In a highly anticipated judgment, the UK Supreme Court has unanimously dismissed the summary judgment application made by the Law Debenture Trust Corporation plc (the “Trustee”), acting on behalf of the Russian Federation (“Russia”), regarding the Trustee’s contractual claim against Ukraine concerning the non-payment by Ukraine of Eurobonds with a nominal value of USD$3 billion (the “Notes”).
The case will now proceed to trial, although Ukraine must amend its defence to: (i) focus on duress of the person or of goods resulting from the alleged threatened use of force by Russia; and (ii) exclude its countermeasures defence. The Supreme Court agreed with the lower courts that Ukraine has no arguable case that it lacked capacity to issue the Notes or to enter into the relevant contracts, or that the Notes were issued, or the relevant contracts entered into, without authority.
The Trustee, an English company, is the trustee of notes with a nominal value of USD$3 billion. In 2013, Ukraine, represented by its Minister of Finance and acting on instructions by the Cabinet of Ministers of Ukraine (“CMU”) issued the Notes, and they were constituted by a trust deed dated 24 December 2013, and the parties were the Trustee and Ukraine (the “Trust Deed”). The Trust Deed is governed by English law and provided exclusive jurisdiction to English courts to hear disputes (subject to the Trustee’s right to elect to arbitrate which it did not exercise).
During 2014 and 2015, Ukraine paid USD$233,333,350 by way of interest repayments in respect of the loan. On 21 December 2015, the principal amount of the loan and the last instalment of interest fell due for payment, but Ukraine refused to effect the repayment. In February 2016, the Trustee issued proceedings against Ukraine before the English courts claiming the outstanding sums.
Ukraine contended that the Notes are voidable (and have been avoided) on grounds of duress. Ukraine argued that Russia had applied massive unlawful and illegitimate economic and political pressure on it, including:
- restrictive trade measures and threats thereof; and
- threats to Ukraine’s territorial integrity and threats of the use of unlawful force.
Ukraine’s case was that the threats were issued to deter Ukraine from signing an Association Agreement with the European Union and to compel Ukraine to accept financial support from Russia in the form of the Notes. Notably, following Ukraine’s decision not to sign the Association Agreement and the protests which ensued as a result, in February 2014, Russia invaded Crimea and purported to annex it. The appeal was heard before Russia’s invasion of Ukraine in February 2022, and the Supreme Court noted that neither party asked it to consider those subsequent events.
Additional to its defence of duress, Ukraine contended that it lacked capacity to enter into the Trust Deed and issue the Notes, and that the Trust Deed was signed and the Notes were issued by the Minister of Finance without actual authority under Ukrainian law. Moreover, Ukraine argued that in light of Russia’s alleged breach of its obligations to Ukraine not to use force against Ukraine and not to intervene internally in the affairs of Ukraine, Ukraine was entitled to rely on the public international law doctrine of countermeasures to refuse to make payment.
The Trustee’s claim focused on the dispute being a simple debt claim. The Trustee maintained that, even if Ukraine’s account of events was accurate, those matters would be irrelevant to a debt obligation governed by English law. In July 2016, the Trustee applied for summary judgment. This procedure enables the court to decide the claim without a trial, provided the Trustee can show that there is no real prospect of Ukraine successfully defending the claim and there is no other compelling reason for a trial.
At first instance, Blair J granted the Trustee’s summary judgment application and ordered Ukraine to pay the sums due under the Notes, and Blair J held that: (i) Ukraine did not lack capacity to enter into the transaction; (ii) the Minister of Finance had usual or ostensible authority; (iii) Ukraine’s defence of duress was not arguable or justiciable; and (iv) the doctrine of countermeasures could not be relied on. The Court of Appeal agreed with Blair J’s conclusion on capacity, authority and countermeasures. However, the Court of Appeal allowed Ukraine’s appeal from summary judgment, and concluded that the claim could not be determined without a trial because Ukraine had an arguable and justiciable defence of duress.
The legal issues
The legal issues arising before the Supreme Court on the appeal were as follows:
1. Did Ukraine have capacity to issue the Notes or to enter into the relevant contracts? (First issue)
2. Were the Notes issued or the relevant contracts entered into without authority? (Second issue)
3. Is the defence of duress available as a result of Ukraine’s allegation that the Trust Deed was signed and the Notes issued as a result of duress exerted by Russia? (Third issue)
4. Is it open to Ukraine to maintain that non-payment of the sums due under the Notes is a lawful countermeasure? (Fourth issue)
The Supreme Court unanimously held that Ukraine had a justiciable and arguable defence of duress based on Russia’s alleged threats to Ukrainian people or property. Lord Carnwath agreed, but in his dissenting opinion he stated that he would have allowed the case to proceed on duress on a broader basis. The Supreme Court rejected Ukraine’s arguments in respect of the first, second and fourth issues, but Lord Carnwath considered that Ukraine’s countermeasures defence should be able to proceed.
