Whilst confrontation between Ukraine and pro-Russian separatists continues in the east of the country, the hostility between the two neighbours will soon find an unlikely outlet in the English Court of Appeal, which is shortly due to hear an appeal from Blair J's decision in Law Debenture Trust Corp plc v Ukraine [2017] EWHC 655 (Comm), in which Russia was granted summary judgment in a claim for USD 3bn due under Eurobonds issued by Ukraine. The case revolves around sovereign bonds issued by Ukraine to Russia, on payment of which Ukraine subsequently defaulted. However, what would have otherwise been a straightforward banking case before an English court, became a case in which public international law arguments took centre stage, necessitating a judgment of almost one hundred pages. The reason? Whilst the claimant a Trustee bringing the proceedings on the direction of the Russian Ministry of Finance - argued that this was an "ordinary debt claim", Ukraine's defence argued that the claim arose from, and was part of, "a broader strategy of unlawful and illegitimate economic, political and military aggression by Russia against Ukraine", and that, inter alia, Russia had applied "massive, unlawful and/ or illegitimate military, economic and political pressure to Ukraine" (amounting to duress), to force Ukraine to obtain financial support from Russia "on unique and onerous terms". It argued that a full trial was necessary to examine the matter in
full, including looking into the legality of the annexation of Crimea by Russia, and establishing whether Ukraine's default was a legitimate non-forcible countermeasure in respect of what were alleged to be internationally wrongful acts. In other words, Ukraine invited the court to assess the legality of Russian's acts, which were, of course, foreign acts of state. Blair J found Ukraine's defences to be nonjusticiable in the English courts.
questions of considerable difficulty" (para 372), may become relevant in commercial cases; (ii) It will test the boundaries of the doctrine of non-justiciability in English Courts in claims relating to foreign affairs of two sovereign States; and (iii) More specifically, it is a test of the suitability of English courts as a forum to deal with the politics inherent in sovereign lending and borrowing. Ukraine's factual case
English courts, of course, are no strangers to public international law arguments. There are some larger questions underlying the case. Are international law arguments outside the terms of the notes issued by Ukraine to Russia- relevant in adjudicating upon the rights of the parties? Can contractual arrangements governed by English law be rendered voidable by the operation of international law, for instance, internationally wrongful acts? Yet even if these questions can be answered in the affirmative, would an English Court addressing them in these proceedings effectively have to decide matters of international law between two foreign States, in other words, venturing into a sort of "judicial no-man's land" in the language of Lord Wilberforce in Buttes Gas and Oil Co. v Hammer (No. 3)) [1982] AC 888, 938? The case now going to the Court of Appeal is instructive in at least three ways: (i) It reflects the complexity of cases reaching English courts today and the manner in which public international law subjects raising "legal
In 2013, Ukraine was preparing to sign an Association Agreement with the European Union, laying the ground for eventual membership. Ukraine's case is that, in an effort to dissuade Ukraine from concluding the Association Agreement, Russia threatened (i) to impose trade sanctions, including boycotting of Ukrainian goods and suspension of the gas supply to Ukraine (para 200) and (ii) to violate Ukraine's territorial integrity by intervening in support of its Russianspeaking minority, partitioning Ukraine and revising its frontier with Russia (para 202). In addition to threats, Russia allegedly offered certain incentives, including loans of up to USD 15bn and access to discounted gas, on condition that Ukraine declined to conclude the Association Agreement (para 208). In the course of autumn 2013, the thenpresident of Ukraine, Viktor Yanukovych, agreed to accept Russia's terms. On 21 November 2013, the Cabinet of Ministers of Ukraine ("CMU") decided to suspend preparation for the conclusion of the Association Agreement. The CMU's decision triggered social unrest in Kyiv.
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On 17 December 2013, the CMU announced that Russia had agreed to subscribe for up to USD 15bn of Ukrainian sovereign debt before the end of 2014, beginning with an initial tranche of Eurobonds in the value of USD 3bn. On 18 December 2013, the CMU approved the first tranche of Eurobonds and, on 24 December 2013, Ukraine issued the notes to Russia. This was done, as is usual, by the issuance of notes to a trustee (the "Trustee"), who was to represent the interests of noteholders. The notes were to fall due on 20 December 2015, and carried interest at 5% payable bi-annually (which was a better rate of interest than Ukraine could have achieved on the open market). Although the notes were issued to Russia in the first instance, albeit through the Trustee as intermediary, they were, in principle, transferrable to third parties (though, as it transpired, the notes remained exclusively held by Russia when they fell due).
"The case now going to the Court of Appeal will test the boundaries of
the doctrine of non-justiciability in English Courts in claims relating to foreign affairs of two sovereign States."
