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

The Court of Appeal allowed the appellant's challenge in part to summary judgment entered by Blair J under CPR 24.2, holding that several of Ukraine’s defences engaged questions of English substantive law which could not be summarily disposed of. The court held that a recognised sovereign state enjoys legal personality and, under English law, unlimited capacity to contract; therefore alleged breaches of Ukraine’s domestic budget procedures affected authority, not capacity. The court upheld the trustee’s case that the Minister of Finance had ostensible/usual authority to issue the Notes and that Law Debenture was not put on notice of the relevant Ukrainian-law defects. However, the court concluded that Ukraine’s pleaded defence of duress raised a sufficient domestic foothold (including alleged breaches of ius cogens, notably Article 2(4) of the UN Charter) and that the public‑policy exception to the foreign act of state doctrine applied. For that reason ratification, affirmation and duress required trial and were unsuitable for summary disposal; counter-measures under international law did not provide a justiciable domestic defence at summary stage. The judge’s refusal to allow those matters to proceed to trial was therefore unsustainable in part.

The appellant, the State of Ukraine (acting by its Minister of Finance), appealed a summary judgment ordered by Blair J for recovery by The Law Debenture Trust Corporation p.l.c. as trustee of US$3 billion nominal Notes subscribed by the Russian Federation. Law Debenture claimed US$3.075 billion (principal plus final interest) under trust documentation governed by English law and subject to an exclusive English jurisdiction clause. Ukraine defended on multiple grounds, including that (i) under Ukrainian law the borrowing exceeded statutory limits and so Ukraine lacked capacity or that the relevant officials lacked authority; (ii) the Notes were procured by unlawful pressure/duress by Russia; (iii) alternatively a stay should be ordered because the issues were non‑justiciable; (iv) implied terms should excuse performance where the Noteholder (Russia) prevented or hindered repayment or breached international law; (v) counter‑measures under international law justified non‑payment; and (vi) there were compelling reasons for a trial.

The Court of Appeal accepted for the purposes of the appeal the Ukrainian expert evidence that Ukrainian domestic law (the Budget Code and the 2013 Budget Law) had been breached and that the CMU resolution was vulnerable. On capacity the court held that a recognised sovereign state has legal personality under English law and, as a matter of English common law, unlimited capacity to enter contracts governed by English law; domestic constitutional limits therefore go to the authority of officials, not to the state's capacity. On authority the court accepted that, judged by the Trust Deed, the Prospectus and past practice, the Minister of Finance had usual/ostensible authority to issue the Notes and that Law Debenture was not put on inquiry as to the alleged Ukrainian-law defects; accordingly Ukraine had no real prospect of avoiding the obligations for lack of authority.

By contrast the court concluded that Ukraine did have a domestic foothold for a duress defence under English law. The court held that the English doctrine of duress can accommodate allegations about unlawful threats by a foreign state and that the foreign act of state doctrine (third rule) did not bar consideration here because the public‑policy exception applied, particularly given allegations concerning threats violative of ius cogens (Article 2(4) UN Charter) and the fact the transaction was governed by English law and submitted to English jurisdiction. As a result, duress (and related issues of ratification and affirmation) raised triable issues unsuitable for summary determination. Counter‑measures were held not justiciable absent a domestic foothold. The court therefore allowed the appeal in part, set aside aspects of the summary disposal and invited parties to propose consequential orders.

Key issues decided: (i) capacity of a recognised sovereign is unlimited in English law and domestic limits affect authority not capacity; (ii) usual/ostensible authority of ministers can bind a state where third parties are not on notice of limits; (iii) English courts may resolve duress claims that implicate international‑law standards where the public‑policy exception to foreign act of state applies; (iv) ratification and affirmation raise factual issues for trial; and (v) counter‑measures under international law do not afford a justiciable domestic defence at summary stage.

Appeal allowed in part. The court held (i) that a recognised sovereign state has legal personality under English law and, as a matter of English common law, unlimited capacity to contract so that alleged breaches of Ukraine’s Budget Code affected authority not capacity; (ii) that the Minister of Finance had ostensible/usual authority to issue the Notes and Law Debenture was not on notice of the asserted Ukrainian-law defects; (iii) but that Ukraine’s defence of duress presented a domestic foothold and fell within the public-policy exception to the foreign act of state doctrine and therefore could not be resolved on summary judgment; accordingly issues of duress, ratification and affirmation required trial and summary judgment could not stand in those respects. The court dismissed Ukraine’s other grounds and invited parties to propose consequential orders.

Appeal from the High Court of Justice, Queen's Bench Division, Commercial Court (Financial List), Blair J, [2017] EWHC 655 (Comm). Permission to appeal was granted by the judge and the matter was determined by the Court of Appeal in this judgment, [2018] EWCA Civ 2026.