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Business world says judicial reform is Ukraine’s top priority

The current system of commercial courts in Ukraine is based on the system of state arbitration of the former USSR, which does not fully correspond to the needs of contemporary business. Photo:
Business world says judicial reform is Ukraine’s top priority
A recent survey of 100 CEOs of the largest Ukrainian investors by the American Chamber of Commerce revealed they don’t trust Ukrainian courts. Ukraine’s shaky judicial system remains, arguably, the country’s largest impediment to investments. We explore what needs to be done for businesses to have good arbitration in Ukraine, and compare this to how the problem is resolved in Western Europe.

100 CEOs and top managers of the largest Ukrainian and international investors are estimated to be part of Ukraine’s business world, says a member’s survey conducted by the American Chamber of Commerce — Ukraine’s most powerful, international business association. The majority of the respondents recognized judicial reform, implementation of the rule of law, and eradication of corruption as top priorities for Ukraine’s economic growth.

According to the survey, 90% of respondents gave a positive forecast for the year-end of their companies — 62% stated they will achieve planned financial results, and 28% said they will achieve better than planned. Only 10% stated that their companies will fail to achieve planned financial results. Also of note, 65% of respondents reported an increase in revenues in 2021 compared to 2020, 46% had an increase in the number of employees, and 37% an increase in investments.

Meanwhile, a fair judiciary remains the top priority for Ukraine’s cooperation with its Western partners, as is included in the EU and IMF memorandums. Moreover, a fair judiciary is often named as the main obstacle for other reforms within the country. Predictably, the American Chamber members also specified reforms as a top priority.

Importantly, the report shows that 93% of businesses stated that the implementation of real and effective judicial reform; rule of law; fair justice; and the eradication of corruption is the number one strategic step Ukraine’s government should take first, to achieve economic growth, improve the business climate, and attract direct foreign investment.

Сourts (56%), law enforcement agencies (32%), oligarchs (28%), and tax authorities (28%) create the biggest obstacles for business, according to the chamber’s research.

The possibility of a new lockdown (61%), geopolitical uncertainty (53%), and the escalation of conflict with Russia (39%) were identified by business representatives as the top three major concerns, with regard to doing business over the next six months.

How Swedish manufacturer faced Ukraine’s judiciary

Lawsuits  between the Swedish truck manufacturer Scania Ukraine and its vehicle dealers and service providers have lasted for years. Photo:

One of the vivid illustrations of how business and judiciary are closely related are the lawsuits between the Swedish truck manufacturer Scania Ukraine and the vehicle dealers and service providers Zhuravlyna and Proscan, which have been ongoing for about a decade.

Zhuravlyna and Proscan almost simultaneously filed lawsuits against Scania Ukraine, demanding compensation for alleged lost profits. Proscan lost its premises due to loan debts. The bankruptcy proceedings on it started. The company could not fulfill its obligations, which led to the termination of the contract with Scania.

The contract with Zhuravlyna was terminated after Scania exposed them for selling cheap, old spare parts to customers, instead of the original products of the Swedish manufacturer. Commenting on the Zhuravlyna case to Kyiv Post, Vitaliy Tytych, ex-coordinator of the Public Integrity Council (a civil society watchdog), said that it is crystal clear for any lawyer that it is practically impossible to win a case such as this without paying off the judges.

Depending on the outcome of the lawsuits, the Swedish producer could lose more than $10mn.

“There needs to be a reliable judicial system so that foreign companies don’t feel it’s a risk to invest in Ukraine. I think it’s the first, second, and third thing that you ask for in this country,” Håkan Jyde, managing director of Scania, said in his interview with Kyiv Post.

Launched in Summer 2021, President Volodymyr Zelenskyy’s judicial reform has been stuck in the initial stage of implementation. In particular, old guard judiciary representatives have blocked the formation of the Ethics Council which is key to reforming the High Council of Justice — the highest judiciary executive body and the core group responsible for forming the judicial corps in Ukraine.

Meanwhile, on 8 October the Supreme Court supported the old guard High Council of Justice requesting the Constitutional Court to check whether some provisions of the judicial reform correspond to the Constitution. This step puts at risk the reform which has only been launched.

“We will continue to vigorously push for rule of law, and protection of investors’ rights, making Ukraine a better and more secure place to do business,” Andy Hunder, President of the American Chamber of Commerce in Ukraine, stressed while commenting on the results of the survey.

Other top strategic steps which the government should take, according to the American Chamber research are the following:

  • guarantee a fair, equal, predictable, and transparent tax policy as well as fair competition (52%);
  • ensure macroeconomic stability and continue cooperation with the IMF (26%);
  • ensure predictability of the regulatory environment for investors (23%); and
  • secure investment and property rights (21%).

What can be done for making businesses trust Ukrainian courts

Analyzing how justice for business works in Western Europe, Taras Shepel, co-founder and member of the board of the DEJURE Foundation, summarizes that in Western Europe business disputes are mainly resolved by the business community itself, through self-governing arbitration institutions. A smaller number of disputes is resolved by state courts.

In particular, the expert describes how in Western Europe, national entrepreneurs form courts to protect economic interests. In France, specialized commercial courts exist within the original jurisdiction of wrongdoing. Judges here are appointed for four-year terms by entrepreneurial groups that include judges of the commercial courts.

In Germany, Austria, Belgium, and the Netherlands there is the possibility of resolving commercial and even civil disputes by a blended court, which, in addition to the state judge, includes jurors elected by entrepreneurs. This allows for the creation of a court of experts and prevents the risk of corruption.

Shepel notes that modern Ukraine appeared out of the totalitarian Soviet Empire.

“After gaining independence, our state, unfortunately, went into the negatives, because it started to adapt socialist instruments, including the courts, to capitalist realities. They immediately shifted their subordination to party functionaries for a subordination to newborn businessmen-politicians.”

Shepel concludes that courts remain an instrument of domination of the rich over the poor.

DEJURE’s research analyzes the activities of commercial judges in Germany, and assesses the prospects of the restoration of activities of commercial judges in Ukraine, using the German experience.

Their research traces how the current system of commercial courts in Ukraine is based on the system of state arbitration of the former USSR, which does not fully correspond to the needs of contemporary business, and is another reason why trust in the courts is extremely low. Further, the report outlines how major distrust also lies in the lack of accountability; for example, the fact that the court resolves business disputes without the business community itself.

The business community, as well as ordinary citizens, do not trust judges appointed under the current procedure. The influence of entrepreneurs on the career of judges is no different from that of ordinary citizens — solely indirect, exercised through the process of parliamentary and presidential elections. Only those who are elected implement policy regarding the judiciary delegating their members to the bodies of judicial governance — the High Qualifications Commission of Judges and the High Council of Justice. However, these two bodies are the very ones that need reform because they have been proven to be corrupt.

The report of the DEJURE Foundation underlines that direct participation of business in the selection and appointment of commercial court judges could increase trust in the commercial courts through better insight into the needs of the business. Importantly, when talking about judicial reform, the report notes that reforming commercial courts should be considered as a separate undertaking for the following reasons:

  • Commercial courts are quite a compact system that is easier to change;
  • Commercial courts are a priority for the protection and development of business; and
  • Resolution of commercial disputes requires much less funding and is possible to attract from the business community itself.

The report concludes that changes to the commercial courts should be addressed in the manner of a separate judicial reform direction. In particular, representatives of business communities should be involved in the process of the competition procedure and continuance — in other words, the qualification for, and assessment of, commercial court judges.

However, so far reforming the core of judiciary, the bodies of judicial governance, is the main step to launch changes in all kinds of courts.

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