The UK Supreme Court (UKSC) has handed down its long-awaited judgment in Law Debenture Trust Plc v Ukraine  UKSC 11. In this post we take a look at where this leaves the dispute, which arose from pre-war events. We also examine some of the key findings of the judgment including what English law has to say about the legal capacity of states, and the defence of duress in English contract law.
What’s happening in the case?
The proceedings concern a late 2013 $3bn Eurobond issuance by Ukraine. Russia was (and remains) the sole subscriber. The claimant is the trustee under the issuance’s trust deed. Since maturity in late 2015, Ukraine has refused to repay the principal amount, as well as some outstanding interest. The trustee brought proceedings in England to recover these sums (the issuance was under English law and jurisdiction). The claim is worth $3.075bn plus continuing interest.
Ukraine has defended the proceedings on a number of grounds. These include, principally, that it lacked capacity to enter into the notes, that its Minister of Finance (MoF), who concluded the transaction, lacked authority to do so, and that Ukraine is entitled to avoid the notes on the basis of duress.
In relation to duress, Ukraine alleges that, in 2013, Russia applied economic pressure and trade measures to it, and threatened the use of force against it. This is alleged to have been done by Russia with the aim of inducing Ukraine to accept financial support (in the form of the notes) instead of EU support by way of an association agreement.
At first instance, the judge granted summary judgment against Ukraine. The Court of Appeal allowed an appeal (in part) by Ukraine. The UKSC has now ruled as to whether the grant of summary judgment was correct.
What did the UKSC decide?
The overall result was that it accepted that Ukraine had an arguable case that the notes could be avoided on the basis of duress. This was, however, limited to Ukraine’s allegations involving the use of force against it. Ukraine’s other defences were rejected as not arguable.
Taking a closer look at the UKSC’s reasoning.
Ukraine’s capacity defence failed as, in England, a foreign state recognised by the UK executive is regarded as having full legal capacity.
Ukraine’s defence of capacity was based on assertions that the issuance led to it borrowing more than its budgetary law allowed, and that there had been other breaches of domestic constitutional requirements regarding required approvals.
This raised the question of how the English courts assess the legal capacity of a state; is it by that state’s own law? The UKSC confirmed that it was not. In a detailed examination [20-34], it noted that, in England, the legal personality of a foreign state comes from recognition by the UK executive (unlike, say, foreign corporations which are creations of their own domestic law [27-29,32]). Furthermore, English law treats a state so recognised as having full legal capacity [25-26]. So, Ukraine’s laws were not relevant to the question of whether it could enter into a contract governed by municipal law, and Ukraine had no arguable defence on capacity .
There was no case that the MoF lacked (ostensible) authority to enter into the notes and relevant contracts.
Irrespective of the above, Ukraine also argued that the breach of its budgetary limits, and constitutional processes, resulted in a lack of authority on the part of the MoF to bind Ukraine.
The trustee accepted that this meant the MoF lacked actual authority but said that, on the facts, the MoF had ostensible authority. The UKSC discussed the general principles ([38-42]). Actual authority is the actual express, or implied, power granted by a principal to an agent. Ostensible authority, by contrast, describes a situation where a principal represents to another (which may be by implication/ conduct) that an agent is authorised to bind the principal. Provided that party relied on that representation and is not reasonably on inquiry to investigate the existence of authority, the principal will be bound. Although actual and ostensible authority might coincide, they are separate. So it is possible for ostensible authority to exceed actual authority.
The key question was, accordingly, whether the requirements of ostensible authority were met. At [66-115] the UKSC sets out a detailed factual examination concluding that they were. The main points were as follows. First, the representation that the MoF had authority and that the issuance was approved came holistically from Ukraine’s activities in the lead up to it. That, generally speaking, involved the actions of Ukraine’s parliament, president, cabinet and the MoF all being entirely consistent with there being no problem with the borrowing [74-81].
Furthermore, the trustee was not to be regarded as having been on inquiry to investigate whether the borrowing might breach Ukraine’s budget borrowing limit. A reasonable person in the trustee’s position would not have made those inquiries due to the position taken by Ukraine and its representatives during the issuance process. These, at no stage, indicated that there might be a problem and included confirmatory statements by the parliament, in the prospectus, and relevant legal opinions [91-106].
Finally the trustee had clearly relied on the representation of authority as it would not have proceeded with the transaction had any potential issues been flagged. [114-115].
Ukraine’s defence of duress can proceed to trial, insofar as it relates to the use of force.
The UKSC emphasised that at common law, the defence of duress involves the use of illegitimate pressure to induce a party to enter into a contract. Following its decision in Times Travel, the touchstone for illegitimacy is behaviour which would be judged in equity to render a contract unconscionable. Threats against the person, or goods, were examples. But economic pressure was not necessarily illegitimate, particularly where the threatened conduct was lawful (as Times Travel noted, the scope for the doctrine to apply in such situations is very limited) [140-142].
As to Ukraine’s allegations that Russia exerted economic pressure against it, the UKSC held that these were not sufficient to meet the threshold of illegitimacy. Sanctions, embargoes and trade restrictions were normal aspects of statecraft. The fact that these might be said to be in breach of international law (in this case treaties between Russia and Ukraine) was not relevant as the question was one of the standards of English law on duress, not standards drawn from elsewhere [145-170].
As to the threats of the use of force against Ukraine, that would inevitably involve the use of violence against Ukrainian armed forces, and citizens. Unless justified (by e.g. self-defence), threats to the person had long been treated as illegitimate and did not need to be directed at the contracting party. The UKSC therefore considered that these were, in principle, capable of founding a defence of duress. [171-183]
In relation to that defence based on use of force, the UKSC also had to then go on to consider the trustee’s reliance on a rule of non-justiciability whereby the English courts will not determine the legality of a foreign government’s actions in its conduct of its foreign affairs. Although, on the face of it, Russia’s threats might fall within that category, the UKSC noted that this principle only applied where those sovereign acts were the very subject matter of the action. In the case before it this was not made out. The point in issue was whether the contract was liable to be set aside on the ground of duress which depended on an assessment, under English law, of whether the pressure was illegitimate. By contrast, the court was not being asked to rule (either under international or domestic law) on the legality or validity of Russia’s acts of foreign affairs. That rule of non-justiciability therefore was not applicable to Ukraine’s defence [184-193].
What happens now?
Whether Ukraine’s defence of duress is made out on the facts will now go to trial. As the UKSC noted, one important aspect of this, and which Ukraine will need to satisfy, is whether the threats impacted on Ukraine’s consent. The standard of causation in that respect depends on the nature of the pressure applied. However, where it concerns threats of violence, the bar is comparatively low (“were the threats a reason for the decision”) [143-144]. And, as the UKSC noted , Russia’s threats of economic action might return to be factually relevant/significant in that analysis if they tended to accentuate the threats of violence on which the duress defence is legally based.
Click here for a copy of the judgment.
For further information, please contact:
Christa Band, Partner, Linklaters