42705 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

UKRAINE COMMERCIAL DISPUTE RESOLUTION STUDY Researching commercial disputes among Ukrainian companies Public Disclosure Authorized The contents of this report are protected by copyright.

Neither this report nor its parts may be reproduced, copied or distributed in any form without reference to the International Finance Corporation report “Ukraine Commercial Dispute Resolution Study. Researching Commercial Disputes among Ukrainian Companies”.

This report is to be distributed under the condition that it will not (as the result of sale or otherwise) be loaned or resold, rented or distributed on any kind of commercial basis without prior consent from the International Finance Corporation (IFC).

The materials contained in this report are presented as an overview of the results of a study that was conducted in May-June 2006 among Ukrainian companies by size – small, medium and large and by region – Kyiv, Lviv and Dnipropetrovsk. The study was funded jointly by IFC and the Swedish International Development Agency (SIDA). The information in this report is presented in good faith for general information purposes, and the Swedish International Development Agency (SIDA), the International Finance Corporation (IFC), the World Bank Group or PricewaterhouseCoopers (PwC) shall not be held liable for any of the information contained herein.

This report does not claim to serve as an exhaustive presentation of the issues discussed herein. Although the Ukraine Commercial Dispute Resolution Study experts took a very thorough approach in preparing this report, it should not be used as a basis for making commercial decisions. Please approach independent legal experts for their expert recommendations on any legal issues.

All information and materials used in preparing this report are the property of and archived by the International Finance Corporation (IFC).

© 2007 International Finance Corporation

This report was peer reviewed and edited by PwC UKRAINE COMMERCIAL DISPUTE RESOLUTION STUDY Researching commercial disputes among Ukrainian companies

2006

Ukraine commercial dispute resolution study

CONTENTS

1. INTRODUCTION ...... 4

2. KEY TERMS DEFINED ...... 5

3. EXECUTIVE SUMMARY ...... 6

4. THE RESULTS ...... 9 4.1 Introduction ...... 9 4.2 Frequency of Disputes ...... 9 4.3 Nature of Disputes ...... 10

5. IMPACT OF DISPUTES ...... 12 5.1 Effect on Current Business ...... 12 5.2 Termination of Business Relationships ...... 13 5.3 Employees and Time Involved in Resolving the Dispute ...... 14 5.4 Financial Costs of the Dispute ...... 15

6. CURRENT USE OF DISPUTE RESOLUTION METHODS ...... 18 6.1 Use of Dispute Resolution Methods in General ...... 18 6.2 Negotiation ...... 19 6.3 Court Proceedings ...... 21 6.4 Arbitration ...... 22 6.5 Mediation ...... 24

7. AWARENESS OF ALTERNATIVE DISPUTE RESOLUTION ...... 25

8. CONCLUSION ...... 27

ANNEX 1. Survey Methodology ...... 28

ANNEX 2. Survey Results by Company Size ...... 34

3 1. Introduction Ukraine commercial dispute resolution study

1. INTRODUCTION

The International Finance Corporation (IFC), the private-sector arm of the World Bank Group, conducted a comprehensive survey of commercial disputes of businesses in Ukraine in 2006. This study, which was funded by SIDA, the Swedish International Development Cooperation Agency, is part of IFC’s work to improve business opportunities and the private sector environment in Ukraine. Consistent with these aims, IFC is interested in ensuring that business disputes can be efficiently resolved so that enterprises can devote their resources to doing business.

IFC conducted the survey to gain an understanding of how business disputes are currently managed and resolved, the resources businesses devote to such disputes, the effectiveness of and satisfaction with current dispute resolution methods, the needs and priorities of businesses when resolving disputes, and the demand for alternative methods, particularly focusing on the potential for developing commercial mediation in Ukraine. The survey required executive level people to take time out of their busy schedules to share potentially sensitive information about company matters. IFC wants to thank all respondents for their time and efforts and also leading business organisations for their cooperation in order to help promote an interest in the survey.

IFC also wants to thank Dr. Patricia Shaughnessy, University of Stockholm, Sweden, lead consultant to this survey for her professional guidance and analysis of the survey results and also Dr. Michael Hammes, Pricewater- houseCoopers, Frankfurt, Germany, for editing and providing a peer review of the survey report.

4 2. Key terms defined Ukraine commercial dispute resolution study

2. KEY TERMS DEFINED

Alternative dispute resolution (ADR) refers to any process by which parties, either individuals or legal entities, can resolve disputes without entering the formal court system. The two main types of ADR are arbitration and mediation.

Arbitration is a process whereby two parties come together before a neutral third party who is a trained arbitrator, who listens to both sides and then issues a decision which may be binding or non-binding, depending on what the parties have agreed to in advance (usually in a contract). In effect, arbitration creates a private court system. If one of the parties does not want to adhere to the terms of the decision, it might need to be enforced through the public courts.

International arbitration is used when the parties or the subject of the dispute are based in different jurisdictions. Usually the parties have entered into an agreement which indicates to which international arbitration court the case should be referred. This type of arbitration is also used by governments to resolve international disputes.

Domestic arbitration is used when the parties reside in or have a business registered in the same country and refer the dispute to an arbitration court in that country.

Mediation is a process whereby two or more parties sit down with a neutral third party, usually a trained mediator, who facilitates a mutually acceptable agreement to resolve the dispute in question by focusing on interests rather than legal positions and contractual rights. Unlike litigation and arbitration, in mediation the parties come to an agreement themselves – the mediator does not make any decisions for them.

5 3. Executive summary Ukraine commercial dispute resolution study

3. EXECUTIVE SUMMARY

In business, disputes are inevitable. Resolving them quickly while preserving important business relationships is a key priority in a modern commercial environment. In Ukraine today the main formal methods available to businesses for resolving disputes are the court system and arbitration. Informal methods include negotiations, out of court settlements and using the mass media to put pressure on other parties involved in the dispute. The survey gathered comprehensive information from businesses about their disputes, how disputes affect their business, and how they attempt to resolve them. The survey sought to gain insight into business disputes across Ukraine by looking at different regions and sizes of businesses.

A commercial dispute was defined for the respondents as any disagreement between companies that required intervention by any method, including negotiation, some form of alternative dispute resolution, or initiating judicial proceedings. Disputes involving consumers or government bodies, such as tax disputes or other regulatory types of disputes, were excluded from consideration. The survey was conducted in the city of Kyiv which, as the capital, has the largest concentration of businesses, and in the oblasts of Lviv and Dnipropetrovsk, reflecting significant business activities in diverse geographic locations. A total of 1,210 companies were included in the survey. For further information on the survey methodology please see Annex 1.

The following key survey results should be highlighted:

 On average businesses have 4 disputes per year mainly concerning goods and services contracts with clients and suppliers

 Disputes often trigger an end to business relationships

 Small and medium-sized businesses suffer more from disputes while large businesses use courts more frequently and win more often

 Businesses are dissatisfied with the court system, particularly with the enforcement of court judgments and a majority of businesses are interested in trying Alternative Dispute Resolution (ADR)

 Many businesses lack knowledge about arbitration and mediation, but those businesses who have experience in arbitration are satisfied with this procedure

6 3. Executive summary Ukraine commercial dispute resolution study

The survey found that businesses in Ukraine had approximately four disputes per business in the 12-month period preceding the survey. There was a direct correlation between the size of the business and the number of disputes: most small businesses had two disputes, medium-sized businesses – four, and large companies – ten. Most disputes concern conflicts with clients and suppliers regarding goods and services contracts, but also include financial matters (debts and loans).

Many survey respondents reported that their most recent dispute involved a significant contractual relationship with another party. Unfortunately, the survey also indicated that disputes often result in terminating business relationships, with 26 percent of small companies reporting they had terminated a business relationship as a result of their most recent dispute and 17 percent of medium and 7 percent of large companies reporting the same. Such a result is not helpful to business growth and development, particularly if the business relationship was an important one.

Generally, in their most recent dispute, larger companies were less affected and more successful in using the court system to resolve disputes. Smaller companies suffered a greater impact on their current activities and were less successful in using the court system as a dispute resolution method. Smaller companies stated they used the courts less frequently, and, when in court, they lost the dispute more often than not. Large companies report greater use of the courts and greater success, most likely because they frequently have in-house lawyers or legal departments, can afford to hire the best trial lawyers, can exert more influence, have greater access to the media, and are better able to manage the cost of the dispute. Smaller companies tend to try to resolve their disputes through negotiations rather than resort to the courts.

Businesses are generally dissatisfied with the court system as a mechanism for resolving disputes. Thirty-two percent of all businesses surveyed reported they were very dissatisfied with the lack of enforcement of court judgments and this may dissuade companies, especially smaller ones, from undertaking the effort and expense to pursue a dispute in court. Fifty percent of large businesses are able to effectively use the courts to obtain a decision in their favor, but even these users had problems enforcing decisions.

Although new legislation has recently improved the legal framework supporting arbitration in Ukraine, this form of dispute resolution is currently only used by approximately three percent of all companies regarding domestic arbitration and four percent of companies regarding international arbitration. It is noteworthy that 65 percent of respondents who have experience with arbitration are either completely or very satisfied with the effectiveness of this instrument as a means of dispute resolution.

7 3. Executive summary Ukraine commercial dispute resolution study

Mediation is essentially non-existent in Ukraine today. Seventy-seven percent of businesses currently solve their disputes through negotiation without third party involvement. When third parties are engaged to assist in negotiations, parties often feel they’ve been brought in to exert influence rather than to help the parties conciliate or find ways to compromise. Despite this impression of the role of third parties in dispute resolution, 56 percent of businesses indicated they would likely try mediation to resolve disputes if it were available.

The low awareness among Ukrainian businesses of alternative dispute resolution procedures is accompanied by a great interest in obtaining more information about ADR and participating in training and seminars. There is a need to develop more effective dispute resolution in Ukraine, and it is hoped that the judicial system and business organisations will work to accommodate these needs. Increased awareness should lead to a wider inclusion of ADR in contractual dispute clauses and increase the application of ADR in commercial disputes. In particular, mediation as an interest-based consensual solution will increase the rate of compliance with such solutions and therefore, will also decrease the burden of enforcement of judicial decisions. One of the challenges in drafting the questions was determining the level of interest in and demand for mediation when few business people had any knowledge about or experience with mediation. Difficulties with terminology exacerbated this problem as there is no generally accepted equivalent term for mediation in Ukrainian and the word “mediatsiya” (mediation in Ukrainian) is not commonly used or understood. Therefore, it was very important to provide a clear definition of mediation when conducting the survey.

