Recognition of contracts as void: pyramid schemes as unfair business practices in Ukraine

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Today it is a common practice to purchase goods by participating in pyramid schemes when the pyramid organizer does not spend his money. He just provides the "right" or creates conditions for the "right" obtainment by customer in order to get the specified good and accumulates contributions of the pyramid participants.

In fact the contributions which are paid by consumer are used to purchase goods for those consumers who are above him in the pyramid scheme and he receives contributions of those who entered the scheme later (in other words is ulterior from a pyramid top). At the same time a consumer pays to organizer of a pyramid not for goods but in fact for the opportunity to have the right to purchase goods which is provided not by the organizer of the pyramid but by involving other consumers and their money into the same scheme. Pyramid cannot exist without constant attraction of new consumers but when the flow stops all consumers who are at the "bottom" of the pyramid have no gain as well as are in the red since they have already contributed.

Implementation of pyramid schemes in business activity is prohibited because it is a form of unfair business activity which misleads.

However there are examples when pyramid schemes are disguised as legitimate business activity. Consumers need to be very careful in such cases and take into consideration the following things.

Such activities of an enterprise must comply with the legislation of Ukraine in the field of financial services provision since a business entity collects and accumulates money of customers. Thus a business entity must have appropriate license. Since the activities related to any financial services which involve direct or indirect involvement of financial assets of individuals obligatory require a license, absence of which can result in recognition of a legal action as void under Section 1 of Art.227 of the Civil Code of Ukraine.

Bargain is considered void if such voidance is stipulated by the law – void bargain (Part 2 of Art. 215 of the Civil Code of Ukraine). Agreements entered into as the result of unfair business practice are void (Section 6 of Art.19 of the Law of Ukraine "On Protection of Consumer Rights"). Since the voidance of such agreement is stipulated by the law and taking into consideration Art. 215 of the Civil Code of Ukraine such a bargain is worthless and recognition of it as void by the court is not required and it seems that there is no need to go to court.

However the need to go to court for recognition of bargain as void may occur in particular when the parties have completed some actions stipulated in such agreement (made payments, passed an object, etc.). In this case for the purpose of applying legal implications of voidance (return paid money) it is required to go to the court since it is practically almost impossible to achieve positive results voluntarily.

However it should be noted that despite the direct prohibition of pyramid schemes use in business activities actual jurisdiction is very versatile. Reasoning judgment dismissing the case of courts apply in particular principle of freedom of contract, presumption of validity of contract, determine that the activity of a company are of intermediary nature and do not find usage of pyramid schemes in agreements. However such dismissals are often caused by unfounded claims of consumers.

At the same time there is positive actual jurisdiction in particular Resolution of the Supreme Court of Ukraine dated the 23rd of May 2012 which ruled that activities of a company related to implementation of the "Car Credit" system mislead consumers by using a pyramid scheme and overruled the decision of appellate court which dismissed the claim.

Some legislative initiatives related to protection of consumer rights are also worth mentioning. The Cabinet of Ministers of Ukraine prepared a bill "On prohibition of pyramid schemes in Ukraine" which proposes to introduce criminal liability for use of pyramid schemes in business activities. However as of today this bill is not registered in the Parliament and is not clear when if it will be adopted.

As for the legal consequences related to bargain voidance a general rule says that in case of bargain voidance each party shall return all that it has received pursuant to such agreement conclusion - a bilateral restitution. And if such return is impossible particularly when received in a form of rendered service it is required to compensate the cost of obtained objects based on prices that existed at the time of compensation.

Thus as of today the jurisdiction related to cases of consumer protection which were misled by the use of prohibited business activities is very diverse. However examination and analysis of situation between consumer and counterparty, reasoned and professional approach to procedural documents drafting will ensure adequate court protection of consumer rights.

Publication date: 28/09/2012

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