First issue: The capacity of Ukraine to issue the Notes and enter into the Trust Deed
Ukraine’s defence raised interesting issues relevant to public international law. In particular, Ukraine submitted that it had no capacity to issue the Notes because their issuance was contrary to fundamental requirements under Ukrainian constitutional law which governed how the government could bind Ukraine in contractual matters.
In response to that submission, the Supreme Court declared that Ukraine is a sovereign state and, as such, it is a subject of international law, it possesses legal personality and enjoys the fullest capacity in international law. The Supreme Court held that in respect of English law, it has long been established – since the nineteenth century - that questions as to the personality and capacity of a foreign state to act within the municipal law of the UK depend on whether that state has been recognised by the UK government as a state.
This recognition does not convert a foreign state into a domestic corporation, rather, a foreign state is simply recognised by domestic law as having legal personality. Further, a recognised state cannot lack capacity to make and perform a contract, regardless of any provision of the state’s domestic constitution and laws.
The Supreme Court held that Ukraine had full capacity to issue the Notes under English law, and the judgment highlighted that this was a reflection of the sovereignty and independence of sovereign states and was consistent with, and promoted, the principle of comity.
Second issue: On whose authority was the Trust Deed entered into?
The second issue before the Supreme Court required consideration of the general principles of agency under English law. Ukraine argued that the Minister of Finance who signed the Trust Deed lacked authority to do so and, further, that he did not obtain the requisite authorisation from the CMU before implementing the borrowing. In response, the Trustee contended that the Minister of Finance had ostensible or usual authority to sign the Trust Deed, to procure the issue of the Notes and, thereby, bind Ukraine.
As a matter of English law, if a state, as principal, represents that a person had authority to act on its behalf, it will be bound by the acts of that person with respect to anyone dealing with him as an agent on the faith of that representation (Attorney General of Ceylon v Silva (AD)  A.C. 461).
When considering the second issue, the Supreme Court analysed all the circumstances in the case and assessed the activities of Ukraine as a whole to determine whether they constituted the relevant express or implied representation by Ukraine that the Minister of Finance had authority to issue the Notes, for and on behalf of Ukraine, on the basis that the CMU had approved their terms. The Supreme Court had no doubt that they did. In reaching this conclusion, the Supreme Court observed that a striking feature of this aspect of the case was that the events leading up to the issuance of the Notes occurred over a short timeframe, involved the President of Ukraine, the Parliament of Ukraine, the CMU and the Minister of Finance and, therefore, those events evidenced to the Trustee a co-ordinated and consistent approach had been followed by different parts of the state of Ukraine to arrange the borrowing.
Further, the relevant transaction in this case was familiar to the parties and mirrored Ukraine’s history of borrowing. Indeed, by the time the Notes had been issued, the Trustee had acted as a trustee on 31 issuances of Eurobonds by Ukraine which were similar in structure and substance. On all those occasions, the Minister of Finance, representing the CMU, had acted on behalf of Ukraine. Significantly, the court noted that Ukraine had considered itself bound by the terms and conditions of those 31 earlier issuances. This background was important and the court said it would have informed the views of the Trustee as to the enforceability of the proposed transaction.
Given these facts, the Supreme Court held that Ukraine had represented to the Trustee that the CMU had ostensible authority to authorise the Minister to proceed, and that the Minister of Finance had ostensible authority to issue the Notes, in just the same way that the Minister had in relation to the 31 previous issuances of Eurobonds.
Third issue: The defence of duress
The Supreme Court emphasised that, as the Trust Deed is governed by English law, it is English law principles that apply to whether the contract is void due to duress. If the contract has been affected by duress, it can be set aside and, if so, assuming the party affected by duress has received some benefit, there may be an obligation to make restitution.
When considering the principles relating to duress, the first question to be asked is whether a party’s consent to a contract has been influenced by pressure imposed by the other party which, under English law, is regarded as illegitimate. Assuming the pressure is regarded as illegitimate, the second relevant question is whether it has affected the party’s consent to the contract to render the contract voidable. The court noted that the term “illegitimate” is not synonymous with “unlawful”; and in limited situations pressure can be lawful but nevertheless illegitimate and therefore constitute duress. The relevant standard as to whether pressure is illegitimate is whether the behaviour in issue is unconscionable (as discussed by Lord Hodge in Times Travel (UK) Ltd v Pakistan International Airlines Corpn  UKSC 40).