8 4. The results Ukraine commercial dispute resolution study

4. THE RESULTS

4.1 INTRODUCTION

The results of the study provide unique insights into the nature of current commercial disputes in Ukraine and how businesses deal with and are affected by these disputes. While the survey found no statistically significant variation in the data between the three regions surveyed, there was a correlation, in many cases, between the size of the company and the responses to questions. The discussion of the results is presented in the following order: information about the frequency of disputes, the nature and impact of disputes, current methods for resolving disputes, awareness of and interest in the development of alternative dispute resolution mechanisms.

4.2 FREQUENCY OF DISPUTES

The survey found that businesses in Ukraine had approximately four disputes per business in the 12-month period preceding the survey. There was a direct correlation between the size of the business and the number of disputes: most small businesses had two disputes, medium-sized businesses – four, and large companies – 10. At the time of the survey twenty-eight percent of the respondents were involved in an ongoing business dispute. Less than 10 percent of all businesses surveyed had no disputes in the 12 months preceding the survey and nearly 30 percent of large businesses had more than 10 disputes.

10% 10% Chart 1: Average Number of 8% Disputes for Ukrainian 6% Businesses Per Year 4% 4% 4%

2% 2%

0% Large Medium Small All companies

9 4. The results Ukraine commercial dispute resolution study

4.3 NATURE OF DISPUTES

While there is some variance in the nature of business disputes in Ukraine, nearly all disputes have arisen regarding a contract with an important business partner. The majority of respondents indicated that they most often have disputes with companies they will have to do business with in the future. When asked to describe their most recent dispute 87 percent of all respondents, regardless of company size, reported that they had a signed contract with the opposing party, a figure which was slightly lower for smaller companies (84% for small companies, 89% for medium-sized and 90% for large companies). This is significant because it indicates that the parties have an established business relationship presumably intended to have long-term value and provide commercial benefit to both parties.

Fifty percent of all respondents noted that their most recent dispute was with clients and suppliers about goods or services. This is consistent with general international trends where these types of disputes are often the most commonly occurring in terms of the number of disputes registered at courts and arbitration institutes. Disputes concerning financial matters, particularly loans and debts, are also quite common in Ukraine: 36 percent of all most recent disputes were reported in this category. Less common were disputes involving property (8%), intellectual property rights (3%), and corporate relations (3%)1. However, it can also be noted that, internationally, disputes regarding the latter categories are on the rise and this trend is eventually likely to affect disputes in Ukraine as well. Smaller companies tend to have more disputes involving goods and services, while larger companies have slightly higher figures for financial disputes. However, there is not a substantial difference between the type of dispute and the size of the company as Chart 2 illustrates.

Chart 2: GOODS AND SERVICES DISPUTES FINANCIAL DISPUTES

60% 40% 38% Nature of Disputes 55% 36% 37% 50% 49% 50% 47% 32% 30% 40%

30% 20%

20% 10% 10%

0% 0% All Small Medium Large All Small Medium Large companies companies

1 Disputes on corporate relations include disputes regarding ownership of the company (e.g. transaction disputes, shareholder related disputes) and other governance issues.

10 4. The results Ukraine commercial dispute resolution study

Parties based their legal positions in their most recent disputes on interpreting and applying legislation (82%), rather than on industry practices (18%), common sense (16%) or customary practices accepted in a specific business relationship (9%). This is significant because the respondents indicated that they consider one of the most important factors in selecting a dispute resolution method to be obtaining the implementation of the “letter of the law” despite the fact that respondents frequently indicated that they find Ukrainian legislation related to business relationships to be inadequate, ambiguous, or in conflict with other legal provisions. This apparent contra- diction is not unusual for a country in transition such as Ukraine where the ambiguous nature of “the letter of the law” is often used by businesses to their advantage, where possible.

However, when unclear legislation is the basis of a dispute, it can be difficult to predict the outcome, which may increase legal costs and can lead to appeals. The time and expenses associated with such procedures are typically beyond the means of small businesses in Ukraine. This is borne out by the survey results which indicated that while all companies tended to rely upon legislation as their key argument in a dispute, small companies more often relied on common sense, customary practice with the business partner, and generally accepted industry practices than large companies did. Many respondents reported they were critical of Ukrainian legislation and this opinion was also supported by anecdotal evidence.

11 5. Impact of disputes Ukraine commercial dispute resolution study

5. IMPACT OF DISPUTES

5.1 EFFECT ON CURRENT BUSINESS

Although all companies suffer negative consequences from their disputes to some degree, it comes as no surprise that smaller companies suffer greater impact from their disputes than larger ones. The actual impact of disputes can be difficult to measure as many companies appear to underestimate the impact and costs of their disputes by only focusing on legal fees and the amount of the dispute, and not quantifying the costs associated with employee time or opportunity costs.

The survey sought to identify some of the factors that could indicate how disputes may affect Ukrainian businesses, but did not attempt to exhaustively explore this area and did not quantify the impact. The survey focused on the factors which were of particular relevance for determining the suitability of introducing ADR methods. These factors included:

 incidence of terminating business relationships because of a dispute;

 the cost of the dispute in relation to the value of the matters in dispute;

 the number of employees involved in dealing with the dispute;

 the number of days needed to resolve the dispute; and

 the degree of satisfaction with the outcome of the dispute.

The survey did not measure the level of businesses’ actual recovery from a dispute and also did not quantify the impact of negative media coverage, increased costs for doing business, or the loss of business opportunities, good-will or reputation, all of which can often be significant factors in the actual costs of a dispute. The degree of satisfaction with the outcome is discussed in connection with the assessment of particular dispute resolution procedures in section 6.

Large companies reported more frequently that their most recent dispute did not have a significant effect on their current activities; about 55 percent of large companies reported the dispute had no effect on the company’s on-going activities, while 36 percent indicated that the dispute had some but not significant effect on such activities; only 9 percent reported that the dispute completely or substantially adversely affected the company’s activities. About 59 percent of small companies reported that the most recent dispute had affected the current activities of the business.

12 5. Impact of disputes Ukraine commercial dispute resolution study

All companies 11% 39% 48% Chart 3:

Small 13% 43% 41% Impact of Most Recent Dispute on Current Business Medium 11% 39% 49% Activities

Large 9% 36% 55%

Completely suspended current activities Slowed down current activities, but not substantially

Substantially slowed down current activities Did not affect at all

Medium-sized companies fell between these figures, thus indicating that the perceived impact of a dispute on the activities of a company is related to the size of the company. Therefore, it can be concluded that the larger the company the less likely the company’s on-going activities will be affected by a dispute. This may be explained by the fact that larger companies may have more diversified activities and greater resources to withstand and compensate for the negative consequences of disputes.

5.2 TERMINATION OF BUSINESS RELATIONSHIPS

Relationships between business partners, suppliers and clients often play a key role in the success of a business, therefore ending a business relationship can be a decision with far-reaching ramifications. As reflected in Chart 4, more small and medium sized companies (47% each) than larger companies (35%) reported that they had used breach of business relationship as a dispute resolution method in their most recent dispute. When reporting the outcome of their company’s most recent dispute, 26 percent of small companies said the dispute resulted in the termination of the business relationship with the disputing party, compared to 17 percent of medium and 7 percent of large companies. Despite this relatively high rate of business relationship termination, approximately 34 percent of the responding companies indicated the disputing party was either a rather important or the most important business partner for the company. There were only marginal differences according to the size of the company on this last response.

50% 47% 47% Chart 4: 44% 40% Incidence of Use of 35%

30% Terminating Business Relationship as a Dispute 20% Resolution Method 10%

0% All Small Medium Large companies 13 5. Impact of disputes Ukraine commercial dispute resolution study

In cases where the business relationship was terminated 59 percent of companies suffered a financial loss. In 30 percent of these cases, the loss of the relationship was valued at more than half of the amount in dispute.

There were only slight differences in responses according to company size when reporting the length of time over which the parties had cooperated before their dispute arose. In about 75 percent of the responses, the disputing parties had cooperated for more than a year, and in over 40 percent of the disputes this cooperation existed for more than three years.

Despite the relatively long-term nature of the business relationships which formed a basis for the disputes, preservation of business relationships was ranked only fourth on the list of factors companies consider when selecting a method of resolving a dispute (see Chart 12). These responses would seem to indicate that many Ukrainian businesses either do not place significant value on preserving business relationships and may underestimate the cost of establishing new business partners, or can easily establish new partnerships. Other business dispute surveys have shown that companies that value long- term business relationships tend to have fewer disputes, use the courts less frequently, are more likely to resolve their disputes through negotiations, and more frequently base their position in a dispute on common sense rather than on legislation2. The results of the Ukraine ADR survey may be an indication that businesses, particularly small businesses, need more non-court dispute resolution methods and information about the negative impact ineffective dispute resolution can have on their companies.

5.3 EMPLOYEES AND TIME INVOLVED IN RESOLVING THE DISPUTE

One of the important indicators of the impact of disputes is the amount of employee time which is devoted to dealing with a dispute. Human capital is a valuable resource for a company and dedicating employee time and attention to handling disputes does not usually contribute to the productivity

2 A survey “Dispute-Wise Business Management, Improving Economic and Non-Economic Outcomes in Managing Business Conflicts”, New York, 2003, conducted by the American Arbitration Association in the USA determined that so called “most dispute-wise companies” place a higher value on their business relationships with clients, suppliers and partners and thus being economically more successful than “least dispute-wise companies”.

Another study “Commercial Dispute Resolution – Konfliktbearbeitungsverfahren im Vergleich (A Comparative Study of Dispute Resolution Procedures)”, Frankfurt am Main, 2005, conducted by Price- waterhouseCoopers in cooperation with the European University Viadrina, Frankfurt/Oder also revealed that German companies regard the preservation of business relationships as one of the most important qualities of a dispute resolution mechanism.

