Ukraine v Russia in the English courts

The same day that Ukraine filed its much-discussed claim against Russia before the International Court of Justice, many of the same issues were being argued in the quiet surroundings of the English Commercial Court.

A seemingly anodyne application by a firm of professional trustees for summary judgment in respect of non-payment of debt instruments gave rise to a hearing involving difficult questions of international law, arising out of one of the most highly-profile conflicts in the world today. How did this happen?

How the issues arose

The claim (Law Debenture Trust Corporation PLC v Ukraine [2017] EWHC 655 (Comm)) concerned $3 billion of Eurobonds (‘the Notes’). The claimant, Law Debenture Trust Corporation plc (‘the Trustee’), is a firm of professional trustees, acting on the direction of the Russian Federation. As the judge, Blair J, recorded:

Ukraine’s case is that Russia applied massive, unlawful and illegitimate economic and political pressure to Ukraine in 2013 to deter the administration led by President Viktor Yanukovych from signing an Association Agreement with the European Union, which was to have been signed at the Vilnius Summit on 28 November 2013, and to accept Russian financial support instead. The Notes were to be the first tranche of that support. Ukraine’s case, opposed by the Trustee, is that the borrowing resulted from that pressure, and that for this and other reasons, its non-payment of the Notes is justified, and that in any event summary judgment is not appropriate. [4]

The Notes were constituted by a trust deed governed by English law, granting exclusive jurisdiction to the English courts, and in which Ukraine waived sovereign immunity in respect of the transaction.

Payment from Ukraine was due on 21 December 2015. On 18 December 2015, the Cabinet of Ministers of Ukraine (‘CMU’) approved a moratorium proposed by the Government to suspend payment of the Notes. On 12 April 2016, the Verkhovna Rada (the Ukrainian Parliament) voted to extend the payment moratorium indefinitely.

The Trustee, on direction of the Russian Ministry of Finance, brought enforcement proceedings in the English court, seeking the principal sum outstanding and interest. Ukraine argued in its defence that, as the Court summarised, “the claim forms part of a broader strategy of unlawful and illegitimate economic, political and military aggression by Russia against Ukraine and its people aimed at frustrating the will of the Ukrainian people to participate in the process of European integration.” [28]

The Trustee applied for summary judgment, pursuant to Rule 24.2 of the Civil Procedure Rules, arguing that Ukraine did not have any real prospect of successfully defending the claim, and that there was no other compelling reason why the case should go to trial.

Ukraine’s case

Ukraine resisted the application on the basis of four defences which it argued were unsuitable for summary judgment:

1. Ukraine lacked capacity to issue the Notes.
2. The contractual arrangements were procured by duress, and Ukraine’s purported consent was vitiated by unlawful and illegitimate threats and pressure by Russia.
3. There were implied terms of the Trust Deed which included terms that Russia would not deliberately hinder Ukraine’s ability to repay, or demand repayment if it was in breach of its obligations towards Ukraine under public international law.
4. If, contrary to the above, Ukraine owes a valid contractual obligation which it had breached, it is entitled to withhold payment as a ‘countermeasure’ under public international law.

In addition to these four defences, Ukraine argued that:

Irrespective of its prospects of success, Ukraine submits that there are compelling reasons to proceed to trial because the claim is in reality a tool of oppression which includes military occupation, destruction of property, the unlawful expropriation of assets, and terrible human cost. Ukraine submits that these matters should be the subject of a trial, and that the summary judgment process is not something to which Russia should be entitled to benefit given its egregious conduct. [33]

Ukraine argued that the bond issue was, in reality, a bilateral loan from Russia to Ukraine:

negotiated directly between the two sovereign states, which avoided the cumbersome and lengthy approval process which would have been required of a formal bilateral loan and enabled the transaction to be implemented within the very short timeframe available. The terms are neither conventional nor commercial, but are unusual, extraordinary and oppressive to Ukraine. They were imposed on Ukraine by Russia and the arrangements for their implementation were rushed through in what [Ukraine’s legal expert] refers to as ‘flagrant’ breaches of fundamental requirements of Ukrainian law, and in circumstances constituting duress under English law. [52]

This post examines the first and second of Ukraine’s arguments – capacity and duress – focussing first on the issue of duress.

