Contracts, payment and disputes

Companies entering a new market negotiate hard on price and casually on payment terms. The second decision determines whether the first one matters.

The instruments, in order of security

Advance payment. Completely secure for the seller and commercially difficult, because it puts the entire risk on the buyer and few will accept it beyond a first transaction.

Documentary letter of credit. A bank undertakes to pay against documents proving shipment. Secure, well understood internationally, and slower and more expensive than people expect — every document must match the credit exactly, and discrepancies are the normal reason payment is delayed.

Bank guarantee or standby credit, which sits behind an open account arrangement and is called only if payment fails.

Documentary collection, which is cheaper than a credit and gives less protection: the bank handles documents but does not guarantee payment.

Open account, which is normal between established partners and is unsecured credit by another name.

Credit insurance

Frequently the practical answer for ongoing trade: insure the receivable, sell on open account, and let the insurer assess the buyer. Export credit agencies in most European countries cover trade with Ukraine, and their appetite has broadened.

The practical advice

For a first transaction with a new counterparty, use a secured instrument even if it costs margin. Move to open account when you have a payment history, not when the counterparty asks.

And check who you are actually contracting with. A well-known trading name may be a small entity with no assets, and a guarantee from the group is worth having in writing before you ship.

In a new market the most expensive mistake is not missing a sale but making one and not being paid — and a firm that makes it once usually withdraws from that market. My own rule is that the first three shipments go on a letter of credit and everything after that depends on the record. It looks rigid, but in twenty years it is why the receivables I never collected can be counted on one hand.

Every contract has a clause specifying where disputes are resolved. It is usually the last thing agreed, by people who are tired, and it is the provision that determines your position if anything goes wrong.

Ukrainian courts

Cheaper, faster than their reputation suggests in commercial matters, and conducted in Ukrainian with Ukrainian procedure. Judicial reform has improved the commercial courts materially, and a straightforward debt claim is a reasonable thing to bring here.

The disadvantage for a foreign party is unfamiliarity and the perception of risk, which affects how a dispute is viewed by your own board and insurers regardless of the actual quality of the court.

International arbitration

The usual choice for cross-border contracts of any size. Neutral forum, arbitrators the parties select, proceedings in a language both understand, and — the decisive advantage — an award enforceable in most countries under the New York Convention, to which Ukraine is a party.

The disadvantage is cost. Arbitration is expensive enough that it is not worth invoking below a certain claim value, which means a badly drafted clause can leave you with a theoretical remedy you cannot afford to use.

The practical drafting points

Name the institution and its rules precisely. Specify the seat, the language and the number of arbitrators — one for smaller contracts, three for large ones. State the governing law separately from the forum; they are different things and are frequently confused.

And consider a tiered clause: negotiation, then mediation, then arbitration. Most disputes settle, and a structure that requires a conversation before an escalation saves a great deal of money.

The point

Draft the clause as though you will lose the argument on the merits. That is the only way to find out whether it protects you.

I stopped discussing this clause in the last ten minutes of a negotiation years ago; it now goes into the first draft and I do not leave it open. The reason is simple: this clause determines how much the rest of the contract is worth. A receivable you cannot enforce is not a receivable — learning that once is expensive enough.

Every assessment of Ukraine as an investment destination arrives at the same conclusion about the courts: they are the weakest part of the system and the single largest source of risk that cannot be priced accurately.

That is correct, and it is also not a reason to stay out. Substantial foreign capital has operated in Ukraine profitably for two decades. What those investors did was structure around the problem rather than assume it away.

Holding structure

Most significant foreign investment into Ukraine is held through an intermediate holding company in a jurisdiction with reliable corporate law and a strong bilateral investment treaty with Ukraine — historically Cyprus, the Netherlands and Austria have been the most common.

This is not primarily about tax. It is about the governing law of the shareholder agreement, the forum for shareholder disputes, and the ability to invoke treaty protection. A shareholder dispute between two parties in a Dutch holding company is resolved under Dutch law in a Dutch forum, regardless of where the operating asset sits.

Arbitration clauses

Ukraine is a party to the New York Convention, which means foreign arbitral awards are enforceable there. That is a meaningfully different position from relying on a Ukrainian court to decide the merits.

The practical guidance is to specify institutional arbitration — the ICC, the SCC in Stockholm, the LCIA, or the Vienna centre — with a seat outside Ukraine and a defined governing law. This is standard in large contracts and is often omitted in mid-sized ones, which is a mistake worth correcting at the drafting stage.

The limitation is cost. International arbitration is expensive enough that it is not a realistic remedy for disputes below a substantial threshold, which is why the other mechanisms matter more for mid-sized business.

Treaty protection

Ukraine has bilateral investment treaties with a large number of countries, and the Energy Charter Treaty applies to energy-sector investment. These provide protection against expropriation and unfair treatment by the state, enforceable through investor-state arbitration.

They protect against state action, not against a commercial counterparty, and they only apply if the investment is held through a qualifying jurisdiction — which is one more reason the holding structure matters.

What actually protects a mid-sized investment

For most companies the legal mechanisms are a backstop rather than a working tool, and the real protections are operational.

Control of the things that cannot be taken: the customer relationships, the brand, the technical knowledge, the supply of a critical input. A local partner who takes the assets but cannot serve the customers has taken very little.

Majority ownership with clear board control, or a minority position with genuine veto rights over the decisions that matter — never a 50/50 structure, which is the configuration that produces the most deadlocks and the worst outcomes.

