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Fundamental breach of a contract in Ukraine: analysis of legal cases

At request of “Yurydychna gazeta” newspaper Alyona Lytvyn, lawyer of law firm “Pravova Dopomoga” commented on judicial practice related to use of fundamental breach of loan contract as a ground for its alternation or termination.

This material was published in “Yurydychna gazeta” newspaper issue number 12 dated the 19th of March 2013.

Unabridged text of the comment:

“Section 2 of Article 651 of the Civil Code of Ukraine provides that fundamental breach of contract by counterparty serves as a ground for alternation or termination of contract be means of court procedure.

Fundamentality of such violation can be recognized exclusively by court by means of actual data of other evaluation category: “significant extent” of deprivation of things that a person could expect for when entering a contract.

Significant extent of such deprivation must be exclusively in the form of objective circumstances that are considered by the court during hearing of this category of cases. In practice objective circumstances can be in the form of non-fulfillment of obligations stipulated in a contract. In particular, when speaking about loan contract, such objective circumstance can be in the form of bank’s refusal to provide loaned money (next tranche) stipulated in the loan contract.

The resolution of the Supreme Court of Ukraine number 3-74gs11 dated 19.09.2011 upheld decision of commercial court of Ivano-Frankivsk region dated the 23rd of November 2010 which satisfied claims of a claimant about termination of loan contract. The lawsuit was based on bank’s refusal to provide loaned money to a borrower due to circumstances related to worldwide crisis. Court’s decision was reasoned to be made based on fundamental breach of loan contract by the bank which served as a ground for termination of contract under Section 2 of Article 651 of the Civil Code of Ukraine. The court also pointed out that circumstances of financial crisis of 2008 that the bank referred to were not force majeure and therefore the grounds for exemption from liability were absent. The mentioned position was upheld by the High Commercial Court of Ukraine in its resolution number 39/189 dated 17.12.2009.

It should be mentioned that if bank commits fundamental breach of contract then based on Article 22 of the Civil Code of Ukraine a borrower is entitled to reimbursement of losses in the form of actual losses and lost interest.

However judicial practice that is related to reimbursement of losses and termination of loan contracts based on fundamental breach of contract remains quite unambiguous. Thus, decision of the Commercial Court of Kiev in case number 17/465 dated 27.02.2012 satisfied claims about recovery of losses from a bank, however claims about termination of contract were denied. And its resolution in case number 17/33-11 (19/57-10) dated 09.08.2011, the High Commercial Court of Ukraine upheld decisions of previous instances which denied claimant’s claims about termination of loan contract and recovery of losses.

Thus “fundamentality” of breach of loan contract is a ground for its coercive alternation or termination (in court) that is defined by means of causation between violation of right and “significant extent” of deprivation of things that a borrower expected for when entering loan contract. At the same time term of party’s “guilt” is not taken into consideration since description of the regulation sets presumption of guilt in case of fundamental breach of loan contract. Practice of application of Section 2 of Article 651 of the Civil Code of Ukraine is quite unambiguous, though scales of Themis are mostly in favor of a borrower.

Practice of Problem loans is one of the main practices of law firm “Pravova Dopomoga”.

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