In February 2014, prompted by continuing civil unrest, President Yanukovych fled the country. Shortly thereafter, Russia invaded Crimea and allegedly began to support separatists in eastern Ukraine. During the course of 2014 and 2015, Ukraine paid a number of instalments of interest on the notes in the order of USD 233m. It was not until 18 December 2015, shortly before the notes fell due, that the CMU voted to suspend repayment of the notes (para 23). Under the Trust Deed, the Trustee was
required to commence enforcement proceedings if one quarter of the noteholders so directed. Perhaps significantly for the purposes of this note, the Trustee appears to have had the right to elect between arbitration and English court proceedings (para 37(xi)). Acting at the direction of the Russian Ministry of Finance, the Trustee elected to bring court proceedings to enforce the notes, and duly applied for summary judgment against Ukraine. Ukraine's defences Ukraine raised four main defences to Russia's summary judgment application: (1) The notes were issued ultra vires the capacity of the CMU, and were therefore void. (2) Ukraine issued the notes under duress from Russia, in the form of trade sanctions and threats to its territorial integrity, such that they were voidable. (3) The notes were subject to an implied term that the noteholders would not impede the issuer from performing, which Russia wrongfully did by inter alia invading Crimea. (4) As a matter of public international law, Ukraine was entitled to refuse to honour the Eurobonds as a lawful countermeasure to unlawful acts on the part of Russia. (1) Capacity Ukraine argued that the CMU exceeded its capacity when it sanctioned the issuance of the notes, in that (a) the notes infringed the Ukrainian Budget Law, which restricted the value of borrowing in which Ukraine may engage in any given year; (b) the CMU failed to observe certain procedural requirements, in particular that it should procure an expert opinion concerning the legality of the notes; and (c) the CMU abdicated its responsibility to consider the detailed provisions of the Eurobonds, some of which were unreasonable and oppressive, to the Minister of Finance,
which it was not entitled to do. It should be noted that, even if the Eurobonds were void for lack of capacity, this would be unlikely to prevent Russia from obtaining restitution of the funds advanced, but, since Russia had not pleaded a claim in restitution, Ukraine did not need to address any such claim in order to avoid summary judgment. Blair J noted that there is a crucial distinction between contract that is void for lack of capacity, and a contract concluded outside authority: "if an act is unauthorised, a number of legal doctrines come into play to mitigate the rigour of the outcome, such as usual or ostensible authority, and subsequent ratification. These doctrines are not available in the case of lack of capacity, which in principle invalidates a contract regardless of the knowledge or lack of it of the counterparty" (para 108). Blair J further observed that "neither party was able to point to any case law in which the question of the capacity of a state to borrow, or indeed to enter into other forms of contract, has been raised before" (para 110). On this issue, the Judge ultimately concluded that "once a state is recognised as such, as a matter of international law, it has unlimited capacity to borrow, and such capacity is recognised under English law...the reason for the absence of case law to this effect may simply be that the principle has never been questioned" (para 129-130). The Judge rejected an analogy with public authorities, which do have limited capacity to enter transactions (para 188), on the basis that, as a matter of public international law, states have the capacity to do anything that is not prohibited in PIL (paras 126-129). With respect, the Judge's reasoning is open to doubt. It is clear that legislation restricting the powers of a Ukrainian public authority would be sufficiently fundamental to go to their capacity to contract, rather than merely their authority to do so (para 111, Haugesund Kommune v Depfa ACS Bank [2010]
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EWCA Civ 579). By parity of reasoning, the same should apply to legislation that restricts the powers of the state itself, such as the Budget Law, since there would otherwise be an irrational distinction between public authorities and states (see para 131). It was, in our view, incumbent upon Russia to satisfy itself that the transaction complied with Ukrainian public law, which, being a matter of public record, should not have been difficult. Russia should not have been entitled to rely on the usual and apparent authority of the Ukrainian Minister to issue the notes (which it could not have done if the Judge had decided that the Budget Law went to Ukraine's capacity, rather than merely its authority to enter the transaction). (2) Duress First of all, the Trustee argued that, even if Russia had originally procured Ukraine to issue the Eurobonds by duress, it had affirmed the transaction by inter alia making interest payments during 2014 and 2015. The Judge concluded (correctly, in our respectful view) that whether Ukraine's acts were sufficiently unequivocal to amount to an affirmation was a factual issue unsuitable for determination on a summary judgment application. Blair J then went on to consider whether the Eurobonds were, in fact, vitiated by duress, ultimately concluding that this issue was non-justiciable under the act of state doctrine. If the English Courts were required to decide whether Russia had applied unlawful and/or illegitimate pressure by threatening trade sanctions and/or the use of force, they would have to adjudicate on "rights arising out of transactions entered into by independent sovereign states between themselves on the plane of international law" (adopting the classic formulation in JH Rayner (Mincing Lane) Ltd v Dept of Trade and Industry [1990] 2 AC 418, 499, para 295(iv)). The reference to "act of state doctrine" in the case may be not precise enough,
