The Supreme Court has unanimously held that the Law Debenture Trust Corporation plc (the Trustee), acting on the instruction of and for the benefit of the Russian Federation (Russia), is not entitled to summary judgment in respect of its claim for sums due under Eurobonds issued by Ukraine (the Notes), and that the case should proceed to trial: The Law Debenture Trust Corporation plc v Ukraine (represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine)  UKSC 11.
The judgment serves as a useful reminder of the principles of capacity and authority, which have a long history in claims against financial institutions. It provides a helpful exploration of whether a sovereign state has capacity to enter into and perform a contract, with the court concluding that Ukraine had no arguable case that it lacked capacity to issue the Notes.
On the issue of authority, the court evaluated Ukraine’s overall conduct and actions leading to the issuance of the Notes. It considered whether Ukraine’s Minister of Finance had ostensible authority to issue the Notes on behalf of Ukraine, and whether the Cabinet of Ministers of Ukraine (CMU) had ostensible authority to pass the relevant resolution authorising the Minister to proceed. The court was firmly of the view that the facts constituted a representation by Ukraine that both the Minister of Finance and the CMU had the requisite authority. Accordingly, Ukraine had no arguable case that the Notes were issued without authority.
However, the court held that Ukraine had an arguable and justiciable defence of duress, so the case should proceed to trial. The court ruled that statements made by an adviser to the President of Russia, suggesting the use of force to destroy Ukraine’s security and territorial integrity, were capable of amounting to a threat to the person (and possibly goods), which are clear examples of “illegitimate” pressure for the purpose of establishing duress, as per the test in Times Travel (UK) Ltd v Pakistan International Airlines Corpn  UKSC 40 (see our blog post). Despite recent guidance from the Supreme Court in the Times Travel case, the present judgment suggests that the law of duress is still in a degree of flux.
This decision also provides an interesting discussion on the intersection between commercial and public international law issues. Given the current state of geopolitical instability, it may suggest that non-justiciability issues will arise more frequently in future cases.
In 2013, Ukraine, represented by its Minister of Finance and acting on instructions of the CMU, issued Eurobonds with a nominal value of US $3 billion and carrying interest of 5% per annum. The Notes were constituted by a trust deed governed by English law, to which the parties were the Trustee and Ukraine. The sole subscriber of the Notes was Russia, which has retained the Notes since their issue.
During 2014 and 2015, Ukraine made three payments under the Notes in the full amount of interest allegedly due on each occasion, totalling around US $230 million. However, Ukraine did not pay the principal amount or the last instalment of interest when the Notes matured in December 2015. On 17 February 2016, the Trustee initiated proceedings against Ukraine in the High Court, claiming approximately US $3 billion plus interests and legal costs.
A key aspect of Ukraine’s defence was that the Notes are voidable (and have been avoided) for duress. Ukraine contended that Russia applied unlawful and illegitimate economic and political pressure (including threats to its territorial integrity and threats of the use of unlawful force) in the lead up to the transaction, in an effort to deter the Ukrainian administration from entering into an Association Agreement with the EU and to accept Russian financial support instead (in the form of the Notes). Following the decision by Ukraine not to sign the Association Agreement, protests in Ukraine grew. Shortly afterwards, Russia invaded Crimea and caused widespread destruction across eastern Ukraine.
Ukraine’s further defences to the Trustee’s claim were that it lacked capacity and authority to enter into the transaction. Ukraine submitted that, in light of Russia’s alleged breach of its obligations to Ukraine not to use force or to intervene internally in the affairs of Ukraine, Ukraine was entitled to rely on the public international law doctrine of countermeasures to decline to make payment under the Notes.
High Court and Court of Appeal decisions
In July 2016, the Trustee applied for summary judgment against Ukraine, which was granted by the High Court on 29 March 2017 (but with general and unconditional permission to appeal).
On 14 September 2018, the Court of Appeal allowed Ukraine’s appeal against summary judgment, on the grounds that it had an arguable and justiciable defence of duress. However, it upheld the High Court’s conclusions in favour of the Trustee on the issues of capacity, authority and countermeasures. The Court of Appeal granted both parties leave to appeal.
Supreme Court decision
The legal issues arising before the Supreme Court were as follows:
- Did Ukraine have capacity to issue the Notes or to enter into the relevant contracts?
- Were the Notes issued or the relevant contracts entered into without authority?
