How a Commercial Bond Dispute in the UK Supreme Court Invokes International Law

While the heads of state for Ukraine, Russia, France and Germany met in Paris on December 9 to discuss terms of peace, across the English Channel in London the UK Supreme Court heard arguments concerning Russia’s suit for repayment on a US$3 billion loan to the government of Ukraine. The deal was made in December 2013 shortly after then President Viktor Yanukovich pulled out of an association agreement with the EU, and months before Russia annexed Crimea and invaded Eastern Ukraine. When the principal and final interest installment came due in December 2015, Ukraine refused to make payment.

The Law Debenture Trust Corporation p.l.c. v. Ukraine is a matter of English law because the notes, issued in the form of Eurobonds tradeable on the Irish stock exchange, were constituted by a trust deed negotiated by the parties to be governed by English law, with English courts having exclusive jurisdiction. Law Debenture is trustee of the notes, whose sole subscriber is the Russian Federation. But beyond being just another commercial bond dispute, this case is a study in how international law is woven into the fabric of national laws. The court’s ruling may have significant consequences in reaffirming faith in the status of public international law, sending a message to all nations seeking the recognition and benefits of a liberal rules-based order.

Of Ukraine’s myriad defenses to the claim, the one which survived summary judgment at the appellate level was the English common law defense of duress. As the Court of Appeal points out at 159, “English law provides that a contract made as a result of illegitimate pressure will not be enforceable.” In this case, Ukraine alleges that Russia applied illegitimate economic and political pressure to Ukraine in 2013, including threats of use of force, to deter the administration from signing an association agreement with the European Union and compel Ukraine to accept Russian financial support instead. Russia argues that Ukraine cannot make out its defense because it has no domestic foothold, and because doing so would require investigation into Russia’s dealings on an international plane, something the English court should not endeavor.

This is not a case of the court thrusting itself into the affairs of sovereign states. Russia explicitly chose English law to govern the trust deed. It calls on the power of the English court to enforce its claim. As Lauterpacht wrote, in Hugo Grotius’ view: “Such is the impact of economic interdependence or of military security that there is no state so powerful that it can dispense with the help of others.” (Hersch Lauterpacht, The Grotian Tradition in International Law, 23 Brit. Y.B. Int’l L., 31 (1946)) Russia needs the English legal system to compel payment on the notes. The Supreme Court is compelled to follow English law. But whether the English court should restrain itself from examining the conduct of a foreign state is a different question than whether Ukraine is entitled to a defense under English law before being subjected to judgment.

At the hearing, a good deal of time was spent covering the distinction between behavior that is “unlawful” and behavior that is “otherwise illegitimate”. Law Debenture’s argument against Ukraine having a justiciable duress defense can be summarized through four of its proffered propositions: 1) English law requires that the court should apply English law standards; 2) Ukraine’s case is based on breaches of international law; 3) English law and international law are separate legal systems and international law is not automatically incorporated into English law; and 4) when a party seeks to invoke international law rules that are irrelevant to domestic law rights, that is one form of non-justiciability. (09 Dec 2019, Morning and Afternoon sessions).

To follow the Court of Appeals’ reasoning at 157, both sides relied on the statement of the law by Cooke J in Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] EWHC 273 (Comm); [2012] 2 All ER (Comm) 855, at [21]—[35], himself relying on the statement of principle by Steyn LJ in CTN Cash and Carry Ltd v Gallaher Ltd [1994] 4 All ER 714 at 718-719. Cooke J summarized the effect of this case at [30]:

“This is Court of Appeal authority for the proposition that the exertion of pressure by “lawful means” does not prevent the operation of the doctrine of economic duress. Whilst the particular examples in earlier cases, to which reference is made in the passage quoted above, do not take the matter much further, Steyn LJ refers to “the critical enquiry” as being “not whether the conduct is lawful but whether it is morally or socially unacceptable”. He said in terms that that was the enquiry in which the court was engaged, although the Court should not set its sights too high and it might be a relatively rare case in which “lawful act duress” could be established, particularly in a commercial context.” (Italics added)

From this, the counter-argument simply put is: in contrast to unlawful behavior, the question of legitimate behavior is a moral question. The English law standard is not English laws, but English morals. The international law norms known as jus cogens, universal norms from which no derogation is permitted, include “the threat or use of force against the territorial integrity or political independence of any state” as spelled out in Article 2(4) of the Charter of the United Nations. These moral norms stand alone in their achievement of a worldwide consensus on what is illegitimate behavior under all circumstances. At a minimum, jus cogens must be considered relevant to a question about English morals. It is a feature that all members of the United Nations agree about a thing; a moral imperative should not be deemed irrelevant for not being particularly English.

The court is seemingly left with two options. First, it could rule that the English court is in fact capable and authorized to examine whether Russia’s behavior rose to the level of illegitimate pressure. After all, international law clearly sets out the standards of legitimate behavior between sovereign states, the most generally accepted of these standards being jus cogens. Moreover, from the earliest cases of piracy to the issue of Quebec’s secession, national courts have consistently incorporated international law and contributed to its corpus, and England is no exception.

Or else, the court is left to decide if it would be equitable to enforce a judgment against Ukraine without affording it the opportunity to make out a legitimate defense under English law, and whether public policy condones enforcement of a contract that may have been born out of violations of jus cogens norms.

As Lord Sales brilliantly points out at 153 of the Court of Appeals opinion, the court may not have to decide. There are other fora, like the International Court of Justice (ICJ), that are well-suited to hear this specific piece of the case. Russia, however, has made no indication that it would be willing to grant the ICJ jurisdiction to resolve this matter. The irony is that Russia seeks the benefit of English law in the form of a legal judgment against Ukraine and simultaneously expects that its behavior should stand above scrutiny, dispossessing Ukraine of the law’s protection.

There are other arguments on both sides that might end this case much sooner than that. Should Ukraine lose its appeal, it will likely continue to claim non-payment as a legitimate counter-measure, to avoid the perverse result of paying blood money to the country that is financing a war against its people. But beyond a win for Ukraine or a win for Russia, this case has the chance to stand for the proposition that no nation, in its relations with others, is above the law.