The Court’s judgment

The Court began by setting out the well-established test for summary judgment: the Trustees had to show that Ukraine had no real prospects of successfully defending the claim; conversely, Ukraine had to show that its defences were more than merely arguable. The Court noted that it was inappropriate to resolve points of law or construction summarily where a question of law “calls for detailed argument and mature consideration”: Home & Overseas Insurance Co. Ltd v Mentor Insurance Co. (UK) Ltd [1990] 1 WLR 153 at 159 G-H. [44]

The issue of duress

Duress was at the heart of Ukraine’s case. It argued that Russia’s conduct amounted to duress under English law, and that the contractual arrangements were therefore voidable. It relied on the decision in Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] EWHC 273 (Comm) for the proposition that pressure may amount to duress even if no illegality is involved. In other words, the Court did not need to find that Russia’s conduct had been illegal in order to reach a finding of duress. The Court noted that “No authority was cited in which the doctrine of duress had been invoked by a state as regards a contract entered into by the state, but neither was it suggested that the principles applicable to non-states do not apply.” [180]

“Ukraine’s case is that Russia applied massive, unlawful and illegitimate economic and political pressure to Ukraine in 2013”

Ukraine’s case on duress was that “By December 2013, [Russia’s] threats and pressure had inflicted billions of dollars of damage, Ukraine had effectively lost access to capital markets, and it had no real choice but to abandon the EU Association Agreement and accept a deal on Russia’s terms. Russia had achieved its objective.” [181] It also argued that the subsequent Russian invasion of Crimea constituted ongoing duress, such that it could not ratify or affirm the contract. Ukraine provided abundant evidence in support of its case on this point, and pleaded a detailed case, set out as an annex to the judgment of the Court. The Court considered that it had provided “ample material supporting its factual case” on initial and continuing duress [251, 253], while Russia had not provided any evidence to the contrary. (Although on a summary judgment application the facts are assumed in favour of the respondent – here, Ukraine – that did not preclude Russia, through the Trustee, from pleading a factual case).

The Trustee did not advance any case on the substance of the duress issue, but concentrated entirely on arguing that Ukraine’s case on duress fell within the act of state doctrine, as recently analysed by the Supreme Court in the case of Belhaj v Straw and others [2017] UKSC 3 (see our analysis here), and could therefore not be examined by the Court.

Ukraine argued that Russia had applied two related forms of duress: trade restrictive measures, and threats of the use of force (followed by the actual use of force when Russia went on to invade Crimea: but at the relevant time, when the bond arrangement was made, force remained at the level of threats). On trade restrictive measures, Ukraine argued that the measures imposed by Russia during 2013 breached specified free trade agreements, including the GATT, the Free Trade Agreement between Member States of the CIS, and the Friendship Agreement between Ukraine and Russia.

On whether these matters were justiciable, the arguments were as follows:

1. The Trustee relied on the principle in Buttes Gas and Oil Co v Hammer (No 3) [1982] AC 888 that the courts will be very reluctant to entertain a claim that a State has acted in an unlawful or illegitimate way on the international plane.
2. Ukraine argued that this principle has no application where there is a “domestic foothold”: that is, whether the determination of international law is required as part of the Court’s determination of English law rights. It also argued that, given that duress is broad enough in English law to include the use of illegitimate means which are not necessarily unlawful, the Court did not have to hold Russia’s conduct to be unlawful in order to find that there had been duress.
3. In response to this, the Trustee argued that in order for there to be a “domestic foothold”, it must be possible for the English court to condemn the relevant conduct by some standard of English law. It also argued that, in a dispute between States (as opposed to commercial parties, as in the Progress Bulk Carriers case), “the only standard by which the legitimacy of conduct can be assessed is international law itself”. In other words, when it comes to inter-State disputes, the legality enquiry cannot be avoided by referring to “legitimacy” instead.