as the case raised more narrowly the doctrine of "foreign act of state". In addition, the judgment did not adequately address the relationship between this doctrine and nonjusticiability, which we submit is a distinct and broader notion. As F.A Mann suggested, non-justiciability is concerned with cases of judicial inability to render a decision, whereas the act of state doctrine is concerned with propriety. Indeed, Dicey, Morris and Collins describe the scope of the act of state doctrine as follows: The courts will not investigate the propriety of an act of a foreign government performed in the course of its relations with another State nor enforce any right alleged to have been created by such an act unless that right has been incorporated into English domestic law. After all, as aptly pointed out by Lord Sumption, foreign act of state doctrine "does not depend on the absence of juridical standards". Rather, it depends upon the principle of comity that the courts of one country will not sit in judgment on the sovereign acts of another. Arguments concerning comity however were absent in the claim. It must be true that, if the Courts had gone on to rule on Ukraine's duress defence, and had decided that Russia had acted perfectly lawfully and legitimately, that would have proved embarrassing to the British Government, since it would have been out of step with the tenor of their foreign policy towards Russia. The avoidance of such hindrance to the activities of the executive is one of the principal rationales for the act of state doctrine. However, we would have like to have seen a greater consideration of the clarity of the position as a matter F.A. Mann, Foreign Affairs in English Courts, Clarendon Press, Oxford, 1986, p. 165. Dicey, Morris and Collins on the Conflict of Laws (16th ed, 2012), para. 5-043. Lord Sumption, "Foreign Affairs in the English Courts since 9/11", Lecture at the Department of Government, London School of Economics, 14 May 2012, p. 6. Ibid.
of international law. If it had been crystal clear that Russia had acted unlawfully or illegitimately, then there would have been little prospect of a decision that would be embarrassing to the executive. Conversely, if it were absolutely clear that Russia had not been engaged in unlawful or illegitimate activities, then it is hard to see why the executive should be protected from acknowledgement of that reality by the Courts. It is in the grey middle-ground, we suggest, where the act of state doctrine applies most strongly, and, in our respectful view, there ought to have been more consideration of whether Ukraine's duress defence fell into that middle-ground, or raised issues of international law and foreign affairs that were near-indisputable. That approach is supported by Kuwait Airways Corpn v Iraqi Airways Co (Nos 4 and 5) [2002] 2 AC 883, in which the indisputability of the relevant breaches of international law was one reason given for the non-applicability of the act of state doctrine.
"The reference to "act of state doctrine" in the case may be not precise enough,
as the case raised more narrowly the doctrine of "foreign act of state".
Blair J did state that in the instant case violations were disputed (by Russia, para 308(vii)), but that should not necessarily be sufficient. The Judge, with respect, did not engage with the "flagrant breach of international law" standard ("plain", "acknowledged") articulated in the Kuwait Airways case, nor with the "degree of international consensus" standard proposed by Lord Steyn in the same case. Blair J dismissed the Kuwait Airways case as "exceptional" (para 308). Rather than addressing the clarity of the alleged breach of international law, he focused on the subject-matter of the alleged violation: on the use
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of armed force and on aggression as "central areas of abstention", "giving rise to core examples of issues upon which domestic courts should refrain from adjudicating" under the foreign act of state doctrine (307(x)). We would, however, welcome the Judge's acknowledgement that, if there had been a UNSC Resolution condemning Russia's acts, the outcome might have been different (para 308(vii). Certainly R v Jones (Margaret) [2007] 1 AC 136 (which the judgment referred to in a different way) is authority for such a proposition, stating at [30]: A charge of aggression, if laid against an individual in a domestic court, would involve determination of his responsibility as a leader but would presuppose commission of the crime by his own state or a foreign state. Thus resolution of the charge would (unless the issue had been decided by the Security Council or some other third party) call for a decision on the culpability in going to war [...] of [...] a foreign government [...] But there are well-established rules that the courts will be very slow [...] to adjudicate upon rights arising out of transactions entered into between sovereign states on the plane of international law. [Emphasis added] In our view, greater attention should also have been paid to the effects of non-justiciability or the drastic consequences of accepting Russia's plea of act of state: Russia's debt claim for USD 3bn succeeded, and the Court was entirely precluded from considering Ukraine's duress defence. This merits two observations. First, the potential unfairness inherent in the act of state doctrine, which can effectively deprive parties of the right to rely on the full range of defences, is a compelling reason for confining its scope as narrowly as possible. Second, the act of state doctrine, which creates `forbidden zones' for the English court, should give rise to consideration of the suitability of English courts as the forum