- Can Ukraine maintain that it was entitled to avoid the Notes on account of duress exerted by Russia?
- Is it open to Ukraine to maintain that non-payment of the sums due under the Notes is a lawful countermeasure?
Each of these issues is considered further below.
1: Did Ukraine have capacity to issue the Notes or to enter into the relevant contracts?
The Supreme Court held that Ukraine, as a sovereign state which is recognised as such by the UK executive, is considered for the purposes of English law to be a legal person with full capacity. It was not arguable that Ukraine lacked capacity to enter into and perform a contract, irrespective of the provisions of its own domestic constitution and laws. This is because Ukraine’s capacity derives from the UK government’s recognition of the state, not from Ukraine’s internal law. Such recognition is a reflection of the sovereignty and independence of sovereign states and fully accords with and promotes the principle of comity.
2: Were the Notes issued or the related contracts entered into without authority?
Ukraine contended that even if it had capacity to issue the Notes, the Minister of Finance who signed the Trust Deed to “effectuate” the borrowing did not have authority to do so.
Assuming that the Minister of Finance did not have actual authority to procure the issuance of the Notes, the Supreme Court considered the critical question of whether Ukraine nevertheless represented, by conduct or in some other way, that the Minister of Finance did have such authority. At first instance, the High Court analysed this question as two separate issues: (a) whether the Minister of Finance had ostensible authority to sign the trust deed and to issue the Notes on behalf of Ukraine, on the instructions of the CMU; and (b) whether the CMU had ostensible authority to pass the relevant resolution (resolution 904) authorising the Minister to proceed.
In the Supreme Court’s view, it was not helpful to compartmentalise the relevant events, but to assess the activities of Ukraine as a whole. In particular:
- The relevant events took place in the three-month period from October to December 2013 and involved all levels of the Ukrainian state.
- At no stage did any level of the Ukrainian state suggest that the Minister had no authority to proceed, nor did any of them attempt to intervene. On the contrary, their “active and evident participation” ensured that the Notes were issued.
- The transaction was of a familiar nature to the parties and conformed to Ukraine’s history of borrowing. The Trustee had acted on 31 previous issuances of Eurobonds by Ukraine and those earlier issuances were similar to the present issuance. In all of them, the Minister of Finance, representing the CMU had acted on behalf of Ukraine. In the view of the court, it was significant that Ukraine considered itself bound by the terms of the 31 earlier issuances and did not suggest that the Minister did not have the necessary authority in respect of those issuances. The court held that such background “would inevitably and properly inform the attitude of the Trustee“ to the proposed transaction.
- The Trustee would naturally expect the Minister of Finance to have authority to effect such borrowing acting pursuant to an instruction from the CMU, unless that person was on notice of any matters which would have led a reasonable person to make inquiries as to whether the Minister and the CMU had authority.
The Supreme Court was firmly of the view that these facts constituted a representation by Ukraine that the CMU had authority to issue resolution 904 and that the Minister of Finance had authority to issue the Notes, acting on the instructions of the CMU, in just the same way that the Minister had in relation to the 31 previous issuances of Eurobonds.
The Supreme Court rejected all other arguments made by Ukraine on the authority question and concluded that Ukraine had no arguable case that the Notes were issued, or the relevant contracts entered into, without authority.
3: Can Ukraine maintain that it was entitled to avoid the Notes for duress exerted by Russia?
The next question for the Supreme Court was whether Ukraine had an arguable defence of duress so that the case should proceed to trial.
In reaching its judgment on this issue, the Supreme Court considered the development of the law of duress, citing the seminal cases of Barton v Armstrong  AC 104 and Times Travel (UK) Ltd v Pakistan International Airlines Corpn  UKSC 40 (which was handed down after the decisions of the courts below in this case, and also after the initial hearing of this appeal).
The Supreme Court noted there are two questions which arise when a party’s consent to a contract has been influenced by pressure exerted by the other party:
- Whether the pressure is of a kind which English law regards as “illegitimate”. The court noted that the meaning of this term is not always clear, although commented that “illegitimate” is not synonymous with “unlawful”. The court noted that duress of the person and duress of goods are clear examples of illegitimate pressure, whereas economic pressure is not necessarily illegitimate, particularly where the threatened conduct is lawful.