14 5. Impact of disputes Ukraine commercial dispute resolution study

of the business or generally promote business development. It was not possible to actually measure the total amount of employee time dedicated to handling disputes, but respondents were asked to report the number of people within the company who were involved in handling the company’s most recent dispute. Medium-sized and large companies indicated their most recent disputes required the involvement of approximately 3 employees, while small companies reported a slightly lower figure of about 2.

As mentioned above, many companies fail to fully measure the financial impact of a business dispute because they do not quantify employee time devoted to resolving disputes, or the opportunity costs of employees involved in dispute resolution rather than their regular responsibilities. Taking these issues into account, it becomes obvious that the longer it takes to resolve a dispute the greater the costs may be for the company, therefore efficient dispute resolution capacity is a skill businesses may want to cultivate. Surprisingly, medium-sized companies reported the shortest number of days to resolve issues in dispute with a mean of about 225 days for settled issues and 318 for unresolved issues or cases ongoing as of the date of the interview. In contrast, large companies reported a mean of 240 days for resolved issues and 367 days for unresolved ones; and small companies reported 254 days and 437 days, respectively. These figures are in line with a 2008 World Bank and IFC study which found that resolving a collection dispute in Ukraine required an average of 30 procedures over the course of 354 days3.

5.4 FINANCIAL COSTS OF THE DISPUTE

One of the more obvious costs of a dispute is that of procuring legal services to handle the dispute. The frequency with which businesses referred their most recent dispute to outside legal counsel varied according to the size of the business. Smaller companies tended to refer their disputes to outside counsel more frequently, which is likely due to the fact that large and medium-sized companies often have in-house counsel.

3 World Bank publication: http://www.doingbusiness.org/ExploreTopics/EnforcingContracts/

15 5. Impact of disputes Ukraine commercial dispute resolution study

Chart 5: Use of External Lawyer Use of Lawyers in Business 50%

Disputes 40% 36%

29% 30% 26%

20%

11% 10%

0% All Small Medium Large companies

Use of In-house Lawyer

IN-HOUSE LAWYER LEGAL DEPARTMENT

60% 59% 60%

50% 48% 50% 42% 40% 40% 33% 30% 30% 22% 20% 20% 17% 13% 10% 10% 9%

0% 0% All Small Medium Large All Small Medium Large companies companies

As seen in Chart 5, over 90 percent of large companies have a legal department or at least an in-house lawyer, about 60 percent of medium- sized companies report having in-house legal services, and only about 30 percent of small companies have such services. Interestingly, regardless of the size of the company, those with legal departments have on average three lawyers employed in the legal department.

16 5. Impact of disputes Ukraine commercial dispute resolution study

During their most recent dispute only 11 percent of large companies turned to outside counsel, while 28 percent of medium-sized companies and 36 percent of small companies sought help from an external lawyer. Given the fact that twice as many medium-sized companies have in-house lawyers or legal departments as small companies, it might appear surprising that small companies do not refer more disputes to outside lawyers. This can probably be explained by the cost factor; small companies may have fewer resources available to devote to outside legal services. The disputes of the smaller companies may also involve lesser amounts, thus not justifying incurring legal expenses, and as discussed in this report, smaller companies report less success in court proceedings that may inhibit their willingness to pursue their disputes in court.

Large companies report that the cost of resolving disputes is less than five percent of the value of the dispute, while small companies estimate 10 percent, and medium-sized companies’ estimates fall between these figures. Companies may underestimate the impact and total actual cost of their disputes on the company’s resources because they often do not consider the lost opportunity costs, non-legal personnel costs and resources devoted to dealing with the dispute, tied-up capital, insurance and other measures to avoid or minimize disputes, using legal services to deal with disputes, and most importantly, the cost of ending business relationships. These costs can particularly affect small and medium-sized businesses which typically have fewer resources to spare.

Apart from the costs to individual companies, there are also significant costs to society both in terms of providing judicial and enforcement services, businesses transferring the costs of disputes through higher costs for goods and services, and reduced investment and capital flow as a result of the losses connected with the risks of disputes.

17 6. Current use of dispute resolution methods Ukraine commercial dispute resolution study

6. CURRENT USE OF DISPUTE RESOLUTION METHODS

6.1 USE OF DISPUTE RESOLUTION METHODS IN GENERAL

The most commonly used method for resolving disputes in Ukraine today is to try to negotiate a settlement with the opposing party. The survey indicated that negotiation without third party involvement was used by 77 percent of all businesses in their most recent dispute, 73 percent of all companies formally settled their dispute prior to filing a claim, and 67 percent filed a claim with the commercial court. Less than seven percent of all disputes are resolved by arbitration, either international or domestic. Commercial mediation was not indicated as a dispute mechanism by any of the respondents and is essentially non-existent in Ukraine today4. This general determination is also reflected in Chart 6 which indicates the respondents’ preferences of dispute resolution procedures for their most recent disputes.

It is possible, and indeed likely, that parties use more than one type of dispute resolution method to attempt to resolve a dispute. For example, a party may seek to negotiate and, if not successful, may file a claim with the court. A party may continue to negotiate after a claim is filed and may also seek to use the media or exert influence through other channels. Some parties report termination of the relationship as a final dispute resolution method. Interestingly, when asked to describe their most recent dispute, most companies reported that they were the party initiating the dispute (76%).

Negotiations without third party Chart 6: 77% involvement Formal settlement prior to filing Dispute Resolution Methods 73% a claim Used Today Claim/response at the commercial 67% court of Ukraine Breach of relationship with the 44% disputing company Negotiations through the third 13% party, unrelated to either company

Acted via mass media 3%

Claim/response in domestic 2% arbitration Claim/response in international 1% arbitration

4 This pattern can also be observed in other countries which a much longer tradition of civil law, e.g. Germany or Austria. The survey “Commercial Dispute Resolution – A Comparative Study of Dispute Resolution Procedures in Germany” conducted by PricewaterhouseCoopers in 2005 also shows this ranking in a similar extent. 18 6. Current use of dispute resolution methods Ukraine commercial dispute resolution study

6.2 NEGOTIATION

Although negotiations are frequently used by Ukrainian businesses to resolve disputes the survey indicates that many businesses may not be employing the most effective negotiation methods. Almost 60 percent of all businesses say they strive to find common interests and solutions that satisfy both parties in a dispute. However, the survey also shows that the main reason parties believe business dispute negotiations fail is the dishonesty of the other party, followed by incomplete information, reluctance to make concessions, lack of negotiating skills, and lastly, emotions. This contradiction between businesses’ intentions and their perceptions about the other party and the negotiation process is surely a barrier to effective dispute resolution.

Negotiations can take a variety of forms in Ukraine, but most often occur without any third-party involvement. Only 13 percent of all companies relied upon a “third party” to assist them in negotiations to settle their most recent dispute. When small and medium-sized companies did engage a third party, the majority of them (as reflected in Chart 7) relied on external lawyers, while large companies reported that they most frequently engaged a government official as their third party which likely reflects the political clout of larger companies in Ukraine. In fact, large companies reported using government officials as the third party in 43 percent of cases and lawyers in only 21 percent of cases. Small and medium-sized companies reported quite the opposite, using government officials in only 18 percent and 22 percent of their cases respectively, and external lawyers in 60 percent and 57 percent.

55% Chart 7: Law firm, external 60% lawyers 57% 21% Third-Parties Assisting with 7% Negotiating Disputes Other professional or 5% industry associations 6% 21%

2% 3% Professional mediator 0% 7%

22% Government officials 18% (excl. court officials) 22% 43%

8% Representatives of 8% other companies 8% 14% A person, who has 5% personal relations with 6% the other party of the 6% dispute 0% All companies Small 2% 2% Medium Other 2% 0% Large

19 6. Current use of dispute resolution methods Ukraine commercial dispute resolution study

The survey results indicate that these third parties are almost never a trained mediator and often (37% of all cases) their main role was to exert influence on the other party. However, large companies reported that they most often used the third party to provide legal advice (38%) or reveal the interests of the other party (38%), as compared to small companies which reported that the third party was mostly used to exert influence (40%), and to help establish proper communication (35%). Based on this information, it appears that third parties currently assisting in negotiating disputes are not used in the most effective manner. These figures are illustrated in Chart 8.

Chart 8: 37% Influencing the 40% parties 38% Role of the Third Party 23% Assisting in Negotiations 30% Establishing proper 35% communication 29% 15%

23% Revealing the interests 18% of the parties 26% 38%

22% Other (mainly legal 22% advice) 17% 22%

All companies Small Medium Large

NEGOTIATIONS THROUGH A THIRD PARTY FORMAL SETTLEMENT PRIOR TO FILING Chart 9: A CLAIM 20% 100% Use of Third Party 18% 80% 80% 75% Negotiations and Formal 15% 73% 13% 66% 12% Settlement prior to Filing 60% 10% a Claim 8% 40%

5% 20%

0% 0% All Small Medium Large All Small Medium Large companies companies

20 6. Current use of dispute resolution methods Ukraine commercial dispute resolution study

Though current negotiation methods may not be completely effective, the survey does indicate that negotiation is more effective than other methods in terms of compliance with the outcome. When a dispute is settled through negotiation, the rate of compliance with the agreement is higher than the rate of adherence to court decisions: reportedly about 68 percent full compliance with a negotiated settlement versus about 45 percent complete adherence to a court decision. Parties also frequently use “claim settlement” to attempt to resolve disputes, which is a more formal type of negotiated settlement. There is also a significant difference in the usage of extrajudicial claim settlement procedures by companies according to their size: nearly 80 percent of large companies have used this method in their most recent dispute in comparison to 66 percent of small companies.

6.3 COURT PROCEEDINGS

Large companies litigate disputes in commercial courts much more often than medium or small-sized companies: 86 percent of large companies have resolved disputes in court as compared to 72 percent of medium-sized companies, and only 46 percent of small companies. The rate of success in court proceedings also varied greatly, correlating to the size of the company. Large companies frequently prevailed in court, while small companies usually lost. The rate for having the case decided in the company’s favor was: 58 percent for large companies, 40 percent for medium-sized companies, and 24 percent for small companies5. Given the statistics, it is not surprising that small companies use the court system less often.