for resolution of these types of disputes; an issue that could have been considered by the court as discussed further below. Summary judgment or stay of proceedings? Having accepted that Ukraine's defence was non-justiciable as act of state, the Judge then went on to consider whether he should give summary judgment on Russia's claims, or stay them (paras 309313). Here, the Judge faced something of a Hobson's Choice: if he gave summary judgment, he would be finding in Russia's favour without considering the full range of defences that Ukraine wished to advance but, if he stayed the proceedings, he would be keeping Russia out of a claim for USD 3bn that might well transpire to be wholly justified. The Judge declined to stay the proceedings, but we submit that there may, in fact, have been a third way, as developed below. (3) Implied term The Judge rejected Ukraine's argument that it was an implied term of the notes that Russia would not impede its performance (which it allegedly did by invading Crime and eastern Ukraine, thereby hindering its ability to repay). The Judge's reasoning was, in outline, that it would be unfair on subsequent transferees if they were prevented from enforcing the notes by the breach of a previous noteholder, namely Russia (paras 344-356). The solution, in our respectful view, is an implied term that would only prevent enforcement of the notes by noteholders who had themselves impeded Ukraine from performing its obligations; noteholders would not be prevented from enforcing the bonds by the conduct of their predecessors in title. The Judge ought not, therefore, to have given summary judgment on Ukraine's implied term defence.
(4) Countermeasures
Ukraine argued that (i) non-payment of the Eurobonds is action `directed against a State' (Russia); (ii) that non-payment constituted the non-performance of an international obligation of Ukraine (para 360), (iii) that Ukraine refused to pay in order to induce Russia to cease its internationally wrongful act, and; (iv) that it was proportionate, "given the severity of the effect of Russian interference on its territorial integrity and economy" (para 362). In substance, as the Judge acknowledged, the case on countermeasures was the same as the case on duress, placed in the context of non-payment (as a legal consequence to a wrongful act). Blair J held that "where the underlying acts concerned are non-justiciable, they cannot result in legal consequences through this route" (365).
Novel in the contractual context as it may be (as pointed out by Ukraine), and having remained an aspect of the case that "was not developed at any length in oral submission", the definition of countermeasures as reflected in the Judgment nevertheless is not accurate under international law. Ukraine's case defining countermeasures is summarised as follows: "countermeasures are unlawful actions taken by one state against another in response to that other state having committed an internationally wrongful act in order to induce that other state to comply with its international obligations" (para 357) (Emphasis added). It is not the case that countermeasures are "unlawful actions" in the referred context. As defined in the International Law Commission's Article on State Responsibility, a fundamental prerequisite for any lawful countermeasure, indeed is the existence of an internationally wrongful act which injured the State taking the countermeasure, this point being made clear by the International Court of Justice in the Gabcikovo-Nagymaros James Crawford, The International Law Commission's Articles on State Responsibility, Cambridge University Press, 2002, Part Three, Chapter II (Countermeasures), p. 284.
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Project case (Hungary/Slovakia, I.C.J Reports 1997, p. 7 at p. 55, para 83).
"Notwithstanding that Ukraine was prevented
from relying on its defences by the doctrine of non-justiciability, the Judge ultimately declined to stay the proceedings, but we submit that there may, in fact, have been a
third way."
It is fair to say, however, that ultimately the decision on the arguments on countermeasures in the case was tied to the arguments on duress. Since the Judge found those arguments nonjusticiable, the arguments on the legal consequences concerning the alleged duress could not be entertained either.
English Courts: A sort of forum non conveniens?
Are English courts a sort of forum non conveniens for resolving a claim which ultimately may turn on matters that are found to be "non-justiciable"? Prof Dapo Akande's observation that the "appropriate forum for resolving claims against foreign governments is not in the national courts of other states, but on the international plane", suggesting that the act of State doctrine may be a source of the forum non conveniens principle, supports this submission. Notwithstanding that Ukraine was prevented from relying on its defences by the doctrine of non-justiciability, the Judge ultimately declined to stay the proceedings, but we submit that there may, in fact, have been a third way. Under the Trust Deed, the Trustee appears to have had the option to elect Dapo Akande, Transcript of British Institute of International and Comparative Law, Non-justiciability Reappraisal of Buttes Gas in the Light of Recent Decisions, 15 January 2007, cited in Fox and Webb, The Law of State Immunity, third edition, OUP 2013, p. 60.
