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Fixing the prices of goods and services in dollar equivalent

In connection with the publication by the State Inspectorate for the Control of the Prices of letter No. 200/7-6/6148 of December 3, 2009, in which the Inspectorate insists on the inadmissibility of the expression of prices for goods and services in dollar equivalent, we bring to your attention the analysis of this issue with our comments.

General provisions
First, we will note that the letter of December 3, 2009 is not the first letter in which the Inspectorate expresses such opinion. After analyzing the Inspectorate’s letters over the past 10 years, we found four more such letters; the first of which was published in December 2001, and the last one was dated August 2009 1 .
In all the above letters, the Inspectorate refers to the provisions of the Resolution of the Cabinet of Ministers of Ukraine No. 1998 “On the Improvement of the Pricing Procedure” dated December 18, 1998 (hereinafter referred to as “Resolution No. 1998” ). At the same time, pricing issues in agreements (contracts) are also regulated by the Law of Ukraine “On Prices and Pricing” (hereinafter – the “Law on Prices”), the Civil and Economic Codes of Ukraine (hereinafter “the CC of Ukraine” and “EC of Ukraine”, respectively).

Background
We will remind that the reason for the publication of Resolution No. 1998 was the sharp devaluation of the hryvnia in September-October 19982.  Actually, this is also mentioned in the preamble of this Resolution. For this reason, clause 1 of Resolution No. 1998 has in fact established that the formation, establishment and application of free prices on the territory of Ukraine by business entities is carried out exclusively in the national monetary unit. The same clause allowed to take into account prices in dollar equivalent only in terms of the import component of the price structure.

At the same time, at the time of the issuance of the Resolution, the Civil Code of the Ukrainian SSR of 1963 was in force in Ukraine, which stipulated that monetary obligations shall be expressed in “Soviet currency” , and the expression and payment of monetary obligations in foreign currency is allowed only in cases and in the manner prescribed by the USSR legislation1 .

On January 1, 2004, the Civil and Economic Codes came into force in Ukraine, which regulate differently the possibility of expressing monetary obligations in foreign currency. Thus, according to Article 524 "Currency of the obligation" of the Civil Code of Ukraine, the obligation shall be expressed in the monetary unit of Ukraine – hryvnia. The parties may express the monetary equivalent of the obligation in foreign currency. At the same time, Article 198 of the EC of Ukraine provides that monetary obligations of participants in economic relations shall be expressed and payable in hryvnias. Monetary obligations can be expressed in foreign currency only in cases where business entities have the right to make payments between themselves in foreign currency in accordance with the law. However, Article 189 of the EC of Ukraine provides that the price is an essential condition of the contract and is determined in hryvnias. Prices in foreign trade agreements (contracts) can be expressed in foreign currency by agreement of the parties.

Authority of the Inspectorate for the interpretation of laws and other legal acts

Analyzing the inspectorates letters on prices, it is necessary to note that the legal status of the Inspectorate is determined by the Regulations on the State Inspectorate for Price Control approved by Resolution of the Cabinet of Ministers of Ukraine No. 1819 dated December 13, 2000 (hereinafter referred to as the “Regulation”).

In accordance with the Regulation, the Inspectorate has not been given the right to interpret pricing regulations or issue pricing regulations. The Law on Prices and Pricing, which regulates price control, also does not give the Inspectorate such authority. It should be noted that according to Article 13 of the Law on Prices, the state control over prices is exercised when establishing and applying state fixed and regulated prices and tariffs. At the same time, the legality of their application and compliance with the requirements of the legislation on the protection of economic competition is controlled.

We will also remind that the letters of the Inspectorate (as well as letters of other ministries and departments) are not normative acts, but represent only an expression of the Inspectorate’s opinion on a specific issue. We will remind that according to clause 1 of the Regulations, the State Price Inspectorate is a government agency that operates in the system
of the Ministry of Economy. In this regard, we consider it necessary to pay attention to the letter of the Ministry of Economy No. 3804-25/544 “Regarding the Use of Foreign Currency” dated October 20, 2009. In this letter, the Ministry of Economy, citing articles 524, 533 of the Civil Code of Ukraine, concludes that “when determining the contract price, the parties can define it as an equivalent in foreign currency, while using foreign currency as well as payment documents in foreign currency when making settlements on the territory of Ukraine for obligations are allowed in the cases, manner and conditions established by the legislation on these issues.”

