Fixation and compensation for damage caused to business entities as a result of hostilities

Throughout the entire period since the beginning of the military aggression of the Russian Federation against Ukraine, we continue to observe changes in legislation and topical issues that may arise for our clients.

Now in some regions of Ukraine arise issues of potential fixation and compensation for damage caused as a result of hostilities, in particular, due to the destruction or damage to the property of enterprises.

WHO AND UNDER WHAT PROCEDURE IS OBLIGED TO COMPENSATE FOR DAMAGES CAUSED BY MILITARY ACTIONS?

First of all, it should be noted that, in accordance with the international Convention with Respect to the Laws and Customs of War on Land, the destruction or seizure of property without military necessity is prohibited.

At the same time, as of today, neither at the international level, nor in the national legislation of Ukraine, there are unified and unambiguous special rules for compensating for damage caused to business entities as a result of the destruction of property during hostilities, in particular, it is not defined who exactly should indemnify such losses, according to what procedure and what judicial body is authorized to consider such disputes.

In Ukrainian courts, claims against foreign states (in particular, the Russian Federation) can be considered only with the consent of the competent authorities of such a foreign state (Article 79 of the Law of Ukraine “On Private International Law”).

From a purely theoretical point of view, claims by individual business entities for damages against the Government of the Russian Federation can potentially be considered in the judicial bodies of the Russian Federation itself, but as of today, such a scenario seems extremely unlikely.

Another potentially possible mechanism for damages can be filing a claim against the Russian Federation with the European Court of Human Rights (ECHR). However, the following aspects should be taken into account with respect to this mechanism:

* The basic principle of the European Convention on Human Rights, on the basis of which the ECHR exercises its jurisdiction, is that the claim is filed against the country exercising jurisdiction in the relevant territory.

That is, as a general rule, if the rights were violated on the territory of Ukraine, then a lawsuit should be filed against Ukraine. But, on the other hand, in the situation of military aggression of the Russian Federation on the territory of Ukraine, it is obvious that Ukraine is not guilty of causing damage.

Therefore, in the practice of the ECHR there are certain exceptions regarding situations of armed conflicts, but in this it is not unambiguous: there are cases when the aggressor country was found guilty, but there is also the opposite practice.

For example, in 2015, Ukraine at the level of the Verkhovna Rada made a statement about derogation from the Convention and the impossibility of exercising full jurisdiction in the ATO zone, which was reported to numerous international organizations. From that moment on, this refusal made it easier for the applicants to justify the determination of the Russian Federation as a defendant that actually exercises jurisdiction in the ATO zone.

In the situation that concerns today’s war, Ukraine has not yet adopted official acts on recognition of the seizure territories since February 24, at least temporarily occupied, has not made statements about the renunciation of jurisdiction over any seizured territoties, etc.

Thus, today, when filing a claim with the ECHR, there is a risk of refusal associated with the definition of the Russian Federation as the defendant, who exercised control over the exact territory where the event occurred.

* Also under the general rules, the pursue a claim in the ECHR, the completion of all legal proceedings at the national level in the country of the defendant must precede. But in cases of claims against the aggressor state, the ECHR often makes exceptions in practice and accepts claims without going through national courts, provided that there is detailed justification that it is impossible and ineffective to go to court in the aggressor’s country. But in this case, a claim to the ECHR must be filed no later than 4 months from the date of damage to property.

It should also be taken into account that in connection with the exclusion of the Russian Federation from the Council of Europe, on March 22, 2022, the ECHR adopted a resolution according to which Russia ceases to be a party to the European Convention on Human Rights from September 16, 2022. This means that the ECHR will be able to accept and consider applications against the Russian Federation only regarding violations that took place before September 16, 2022.

Thus, as of today, there is no special legislative mechanism for compensation for damage caused as a result of the destruction or damage to the property of enterprises during the military aggression of the Russian Federation on the territory of Ukraine. However, such a mechanism may be approved in the future.

