When a trustee sued Ukraine over US$3 billion in unpaid bonds, it asked for judgment without a trial. The Supreme Court held that one defence needed to be heard. Ukraine could try to prove that threats of force against people or property had induced it to borrow. The Court also explained why a state can be bound by a borrowing contract even where its finance minister allegedly exceeded domestic borrowing limits.
The Law Debenture Trust Corporation plc sued as trustee of Notes with a nominal value of US$3 billion, issued by Ukraine on 24 December 2013 under an English-law trust deed and subscribed solely by the Russian Federation. The Notes matured on 21 December 2015. Ukraine had received the subscription money and paid three interest instalments, but made no further payment. The Trustee, acting for the Russian Federation, claimed the principal, outstanding interest and costs.
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Ukraine challenged its legal capacity to borrow and its finance minister’s authority to act. It also alleged that Russia had used trade restrictions and threats to its territorial integrity to deter it from signing an association agreement with the European Union. Finally, it argued that withholding payment was a lawful response to Russia’s conduct under international law. At this stage the Court had to decide which defences could go to trial. It had heard no evidence establishing that Russia had made the alleged threats.
Capacity
Lord Reed, Lord Lloyd-Jones and Lord Kitchin, with whom Lord Hodge agreed, held that a state recognised by the United Kingdom government is a legal person with full contractual capacity in English law. Recognition confers personality and the fullest capacity; capacity is not limited by the state’s own constitution. Ukraine is not a creature of Ukrainian law in the way a foreign corporation is a creature of its law of incorporation. Alleged breaches of the 2013 Budget Law and of Cabinet procedure therefore could not make the contracts a nullity. It was not arguable that Ukraine lacked capacity.
Authority
The Court assumed that the Minister lacked actual authority because the borrowing allegedly exceeded published limits and the Cabinet’s authorising resolution was invalid. It nevertheless held that Ukraine was bound by ostensible authority. Article 16 of the Budget Code, 31 earlier Eurobond issues in which the same Trustee had acted, and the coordinated public steps taken in December 2013 by the President, Parliament, Cabinet and Minister represented that the Minister could issue the Notes on terms approved by the Cabinet. A reasonable person in the Trustee’s position was not put on inquiry by Annex 2 of the Budget Law, by the terms described as unusual, or by any apparent delegation. The legal opinion and contractual warranties reinforced that conclusion. The Minister therefore had ostensible authority, and the Cabinet had ostensible authority to hold him out.
Duress
The majority treated economic pressure and threats of force separately. Restrictions on trade, customs measures and related threats are a familiar instrument of statecraft. They are not inherently illegitimate under the English law of duress, nor do they become so merely because they are alleged to breach unincorporated treaties. English law, not international law, supplies the standard of illegitimate pressure. There was no domestic foothold requiring the court to decide whether Russia had breached those treaties, and the foreign act of state doctrine therefore did not arise on this part of the case. Economic pressure alone could not establish duress.
Statements attributed to a presidential adviser, suggesting that Russia might cease to guarantee Ukraine’s status, support partition, or reopen border questions if Ukraine signed the Association Agreement, were capable of amounting to threats of force against people and property. Threats of violence to persons, including a state’s citizens and armed forces, and threats to destroy property, are inherently illegitimate and can constitute duress of the person or of goods. Deciding that defence requires the court to apply English standards to the facts; it does not require a ruling on the international legality of Russia’s acts, so the act of state doctrine is not engaged. No executive statement of foreign-policy embarrassment had been made. Causation for threats to the person places the onus on the Trustee to show that the threats contributed nothing; the alleged economic pressure remains relevant as context. Ukraine must amend its pleadings so that this, and only this, is the duress defence. On that ground the Trustee was not entitled to summary judgment.
Countermeasures
The majority rejected the argument that non-payment could be justified as a proportionate countermeasure for Russia’s alleged internationally wrongful acts, including the annexation of Crimea. Customary international law is a source on which the common law may draw, but English law recognises no contractual defence corresponding to the right to take countermeasures. Those rules govern conduct between states on the international plane. Giving them domestic effect would require an English court to decide whether Russia’s acts were wrongful and whether Ukraine’s response was proportionate, which is not the court’s function. The defence was not arguable.
Dissent
Lord Carnwath agreed that the capacity and authority defences should fail. He would, however, have allowed the duress defence to proceed as pleaded, treating economic pressure and alleged international illegality as part of one campaign rather than mere background, and would also have allowed the countermeasures defence to go to trial.
Verdict: Both appeals were dismissed. The trustee could not obtain judgment without a trial. Ukraine could defend the claim on duress arising from alleged threats of force, subject to amending its pleadings. Its defences based on capacity, authority and countermeasures could not proceed.
