Ukraine granted permission to defend itself in UK trial over a $3 billion bond dispute

The UK Supreme Court has held (85-page / 564KB PDF) that it is necessary for Ukraine’s defence against non-repayment of the loan – that it had entered the agreement under duress on the threat of physical violence to Ukrainian soldiers and civilians and on the threat of damage or destruction to Ukrainian property – to be considered at trial.

Background

The appeal arose from a contractual dispute between Ukraine and the Law Debenture Trust Corporation plc, acting as a trustee on behalf of the Russian Federation. In December 2013, Ukraine issued eurobonds with a nominal value of $3 billion, with interest set at 5% per annum to Russia (the Notes). Effectively, this was a loan from Russia to Ukraine, repayable in December 2015, constituted by a trust deed governed by the law of England and Wales.

Ukraine argued that the contract was entered into in 2013 following “massive unlawful and illegitimate economic and political pressure” from Russia to induce Ukraine, then led by president Viktor Yanukovych, to accept Russian financial support, rather than to enter into an association agreement with the EU. The loan was the first tranche of a $15 billion package of economic and financial support, agreed by Russian president Vladimir Putin and president Yanukovych in autumn 2013, which was publicly announced on 17 December 2013.

The Notes were constituted by a trust deed on 24 December 2013 following a series of actions taken by the Cabinet of Ministers of Ukraine, Ukraine’s prime minister, the Ukrainian parliament and Ukraine’s minister of finance. On 24 December 2013, the Russian Federation also subscribed to the Notes, and the moneys were received by Ukraine.

The decision by Ukraine not to sign the association agreement with the EU was followed by wide-scale protests in the country, which resulted in president Yanukovych fleeing Ukraine in February 2014. Shortly afterwards, Russia invaded Crimea and sought to annex it. Ukraine has argued that there has been Russian military interference in eastern Ukraine ever since.

The Supreme Court heard the case prior to the Russian invasion of Ukraine in February 2022 and, therefore, did not factor that into its decision in this case.

The proceedings

While Ukraine made three instalments of interest worth a total of $223.33 million between 2013 and 2015, it had failed to pay the Notes by the time they matured on 21 December 2015. Law Debenture Trust subsequently issued proceedings against Ukraine, claiming the debt, as a trustee, owed to Russia.

The Supreme Court considered a range of defences Ukraine has raised against the claim with a view to determining whether the case should be resolved in the Law Debenture Trust’s favour on the basis of summary judgment or proceed to trial. Ukraine’s defences were that:

• it lacked the capacity to enter into the transaction by which the Notes were issued as a matter of Ukrainian law;
• the minister of finance of Ukraine, who had represented Ukraine in the contract negotiation, lacked authority to enter into the transaction;
• Ukraine was entitled to non-repayment of the notes because of duress caused by Russia’s unlawful and illegitimate threats and pressure; and
• Ukraine was entitled to rely on the public international law doctrine of countermeasures to decline to make the payment.

The Law Debenture Trust has argued that the circumstances that Ukraine has found itself in are irrelevant to its claim for repayment of the loan, which it has pursued before the courts in England and Wales under the terms of the trust deed. It was initially successful in applying for summary judgment, but Ukraine was partly successful with an appeal before the Court of Appeal which held that Ukraine had an arguable defence of duress.

The Supreme Court has agreed with the Court of Appeal’s decision that Ukraine should be allowed to defend the claim on the ground of duress, though not on the basis of economic pressures exerted but rather to the extent that it is based on Russia’s alleged threatened use of force.

The failed defences

In relation to Ukraine’s claim that it lacked the capacity to enter into the transaction by which the Notes were issued as a matter of Ukrainian law, the Supreme Court found that the capacity of a sovereign state in English law is derived from the state’s recognition by the UK government, not from the state’s internal law.

Regarding Ukraine’s defence that the minister of finance lacked authority to enter into the transaction, the Supreme Court held that if a state represents that a person has authority to act on its behalf, it is bound by those acts.

The Supreme Court further held that English law does not recognise Ukraine’s defence that it was entitled to rely on the public international law doctrine of countermeasures to decline to make the payment.

Duress

The Supreme Court has held that, when a party’s consent to a contract is induced by threats or pressure, that contract is voidable by the aggrieved party provided that:

• the threat or pressure was illegitimate under English law; and
• there is a sufficient causal connection between the threat or pressure and the aggrieved party’s decision to enter into the contract.

Ukraine had argued two different kinds of pressure which are treated differently in English law.

Economic pressure, including trade restrictions

The Supreme Court held that trade sanctions, embargoes and protectionism are normal aspects of statecraft and cannot be considered inherently illegitimate or contrary to public policy, as is in fact now the case with the UK, EU and US sanctions packages against Russia following its invasion of Ukraine in February 2022.

Threats to use force to destroy Ukraine’s security and territorial integrity

The majority of the Supreme Court judges held that in English law these threats may constitute duress of the person, because they would inevitably involve the use of violence against Ukrainian armed forces and civilians. They found that the threats might also constitute duress of goods because they are likely to result in the destruction of or damage to property in Ukraine.

The alternative view of Lord Carnwath

However, Lord Carnwath expressed a minority part-dissenting opinion. He preferred a wider interpretation of duress. He said that it was unnecessary to separate the two kinds of pressure because they were parts of “a single concerted course of action” and that in exceptional circumstances international legal standards, as well as English law, could be relevant when considering whether the conduct of one state towards another is illegitimate.

In this case, duress of the person and duress of goods were both held to be clear examples of illegitimate pressure. This means that, if Ukraine can demonstrate at trial that such illegitimate pressure caused Ukraine to enter into the trust deed and related contracts then its contract will be void. The onus at trial will now be on Russia to demonstrate that its acts of aggression did not contribute to Ukraine’s decision to enter into the contract.

Practical considerations

The Supreme Court held that Ukraine should be permitted to defend itself at trial on the ground of duress, having established that the threats used by the Russian Federation had been illegitimate at English law. However, it is worth reflecting on the alternative view of Lord Carnwath – that the principles of international law may also be considered in exceptional circumstances.

The English courts struck out the defences of lack of capacity, lack of authority and entitlement to rely on the international law of countermeasures. However, Lord Carnwath suggested that the majority had considered the question of whether illegality or otherwise under international law to be non-justiciable in England and Wales in too simplistic a fashion.

This case has not redefined the English law principles of duress or agency, but it has raised an interesting question – should the principles of international law be considered alongside English law in “exceptional circumstances”?

The political landscape has developed since the case was brought before the Supreme Court and it remains to be seen whether this judgment will be the first in a number of similar cases.

Co-written by Slava Tretyak and Helen Garforth of Pinsent Masons.