The Law Debenture Trust Corporation plc v Ukraine [2023] UKSC 11

Ukraine issued US$3 billion Notes to Russia, governed by English law. Ukraine defended against enforcement claiming duress through Russian economic pressure and threats of force, lack of capacity and authority, and countermeasures. The Supreme Court held Ukraine had capacity and the Minister had ostensible authority, but allowed the duress defence based on threats of force to proceed to trial.

Facts

In December 2013, Ukraine issued Notes with a nominal value of US$3 billion to the Russian Federation, constituted by a Trust Deed governed by English law with exclusive jurisdiction in English courts. The Law Debenture Trust Corporation plc acted as Trustee. Following Ukraine’s failure to repay the principal and final interest instalment due on 21 December 2015, the Trustee brought proceedings to recover the debt.

Ukraine pleaded various defences including: (1) lack of capacity under Ukrainian law as the borrowing exceeded limits in the Budget Law of 2013; (2) want of authority as the Minister of Finance lacked actual authority; (3) duress arising from unlawful Russian economic pressure and threats to Ukraine’s territorial integrity; and (4) that non-payment constituted a lawful countermeasure under international law.

Issues

Capacity

Whether Ukraine, as a sovereign state, had capacity to issue the Notes notwithstanding alleged breaches of Ukrainian constitutional law.

Authority

Whether the Minister of Finance had ostensible authority to issue the Notes on behalf of Ukraine.

Duress

Whether Ukraine’s allegations of Russian economic pressure and threats of force could support a defence of duress under English law.

Countermeasures

Whether Ukraine could rely on international law principles of countermeasures as a defence to non-payment.

Judgment

Capacity

The Supreme Court unanimously held that a foreign state recognised by the UK executive has full capacity to contract under English law, regardless of its own constitutional limitations. Lord Reed, Lord Lloyd-Jones and Lord Kitchin stated:

A foreign state which is recognised as such by the executive in the United Kingdom is considered, for the purposes of municipal law within the United Kingdom, to be a legal person with full capacity.

The analogy with foreign corporations was rejected as foreign states are not creatures of their own domestic law but derive their personality from international law.

Authority

The Court held that the Minister of Finance had ostensible authority. Ukraine’s history of 31 previous Eurobond issuances through the same mechanism, combined with the CMU’s resolution 904 and the Prospectus, constituted a representation by Ukraine that the Minister had authority. The Trustee was not put on inquiry regarding any limitations.

Duress

The majority held that Ukraine’s allegations of economic pressure could not constitute duress under English law, as trade restrictions are normal aspects of statecraft and breach of unincorporated international law does not render such conduct illegitimate under domestic law. However, the alleged threats of force by Russia could constitute duress of the person and goods:

United Kingdom courts have not previously had to consider whether threats to the safety of a state’s citizens, or to the safety of members of its armed forces, can constitute duress of the person. We consider that in principle they can.

This aspect of the defence was allowed to proceed to trial, with pleadings to be amended accordingly.

Countermeasures

The Court rejected the countermeasures defence. International law principles governing countermeasures between states do not provide a defence to contractual obligations under English law. There is no domestic foothold for such a defence.

Implications

This case clarifies that sovereign states have unlimited contractual capacity under English law regardless of their internal constitutional constraints. It establishes that threats of force by one state against another can constitute duress of the person under English law, extending traditional duress principles to inter-state relations. The judgment also confirms that unincorporated international law cannot render otherwise legitimate economic pressure illegitimate for duress purposes, and that international law countermeasures doctrine has no application as a defence in English contract law.

Verdict: The Trustee’s appeal was dismissed. Ukraine was permitted to defend the claim on the ground of duress only to the extent based on duress of the person or of goods resulting from alleged threatened use of force, subject to amendment of pleadings. Ukraine’s appeal was dismissed on all grounds: it had no arguable case on lack of capacity, want of authority, or countermeasures.

Source: The Law Debenture Trust Corporation plc v Ukraine [2023] UKSC 11