukraine for this. Fortunately, large scale irrigation is possible in Ukraine due to Ukraine’s many large rivers.

(3) Reform of Ukrainian Legislation

The BUCC is frustrated by the many legal problems, including technical errors in Ukrainian legislation, that continue to exist, despite criticisms that should have long ago resulted in their cure. For example, it is often impossible to do a complete legal due diligence on Ukrainian real estate because notarial records on prior transactions are often not made available, even to the owner that is selling, based on an odd interpretation of notarial privacy. Instead, each property owner should have a right to access all records on all prior transactions in the owner’s chain of title, that the owner should succeed to as well upon acquisition of a property. Due to such limitations on prior due diligence, the BUCC recommends that in order to protect against possible prior title problems that an owner is not aware of, after a period of time, say 12 years, all possible prior conflicting claims against a registered owner that have not actually been legally made in court, since the owner acquired its title, should expire. (While Ukraine has a statute of limitations, it is subject to too many possible exceptions, so more is needed to protect title.) These and other problems in real estate law discourage investors, often preventing knowledgeable lawyers from being able to issue clean legal opinions to the purchasers of real estate, and need to be remedied. Another example of a problem is that foreign investors are not presently able to have trusted foreign employees serve as their initial directors of their Ukrainian companies if they wish. Instead, they must initially appoint someone whom they may not really know or trust, giving them power over bank accounts and other assets, merely because the foreign investor presently must appoint a Ukrainian as its first director – a rule that has led to serious corruption damaging many US, UK and other investors.

Bate C. Toms,

Chairman of the BUCC; Managing Partner of B C Toms & Co, Kyiv and London; JD Yale Law School and MS Yale Graduate School. Mr. Toms has extensive experience with obtaining remedies for investors in Ukrainian and foreign litigation as well as BITs arbitrations, including the largest award for a Ukrainian investor claim for a denial of justice in a BIT case, at the Permanent Court of Justice at The Hague. He is chair of the BUCC’s Legal Committee. This article reflects law reform positions taken by the BUCC, but the author takes sole responsibility for its wording.

The BUCC is committed to helping Ukraine address the major issues facing business in the country.

Please join the BUCC, and help us improve Ukraine, by emailing or telephoning us at:

Email: BUCCUkraine@bucc.com.ua

Tel.: (38044) 490 6000