Around 79 percent of the companies that prevailed in court reported that the court has completely restored their rights. When asked to rank the most important attributes of an effective court system, companies stated that the most important factors were the competence of judges, fairness of the decision, and independence of judges, while efficiency and enforcement were rated low, and surprisingly, cost was the least important. It might appear contradictory that enforcement was rated low, but this is likely because enforcement in Ukraine is beyond the power of the courts. When selecting dispute resolution methods respondents indicated ability to enforce the agreed to resolution as the most important factor (see Chart 12). The survey results confirmed anecdotal evidence that court decision enforcement mechanisms are inefficient and ineffective. In relation to their last dispute companies reported that the court decision was completely enforced in only about 45 percent of the cases, with about 37 percent not being enforced and the remaining cases partially enforced. Thus, while the respondents may have reported that their rights had been restored, it did not mean that their actual losses were fully compensated. The rate of adherence to a settled agreement is significantly higher when there is a negotiated settlement.

5 These figures also include arbitration proceedings. Since arbitration is virtually not used by Ukrainian companies the above statement can be attributed to court proceedings without restriction. 21 6. Current use of dispute resolution methods Ukraine commercial dispute resolution study

6.4 ARBITRATION

Although relatively new, arbitration legislation has encouraged a growing interest in this method of dispute resolution. Arbitration remains underdeve- loped and is rarely used to resolve commercial disputes between Ukrainian companies, accounting for only about seven percent of total dispute resolution in Ukraine. Of the companies surveyed, only 24 percent had ever been a party to domestic arbitration. The survey made a distinction between domestic arbitration and international commercial arbitration as these are subject to differing legal frameworks and different court jurisdiction.

Some companies, primarily large ones, resolve international disputes at either the International Arbitration Court at the Ukrainian Chamber of Commerce and Industry, or through an arbitration proceeding abroad; five percent of medium-sized and nine percent of large companies surveyed indicated they have been a party to an international arbitration, while only two percent and four percent respectively have been involved in domestic arbitration. This can be compared to small companies, which are even less experienced with international (2%) and domestic (1%) arbitration.

Chart 10: Use of Arbitration Clauses in Contracts Use of Arbitration and DOMESTIC ARBITRATION INTERNATIONAL COMMERCIAL ARBITRATION

10% 10% Arbitration Clauses 9%

8% 8%

6% 6% 5% 4% 4% 4% 4%

2% 2% 2% 2% 2% 1%

0% 0% All Small Medium Large All Small Medium Large companies companies

Use of Arbitration

DOMESTIC ARBITRATION INTERNATIONAL COMMERCIAL ARBITRATION

30% 50%

25% 40% 23% 40%

20% 19% 17% 30% 28% 16% 26% 15% 21% 20% 10%

10% 5%

0% 0% All Small Medium Large All Small Medium Large companies companies

22 6. Current use of dispute resolution methods Ukraine commercial dispute resolution study

Currently, large companies use clauses providing for international commercial arbitration in nearly 40 percent of their contracts and domestic arbitration clauses in approximately 17 percent of their contracts. Medium- sized companies and small companies report significantly less use of such clauses. However, arbitration may become more common as companies and courts become more familiar with the idea and increasingly use arbitration clauses in contracts.

Domestic arbitration Chart 11:

Lack of information 46% Factors Hindering the Use of Arbitration for Dispute Deficiencies in arbitration law 38% Resolution in Ukraine Difficulty in enforcing decisions 27%

High costs 18%

Partiality of arbitrator 18%

Unprofessional arbitrators 12%

Too time consuming 8%

Other 8%

International arbitration

Difficulty in enforcing decisions 46%

High costs 41%

Lack of information 29%

Too time consuming 24%

Other 7%

Partiality of arbitrator 6%

Unprofessional arbitrators 5%

Nothing 3%

Users of both international and domestic arbitration tend to be satisfied with this dispute resolution method, with 40 percent completely satisfied and 36 percent rather satisfied with international arbitration. This can be compared with domestic arbitration where 50 percent reported being completely satisfied and 15 percent reported being rather satisfied. Only a relatively small percentage was rather dissatisfied or completely dissatisfied (2% and 4% for international and 8% and 12% for domestic arbitration). 23 6. Current use of dispute resolution methods Ukraine commercial dispute resolution study

6.5 MEDIATION

Mediation is a process where a neutral third party assists the parties in amicably resolving their dispute without judicial involvement by helping them to identify their interests and find a consensual solution. It is based upon the agreement of the parties to refer their dispute to an alternative form of resolution. Unlike litigation and arbitration, mediation is not a determination based on legal and contractual rights and obligations. Increasingly businesses worldwide are relying upon mediation as a means for resolving disputes. However this methodology, and knowledge of it, is essentially non-existent in Ukraine today. The survey reflects the extremely low levels of mediation use in Ukraine as none of the respondents indicated they had ever used mediation as a dispute resolution mechanism.

24 7. Awareness of alternative dispute resolution Ukraine commercial dispute resolution study

7. AWARENESS OF ALTERNATIVE DISPUTE RESOLUTION

One of the primary objectives of the survey was to determine the interests and needs of Ukrainian businesses in developing alternative methods for resolving commercial disputes. As noted above, there is currently little use of arbitration or mediation in Ukraine, yet there is a need for developing more effective and efficient methods for resolving disputes.

Through the survey companies assessed their level of knowledge about mediation as very low with 66 percent of companies indicating they know nothing about mediation and 29 percent indicating they know very little. Only around four percent of respondents reported that they are fully aware of mediation.

The survey sought to evaluate the potential demand for mediation services among companies. While it is difficult to accurately determine whether companies will use a dispute resolution process that they know nothing or very little about, a majority of companies indicated that they would certainly (16%) or most likely (40%) use meditation if it were available, while approximately 25 percent indicated that they would probably not use it.

Surprisingly, many companies thought that mediation was most suited for large and medium-sized companies, when in fact the results of the survey seem to indicate that small and medium companies may benefit most from using mediation as they suffer the greatest impact from their disputes and are less successful in bringing claims to a successful conclusion in court. Companies believe that mediation may be most appropriate for disputes in- volving customers and suppliers (50%), financial issues (49%), corporate rela- tionships (41%), intellectual property (39%) and company property (31%).

It is noteworthy that 73 percent of the surveyed companies are interested in obtaining information or participating in trainings and seminars on ADR. It is somewhat surprising that large companies show a much higher interest (82%) in this regard than small companies (65%).

To assess the needs and demands of businesses for dispute resolution services, the survey requested respondents to record the factors that were most important to them in resolving disputes. The respondents were given a number of factors to select from and Chart 12 indicates the responses and demonstrates that the most important factor was obtaining an outcome that could be enforced, followed by an outcome that conformed to the applicable law. Obtaining complete recovery (satisfaction of interests) was

25 7. Awareness of alternative dispute resolution Ukraine commercial dispute resolution study

ranked third and preservation of the business relationship was ranked fourth followed by the possibilities to affect and control the process. This ranking of factors can be contrasted with the factors which were deemed important when considering dispute resolution in courts as presented in Chart 13.

Chart 12: Guaranteed decision enforcement 58% Ranking of Factors Execution of the letter of the law 55% Considered Important When Satisfaction of interests 50% Selecting Dispute Resolution Preservation of business relationships 46% Methods Possibility to affect the result 45%

Possibility to control the process 44%

Preservation of confidentiality 41%

Possibility to appeal the decision 41%

Saving money 40%

Saving time 38% Neutrality and independence of the 37% third party Informality of the process 35%

Chart 13: Competence of judges 29% Important Factors for Fairness of decision 24% Assessing Court Independence of judges 20% Proceedings Time from filing a claim to court decision 12%

Decision enforcement 9%

Cost of proceedings 6%

It is also noteworthy that businesses in Ukraine appear to be less concerned with the cost of proceedings or the time involved in obtaining a final, enforceable outcome than with other factors including adherence to the “letter of the law”6. This may be in part due to a desire for predictability in the legal system and a response to the perception that legislation is often unclear and conflicting. Ukraine has undergone significant legislative reform in recent years and there may be a wish to ensure the rule of law. Businesses need to be able to resolve their disputes not only in a predictable manner but also efficiently in order to use their resources to do businesses rather than to battle over legal positions.

6 The 2005 PricewaterhouseCoopers study for Germany (refer to footnote 4) also determined that time and cost are not considered as decisive factors by the surveyed companies when assessing dispute resolution procedures. Time and cost issues as the main driver of ADR are primarily referred to in surveys conducted in Common Law countries, particularly the USA, where the legal system is much more adversarial and 26 includes instruments of discovery. 8. Conclusion Ukraine commercial dispute resolution study

8. CONCLUSION

The findings of the survey indicate that Ukrainian businesses are regularly involved in disputes, often with companies with which they have a contractual relationship. As a result, dispute resolution is an important issue for the Ukrainian private sector. Dissatisfaction with the court system and the inability to effectively enforce court judgments related to business disputes mean that many companies currently engage in negotiation to solve their disputes but mediation is not widely used in Ukraine.

The survey shows that companies in Ukraine would benefit from and are interested in having access to alternative methods for efficiently resolving their disputes. Particularly small and medium-sized businesses have a need for dispute resolution methods which would allow them to promptly and effectively resolve disputes at a reasonable cost in order to preserve important business relationships.

27 Annex 1. Survey methodology Ukraine commercial dispute resolution study

ANNEX 1. SURVEY METHODOLOGY

1. INTRODUCTION

The business survey was a key component of the overall CDR study. Therefore, the methodology of the survey was designed to best achieve the aims of assessing the needs and interests of the Ukrainian business community for developing alternative methods of dispute resolution. Importantly, the survey needed to be designed and implemented in a manner that ensured that the resulting data were statistically reliable and accurately represented the views of the full range of business entities in Ukraine. It was essential that the data could be collected with a low risk for error.

Achieving these aims required careful preparation and implementation of the survey. In order to help promote an interest in the survey and to obtain cooperation, leading business organisations were contacted and provided with information about the survey and its aims. Some of these organisations kindly contacted their member companies and encouraged them to cooperate with the survey. Some business organisations included a notice about the survey in their member’s newsletters and magazine, encouraging cooperation with the IFC study. This cooperation was key to the success of the survey.

