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Deregulation in the Construction Industry

Date of publication: 27 August 2020

Leonid Gilevich, Counsel
Dmytro Hrybov, Counsel, Attorney at Law

Source: Ukrainian Journal of Business Law

Attraction of long-term foreign investments and facilitation of doing business (including for foreign investors) have been priority tasks of the state throughout the whole period of independence of Ukraine. Meanwhile, the approach to the key issues of business deregulation varied significantly at different times and the government’s decisions didn’t always meet the then-current needs and the actual demands of business.

According to the Sustainable Development Strategy “Ukraine – 2020”, approved by the Decree of the President of Ukraine dated 12 January 2015, No. 5/2015, deregulation and promotion of entrepreneurship are recognized as key directions of reforming the contemporary Ukrainian state. That Strategy also reads that the medium-term goal of further reforms is fostering the conduct of business, promoting the development of small and medium-sized entrepreneurship, encouraging investments, facilitating international trade and improving the labor market efficiency.

It should be noted that the process of deregulation in the construction industry in Ukraine indeed does not stand still. Based on the results of the assessment of the procedures for dealing with construction permits, Ukraine has risen since 2013 from 183rd to 20th place in the “Doing Business” annual report prepared by the World Bank Group, which also contributed to Ukraine’s gain in the Ease of Doing Business ranking according to the same report, where Ukraine moved from 137th place in 2013 to 64th place in 2020.

Among the reforms implemented in the construction sector, the following should be mentioned:
– reduction of the list of permits;
– acceleration of obtaining and approving permits;
– cancellation of legally, technically and morally obsolete Soviet rules and standards applying to construction and their substitution with standards corresponding to modern developments;
– expansion of the list of construction works that do not require permits and/or special commissioning of the results of such works;
– cancellation of the mandatory fee for “participation in the infrastructure development” – a supplementary contribution required from construction companies to develop local infrastructure, which was often highly criticised as a source of corruption and an additional financial burden on developers;
– launch of the Unified State Electronic System in Construction, designed to combat corruption at all stages of construction.

It should also be mentioned that in spring 2020, the Cabinet of Ministers of Ukraine adopted a resolution on liquidation of the State Architectural and Construction Inspectorate and on optimization of the state architectural and construction control and supervision bodies. Within the framework of that resolution, the decision was taken to create three separate bodies, between which the functions of the State Architectural and Construction Inspectorate were to be distributed, which should lead to the minimization of corruption and to the release of the monopoly position of one body.

Finally, in April 2020, the Draft Law No. 3336 was submitted to the Ukrainian parliament for consideration, which Draft Law is aimed at continuing the reform of the industry. It envisages, in particular, the cancellation of licensing (replacing it with a system of personal liability and certification), as well as the change of the system of obtaining permits for construction and commissioning of completed structures, providing for the functioning of private registrars, who can decide on the issuance or refusal to issue construction documents (which is consistent, in particular, with EU practice). Besides, the draft law assumes introduction of the risk insurance system in construction that is also a world-wide practice.

However, it must not escape one’s attention that deregulation executed by the state is realized, as a whole, and, in particular in the construction industry, mainly in a technical or administrative context and basically concerns interaction between business and the state. Thus, not enough attention is given to creation of conditions for free and predictable cooperation between business undertakings themselves.

The reduction of state regulation in the construction sector increases the importance of contractual relations in it. At the same time, unfortunately, there are certain difficulties with the performance of contracts in Ukraine. In the same “Doing Business” report Ukraine has fallen from 42nd to 63rd place in terms of enforcement of contracts since 2015. According to the Index of Economic Freedom, created by the Heritage Foundation in cooperation with the Wall Street Journal, enforcement of contracts in Ukraine is extremely time-consuming and costly, while the judicial system is subject to political pressure and fraught with corruption. In other words, enforcement of contracts in Ukraine is often considered to be a complex task (Judicial effectiveness 42.2/100; Government Integrity 37.9/100).

