A March 2023 decision[1] of the English Supreme Court ( the “Supreme Court“) regarding a $3billion bilateral loan granted by Russia to Ukraine in 2013, highlights the application of English contract law principles to bilateral loan agreements between sovereigns. In this case, Ukraine failed and had refused to repay the bilateral loan which was due for repayment in 2015. When Russia sued Ukraine for repayment of the bilateral loan, Ukraine set up 4 defences[2].
- That Ukraine is entitled to nullify the bilateral loan because Ukraine entered into the bilateral loan under duress[3](“Duress”)
- That Ukraine’s Minister of Finance lacked authority to enter into the bilateral loan (“Authority“)
- That Ukraine lacked the legal capacity to enter into the bilateral loan under Ukrainian law (“Capacity“)
- That Ukraine could rely on the international law doctrine of counter-measures to decline to pay the amounts due under the bilateral loan ( “Counter-measures“)
History of the Case
At the Trial Court, Russia applied for a summary judgement, a procedure that allows a Trial Court to determine a matter without a trial, where the defence has no real prospect of success. The Trial Judge agreed with Russia that the case ought to be determined summarily and ordered Ukraine to pay the amounts due under the bilateral loan. Ukraine appealed the Trial Court’s decision. At the Court of Appeal, 3 of the 4 defences set up by Ukraine were struck out by that court. The Court of Appeal then ruled that Ukraine’s claim should proceed to trial on the sole issue of Duress. Russia subsequently appealed the decision of the Court of Appeal to the Supreme Court. Ukraine also cross-appealed the judgement of the Court of Appeal overruling its defences centered around Capacity, Authority and Counter-measures.
The Decision of the Supreme Court
In a judgement of the English Supreme Court delivered on March 15, 2023, the Supreme Court held that Russia is not entitled to summary judgement and that Ukraine should be entitled to defend Russia’s claim at the Trial Court on the grounds of Duress but only on to the extent that such defence is based on Russia’s alleged threat to the safety of the Ukrainian people or property. In point of substance, the Supreme Court struck out the cross-appeal filed by Ukraine and held as follows:
On the Defence of Capacity
Ukraine argued that its ability to enter into contracts is limited by local Ukrainian law. The Supreme Court rejected this claim, upon the reasoning that (a) As a sovereign state recognized by the UK Government, Ukraine is a legal person with full capacity under English Law (b) the capacity of a sovereign state under English law derives from a recognition by the UK Government and not from the state’s internal/local laws.
On the Defence of Authority
The Supreme Court held that the events leading up to signing of the subject bilateral loan, which involved the President of Ukraine, the Cabinet and the Minister of Finance, including the existence of a resolution passed by the Ukrainian Cabinet authorising the Minister of Finance to proceed with the bilateral loan demonstrated Authority. The Supreme Court further held that, that if a State represents that a person has authority to act on its behalf, it would be bound by the acts of that person as regards any one dealing with him in reliance on that representation.
On the Defence of Duress
Ukraine argued that “Duress” arose out of the trade restrictions imposed/threatened by Russia and from threats to Ukrainian territorial integrity and independence. On this point, the Supreme Court held that trade restrictions such as embargoes and sanctions are normal aspects of statecraft regularly exercised by countries and cannot be regarded as illegitimate or as evidence of Duress under English law.
On the Defence of Countermeasures
The Supreme Court declined to apply the international law doctrine of Countermeasures on the grounds that English law does not recognize such a defence to breach of contract.
Comments
The practical effect of the decision of the Supreme Court is that, the matter will now be heard on its merits at the relevant Trial Court but the scope of the trial will be limited to an examination of the defence of Duress. Threats to use force as well as violence to persons and property are well established examples of duress under English law. Accordingly, the onus will now be on Ukraine to provide the Trial Court with evidence of any such threat or violence by Russia to Ukraine.
[1] The Law Debenture Trust Corporation vs. Ukraine
[2] None of the parties to the case argued that the invasion of Ukraine by Russia was of any relevance to the case.
[3] In the law of contract, a party to a contract can avoid its obligations under the contract if it can successfully establish that the it was “forced” to enter into a contract
This legal update is not intended to be taken as legal advice. Please seek professional legal advice specific to your situation. For more information or consultation regarding the content of this article, please reach out to the undersigned or to your usual Balogun Harold.