Judicial practice on the issue of expressing prices in dollars or other equivalent
After analyzing the judicial practice, we concluded that economic courts follow the path of recognizing the possibility of expressing an obligation in foreign currency with reference to Articles 524 and 533 of the Civil Code of Ukraine. We will give some examples of judicial practice on this issue.

Thus, in case No. 3/285/05 on the claim of Aston Industrial LLC against Agroexport OJSC, leaving in force the decisions of the court of first and appeal instances, the Supreme Economic Court of Ukraine noted:
“Having analyzed paragraph 1.5. of the loan agreement (novation) dated 10.05.2005, the courts came to the correct conclusion that Agroexport OJSC committed itself to Aston Industrial LLC to pay the amount of debt and interest in the monetary unit of Ukraine (hryvnia), the monetary equivalent of which is defined in foreign currency. By virtue of Article 524 of the Civil Code of Ukraine, the obligation must be expressed in the monetary unit of Ukraine – the hryvnia. However, the parties can determine the monetary equivalent of the obligation in foreign currency. In view of the above, the courts rightly refuted the unsubstantiated statements of the defendant that there were grounds for declaring the loan agreement null and void, to which Agroexport OJSC referred during the trial by the courts of first and appeal instances”1 .

In case No. 4/644-12/105, following the claim of Shuring Ukraine LLC against AVERS LLC, upholding the decision of the Lviv Economic Court of Appeal, the Supreme Economic Court of Ukraine noted:

“In accordance with Article 524 of the Civil Code of Ukraine the «Currency of the obligation», the obligation must be expressed in the monetary unit of Ukraine – hryvnia. The parties may determine the monetary equivalent of the obligation in foreign currency. This article is contained in Chapter 47 “The Concept of Commitmen”; of the Civil Code of Ukraine. At the same time, according to Article 533 of the Civil Code of Ukraine, the monetary obligation must be fulfilled in UAH. If the obligation specifies a monetary equivalent in foreign currency, the amount payable in hryvnias is determined at the official exchange rate of the relevant currency on the date of payment, unless otherwise established by an agreement or law or other regulatory act. Under such circumstances, the Lviv Economic Court of Appeal came to a legally correct conclusion that the contested transaction complied with the laws in terms of determining the currency of the obligation and the defendant’s lack of debt for the equipment received under the contract, correctly applied part 2 of Article 189 of the EC of Ukraine and part 2 of Article 524 of the Civil Code of Ukraine and reasonably denied the claim2 .

Speaking of judicial practice, one cannot but mention the Review Letter of the Higher Economic Court of Ukraine No. 01-8/870 “Regarding the Practice of Resolving Settlement Disputes” dated July 26, 2002 (hereinafter referred to as the “Review Letter”). In paragraph 1 of the Review Letter, the HECU with reference to a specific legal dispute notes: The expression in the contract of monetary obligations in foreign currency in the contract does not contradict the current legislation, but makes it impossible to take inflation into account to justify claims related to the depreciation of the currency of debt”.

Thus, judicial practice confirms the validity of the application of Articles 524 and 533 of the Civil Code of Ukraine, which explicitly provide for the possibility of expressing a monetary obligation in foreign currency.

CONCLUSIONS
The current legislation of Ukraine does not contain a unified approach to the expression of monetary obligations in foreign currency. There is no doubt that it is possible to express the price of goods and services in dollar or other equivalent when entering into agreements (contracts) with non-residents.

As for contracts between residents of Ukraine, we recommend cautiously approach this issue and not express monetary obligations in foreign currency without unnecessary necessity due to the above-mentioned opinion of the Price Inspectorate. If this happens, it is necessary to include in the contract the phrase that payments between the parties are made in the national currency of Ukraine – hryvnia. At the same time, the expression of an obligation in foreign currency between residents cannot be a basis for declaring an agreement (contract) invalid, which is confirmed by the above stated judicial practice.

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1 See letter No. 32/3-10/918 dated December 7, 2001; Letter No. 32/3-10/910 dated October 4, 2002; Letter No. 32/3-7/1889 dated October 6, 2003; Letter No. 200/7-10/3269 dated August 6, 2009.
2 For reference: the exchange rate of the hryvnia to the US dollar as of01.09.1998 was 225 UAH/100 USD, and as of October 31, 1998 it was 342.60 UAH/100 USD.
1 See article 169 of the Civil Code of the Ukrainian SSR.
1 See the resolution of the Supreme Economic Court of Ukraine on case No. 3/285/05 of August 16, 2005.
2 See the resolution of the Supreme Economic Court of Ukraine on case number 4/664-12/105 dated February 15, 2007.