2. SELECTING A PROFESSIONAL RESEARCH COMPANY

In order to select an appropriate professional research company, a short- list of three leading international firms with wide experience in conducting customised market research in the Ukrainian business community was prepared. These three firms were provided with information about the assignment and were invited to meet with the IFC consultant team (“the team”) to further discuss the assignment. Following meetings with representatives from the three firms, each was invited to submit written proposals for the assignment based upon developed guidelines. These guidelines included the budget for the work, the number of interviews to conduct, the time period when the work should be carried out, and other relevant information and instructions. Two of the firms submitted written bids for the assignment. Following a review of the proposals, GfK, Kyiv, was selected to perform the survey.

28 Annex 1. Survey methodology Ukraine commercial dispute resolution study

3. SELECTING REGIONS TO SURVEY

The aim of the survey was to assess the business community’s impressions, experiences and perceived needs regarding commercial dispute resolution across all areas of Ukraine, in all sectors, and in all sizes of business. It was not possible to conduct the survey in every oblast in Ukraine as this would have required considerably more resources and time than was available to the project. However, in order to ensure that the survey did not reflect potentially unique impressions or experiences peculiar to a particular region, it was necessary to conduct the survey in more than one city or region. Ukraine is a large country and potentially there could be significant geographical variation in responses to the questions. Furthermore, while businesses based in Kyiv should be included in the survey, there was a risk that if the survey was confined to Kyiv-based businesses, the results may have been less credible when applied to other businesses in other regions. Based on the amount of the budget and the limited time available for conducting the survey, it was decided to conduct the survey in three regions.

Surveying businesses in three diverse regions provided sufficient variation to ensure statistically accurate information which could be extrapolated to other regions in Ukraine with sufficient reliability. In selecting the regions a number of factors were considered: diverse geographic locations, existence of significant business activity, existence and activity of business organisations, degree of potential or existing investment activity, number of commercial court judges and caseload levels, existence and activity of alternative dispute resolution such as arbitration and mediation, and existence of law and business academic institutions. Notably, the surveyed regions should be potential candidates for possible follow-up activities such as a pilot mediation project for resolving commercial disputes.

The city of Kyiv was a natural choice for one of the three venues for conducting the survey. As the capital city it is also the primary centre for many businesses; it has nearly double the annual tax revenues from business than any other region. Kyiv is the centre for judicial and other institutions and organisations. Consequently, it is also the most likely venue for launching a pilot project to promote commercial mediation. Other regions which were considered included many of the 27 regions (25 oblasts and 2 cities) which comprise Ukraine. After considering the above-noted factors, it was decided to conduct the survey in the oblasts of Lviv and Dnipropetrovsk.

29 Annex 1. Survey methodology Ukraine commercial dispute resolution study

4. SELECTING THE RESPONDENTS

The survey sought to gain insight into business disputes across Ukraine and in every major business sector and size of business. A statistically reliable method of selecting respondents was devised to ensure that the responses of the surveyed companies represented all Ukrainian businesses. To achieve statistical reliability and in order to comply with international best practices, it was necessary to interview a minimum of 400 small, medium-sized, and large companies in each of the three regions. The definition of the size of a business was determined by the number of employees: small – less than 50 employees, medium – 51 to 199 employees, and large – over 200 employees.

A total of 1,210 companies were included in the survey. The companies were randomly selected by tax records. The maximum statistical error for each group by size is 5.5%. It can be noted that Lviv had significantly fewer large companies than the other regions; however, there were sufficient companies to ensure the statistical reliability of the collected data.

5. SELECTING THE APPROPRIATE INTERVIEWEE

To obtain the desired information, questions had to be posed to someone within the company who possessed relevant information about the company’s disputes, the manner in which the disputes were handled, and how the disputes impacted the company. The person who possessed this information varied according to the company’s size, organisation, and procedures. When arranging the interview, the interviewer requested to speak with someone who possessed the requested information and the position of the person was recorded. In large companies the best suited respondent was an in-house lawyer (73%), while in small companies it was the chief executive officer (CEO) or owner of the company (52%). In medium- sized companies it was usually a lawyer (43%), the CEO (25%) or the Deputy CEO (11%). Generally, the most frequently interviewed person was a lawyer for the company, followed by the CEO.

If a company had not had a commercial dispute within the past 3 years then the interview could not be conducted. In such cases the interview was immediately terminated, did not count as a completed interview and was not included in the data. A commercial dispute was defined for the respondents as any disagreement between companies that required intervention with any method: negotiations, some form of alternative dispute resolution, or with judicial proceedings initiated. Disputes involving consumers or government bodies were excluded from consideration, which included tax disputes and other regulatory types of disputes. This definition was important for determining whether a company “qualified“ to be included in the survey.

30 Annex 1. Survey methodology Ukraine commercial dispute resolution study

Consequently, only companies which had had a commercial dispute within the past 3 years were included in the 1,210 interviews which formed the basis for the survey.

6. DEVELOPING THE SURVEY QUESTIONS

The questions for the survey were given considerable attention and were carefully developed in close cooperation with GfK. The aim of the questions was to acquire as much information as possible about commercial disputes in Ukraine and the needs and demands of businesses. The questions were designed to maximise the collected data’s usefulness and also to limit the length of the interview to approximately 30 minutes.

The team designed the questions to avoid suggesting any particular response and to allow for a range of answers. To obtain statistically reliable information which conformed to international best practices, it was necessary that the survey consisted of closed questions which did not allow for the interviewer to interpret or affect the answers. It was also important that the questions did not suggest possible answers or implicitly impose values on certain answers. In order to allow the respondents to select answers that were more nuanced some questions provided opportunities to select differing degrees of agreement to a certain statement or proposition or to select a set answer that best represented their impression or opinion.

The survey attempted to differentiate the overall perceptions of the respondents with their actual practice, although there are inherent difficulties in making this distinction in practice. Therefore, the survey asked questions about the handling of disputes in general and also included a special series of questions that asked the respondent to answer questions specifically relating to the most recent dispute of the company.

One of the challenges in drafting the questions was determining the level of interest in and demand for mediation when few business people had any knowledge of or experience with mediation. Difficulties with terminology exacerbated this problem as there is no generally accepted equivalent term for mediation in Ukrainian. There are several terms which relate to different types of settlement and thus it was necessary to use terms which could be readily understood.

It is difficult to assess the interest and demand for mediation when the respondents do not understand the concept, are unfamiliar with the process, and unaware of the advantages and disadvantages. In order to maintain the integrity of the study, mediation could not be presented and explained in a favourable light. Difficulties with terminology exacerbated this problem as

31 Annex 1. Survey methodology Ukraine commercial dispute resolution study

there is no generally accepted equivalent term for mediation in Ukrainian and the word “mediatsiya” (mediation in Ukrainian) is not commonly used or understood. Therefore, it was very important to provide a clear definition of mediation when conducting the survey. To overcome these difficulties, the questions were designed to identify the interests and demands of the respondents generally in the context of dispute resolution. Thus, respondents were asked to choose between different items, to rank different factors, to select from a number of possible answers, or asked to indicate a high or low degree of agreement with certain statements.

As part of the development of the questions, business representatives were interviewed to better understand how the desired information could best be obtained through a survey. Before finalising the survey questions, the questions were posed to some business representatives for testing and necessary adjustments were made to the questions. Following training sessions with the interviewers, some further minor adjustments were made to the questions. The preliminary survey was then completed and subject to a pilot test. Following the pilot test, there were a few minor revisions to the questions before the survey was conducted.

7. METHOD OF CONDUCTING THE SURVEY

The survey was conducted by telephone interviews, each interview taking about 30 minutes. The team considered having the survey conducted in face-to-face interviews, but after discussions with GfK, it was decided to use a telephone call center rather than to send out teams of interviewers to conduct the interviews at the respondents’ business premises. This decision was not based upon cost considerations as the cost difference between these two types of methods was negligible. Telephone interviews provided the opportunity to monitor the calls, to quickly make adjustments to the questions if necessary, to immediately record responses on a computer which facilitated the use of advanced technology for tabulating some responses, and to conduct the survey in a short period of time. GfK tabulated all of the data and analysed the results to ensure statistical reliability and to identify statistically significant findings.

32 Annex 1. Survey methodology Ukraine commercial dispute resolution study

Using telephone interviews was more efficient than using interviewers who would travel to the place of business of the targeted company to conduct the interview in person. Unlike face-to-face interviews, it was usually not necessary to first call the targeted company to set up an appointment for interview. If it were necessary to pre-arrange a time for the telephone interview with a particular respondent, an interview time could easily be set up or changed to suit the needs of the respondent. The interviewer could then proceed to the next call, thus making effective use of the interviewers’ time. It may also have been easier to obtain the cooperation of busy executives who may have been reluctant to arrange a personal interview in their offices. Using telephone interviews may have increased the risk that the designated respondent was not the most appropriate person to respond to the questions, but this risk exists even in face-to-face interviews. It may be possible to establish greater rapport with the respondent in face-to-face interviews, but it may also be more difficult to obtain answers to sensitive information in such interviews.

With any survey, it is necessary to ensure that the recorded interviews actually took place as recorded by the interviewer. In Ukraine, the practice is to follow- up a survey with random calls to respondents to confirm the interview, with a typical follow-up rate of 20% to 25% of the total number of interviews. With a telephone survey, this follow-up check can occur simultaneously with the actual interviews as a supervisor continuously monitors the on-going calls on a random basis.

The telephone interviews were conducted between May 17, 2006 and June 15, 2006 by approximately 25 specially trained interviewers from the GfK call centre. The team gave the interviewers a special training session to ensure that they had a basic understanding of the purpose of the survey, the terminology used, and the matters which were being discussed in the survey. The interviewers were prepared to respond to anticipated questions and given standardised responses for requests for clarification. When conducting the interviews, the interviewers recorded the responses directly on computers, which allowed the responses to be regularly tabulated and monitored.