The Court found for the Trustee on the issue of duress. On the facts, the Court considered that Ukraine had made out a “strong case” that it was subject to economic pressure by Russia and that this was “more than merely economic” [295]. But looking at what would be required to adjudicate on Ukraine’s defence, the Court accepted the Trustee’s submission that determining the issue would “require the court to interpret the treaties/agreements, determine whether the impugned conduct occurred, determine if it constituted a threat, and whether the threat was of conduct that was in breach of the treaties/agreements.” [286] Then, for the Court to go on to consider whether the trade restrictions were spurious, this would “require a determination as to motive in the sense of whether Russia’s basis for imposing the trade restrictions was legitimate and consistent with its treaty obligations.” [287]

The Court considered that this exercise took it into non-justiciable territory:

1. Assessing the trade restrictive measures would require it to adjudicate on transactions between sovereign states on the plane of international law: a “fundament prohibition”.
2. The Court would also have to interpret treaties which were not incorporated into English law, falling foul of the principle summarised in Belhaj at [123] 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.” [295]
3. Further, unincorporated treaties cannot create or destroy rights under domestic law, but Ukraine was seeking to use them to destroy the domestic law rights held under the Eurobond transaction.
4. The Court also considered that there were no “judicial or manageable standards” [295] by which to assess the legitimacy of the economic measures taken by Russia.

The Court came to the same conclusion on the arguments relating to duress by the threat of force. It noted that violence or threats of violence to a person count as a “paradigm form of duress, entitling the victim to avoid a contract entered into as a result”. If the same approach was applied to Ukraine then “its case is plainly a strong one, particularly on a summary judgment application.” [308]  It considered that, on the facts, “Ukraine’s case as to the threats made is credible, and has not been answered.” [308] But it relied on various statements from Belhaj to the effect that the use of force is a paradigm case of a sovereign act on which the English courts should not adjudicate. [308] So it concluded that:

Applying these statements of principle to the present case, it seems an inevitable conclusion that the threats of the use of force by Russia in 2013, which are relied upon by Ukraine as vitiating the Eurobond transaction it entered into on 24 December 2013, fall within the foreign act of state doctrine. They concern threats, and ultimately aggression by a state and armed conflict between states. On the authorities, these acts are non-justiciable, and fall outside the public policy exception. They cannot give rise to a defence of duress in English law. Ukraine’s case to the contrary has no real prospect of success. [295]

The issue of capacity

Ukraine also argued that the Eurobond transaction was void ab initio because as a matter of Ukrainian law, Ukraine, acting through the CMU, had no capacity to enter into it. It argued that the transaction had violated various provisions of Ukrainian law.

As the Court noted, the point is a potentially significant one for the markets [109]: if a State lacks capacity to enter into a transaction because of breaches of its internal law, its counterparty, who may not know that such breaches have occurred, may find the contractual arrangements unenforceable for reasons outside its knowledge or control.

Reviewing the caselaw on a State’s capacity to borrow, the Court concluded that:

Whether considering the nature of a state on the international plane, or the nature of a state for the purposes of entering into a loan contract governed by English law, the position is the same. Once a state is recognised as such, as a matter of international law it has unlimited capacity to borrow, and such capacity is recognised under English law. A state’s capacity to borrow “rests in its sovereignty” (to use the phrase in the Lotus at p.19). The state’s internal laws as to borrowing, dispositive though they may be in other contexts, cannot operate by way of a limit on the state’s capacity, so as to enable the state, as is contended for in the present case, to treat the obligation to repay as void by reason of breach of such laws. [129]

