Potential risks in contractual work in the enterprise through the prism of litigation

Entering into contracts with counterparties is an important factor in conducting business activities. When entering into a contract, it is necessary to consider the potential risks that may arise in the course of fulfilling that contract.

Main risks when concluding contracts

1. Improper counterparty due diligence

It is advisable to check the counterparty with whom the contract will be concluded, even if the company has been cooperating with it for a long time, but there has been a break in such cooperation. If the contract is concluded with a new counterparty, such verification is mandatory.
Проверка контрагента осуществляется с целью установления "добросовестности" субъекта хозяйствования. Ненадлежащая проверка контрагента может стать основанием для возникновения споров в процессе выполнения договора, а в дальнейшем - обращения в суд.

This verification is done with the help of open resources such as:

• ‘Judicial Power of Ukraine’
• Unified State Register of Court Decisions
• Automated system of enforcement proceedings
• Unified register of debtors
• Unified State Register of Legal Entities, Individual Entrepreneurs and Public Formations

It is also necessary to check that the person signing the contract has the authority to sign the contract. The existence of such authority should be stated in the company's Articles of Association or another document to be provided to the other party to the contract to confirm the signatory's authority.

A number of rulings of the Supreme Court contain a stable legal position on this issue, which is that if the contract contains a condition that it is signed by a person acting on the basis of the company's charter or other document confirming his powers, this indicates that the other party to the contract is aware of such documents, and the court may not take into account the references of this party to the fact that it was unaware of the limitation of the powers of the counterparty's representative (rulings of the Supreme Court of 09. 04.2019 in case No. 924/491/17

2. Failure to agree on contentious issues at the stage of drafting the treaty

The agreement by the parties of the material terms of the contract is a very important stage in the process of contract conclusion.Issues arising in the process of consideration and agreement of the parties to the draft contract can be settled and recorded in a protocol of disagreements. Thus, the parties will reach a compromise and establish mutually beneficial terms of co-operation.

3. Failure to record oral agreements between the parties to the contract in writing

Contractual relations between counterparties are often not limited to the conclusion of a contract. Certain conditions for the fulfilment of the contract are disclosed in more detail in annexes to the contract. Also, in the process of co-operation, the parties may agree on the need to make changes to the concluded contract. Such changes must be fixed by signing additional agreements to the contract or other documents. Lack of written agreement on amendments to the contract may in the future become the basis for the counterparty to apply to the court and proving the existence of agreements in such a case becomes much more difficult.

4. Insufficient attention to the section that provides for the application of penalties for improper fulfilment/non-fulfilment of the terms of the contract

A fairly common situation is when the parties to a contract decide not to specify in detail the section providing for the application of penalties for non-fulfilment or improper fulfilment of the terms of the contract.
As a consequence, it is impossible to collect penalties (fines, penalties) from the counterparty for breach of fulfilment of the obligation.
The ruling of the BP of the Supreme Court of 10.12.2019 in case No. 904/4156/18 states that if the terms of the contract do not establish the amount of penalty for breach of monetary obligation, and part six of Article 231 of the Civil Code of Ukraine does not establish a specific amount (percentage) of the penalty, but only determines the procedure for its establishment in the contract based on the discount rate of the National Bank of Ukraine and the period of application of the sanction, there are no grounds for the application of such a measure of liability as a contractual sanction.

5. Lack of specificity in the contract regarding actions in case of force majeure events

The occurrence of force majeure in itself does not release the business entity from liability for breach of contract terms, as such circumstances must be certified by the Chamber of Commerce and Industry of Ukraine or regional CCIs, which establishes the causal link between the presence of force majeure and the inability to fulfil the obligation under the contract. Accordingly, the document certifying the existence of force majeure in a particular case is the CCI certificate issued as a result of consideration of the company's application.

On the question whether the CCI letter dated 28.02.2022 No. 2024/02.0-7.1 is evidence of the existence of force majeure, the Supreme Court in its ruling dated 13 September 2023 in case 910/7679/22 expressed the following position:

‘The letter of the CCI dated 28.02.2022 No. 2024/02.0-7.1 is not proof of the onset of force majeure for all economic entities of Ukraine with the beginning of the military aggression of the Russian Federation. Each business entity that cannot fulfil its obligations under a certain contract must prove the existence of force majeure.’

Thus, there is a need for a business entity to obtain a CCI certificate of certification of force majeure in each specific case.Also, it should be taken into account that if the contract defines a term within which a party must notify the other party of the occurrence of force majeure, such notification is mandatory. If the contract establishes a term for such notification, late notification or failure to notify the counterparty of the occurrence of force majeure deprives the party of the right to refer to these circumstances, if provided for in the contract. Otherwise, a breach of the notice period does not automatically mean the loss of the right to invoke force majeure.