Law Debenture Trust v Ukraine (2023) – Strategic Ukrainian victory in the Supreme Court
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The Law Debenture Trust Corporation plc v Ukraine [2023] UKSC 11
Summary
This contract law case is steeped in international geopolitics, with direct ties to the 2014 revolution that overturned the government of Viktor Yanukovych, and to the current Russian invasion of Ukraine.
Law Debenture Trust applied for summary judgment. The UK Supreme Court rejected their application, and the case will now go to a full trial. The Court did, however, make decisions on various points of contract law that will be relevant to the contractual position of sovereign states.
Judgment can be found here.
Facts
Law Debenture Trust acted as a professional independent trustee for the Notes of a 2013 Eurobond issue by Ukraine, worth $3bn. The sole subscriber to these Notes was Russia, who never exercised their right to trade – in essence, Russia was loaning $3bn to Ukraine, the sum being deposited at Ukraine’s central bank, and included in the 2014 budget. Ukraine repaid $200m+ over the next year, until in 2015 the Ukrainian Parliament passed a law instituting a moratorium on some debt obligations, including these Notes [judgment paragraph 7(3)]. Ukraine’s political position was that Russia had pressurised it into signing this deal as part of the pivot away from the EU towards Russia under President Yanukovych, and its legal position was that this amounted to duress of goods and of the person. Russian support for Eastern Ukrainian separatists and its annexation of Crimea, combined with the 2014 Ukrainian revolution, meant that the succeeding Ukrainian government had no interest in continuing to repay Russia. Law Debenture Trust claimed that this was in breach of contract and so applied for summary judgment. The hearings for this case were before the 2022 invasion, which was specifically avoided by the Court in its deliberations [2].
Judgment
Strictly speaking, the Court found in favour of Ukraine, in refusing to grant summary judgment to Law Debenture Trust. Ukraine’s President Zelensky tweeted that ‘today Ukraine secured another decisive victory against the aggressor, this time in the UK Supreme Court in the $3bn bonds case. The Court has ruled that Ukraine’s defence based on Russia’s threats of aggression will have a full public trial. Justice will be ours.’ Along the way, however, the Court threw out two Ukrainian defences in capacity and authority, which will have implications for contracting states. The Court then rejected a defence of economic duress, before allowing the defence of duress to property to proceed to a full court. The ‘central question’ for this future court will be ‘whether the threatened use of force, in so far as it involved a threat to Ukrainian property, imposed what English law regards as illegitimate pressure upon Ukraine to enter into the relevant agreement’ [183]. That can only be decided with a deeper look into the strained atmosphere of 2013 Ukrainian-Russian relations.
Before the Court addressed the duress argument, it is worth noting that Ukraine first attempted to argue that it lacked both the capacity and the authority to enter into the agreement.
Capacity
The capacity argument focuses on the Notes issuance exceeding Ukraine’s foreign borrowing limit as set by the 2013 Budget, as well as no expert opinion being provided to the Ukrainian Cabinet prior to approval, in breach of the Cabinet’s Procedural Rules. Ukraine alleged that these were ‘flagrant breaches’ [16] of Ukrainian constitutional law, hence a lack of capacity, with the transactions being ultra vires and thus void.
Blair J, in the High Court’s Commercial Division (and then upheld in the Court of Appeal and Supreme Court), found that Ukraine, as a sovereign state (with its government recognised by the UK Government [20]), had unlimited contractual capacity. Ukraine has a legal personality, and the ability of a foreign state to sue and be sued in the English courts, in its own name, has been established since the 19th Century (see here). A state as a legal person is capable of entering into any contract under English law, regardless of any home-jurisdiction constraints. It does not matter that Ukrainian constitutional law might render the transaction ultra vires, because it was contracted under the jurisdiction of the English courts. The UK Government’s recognition of a foreign state’s government grants it unlimited capacity ‘irrespective of the provisions of its own domestic constitution and laws’ [34]. Therefore, Ukraine’s defence that it did not have the capacity to enter the agreement failed.
Authority
Ukraine’s next defence alleged that Yuriy Kolobov, the then-Minister of Finance, lacked the authority to enter into the transaction. They contended that the trustee had notice of the debt limit that the transaction breached (by the freely available 2013 Budget summary), and the Cabinet of Ministers had not correctly granted the ability to enter into such transactions to the Minister. The Court declined to confirm whether Kolobov had actual authority or not, as this was a matter of Ukrainian law. Similarly, the Trustee did not need to know of the Budget borrowing limit. However, there were enough representations to support Law Debenture Trust’s contention that the Minister did indeed have ‘usual’ and ostensible authority – a course of dealing (31 prior issuances of similar Eurobonds [44]), previous meetings between Presidents Yanukovych and Putin where the transaction was publicly announced [47], and a resolution of the Ukrainian Cabinet authorising the notes [50]. This was originally found by Blair J in the High Court, and then upheld in the two appellate courts.
Judgment summary:
Did Ukraine have capacity to enter this contract? Yes, as a sovereign state it had unlimited capacity.
Did Ukraine have authority to enter this contract? Yes, the Minister of Finance at the time had the backing of the President and the Cabinet of Ministers, and there was precedent for this transaction.
Was Ukraine under duress to enter this contract? It was not under economic duress – trade pressure and restrictions is an acceptable act of international relations (part of the ‘armoury of the state’ [152]). It may well have been under duress of property and the person – it is this question which will likely be considered by the Court at a future full trial.
Commercial Application
The key takeaway is a confirmation by the Supreme Court that states have an unlimited capacity to contract under English law, and cannot be bound in the English courts by their own domestic laws. This will have relevance to English parties with foreign state counterparties. The relevance of the case to the interpretation of duress in English law remains to be seen, pending a potential future return to the courts.
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