In this regard, based on long-standing successful experience of Ilyashev & Partners in real estate and construction, including in providing legal support to foreign investors, it is worth paying attention to practical aspects that would significantly change the situation for the better.

One of the key principles proclaimed by the Civil Code of Ukraine is the freedom of contract, i.e. the possibility of the parties to recede from the rules of the legislation and regulate their legal relations at their own discretion, including by following business customs.

For Ukraine, the application of international customs, recommendations and rules of international authorities and organizations in the formalization of the relations between certain parties is not an innovation and has long been widely used in practice in certain industries. Thus, for example, the Commercial Code of Ukraine expressly enables the parties to determine the terms of supply agreements in accordance with international rules and customs, which resulted in a wide and successful application of Incoterms.

The situation could be similar in the investment and construction industry.

Practice shows that foreign investors and banks have long preferred to work with international standards and standard contracts. In the construction sector, the most common are the standards and contract forms of the International Federation of Consulting Engineers (Fédération internationale des ingénieurs-conseils – FIDIC).

When FIDIC was founded in 1913, its main goal was to form an international methodological base regulating the activities of consulting engineers. Later on, the functions of FIDIC were expanded to the unification of contracts in various areas of construction, including the development and publication of standard contract terms to regulate the relations of participants of international investment and construction processes and fair distribution of risks.

Nowadays FIDIC recommendations are widely spread in most countries of the world, translated into many languages and actively used by IBRD and EBRD, public and private customers in various international and local construction projects. For example, in February 2018, EBRD identified the following advantages of applying FIDIC recommendations: well-balanced contracts, ease of adaptation to the conditions of a particular country, possibility of application for a wide range of projects, constant presence of professional engineering supervision, focus on the timely execution of works within the initial price, recognition and popularity of the standard forms in the market and, most importantly, presence of an effective dispute resolution mechanism provided by the recommendations themselves.

In spite of all positive global experience embodied in FIDIC recommendations, today their application in Ukraine is somewhat complicated. However, separate though inconsistent attempts to refer to FIDIC standards in the legislation of Ukraine still appear. Thus, in 2016 the parliament of Ukraine adopted the Law No. 1764-VIII (which came into force on 1 January, 2018) providing for application of FIDIC standards in road construction. The Cabinet of Ministers of Ukraine, by its Resolution dated 28 December 2016, No. 1065, set a mandatory requirement to engage FIDIC consulting engineers during construction, reconstruction and capital repair of public roads. A similar requirement to engage an independent FIDIC consulting engineer in road construction at the stages of procurement, performance of works and warranty service was established for by the Decree of the President of Ukraine dated 19 July 2019, No. 529/2019.

At the same time, in accordance with the Civil Code of Ukraine, the parties have no right to recede from the provisions of acts of civil legislation, if those acts expressly so determine. Article 323 of the Commercial Code of Ukraine stipulates that when concluding and performing construction contracts, regardless of their funding sources and the ownership form of the employer and the contractor (subcontractors), the parties shall be guided by the General Terms and Conditions for Conclusion and Performance of Capital Construction Contracts, approved by the Resolution of the Cabinet of Ministers of Ukraine dated 1 August 2005, No. 668. The same Terms and Conditions apply in case of conclusion and performance of relevant contracts with foreign entities.

The binding nature of the above Terms and Conditions, which do not correspond to modern developments and are void of the necessary flexibility, undoubtedly slows down the implementation of deeper and better deregulation of the investment and construction industry and prevents the improvement in Ukraine’s investment climate.

Nevertheless, despite still incomplete elimination of uncertainty and discrepancies in the construction rules, and only partial cancellation of obsolete rules and standards (including the aforementioned General Terms and Conditions for Conclusion and Performance of Capital Construction Contracts), it is safe to say that elimination of corresponding deficiencies and constraints in application of the best world practices is rather a matter of time. Meanwhile, Ilyashev & Partners’ own experience proves that relevant practices (including FIDIC standard contract forms) can be used in Ukraine even now, provided that legal professionals have properly adapted them to the requirements of effective laws.