Ukraine v The Law Debenture Trust Corporation Plc (Rev 1)

A recognised foreign state has, in English law, unlimited capacity to contract under English law. Limits in its domestic law ordinarily concern the authority of those acting for it, rather than its capacity.

A contract governed by English law may be avoided for duress where illegitimate pressure caused its making. In relations between states, sufficiently determinate rules of international law, including peremptory norms, may inform whether pressure was illegitimate. The foreign act of state doctrine does not bar that defence where the public-policy exception applies. A state seeking to enforce English-law contractual rights cannot ordinarily prevent scrutiny of an arguable duress defence based on its own alleged breach of a peremptory international norm.

Terms preventing enforcement or hindrance of performance are not readily implied into tradeable debt instruments where they would be uncertain, depend on external relations, or undermine transferability.

Ukraine issued tradeable English-law notes with a principal value of US$3 billion. Russia was the sole subscriber and beneficial holder. Law Debenture, as trustee, sought payment after Ukraine did not redeem the notes at maturity.

Blair J granted summary judgment for US$3.075 billion plus interest: [2017] EWHC 655 (Comm). Ukraine appealed, relying on lack of capacity or authority, duress arising from alleged Russian threats and pressure, implied terms, countermeasures, and the need for a trial. Law Debenture also contended that Ukraine had ratified or affirmed the transaction.

The central issue was whether Ukraine had an arguable, justiciable defence of duress under English law notwithstanding that its allegations concerned acts of a foreign state in international relations.

1. Appeal allowed in part. The court set aside the basis on which summary judgment had been entered because Ukraine had an arguable and justiciable defence of duress requiring trial. The appeal otherwise failed.

2. A recognised sovereign state is a sui generis legal person in English law. Its domestic constitution and laws do not limit its English-law capacity to make and perform a contract. Those laws may instead limit the actual or ostensible authority of its officials. Ukraine therefore lacked no capacity to issue the notes.

3. The court upheld the conclusion that Ukraine was bound through ostensible authority. The proper source of that authority was article 16.1 of the Budget Code of Ukraine, not a freestanding category of usual authority. Law Debenture was taken to know the public Ukrainian legislation, but it had no notice of the factual breaches of the borrowing limit or internal procedures alleged by Ukraine. The court rejected Law Debenture’s separate argument that the Cabinet could confer an authority contrary to the express statutory allocation of functions.

4. Ukraine’s defence of duress had a domestic foothold because English law treats a contract made under illegitimate pressure as avoidable. International-law obligations could supply the applicable standard of illegitimacy in dealings between states. Although the alleged threats were prima facie high-policy foreign acts, the public-policy exception to the third foreign act of state rule applied. Material considerations included the English governing-law and jurisdiction clauses, the need to decide the contractual claim fairly, manageable legal standards, and the strong policy against a state benefiting from an alleged breach of a jus cogens norm reflected in Article 2(4) of the Charter of the United Nations.

5. The international-law doctrine of countermeasures supplied no independent domestic-law defence. Ratification and affirmation raised factual and legal issues unsuitable for summary determination.

6. The proposed implied terms failed the strict test for implication. They were not necessary, obvious or sufficiently certain, and would be incompatible with the character of the notes as tradeable financial instruments.

• Court of Appeal (Civil Division): appeal allowed in part in [2018] EWCA Civ 2026. Ukraine’s duress defence was held justiciable and triable; the remaining appealed issues were dismissed.
• High Court, Commercial Court, Financial List: Blair J granted Law Debenture summary judgment under CPR 24.2 for US$3.075 billion plus interest: [2017] EWHC 655 (Comm).