- If the pressure is “illegitimate”, then the question is whether that pressure affected the party’s consent to the contract so as to render the contract voidable; ie a “test of causation in duress”. The court commented that this case was not the occasion on which to address this issue, as it had not been the subject of detailed argument.
Ukraine alleged two categories of conduct: economic pressure and threats of the use of force. Accordingly, the Supreme Court proceeded to consider the different types of pressure separately in order to address the question of whether they were “illegitimate” under the English law of duress:
- Economic pressure. For example, the imposition of restrictions on trade, and the threat of further restrictions; threats to procure Russian banks to commence insolvency proceedings against Ukrainian businesses; and threats to cancel joint projects, or otherwise withdraw from cooperation in a number of industries.
- Threats of the use of force. Express or implicit threats of the use of force to destroy Ukraine’s security and its territorial integrity.
In respect of economic pressure, the Supreme Court considered that embargoes, trade sanctions, and protectionism are common measures of state governance. It said there was no trace of the pressure imposed by such measures ever having been treated in English law as constituting duress, and measures of this kind could not be viewed as inherently illegitimate or contrary to public policy.
The remaining question was whether trade restrictions which would not otherwise constitute duress under English law, may nevertheless do so because they breach unincorporated international law (ie international law which has not been incorporated into English domestic law). The Supreme Court held that there appeared to be no principled basis for treating international law as a guide to the illegitimacy of conduct under the English law of duress.
Consequently, the Supreme Court held that the threats alleged by Ukraine to constitute economic pressure were not illegitimate, and therefore not in themselves sufficient to amount to duress under English law to establish a defence to the Trustee’s claim.
Threats of the use of force
In respect of the threats of force, Ukraine alleged that certain statements were made by an adviser to the President of Russia, such as supporting a partitioning of Ukraine if it signed the Association Agreement with the EU (among others). The question for the court at this stage was whether the alleged statements were capable of amounting to such a threat. The Supreme Court considered that they were, because such a use of force would “almost inevitably” result in violence being used against Ukrainian military personnel and civilians, and it has long been established that a threat to the person may amount to duress. Indeed, the court noted that a threat to the person need not be unlawful under English law in order to constitute duress. Use of force would also almost inevitably result in destruction or damage to property in Ukraine, and so may also constitute duress of goods.
Given the Supreme Court’s acceptance that Ukraine’s allegations concerning the threatened use of force were relevant to support its defence of duress, the question arose as to whether the doctrine of foreign act of state applies, so as to render the issue non-justiciable. In the Supreme Court’s view, the doctrine did not apply, because the court could rule on the issue without determining the validity or lawfulness of Russia’s acts under international law.
The Supreme Court concluded that Ukraine’s defence of duress, so far as based on threats of physical violence, could not be determined without a trial and so the Trustee was not entitled to summary judgment.
The majority held that Ukraine will have to amend its pleadings to focus its case on duress of the person and of goods, based on Russia’s threats of the use of force. Ukraine’s arguments in respect of trade restrictions were also relevant. Lord Carnwath, who dissented on this point, was prepared to let Ukraine’s defence of duress go forward to trial as pleaded.
4: Can Ukraine maintain that non-payment of the sums due under the Notes is a lawful countermeasure?
The majority of the Supreme Court rejected Ukraine’s submission that the common law should give effect to the rules of public international law governing countermeasures between states, and accordingly held that Ukraine had no arguable defence based on any right it may have in international law to take countermeasures on the international plane.
The Supreme Court held that principles of international law governing the rights of states to take countermeasures are rules addressed to the conduct of states amongst themselves on the international plane, and are generally not justiciable before courts in this jurisdiction for two reasons:
- English law does not recognise a defence reflecting the availability of countermeasures on the international plane, so Ukraine’s case is, “quite simply, irrelevant to the determination of the rights and duties arising in English law in relation to the Notes”.
- The subject matter of such inter-state disputes is inherently unsuitable for adjudication by UK courts.
The majority’s view was therefore that Ukraine’s case on countermeasures falls prima facie within the principle of non-justiciability of inter-state disputes.
Dissenting on this matter, Lord Carnwath would have permitted the defence of countermeasures to proceed to trial. Ukraine submitted that the extraordinary circumstances of this case justified an exception to the doctrine of foreign act of state, and Lord Carnwath did not see any reason why it should be prevented at this stage from seeking to make good that case at trial.
For further information, please contact:
Simon Clarke, Partner, Herbert Smith Freehills