Staged investment tied to milestones, so that exposure grows as the relationship proves itself rather than all at once at the beginning.

Direct banking relationships and direct control of the company seal, the registration documents and the bank signatures. A surprising share of disputes in this region come down to who physically controls the corporate documents.

The honest summary

None of this makes the court risk disappear. It makes the realistic worst case a commercial loss rather than a total loss, and it puts the counterparty in a position where cooperating is more profitable than defecting.

That is the actual objective. In any jurisdiction with weak enforcement, the goal is not to be able to win in court — it is to structure the arrangement so that no one has a strong incentive to take you there.

Related in this archive

• After Crimea: the trade geography that changed in three weeks
• What a foreign company actually does when a country goes into crisis
• Black Sea logistics: how cargo actually moves, and what happens when a route closes
• Ukraine Annual Review 2014: the year everything deferred came due

Drafting a contract I always ask myself the same thing: if I have to enforce this clause, where do I go and how long does it take. If the answer is uncertain the clause does not exist. What actually protects a mid-sized investment is not the arbitration clause but your partner wanting to keep working with you — law is the last resort and the relationship is the first line of defence.

Insolvency law is where a legal system is tested honestly, because it decides who loses money when there is not enough to go round, and everyone involved has a strong incentive to litigate.

What the code changed

Defined timelines for each stage, replacing procedures that could run for years without a decision. A case that never ends is functionally a case the creditor lost.

Stronger creditor participation, with committees able to influence the process rather than watching it.

Electronic auctions for the sale of assets, published and open, which is the single change that most affects how much creditors actually recover. A closed sale to a known buyer at a low price was the classic mechanism for making value disappear.

And, for the first time, a personal insolvency procedure, which matters for households carrying foreign currency mortgage debt.

What a supplier should still expect

That the process takes longer than the code implies, that secured creditors do considerably better than unsecured ones, and that recovery rates for unsecured trade creditors are low — as they are in most jurisdictions.

The practical advice

Insolvency is the wrong place to start protecting a receivable. Security, prepayment, credit limits and paying attention to a customer's payment behaviour are worth more than any recovery procedure.

What still lags

Enforcement of the judgment once obtained, and the quality of insolvency practitioners. A good code administered badly produces the same outcome as a bad code.

As a supplier chasing an unpaid invoice my only question has always been when the process ends. The code made ending possible — but enforcement still lags, which is why my practical advice has not changed: secure the receivable before it reaches litigation. A court is not a solution but the most expensive form of not having one.

Companies entering Ukraine usually treat intellectual property registration as an administrative formality. It is a strategic decision with consequences that appear years later.

Register early

Ukraine, like most countries in the region, operates a first-to-file trademark system. The rights belong to whoever registered, not to whoever used the mark first.

The practical consequence is well known and still catches people: a company negotiates with a local partner, the partner registers the brand, and the company discovers it must buy its own trademark back. Register before you negotiate, not after.

Register broadly enough

Classes matter. A mark registered for one class of goods does not protect against use in another, and a company that registers narrowly to save fees discovers the gap when someone exploits it.

Register the Cyrillic transliteration as well as the Latin form. They are different marks, and consumers use both.

Designs and patents

Industrial design registration is cheap, fast and consistently neglected. For a product whose value is partly its appearance, it is often more useful than a patent.

Patents require the invention not to have been disclosed. Companies routinely destroy their own patentability by exhibiting at a trade fair before filing.

Enforcement

The most effective practical tool is customs registration: recording your rights with the customs service so that suspected counterfeits are stopped at the border. It works, it is inexpensive, and most rights holders never do it.

The advice

Spend a small amount at the beginning on registration done properly. The alternative is spending a large amount later on litigation to recover a position you could have held for a filing fee.

Registering a trademark before entering a market costs a few hundred euros; registering it afterwards costs a lawsuit and sometimes the mark itself. I met this in distribution: somebody had registered the name of a brand I represented before I got to it. Registration belongs near the top of the list of things done before selling, and it almost never is.

Any company operating in Ukraine with foreign currency costs or debt faces the same question: what happens to the business if the hryvnia moves twenty per cent.

Why the standard answer is hard here

The textbook response is a forward contract. In Ukraine the forward market is thin, tenors are short, pricing is expensive and during periods of currency control the instruments may not be available at all.

A hedge you cannot roll over is not a hedge; it is a deferral.

What companies actually do

Natural hedging, which is the most robust approach available: match the currency of your revenue to the currency of your costs and debt. An exporter earning in euros and borrowing in euros has no exposure. The same firm borrowing in hryvnia to buy equipment priced in euros has created one deliberately.

Pricing clauses: contracts denominated in or indexed to a foreign currency. Legal, common, and it transfers the risk to your customer rather than removing it — which works until the customer cannot pay, at which point you have converted currency risk into credit risk.

Balance sheet management: holding working capital in the currency you will need it in, and not accumulating hryvnia balances you do not require.

The mistake to avoid

Assuming stability because the rate has been stable. Ukraine has had long stable periods followed by sharp adjustments, and the stable periods are precisely when firms stop hedging.

The practical rule

Structure the business so it survives a large move rather than trying to predict one. Prediction is unavailable; structure is a decision you control.

I live this problem every month, and I know the standard answer does not work here: there is no deep forward market, and what exists costs close to the risk itself. Our solution is commercial rather than financial — write the contract in euros and put the currency clause in from the start. The mistake to avoid is treating carrying the exposure as a deliberate decision: most companies are simply postponing it.