The Court considered that the failure to follow domestic rules on State borrowing is not irrelevant as a matter of English law: but that that this is not a case of lack of power, but of the power not being exercised as the law required. [134] it considered that Ukraine’s argument was therefore, on the facts, one of lack of authority (to enter into this particular transaction) and not capacity (to enter into such transactions at all). Ukraine argued that, if the defence was characterised as lack of authority then the relevant Minister did not have authority to sign the contractual documents. The Court disagreed: it considered that, as a matter of English law, the Minister of Finance had usual authority to enter into the Eurobond transaction, and Ukraine’s case to the contrary had no real prospect of success. [174]

Conclusions

It is clear that the Court had considerable sympathy for Ukraine’s case on the facts. Given the seriousness of the issues raised, and the complex and evolving nature of the doctrines of non-justiciability and foreign act of state, it is perhaps surprising that the Court felt able to grant summary judgment. The case could well be described as one which “calls for detailed argument and mature consideration”, and thus unsuitable for the summary judgment procedure.

The Court argued that, despite the grant of summary judgment, “there is at least an element of redress in this case to be had at the international level: on 16 January 2017, Ukraine instituted proceedings against Russia in the International Court of Justice, seeking provisional measures.” [308] However, it is not apparent how Ukraine’s case in the ICJ could assist it in the meantime in resisting payment of the bonds: and, in the event, the limited provisional measures ordered by the ICJ did nothing to protect Ukraine from the financial consequences of the transaction.

At the heart of the decision was a very broad interpretation of the foreign act of state doctrine. But this doctrine forms no part of international law: it is entirely a creation of the common law, and as such, takes its place alongside other important common law rules, including the principle that a contract obtained by duress cannot be enforced against the victim of the duress. Reading the judgment, one is given the impression that the English courts never pronounce upon the conduct of foreign states: but they routinely do exactly this in many different contexts. To take extradition as an example, District Judges have to decide on a weekly basis whether a requested person would face human rights abuses on their return, including torture (which, in its core definition, is carried out by public officials). Extradition cases frequently raise the issue of whether a requesting State has improper motives in making the extradition request. In other words, courts hearing such cases have to make “a determination as to motive” as to whether the basis for the State’s conduct is “legitimate and consistent with its treaty obligations” – precisely the exercise which the Court in this case said that it could not carry out in relation to Russia’s motives for the trade restrictive measures. [287]

As against the Court’s conclusions on foreign act of state, it could be argued that:

1. It is highly relevant that the case had a firm “domestic law foothold”. It concerned private law rights – here, rights under an English contract, sought to be enforced by action in the English courts, and subject to the common law of duress.
2. The doctrine of duress did not require the Court to pronounce on the lawfulness of the conduct of Russia, in light of the decision in Progress Bulk Carriers that conduct may amount to duress if it is illegitimate, even if it is not unlawful.
3. It is hard to see why there are no “judicial or manageable standards” to decide whether or not the Russian acts of which Ukraine complained were “illegitimate” in the sense of amounting to duress. The threat of physical force to a person is a paradigm case of duress: invasion of a country is, surely, the precise equivalent at State level.
4. In any event, to the extent that the Court, when deciding on this issue, had to consider the content of international law, including unincorporated treaties, this would not amount to the Court taking the forbidden step of applying those treaties to parties in England. In a number of cases, the English courts have assessed the scope of a remedy in English law with reference to an unincorporated treaty (see for example European Roma Rights Centre v Immigration Officer at Prague Airport [2004] UKHL 55; [2005] 2 AC 1).

There is a sense in which, therefore, international law loomed larger in this decision than it ought to have done. The doctrine of duress, as it has been interpreted, including “illegitimate” conduct, has at its heart an assessment of the fairness of holding a contracting party to a bargain concluded in particular factual circumstances. It would clearly be politically controversial for a Court to allow Ukraine’s claims of duress to continue, but it is suggested that they had – at the very least – sufficient merit not to be summarily dismissed. It may be that the matter will be considered again on appeal.