In the light of the foregoing, at the moment, an important aspect of protecting the rights and interests of business in the context of hostilities is the development of an algorithm and procedure for documenting the facts of damage or destruction of property as a result of military aggression of the Russian Federation, which in the future can be used in the process of compensating for such damage or destruction.

THE CABINET OF MINISTERS APPROVED THE PROCEDURE FOR DETERMINING DAMAGES CAUSED BY MILITARY ACTIONS, WHICH DOES NOT WORK IN PRACTICE YET

On March 20, 2022, the Cabinet of Ministers, by its Decree No. 326, approved the Procedure for determining the damage and losses caused to Ukraine as a result of the armed aggression of the Russian Federation¹.

This act does not regulate the issues of the procedure for reimbursement of the losses, but is intended only to regulate the procedure for their determination, which in the future can potentially be used to prove the fact of losses in order to compensate them.

In particular, the above Procedure defines as one of the directions of such losses – the economic losses of enterprises of all forms of ownership due to the destruction and damage to their property, as well as lost profits from the impossibility or obstacles in the implementation of economic activities, including losses from unpaid goods, works and services, provided/consumed in the temporarily occupied territories.

Responsible for the centralized determination of such losses, according to the Procedure, are the relevant regional state (military) administrations.

However, according to the specified Procedure, the determination of such losses should take place on the basis of a special methodology, which is not yet available today, but must be approved by a general order of the Ministry of Economy and the State Property Fund, in agreement with the Ministry of Reintegration.

Thus, today the specified Procedure does not work in practice yet, but it may work in the near future.

PRACTICAL RECOMMENDATIONS ON THE ALGORITHM FOR RECORDING THE FACTS OF DESTRUCTION OR DAMAGE TO PROPERTY AS A RESULT OF MILITARY ACTIONS

Taking into account all of the above, in the absence of clear legislative regulation, in our opinion, based on the general requirements of legislation and practical aspects, in the event of damage or destruction of the property of an enterprise as a result of hostilities, the following algorithm is recommended today:

1. Contact the authorities of the State Emergency Service of Ukraine (SESU)

The specified body not only eliminates fires and accidents, but also their consequences and neutralizes ammunition. Based on the results of its actions, the State Emergency Service draws up an appropriate act, a copy of which it is advisable for the enterprise to receive and keep.

2. Contact the police

The national police authorities consider the application for the commission of a crime, record the facts, inspect the scene of the incident and start criminal proceedings (in particular, under Article 438 of the Criminal Code of Ukraine – “Violation of the customs of war”).

Based on the results of the appeal, the national police authorities provide an extract from the Unified register of pre-trial investigations, which it is advisable for the enterprise to keep.

3. Record and document as much as possible the destruction/damage, in particular:

3.1. Draw up by means of the enterprise an appropriate act of destruction/damage to property with photo fixation, references to the terrain and diagrams. It is advisable to involve not only employees of the enterprise, but also independent witnesses, representatives of state authorities (military administration), local self-government in the preparation (signing) of this act.

3.2. Create a special inventory commission by order for the enterprise, which will be entrusted with conducting an inventory to establish the fact of destruction/damage of fixed assets and commodity and material assets of the enterprise (for subsequent reflection in the financial statements). The results of the commission’s work should be recorded as much as possible in protocols, orders, memorandums, etc.

3.3. Ensure the search and storage of the maximum number of publications in the media confirming the relevant event, which led to destruction/damage of the company’s property.

3.4. Carefully store all the above documents and evidence, along with title documents for destroyed/damaged company assets.

4. Optionally (and if possible), you can also additionally order an assessment of the amount of damage caused by a professional appraiser

The above recommendations are basic and can be supplemented according to the type of damaged object (for example, obtaining a report on the inspection of the technical condition of the building), new legislative procedures (national or international), the economic sector of the enterprise, or additional measures in specific cases may bee introduced.