Ukraine and Russia to have full trial over repayment of USD 3 billion Eurobond
On 14 September 2018, the Court of Appeal handed down judgment for Ukraine in its long-running dispute with Russia over the repayment of a USD 3 billion Eurobond loan (the "Notes") issued in 2013 (Ukraine v The Law Debenture Trust Corporation PLC [2018] EWCA Civ 2026). In its highly anticipated judgment, the court ruled that Ukraine’s defence of duress is arguable and warrants a trial, overturning the High Court's award of summary judgment in Russia's favour in March 2017. The case will therefore proceed to full trial, with the court potentially acting as (reluctant) arbiter of geopolitical tensions.
Background
The case concerns sovereign bonds, governed by English law and subject to the exclusive jurisdiction of the English courts, issued by Ukraine to Russia in 2013. Ukraine defaulted on the loan after Ukrainian ministers approved a moratorium to suspend further repayments. Russia directed The Law Debenture Trust Company (“Law Debenture”), as trustee of the Notes, to bring proceedings for full repayment of the Notes, plus interest.
Application for summary judgment
Law Debenture proceeded to make an application for summary judgment before the High Court. In its defence, Ukraine argued that the loan agreement was void on the basis that Russia had exerted unlawful and illegitimate political and economic pressure on it in order to deter Ukraine from signing an Association Agreement with the EU, and instead compel it to accede to Russian financial support. As well relying on a defence of duress, Ukraine also advanced the following arguments:
- It did not have the capacity to issue the Notes because the debt issuance contravened its own budget law, or alternatively, even if the state had legal capacity, the ministers and officials who agreed the issue of the Notes lacked the authority to act on its behalf.
- Russia was in breach of implied terms to the effect that it would not deliberately interfere with or hinder Ukraine's ability to repay under the Notes and would not demand repayment.
- Non-payment was a countermeasure against interference in its economy and territory following Moscow’s military intervention in 2014 and its annexation of Crimea.
In its judgment, the High Court held that none of the above four heads of defence had a realistic prospect of success and granted Law Debenture summary judgment.
The Court of Appeal's decision
Ukraine subsequently appealed. The Court of Appeal agreed with the High Court in concluding that Law Debenture was entitled to summary judgment in respect of three of the four defences. In rejecting the argument that the Notes were issued without the requisite authority, Richards LJ held that Ukraine was bound by the ostensible authority of the Minister of Finance and the Cabinet Ministers of Ukraine ("CMU"). The Court of Appeal also agreed with the High Court's finding that the suggested terms could not be implied into the contract and that the counter-measures doctrine lacked any relevant foothold in domestic law, only operating at the level of international law.
However, the court found that Ukraine’s defence of duress was justiciable and should be the subject of a trial. Gloster, Sales and Richards LJJ were unanimous in their decision, agreeing with Ukraine’s argument that Russia had been unduly aggressive in the run-up to the loan being taken out. In particular, Russia's alleged threat to violate Ukraine's territorial integrity through the use of force, as well as the imposition of restrictive trade measures in 2013, violated the peremptory norms of international law. The Court of Appeal rejected the argument that a domestic court has no authority to rule upon whether a foreign state has violated its obligations under international law, noting that the "English courts are well capable of construing treaty obligations and general obligations of states under international law and assessing their application". It was arguable that Russia had applied illegitimate pressure and that this pressure caused Ukraine to enter into the loan agreement. The court stated that it was "desirable" for "the whole pattern of alleged threatening behaviour by Russia to be assessed in its full context”.
The Court of Appeal also granted both parties the right to appeal the decision to the Supreme Court. Law Debenture has expressed its intention to do so. The court granted Ukraine a stay pending the Supreme Court decision and ordered that Russia should repay interim costs paid by Ukraine following the earlier ruling.
Comment
Since the release of the judgment, the Finance Minister of Ukraine, Oksana Markarova, has commented that "Russia must be held accountable for its internationally wrongful acts and the English Court has made clear that it will not shy away from doing so". Whilst lawyers for Russia have argued that the English courts should hear the case as a straightforward default, without taking politics into consideration, the case potentially places the English courts in the difficult position of having to adjudicate the conduct of Russia on the international plane. This was exactly what Blair J at first instance had sought to avoid.
Although Sales LJ noted that Russia could agree to accept the jurisdiction of the ICJ in relation to its alleged breach of international law and thereby avoid a determination by the English courts of the relevant points of international law, Russia gave no indication that it was willing to do so.
The Supreme Court is expected to hear the case during the first half of 2019, when the unfolding of political tensions in the courtroom will continue.