33 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

ANNEX 2. SURVEY RESULTS BY COMPANY SIZE

INFORMATION ABOUT RESPONDENT AND COMPANY

29% 1. What position do you Chief executive 52% officer (CEO) 25% occupy in your company? 5%

(% respondents, N = 1210) 9% Deputy CEO 10% 11% 6%

5% Head of a legal 2% department 4% 11%

43% 19% Lawyer 43% 73%

Chief financial 6% 7% officer/ commercial 7% manager 1%

6% Chief accountant, 8% accountant 7% 2% All companies 3% Small 2% Other Medium 4% 2% Large

2. Does your company have All companies 42% 17% 41% a lawyer or legal department? Small 22% 9% 69%

(% respondents, N = 1210) Medium 48% 13% 39%

Large 59% 33% 8%

Yes, it has a full-time Yes, it has a legal department Neither lawyer with a few persons

34 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

Median, persons 3. How many lawyers Number of lawyers in company’s legal department are employed in the legal 1. All companies 3 department of your 2. Small 3 company? 3. Medium 3 (Number of respondents, N = 173) 4. Large 3

DISPUTES

Median, disputes 4. How many business Number of disputes disputes with other companies 1. All companies 4 (i.e. disagreements resolved 2. Small 2 by talks, extrajudicial 3. Medium 4 methods) has your company 4. Large 10 had during the last 12 months (since May 2005)? (Number of respondents, N = 1210)

Negotiations 80% 80% 5. Which dispute resolution without third party 81% involvement 78% methods has your company 80% Formal settlement 69% used in the last 12 months? prior to filing a claim 79% 90% (% respondents, N = 793) Negotiations through 16% 20% a third party, unrelated 17% to either company 10%

Claim/ response at the 76% 55% commercial court of 77% Ukraine 93%

3% Domestic arbitration 3% claim/ response 4% 3%

International 4% 2% arbitration 4% claim/ response 5%

Breach of relationship 55% 56% with the disputing 54% company 56%

6% Acted via mass media 4% 6% All companies 7% Small 2% Other 2% Medium 1% 2% Large

35 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

6. Of your company’s disputes Mean, disputes during the last 12 months, how Negotiations 12 7 without third party many were settled at each of 8 involvement 23 the following stages: 11 Formal settlement 5 (Number of disputes, N = 485) prior to filing a claim 7 19

Negotiations through 4 4 a third party, unrelated 3 to either company 8

9 Claim/response at the 6 commercial court of Ukraine 6 13

2 Domestic arbitration 2 claim/ response 1 2

2 International arbitration 1 claim/ response 2 3

6 Breach of relationship with 4 the other company 6 7 All companies

5 Small 3 Acted via mass media Medium 3 8 Large

INFORMATION ABOUT MOST RECENT DISPUTE

7. Is your most recent dispute ALL COMPANIES

Settled disputes ongoing or has it been settled? 28% Ongoing disputes (% respondents, N = 1210)

72%

SMALL MEDIUM LARGE

29% 30% 25%

70% 71% 75%

36 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

50% Relations with clients/ 55% 8. This dispute concerned suppliers 49% 47% the following: (% respondents, N = 1188) Corporate relations 3% 3% (concerning ownership 2% of the company) 3%

8% Relations concerning 7% corporate property 8% 10%

Relations concerning 36% financial loans and 32% 38% debts 37%

Relations concerning 3% intellectual property 3% 3% rights 3% All companies

1% Small 1% Other Medium 1% Large

All companies 76% 24% 9. Did your company initiate

Small 75% 24% this dispute or respond to a complaint of the other Medium 77% 22% party? Large 73% 26% (% respondents, N = 1188)

Initiator of a dispute Responded to the claim of other party Was the third party

37 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

10. Did you have an existing ALL COMPANIES 13% written agreement (contract) Yes with the other company? No (% respondents, N = 1188)

87%

SMALL MEDIUM LARGE 10% 11% 16%

90% 89% 84%

11. Describe the company that All companies 68% 14% 14% 4% you have/had a dispute with. Small 71% 13% 13% (% respondents, N = 1188) Medium 65% 16% 14% 6%

Large 68% 14% 15%

A private company A company fully owned by the state A company partly owned by the state Other

12. How long had you been Seven years or more 13% 16% 16% Three to seven years working with this company 20% before the dispute arose? One to three years Three to twelve months (% respondents, N = 1073) 25% 25% 21% 27% Less than three months

34% 36% 32% 34%

16% 13% 17% 15%

12% 10% 9% 10%

Large Medium Small All companies 38 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

ALL COMPANIES LARGE 13. How important is this 30% 30% business partner to your 25% 25% company? (Estimate using 20% 20% a scale of 1 to 5, where 15% 15% 1 – “not important”, 10% 10%

5% 5% 5 – “most important”)

0% 0% 1 2 3 4 5 1 2 3 4 5 (% respondents, N=1125) – “not – “most – “not – “most important” important” important” important”

SMALL MEDIUM

30% 30%

25% 25%

20% 20%

15% 15%

10% 10%

5% 5%

0% 0% 1 2 3 4 5 1 2 3 4 5 – “not – “most – “not – “most important” important” important” important”

Mean number of days, employees 14. How long did it take Dispute settlement indicators All companies Large Medium Small to settle the dispute from 1. Number of days it took to the day it arose to its final settle the dispute, for resolved 239 240 225 254 disputes, (N = 824) settlement, and how many 2. Number of days it took to settle the dispute, for pending 371 367 318 437 employees were involved? disputes, (N = 327) 3. Number of employees who were involved in the dispute 3 3 3 2 settlement (N = 1180)

39 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

15. Did you appeal to external ALL COMPANIES lawyers or legal advisors in the Yes 26% settlement of this dispute? No (% respondents, N = 1182)

74%

SMALL MEDIUM LARGE 11% 28% 36%

64% 72% 89%

16. How did the dispute All companies 11% 39% 48% affect the current activities Small 13% 43% 41% of your company? Medium 11% 39% 49% (% respondents, N = 1188) Large 9% 36% 55%

Completely suspended current activities Slowed down current activities, but not substantially

Substantially slowed down current activities Did not affect at all

17. Please evaluate the level All companies 20% 59% 21% of effort required in the Small 21% 55% 24% settlement of this dispute. Medium 20% 61% 19% (% respondents, N = 1188) Large 19% 60% 21%

Dispute was of high complexity and required a lot of effort

Dispute was of moderate complexity and required certain effort

Dispute was resolved quite easily 40 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

82% 18. Your legal position Legislation 69% 86% 92% in this dispute was based principally on the following: Generally accepted 18% business practice in your 25% 15% (% respondents, N = 1175) industry 15%

Business practice accepted 9% in relations between you 11% 7% and the other company 9% All companies

16% Small 23% Common sense Medium 15% 10% Large

METHOD OF RESOLVING MOST RECENT DISPUTE

Negotiations 77% 78% 19. Which of the following without third party 75% involvement 77% methods did you use in settling the dispute: 73% Formal settlement 66% prior to filing a claim 75% (% respondents, N = 1175) 80%

Negotiations through 13% 18% a third party, unrelated 12% to either company 8%

Claim/response at the 67% commercial court of 46% 72% Ukraine 86%

2% Domestic arbitration 2% claim/ response 1% 2%

1% International arbitration 1% claim/ response 2% 1%

Breach of relationship 44% with the disputing 47% 47% company 35%

3% Acted via mass media 4% 3% 1% All companies

1% Small 2% Other Medium 0% 0% Large

41 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

55% 20. Please describe the third Law firm, external 60% lawyers 57% party you engaged in the 21% settlement of the dispute. 7% Other professional or 5% (% respondents, N = 130) industry associations 6% 21%

2% Professional mediator 3% 0% 7%

22% Government officials 18% (excl. court officials) 22% 43%

8% Representatives of 8% other companies 8% 14%

Person who has 5% personal relations with 6% 6% the other party 0%

2% Unofficial group 2% 2% 0% All companies

2% Small Other 2% Medium 2% 0% Large

21. Please describe the role of 37% All companies 30% 23% the third party in the dispute 22% settlement process. 40% Small 35% (% respondents, N = 115) 18% 22%

38% Medium 29% 26% 17%

23% Large 15% 38% 38%

Exerting influence Revealing the interests of the parties Establishing proper communication Other

42 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

Large 15% 5% 58% 8% 9% 22. What was the result

Medium 23% 15% 40% 7% 9% of the dispute? (% respondents, N = 826) Small 34% 24% 9% 24% 4%

All companies 25% 15% 5% 40% 6% 7%

Agreement was reached, The commercial court/ court of parties continued cooperation arbitration ruled in our favor

Agreement was reached, The commercial court/ court of arbitration but parties ceased cooperation ruled in favor of the other party

Negotiations began, parties Amicable agreement was reached and didn’t reach an agreement approved by the court

Parties terminated relationship Other without negotiations

ALL COMPANIES 23. Did the parties adhere to 6% Yes, completely the agreement? 26% Yes, partially (% respondents, N = 318) No

68%

SMALL MEDIUM LARGE 3% 11% 3% 18% 25%

30% 59%

72% 80%

ALL COMPANIES 24. Was the court decision Yes, completely adhered to? 37% Yes, partially (% respondents, N = 364) 45% No

18% SMALL MEDIUM LARGE

25% 38% 42% 41% 45% 54%

21% 16% 17%

43 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

25. In the course of the last ALL COMPANIES dispute, did you or other Yes parties appeal the decision in 33% No a higher court?