between arbitration and English court proceedings (para 37(xi)). A defence of act of state would probably have been unavailable in international arbitration, since it applies chiefly in court proceedings (Serbia v Imagesat International NV [2009] EWHC 2853 (Comm) at para 120). Further, there have been instances where recognition of the legitimacy of countermeasures has been examined in arbitral proceedings. The Judge could have stayed the court proceedings on the basis that, if Russia wanted to enforce the notes, it could do so by commencing arbitral proceedings, in which Ukraine's full range of defences could be considered. This option, however, was not pleaded, but it remains open to the Court of Appeal to consider it should it so wish. Conclusion Claims relating to foreign affairs of other States or public international law in English courts, often with little or no factual connections with the domestic system, as observed by McGoldrick in The Boundaries of Justiciability, are a well-established legal phenomenon. As noted by Whomersley, on the other hand, "the right of foreign states (or their surrogates) to bring claims in the English courts was first established in 1828 in Hullet v King of Spain (1 Dow. & Cl. 169) and was accepted as being available to a republic in United States v Wagner ((1866-67) L.R. 2 Ch. App. 582 CA)". It is clear he asserts- "that as a general rule a state may bring proceedings to the same extent as a private person".
Such as, Naulilaa (Responsibility of Germany for damage caused in the Portuguese colonies in the south of Africa). R.I.A.A., vol II p. 1011 (1928) at pp. 1025-1026, and others, as cited in James Crawford, op cit. Dominic McGoldrick, "The Boundaries of Justiciability", The International and Comparative Law Quarterly, Vol. 59, No. 4 (2010), pp. 981-1019. C.A. Whomersley, "Foreign states and British Courts", (2009) 125 LQR 227-233. Ibid.
"The case neatly exemplifies the complexity and diversity of the matters litigated in the English courts, which often include public international law arguments and foreign states litigating as private persons."
In this case, two States faced each other, as private persons, in an English court. In Serbia v Imagesat at [128], Beatson J held that "in a commercial context not involving the sovereign acts of a state within its own territory the court need not refrain from deciding the disputed issue unless there is some indication from the executive that a decision will embarrass diplomatic relations between the United Kingdom and that state". This is not a case where English courts have been called to look into the legal validity of the acts of sovereigns within their own jurisdiction. But centrally, on the legal validity of the acts of a sovereign State in its relations to another sovereign State under international law. Blair J held that this was non-justiciable in English courts. The Court of Appeal will have the opportunity to pronounce itself on the boundaries of the doctrine of non-justiciability in English Courts in claims relating to the foreign affairs of two sovereign States. Should it find that English courts are prevented from ruling upon Ukraine's defences, it may be that a more appropriate forum available to the parties would have been arbitration. Whatever the final outcome of the decision may be, the case neatly exemplifies the complexity and diversity of the matters litigated in the English courts, which as this case demonstrates, can include public international law arguments and foreign states litigating as private persons.
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Monica Feria-Tinta Monica Feria-Tinta is an specialist in public international law and international arbitration (investment, commercial, and inter-State arbitration). She acts for States and private parties in international and English courts. Her litigation practice regularly involves cross-border, multi-jurisdictional disputes, and her domestic advisory practice often deals with public international law matters in a commercial context. Recent cases include acting before the International Court of Justice (application to intervene) under Article 66 of its Statute (lead counsel), leading a successful application before an international organ in support of a multi-jurisdictional arbitration against a State owned-entity, working on an ICSID case arising from 52 construction contracts, acting for the FCO on a multi-million pound human rights/tort claim before the High Court; advising an African State on liabilities relating to sovereign guarantees in a commercial contract. Her forthcoming book Foreign State Immunity and Enforcement of Arbitral Awards in English Courts will be published by Oxford University Press in 2018.
Alistair Wooder Alistair Wooder has a broad practice in general commercial dispute resolution. Alistair's current matters include acting for Alexander Vik in his longrunning dispute with Deutsche Bank (with Duncan Matthews QC and Charlotte Tan), a high-profile claim for unpaid remuneration brought by a banking executive against his former employers (with Paul Lowenstein QC) and a planning inquiry raising novel issues of equality and human rights law (with Monica Feria-Tinta). Alistair has a particular interest in private international law and jurisdiction disputes. He is currently instructed in two challenges to the jurisdiction (in England and the Turks and Caicos Islands) in the Vik v Deutsche Bank litigation, and has experience of a number of anti-suit injunctions (including from arbitrators).
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