The Law Debenture Trust Corporation plc v Ukraine (represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine)

A recognised foreign state has full contractual capacity in English law, irrespective of restrictions imposed by its domestic constitution. It may be bound where its conduct gives an official ostensible authority and the counterparty reasonably relies on that appearance.

Under English law, ordinary inter-state economic pressure is not duress merely because it allegedly breaches unincorporated international law. A threat of force against a state's citizens, armed forces or property can, however, constitute duress of the person or goods. Such a defence is justiciable where its determination does not require the court to rule on the international lawfulness of sovereign conduct.

Customary international law is a source, rather than an automatic part, of the common law. International countermeasures therefore provide no defence to an English contractual claim unless domestic law recognises one.

Ukraine issued US$3 billion of English-law sovereign notes, held throughout by the Russian Federation. The respondent Trustee claimed the principal and interest after Ukraine ceased payment. Ukraine alleged lack of capacity and authority, duress arising from Russian economic pressure and threatened force, and a right to withhold payment as an international countermeasure.

Blair J entered summary judgment for the Trustee. The Court of Appeal, in [2018] EWCA Civ 2026, upheld the rejection of the capacity, authority and countermeasures defences but held that duress was arguable and justiciable. Both parties appealed.

The Supreme Court had to determine whether any defence had a real prospect of success and, in particular, whether alleged threats of force could constitute duress under English law without adjudicating their lawfulness under international law.

1. Disposition. By a majority, both appeals were dismissed. The Trustee was not entitled to summary judgment because Ukraine had an arguable defence of duress based on alleged threats of physical violence and damage to property. Ukraine's capacity, authority and countermeasures defences were not arguable. Lord Carnwath dissented concerning the permitted scope of duress and countermeasures.

2. Capacity. A foreign state recognised by the United Kingdom executive is a legal person with full capacity in English municipal law. It is not created by its domestic constitution and is not analogous to a foreign corporation. Domestic constitutional restrictions therefore do not deprive it of capacity to contract under English law. The reasoning in the Tin Council case, [1990] 2 AC 418, formed part of its ratio and established that recognised sovereign states already possess contractual capacity.

3. Authority. Ukraine's conduct as a whole represented that its Cabinet and Minister of Finance had authority to issue the Notes. That conduct included the published legal framework, 31 earlier issues, the participation of the President, Parliament and Cabinet, the relevant resolution, prospectus, warranties and legal opinion. A reasonable person in the Trustee's position would not have been put on inquiry about the alleged borrowing limit or procedural defects. The Minister and Cabinet therefore had ostensible authority.

4. Duress. Whether pressure is illegitimate is determined by English law. The broad criterion of moral or social unacceptability was rejected in Times Travel, [2021] UKSC 40. Trade restrictions, threatened withdrawal of commercial cooperation and the exercise of contractual rights were not inherently illegitimate economic pressure. An alleged breach of an unincorporated treaty could not alter that domestic conclusion.

   Threats of force capable of endangering Ukrainian civilians or armed forces could constitute duress of the person. Threatened destruction of property could constitute duress of goods. Ukraine needed to show that threats to persons contributed to its decision, unless the Trustee proved that they contributed nothing. Economic pressure remained relevant as contextual evidence which might have accentuated the threats' causal effect.

5. Justiciability and countermeasures. The foreign act of state doctrine was not engaged by the surviving duress defence because the court could apply English standards without deciding whether Russia acted unlawfully under international law. By contrast, international countermeasures supplied no domestic contractual defence. Customary international law may inform the common law, but its adoption remains subject to domestic constitutional principles and existing law. Ukraine was permitted to amend its pleadings to advance only duress of the person and goods arising from alleged threatened force.

1. United Kingdom Supreme Court — The Trustee's appeal and Ukraine's cross-appeal were dismissed. The duress defence was confined to threats of force against persons and property.
2. Court of Appeal — In [2018] EWCA Civ 2026, the court allowed Ukraine's appeal in part because duress was arguable and justiciable, but upheld the rejection of the capacity, authority and countermeasures defences.
3. High Court — Blair J entered summary judgment for the Trustee, rejecting all five defences, while holding that ratification and affirmation were unsuitable for summary determination: [2017] QB 1249.