(% respondents, N = 790 67%

SMALL MEDIUM LARGE

30% 37% 34%

63% 70% 66%

26. Please estimate your % Expenses expenses for the settlement All companies Large Medium Small of your last dispute. 1. % of the incurred costs. Mean, (N = 676) 19 13 14 27 2. % of the amount of the suit. Mean, (N = 450) 17 19 14 21

27. To what extent did the All companies 11% 5939% 21% 48% 13% agreement reached satisfy Small 13% 61% 43% 21% 13% your initial demands? 39% 49% Medium 11% 56% 19% 17% 5% (% respondents, N = 352) Large 9% 65% 36% 27% 4%4%

Completely satisfied By half Did not satisfy at all

More than by half Less than by half

28. What were the costs All companies 8% 8% 14% 27% 41% incurred as a result of Small 14% 11% 14% 4% 25% 32% ceasing to cooperate relative Medium 19% 31% 50% to the initial amount of the agreement? Large 20% 20% 60%

(% respondents, N = 49) More than initial amount Half Same as initial amount Less than half

More than half the initial amount No losses at all

44 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

All companies 11% 7939% 48% 6% 10% 29. To what extent did the

Small 13% 4378%% 9% 10% court restore your rights? (% respondents, N = 355) Medium 11% 7439% 7% 12%

Large 9% 65% 8636% 4% 7%

Completely satisfied By half Did not restore at all

More than by half Less than by half

CURRENT COMMERCIAL LEGISLATION

ALL COMPANIES LARGE 30. Please evaluate the 40% 40% quality of legislation in each

30% 30% of the following fields related to business partnerships: 20% 20%

10% 10% A) Customer and supplier relations (% respondents, N = 1084) 0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

SMALL MEDIUM

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

45 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

B) Corporate relations ALL COMPANIES LARGE (% respondents, N = 921) 50% 50% 40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

SMALL MEDIUM

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

C) Relationships concerning ALL COMPANIES LARGE company property 40% 40%

(% respondents, N=1016) 30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

SMALL MEDIUM

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

46 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

ALL COMPANIES LARGE D) Relationships concerning financial 50% 50% loans and debts 40% 40% (% respondents, N=1018)

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

SMALL MEDIUM

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

ALL COMPANIES LARGE E) Relationships concerning 50% 50% intellectual property 40% 40% (% respondents, N=810)

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

SMALL MEDIUM

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Poor” “Excellent” “Poor” “Excellent”

47 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

COMMERCIAL COURTS

31. Please estimate to what ALL COMPANIES LARGE extent you are satisfied with 40% 50% 33% 34% 41% 40% the following aspects of the 30% 34% performance of commercial 30% 20% 16% courts of Ukraine: 20% 14% 10% 8% 9% 10% 6% A) Competence of judges 4% 0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – (% respondents, N = 1014) “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

SMALL MEDIUM

40% 40% 34% 32% 35%

30% 30% 25%

20% 20% 19% 15% 15% 11% 10% 10% 5% 9%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied’” satisfied”

B) Independence of judges ALL COMPANIES LARGE 40% 40% (% respondents, N = 1013) 35% 31% 30% 30% 27% 22% 20% 19% 20% 16% 14% 14% 12% 10% 10% 9%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

SMALL MEDIUM

40% 40% 33% 30% 29% 30% 26% 23% 20% 17% 20% 15% 15% 16% 14% 13% 10% 10%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

48 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

ALL COMPANIES LARGE C) Cost of judicial proceedings 40% 40% (% respondents, N = 1035) 31% 32% 30% 27% 30% 24% 21% 22% 20% 20%

10% 11% 10% 11% 10% 10%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

SMALL MEDIUM

40% 40% 33% 31% 30% 30% 26% 27% 23% 20% 17% 20% 13% 14% 10% 10% 9% 8%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

ALL COMPANIES LARGE D) Time from judicial recourse to 40% 40% the decision settlement

30% 30% 30% 30% 28% (% respondents, N = 1050) 22% 22% 20% 18% 18% 20% 16% 13% 13% 13% 10% 10%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

SMALL MEDIUM

40% 40%

30% 30% 30% 30% 25% 21% 20% 19% 20% 18% 15% 16% 15% 11% 10% 10%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

49 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

E) Effectiveness of ALL COMPANIES LARGE decision enforcement 40% 40% 32% 32% (% respondents, N = 1061) 30% 30% 26% 24% 23% 24% 20% 18% 20% 18% 16% 16% 13% 13% 10% 8% 10% 5%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

SMALL MEDIUM

40% 40% 34% 30% 30% 30% 24% 24% 24% 21% 21% 20% 18% 20% 18% 16% 16% 13% 13%

10% 8% 10% 9%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied’ dissatisfied’ satisfied’

F) Fairness of judgment ALL COMPANIES LARGE

40% 40% 37% (% respondents, N = 1053) 34% 33%

30% 30% 26%

20% 20% 16% 14% 12% 12% 10% 10% 9% 6%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

SMALL MEDIUM

40% 40% 34%

30% 29% 30% 25% 21% 20% 20% 18% 18% 20% 17% 15% 13% 12% 12% 10% 9% 9% 10% 6%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

50 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

ALL COMPANIES LARGE 32. Overall, please estimate to

50% 50% 48% 45% what extent you are satisfied

40% 40% 36% with the performance 29% 30% 30% of commercial courts of

20% 20% Ukraine: 10% 8% 10% 7% 10% 6% 7% 4% (% respondents, N = 1063) 0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

SMALL MEDIUM

50% 50% 44% 44% 40% 40%

30% 30% 28% 25%

20% 20% 14% 12% 12% 9% 10% 10% 7% 5%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

NEGOTIATION

All companies 14% 35% 51% 33. Please assess to what

Small 16% 29% 55% extent the following factors prevent the success of Medium 14% 36% 50% negotiations: Large 13% 40% 47% A) Lack of negotiation skills

Does not prevent at all Prevents a little Greatly prevents (% respondents, N = 1142)

All companies 9% 35% 55% B) Other party’s reluctance to make concessions Small 9% 32% 59% (% respondents, N = 1137) Medium 9% 39% 52%

Large 10% 34% 56%

Does not prevent at all Prevents a little Greatly prevents

51 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

C) Inequality of parties All companies 20% 33% 46%

(% respondents, N = 1112) Small 17% 37% 46%

Medium 22% 30% 47%

Large 21% 33% 46%

Does not prevent at all Prevents a little Greatly prevents

D) Incomplete information All companies 9% 29% 62%

(% respondents, N = 1134) Small 10% 29% 61%

Medium 8% 28% 64%

Large 9% 31% 60%

Does not prevent at all Prevents a little Greatly prevents

E) Other party’s overestimation of his All companies 27% 40% 32% probability of winning in court Small 23% 44% 34% (% respondents, N = 1077) Medium 28% 40% 33%

Large 32% 38% 30%

Does not prevent at all Prevents a little Greatly prevents

F) Dishonesty of the other party All companies 6% 23% 70%

(% respondents, N = 1154) Small 6% 23% 71%

Medium 7% 24% 69%

Large 7% 22% 70%

Does not prevent at all Prevents a little Greatly prevents

52 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

All companies 23% 37% 40% G) Emotions, mutual accusations

Small 19% 37% 44% (% respondents, N = 1153)

Medium 28% 36% 36%

Large 23% 36% 41%

Does not prevent at all Prevents a little Greatly prevents

ALL COMPANIES LARGE 34. Are you satisfied 40% 40% 40% with the effectiveness of 33% 33% 33% 30% 30% negotiations as a means of dispute resolution? 20% 18% 20% 13% (% respondents, N = 1170) 10% 8% 8% 10% 7% 8%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

SMALL MEDIUM

40% 40% 33% 33% 32% 30% 29% 30% 23% 20% 20% 18%

10% 8% 10% 9% 6% 7%

0% 0% 1 – 2 3 4 5 – 1 – 2 3 4 5 – “Completely “Completely “Completely “Completely dissatisfied” satisfied” dissatisfied” satisfied”

53 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

DOMESTIC ARBITRATION

35. Please estimate your level ALL COMPANIES 10% of knowledge about arbitration 24% I know nothing as a means of dispute I know a little I am greatly aware of settlement. this method (% respondents, N = 1210) 66%

SMALL MEDIUM LARGE 9% 10% 12% 12% 25% 32%

60% 66% 76%

36. Does your company’s ALL COMPANIES typical contract with residents 19% Yes of Ukraine contain a clause No on dispute resolution in arbitration court? 81% (% respondents, N = 1168)

SMALL MEDIUM LARGE

23% 16% 17%

77% 84% 83%

37. Has your company ever ALL COMPANIES been a party to domestic 24% Yes arbitration? No (% respondents, N = 117)

76%

SMALL MEDIUM LARGE

15% 22% 34%

54 85% 78% 66% Annex 2. Survey results by company size Ukraine commercial dispute resolution study

ALL COMPANIES 38. Are you satisfied with 60% the effectiveness of the 50% 50% arbitration court as a mean 40% of dispute resolution? 30%

20% (% respondents, N = 26) 15% 15% 12% 10% 8%

0% 1 – 2 3 4 5 – “Completely “Completely dissatisfied” satisfied”

46% 39. What factors, in your Lack of information 47% 40% 51% opinion, hinder the use of arbitration courts for dispute 38% Dificiencies in 38% settlement in Ukraine? arbitration law 43% 33% (% respondents, N = 120) 12% Unprofessional 15% arbitrators 11% 10%

18% Partiality of arbitrator 24% 9% 23%

18% High costs 15% 15% 26%

8% Too time consuming 15% 6% 5%

27% Difficulty in 29% enforcing decisions 26% 26% All companies

8% Small 6% Other Medium 13% 3% Large

55 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

INTERNATIONAL COMMERCIAL ARBITRATION

40. Please evaluate your level ALL COMPANIES 10% of knowledge of international I know nothing commercial arbitration as a 36% I know a little I am greatly aware means of dispute resolution. of this (% respondents, N = 1210) 54%

SMALL MEDIUM LARGE 6% 7% 19% 20% 37% 47%

47% 56% 61%

41. Does your company’s ALL COMPANIES 17% typical contract with non- Yes 28% residents of Ukraine contain No No contracts with a clause for settling disputes non-residents in international arbitration court? 55% (% respondents, N = 1177) SMALL MEDIUM LARGE 13% 17% 21% 21% 26% 40%

63% 52% 48%

42. Has your company ever ALL COMPANIES been a party to international Yes commercial arbitration (i.e. No due to disputes with non- 50% 50% residents)? (% respondents, N = 111)

SMALL MEDIUM LARGE

35% 41% 50% 50% 59% 56 65% Annex 2. Survey results by company size Ukraine commercial dispute resolution study

International commercial arbitrage at the 96% Chamber of Commerce and Industry of Ukraine 43. Which arbitration bodies

Arbitration court of the International were involved in the settlement 7% Chamber of Commerce in Paris of your disputes? Stockholm Arbitrage 4% (% respondents, N = 54)

International Arbitration Court of London 2%

Other 15%

50% 44. To what extent are you 40% 40% 36% satisfied with the effectiveness 30% of international arbitration in 20% 18% Ukraine as a means of dispute

10% 4% settlement? 2% 0% 1 – 2 3 4 5 – (% respondents, N = 50) “Completely “Completely dissatisfied satisfied

29% 45. What factors, in your Lack of information 39% 19% 30% opinion, hinder the use of the International Commercial 5% Unprofessional 4% Arbitration Court (ICAS) at arbitrators 6% 4% the Chamber of Commerce 6% and Industry in Ukraine? Partiality of arbitrator 0% 6% 9% (% respondents, N = 111)