The allegations advanced by Ukraine concerning duress were divided by the Supreme Court into the following two categories, which raised distinct issues under English law:
- The first category of duress relates to various forms of economic pressure. The Supreme Court commented that the imposition or threat of trade restrictions so as to exert pressure on another state, in furtherance of political objectives, has been “part of the armoury of the states since classical times” and, therefore, it could not be regarded as inherently constituting illegitimate pressure under English law. Indeed, and unsurprisingly, the court remarked that such pressure has never been treated in English law as constituting duress. The court concluded that Ukraine’s assertion of economic duress could not establish an arguable defence.
- The court considered it unnecessary to consider whether the trade restrictions constituted a breach of international law and, specifically, a breach of various treaties to which Russia and Ukraine are contracting parties. The court had regard to Lord Neuberger’s statement in Belhaj v Straw  UKSC 3 that “international treaties and conventions, which have not become incorporated into domestic law by the legislature, cannot be the source of domestic rights or duties and will not be interpreted by our courts.” Simply put, the court held that domestic law provides no “foothold” to consider whether, under international law, the trade restrictions amounted to duress.
- The second category of duress relates to express or implicit threats of the use of force to destroy Ukraine’s security and its territorial integrity; which was characterised by Ukraine’s counsel as based on duress of the person and goods. Duress of the person and duress of goods were described by the court as well examined examples of illegitimate pressure (unless justified, such as, made in self-defence) (citing Barton v Armstrong  AC 104). Such threats would almost inevitably involve the use of violence against Ukrainian armed forces and civilians, and could constitute duress of the person. They may also constitute duress of goods, because they are likely to result in the destruction of or damage to property in Ukraine.
The majority of the Supreme Court held that the act of state doctrine was not relevant to Ukraine’s plea of duress because that defence does not require the court to determine the lawfulness, under international law, of Russia’s acts or threatened acts. Conversely, in his dissenting opinion, Lord Carnwath disagreed with this approach and he found it “hard to see why, in judging on the domestic plane whether the conduct of one sovereign state to another is ‘illegitimate’ for the purposes of the law of duress, the court should treat as wholly irrelevant the legal standards which govern their international relationship.”
As the Supreme Court had held that Russia's threatened use of force could constitute illegitimate pressure on Ukraine to enter into the Trust Deed, the consideration of that question necessitated a trial and the matter could not be determined by way of summary judgment. The Supreme Court made it clear that, at trial, the onus will be on the Trustee to prove that the alleged threats contributed nothing to Ukraine’s decision to enter the transaction in order to defeat Ukraine’s defence.
Fourth issue: The doctrine of countermeasures
The final issue before the court related to the availability of the doctrine of countermeasures in response to the claim. Ukraine asserted that its refusal to pay the sums due under the Trust Deed was a lawful countermeasure, under customary international law, responsive to the internationally wrongful action on the part of Russia, specifically, Russia’s invasion and annexation of Crimea and its support of military action in eastern Ukraine.
The court determined that the principles of international law that govern the rights of states to adopt countermeasures are rules relating to the conduct between states at the international level, and such matters are not justiciable before the English courts for two reasons. First, English law does not recognise a defence reflecting the availability of such countermeasures. Secondly, the subject matters of such inter-state disputes are fundamentally unsuitable for determination by domestic courts.
The majority of the Supreme Court held that Ukraine has no arguable defence based on the doctrine of countermeasures.
An interesting feature of this case is that the claim has no factual connection to the UK. This is a prime example of a case in which the English courts have been asked to resolve a dispute because, firstly, the relevant contract, here, the Trust Deed, is governed by English law and, secondly, the affected parties to the dispute voluntarily agreed that English courts should have exclusive jurisdiction to hear and adjudicate the dispute between them relating to their contract.
In defending the debt claim Ukraine has raised novel arguments steeped in public international law which required the Supreme Court to examine principles of state recognition and capacity and when an agent of a state has authority to bind the state. Set against heightened political sensitivities relating to Ukraine and Russia, the judgment illustrates the court’s approach to issues of, and the boundaries relating to, non-justiciability before the English courts. It is clear that the doctrine of countermeasures has been found not to be an available defence in this matter and, going forward, we can expect the English High Court to proceed on the basis that it is not necessary to consider whether the alleged threats to use force by Russia were “valid and lawful” as a matter of international law but only whether the threats were “illegitimate”.
The Law Debenture Trust Corporation plc v Ukraine  UKSC 11