A $3B bond fight can go to trial.

Posted on 21st April 2023 by Streets

Image to represent A $3B bond fight can go to trial.

The Supreme Court granted Ukraine permission to go to trial to avoid repaying USD 3 billion in loans. 

The Law Debenture Trust Corporation plc – the trustee acting on behalf of the Russian Federation- requested a summary judgement of its claim against Ukraine for non-payment. In 2013, Ukraine issued Eurobonds with a nominal value of USD 3 billion carrying interest of 5 per cent per annum to Russia. The notes were repayable in December 2015.

The notes were held in trust by Law Debenture Trust Corporation plc. Both Law Debenture Trust Corporation and Ukraine agreed that the trust would be governed by the law of England and Wales and that English Courts will have exclusive jurisdiction. Ukraine argued that the loan was taken under pressure after Russia used the threat of force in 2013. Shortly after, Russia invaded Crimea and purported to annex it. Ukraine made some payments but failed to repay the  notes by December 2015. Law Debenture issued proceedings against Ukraine. The Court rejected Law Debenture’s claim that Ukraine should repay the loans without facing trial. 

To invalidate the claim, Ukraine filed a defence alleging that it lacked the capacity to enter the transaction according to Ukrainian law and that the Minister of Finance lacked the authority to enter into the agreement. Additionally, the signing of the Notes occurred under duress based on Russia’s threats and pressure- such as restrictive trade measures- which would allow Ukraine to avoid the Notes. Finally, Ukraine claimed to be entitled to rely on countermeasures to decline to make payment. 

Law Debenture applied for summary judgement on the ground that Ukraine had no real chance of prospect. In the first instance, the judges decided in favour of Law Debenture. On Appeal, the Court upheld the trial Judge’s conclusions on capacity, authority and countermeasures but disagreed that the judgement could be decided without a trial. According to the Court of Appeal, Ukraine could potentially be successful in its duress defence.

The Supreme Court agreed with the findings of the Court of Appeal and allowed the case to be heard before the High Court but only with regard to the duress defence. The majority agreed on a relatively narrow duress defence compared to Lord Carnwath who would have agreed to allowing the defence of duress on a broader basis. 
The Supreme Court rejected the claim of lack of capacity by ruling that Ukraine as a sovereign state has the capacity under English law to issue the Notes. Similarly, the Court did not buy Ukraine’s argument that the Minister of Finance did not have the authority to sign the agreement. Finally, the countermeasures argument was deemed to be irrelevant as the case is to be decided under English law. 

The Supreme Court was very cautious in allowing the case to go to trial by only accepting the duress to concern the duress of the person or goods. At the same time, the Court was eager to avoid any miscarriage of justice by granting a summary judgement. 
Its cautious approach is also visible in its rejection of the lack of capacity, lack of authority, and countermeasures claims. The Supreme Court rejected the lack of capacity argument by noting that the capacity cannot be restricted by national law as it derived from the recognition of Ukraine by the UK Government. This is an interesting point as it shuts the doors to future refusal to comply with international agreements based on national laws. Similarly, the Court was not convinced by the argument that the Minister of Finance might not have the actual authority to issue the Notes only allowing a narrow interpretation of this exception. 

The judgement already casts serious doubt as to whether the duress defence will be successful as the Court already noted that the trade sanctions alleged by Ukraine would not constitute duress under English law. The only allegation that the Court would consider is the threat to use force to attack territorial integrity representing the duress of the person or goods. The outcome of the case will, therefore, be determined by how convincing the arguments of both parties are. But as the Court pointed out this point can only be decided at trial. 
This case is not only time-sensitive but also might have great repercussions for international investment law.

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