41% High costs 39% 45% 39%

24% Too time consuming 26% 23% 25%

46% Difficulty in enforcing 17% decisions 65% 47%

7% Other 9% 3% 9% All companies

3% Small 0% Nothing Medium 0% 5% Large

57 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

MEDIATION

46. Please estimate your level ALL COMPANIES 4% of knowledge about mediation I know nothing as a means of dispute 29% I know a little I am greatly aware of resolution. this method

(% respondents, N = 1210) 66%

SMALL MEDIUM LARGE 5% 3% 6%

27% 31% 29%

68% 66% 65%

47. Has your company ever ALL COMPANIES considered using mediation Yes to resolve a dispute (i.e. 39% No involvement of an independent mediator)? 61% (% respondents, N = 49)

SMALL MEDIUM LARGE 17%

36% 41%

59% 64% 83%

58 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

Absolutely Not 48. “Mediation is 16% 19% 22% 19% Rather Not negotiation, with the Rather Yes involvement of an 25% Yes, Absolutely independent third party, 22% 25% 31% which does not make the decision, but helps the parties voluntarily reach an 38% 40% 40% agreement on the basis of 42% common interest.” Based on this definition, would you

22% 16% 16% use mediation as a method of 8% dispute resolution? Large Medium Small All companies (% respondents, N = 1085)

Large 59% 49. Which types of companies, in your opinion, Medium 51% would be most interested in Small 42% mediation services? (% respondents, N = 979)

50% Customer and supplier 50% 50. Mediation would be the relations 50% 49% best method for resolving the following types of disputes: 41% Corporate relations 44% 37% (% respondents, N = 966) 42%

31% Relations concerning 30% Company property 30% 32%

Relations concerning 49% 50% financial loans and 50% debts 45%

39% Relations concerning 39% intellectual property 38% 41%

All companies Small Medium Large 59 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

51. Which organizations, 13% Government bodies 12% 13% in your opinion, would best 13% provide mediation services? Organizations affliated 25% (% respondents, N = 991) with commercial 22% 24% courts 30%

45% Non-governmental 42% organizations 46% 48%

40% Individuals 43% 39% 39%

1% Other 2% 1% 0%

All companies Small Medium Large

SELECTION OF DISPUTE RESOLUTION METHOD

52. When selecting a dispute Guaranteed decision enforcement 58% resolution method what Execution of the letter of the law 55% are the most important considerations for your Satisfaction of interests 50% company? Preservation of business relationships 46% (% respondents, N = 1210) Possibility to affect the result 45%

Possibility to control the process 44%

Preservation of confidentiality 41%

Possibility to appeal the decision 41%

Cost 40%

Length of process 38%

Neutrality and independence of the 37% third party

Informality of the process 35%

60 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

ATTITUDES TOWARD DISPUTE RESOLUTION METHODS

ALL COMPANIES LARGE 53. Please evaluate to what 40% 40% extent you agree with the 30% 30% following statements: 20% 20% A) Going to court is the best way to 10% 10% ensure commitments by the other party are carried out. 0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely (% respondents, N = 1173) disagree” agree” disagree” agree”

SMALL MEDIUM

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

ALL COMPANIES LARGE B) We have adopted procedures and 60% 60% rules for most of the areas of our 50% 50% company’s daily activities. 40% 40%

30% 30% (% respondents, N = 1169)

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

SMALL MEDIUM

60% 50%

50% 40%

40% 30% 30% 20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

61 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

C) Settlement of a dispute is more ALL COMPANIES LARGE effective if a company assumes 40% 40% responsibility for dispute resolution 30% 30% without appealing to the court. 20% 20% (% respondents, N = 1169) 10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

SMALL MEDIUM

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

D) In the case of a dispute, we ALL COMPANIES LARGE strive to find common interests and 60% 60% solutions that satisfy both parties. 50% 50% 40% 40% (% respondents, N = 1173) 30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

SMALL MEDIUM

60% 60%

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

62 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

ALL COMPANIES LARGE E) Our company most often has 40% 40% disputes with companies we will have to do business with in the 30% 30% future. 20% 20% (% respondents, N = 1158) 10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

SMALL MEDIUM

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

ALL COMPANIES LARGE F) Improvement and dissemination 50% 50% of extra-judicial methods for

40% 40% resolving disputes in Ukraine will

30% 30% benefit companies such as ours.

20% 20% (% respondents, N = 1136)

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

SMALL MEDIUM

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

63 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

G) For enforcement of a decision or ALL COMPANIES LARGE agreement reached after a dispute, 40% 40% intervention of government bodies 30% 30% is needed. 20% 20% (% respondents, N = 1158) 10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

SMALL MEDIUM

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

H) We strive to put all details of our ALL COMPANIES LARGE cooperation with partners in writing. 70% 70% 60% 60%

(% respondents, N = 1184) 50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

SMALL MEDIUM

70% 70%

60% 60%

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

64 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

ALL COMPANIES LARGE I) Everything in our country is 50% 50% resolved through personal relations

40% 40% and bribes. 30% 30% (% respondents, N=1161)

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

SMALL MEDIUM

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1– 2 3 4 5 – 1– 2 3 4 5 – “Completely “Completely “Completely “Completely disagree” agree” disagree” agree”

34% 54. Which methods of Court 27% 33% 44% dispute settlement are most 4% commonly used in your Commercial court 4% 4% industry? 5%

57% (% respondents, N = 1170) Negotiations 61% 58% 52%

1% Arbitrage court 1% 1% 0%

6% Agreements and 10% contracts 5% 3%

7% Claims 4% 8% 9%

1% Pre-court settlement 1% 1% 1% All companies

2% Small Other 3% Medium 1% 1% Large

65 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

COMPANY INFORMATION

55. Does your company carry ALL COMPANIES out export-import operations? Yes No (% respondents, N = 1149) 38%

62%

SMALL MEDIUM LARGE

29% 37% 47% 53%

71% 63%

56. Who is the owner or the Ukranian individual/ entity largest shareholder of your Foreign individual/ entity company? Employees 51% 83% Central government bodies (% respondents, N = 1087) 62% 67% Local government bodies

Other

6% 6% 7%

7% 6% 24% 7% 12% 4% 11% 7% 13% 12% 8%

Large Medium Small All companies

57. Which of the following All companies 46% 48% 6% statements about the Small 58% 39% participation of your company owner in company Medium 45% 49% 6% management best fits your Large 30% 61% 9% company? Owners run in daily management of the company (% respondents, N = 1098) Owners do not take part in daily management, only make strategic decisions Owners do not participate in company management at all

66 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

All companies 18% 11% 71% 58. Is your company a joint-

Small 6% 7% 87% stock company? (% respondents, N = 1181) Medium 17% 13% 70% 6%

Large 34% 14% 52%

Open joint-stock company Closed joint-stock company Neither

SHAREHOLDER INFORMATION

Mean, persons 59. What is the total number Number of shareholders in the company of shareholders for your 1. All companies 505 company? 2. Small 78 (N = 187) 3. Medium 413

4. Large 869

ALL COMPANIES 60. Is there a shareholder with Yes a share of 50% or more? No 44% (% respondents, N = 216)

56%

SMALL MEDIUM LARGE

39% 45% 49% 51% 55% 61%

Mean, persons 61. What is the total number Number of shareholders in the company of shareholders with more 1. All companies 6 than 10% of shares? 2. Small 6 (N = 129) 3. Medium 5

4. Large 7

67 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

CORPORATE GOVERNANCE INFORMATION

62. Does your company have ALL COMPANIES a Board of Directors? 17% Yes No (% respondents, N = 287)

83%

SMALL MEDIUM LARGE 4% 24% 36%

64% 76% 96%

63. Does your company have ALL COMPANIES 15% an Audit Committee? Yes No (% respondents, N = 285)

85%

SMALL MEDIUM LARGE 4% 18% 34%

66% 82% 96%

64. Which of the following All companies 40% 60% rules of Corporate Governance Small 54% 46% are provided by constitutive documents or internal Medium 38% 63%

Large 37% 63% regulations of your company? A) Ability to vote at the general Yes meeting by mail or by show of hands. No (% respondents, N = 249) 68 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

All companies 85% 15% B) Shareholders are obliged to vote in person at the shareholder Small 71% 29% meeting. Medium 91% 9% (% respondents, N = 252) Large 84% 16%

Yes

No

All companies 32% 68% C) Cumulative voting for members of the board of directors. Small 31% 69% (% respondents, N = 185) Medium 37% 63%

Large 27% 73 %

Yes

No

All companies 34% 66% D) Minority shareholders may designate the number of directors Small 46% 54% proportional to their share. Medium 30% 70% (% respondents, N = 198) Large 32% 68%

Yes

No

All companies 23% 77% E) Obligation to buy out shares of minority shareholders if they do not Small 42% 58% agree with key decisions of the board Medium 18% 82% of directors.

Large 18% 82% (% respondents, N = 195)

Yes

No

69 Annex 2. Survey results by company size Ukraine commercial dispute resolution study

F) Obligatory payment of dividends All companies 42% 25% 33% at the end of the year if company Small 44% 30% 26% made a profit. Medium 42% 26% 32% (% respondents, N = 345) Large 40% 23% 36%

Yes No Hard to say

G) Directors’ remuneration directly All companies 46% 54% dependent on company performance. Small 56% 44% (% respondents, N = 210) Medium 43% 57%

Large 44% 56 %

Yes

No

INTEREST IN COOPERATION WITH IFC

65. Would you be interested ALL COMPANIES

Yes in obtaining information or 27% participating in trainings and No seminars on ADR? (% respondents, N = 1122) 73%

SMALL MEDIUM LARGE

18% 27% 35%

65% 73% 82%

70 Ukraine commercial dispute resolution study

71 Ukraine commercial dispute resolution study

72

Motria Onyschuk-Morozov Senior Operations Manager Corporate Governance Central and Eastern Europe Department

30A, Spaska Str., Podil Plaza block 2, 6-th floor Kyiv, 04070 Ukraine Tel.: +38 044 490 64 00 Fax: +38 044 490 64 20 E-mail: [email protected]