English Court of Appeal finds good arguable case that public policy exception applies to the foreign Act of State Doctrine allowing Ukraine to argue duress in claim under Eurobonds

In Ukraine v The Law Debenture Trust Corporation plc [2018] EWCA Civ 2026 the English Court of Appeal (the Court) partially upheld an appeal in favour of the state of Ukraine (Ukraine), reversing in part the summary judgment granted to The Law Debenture Trust Corporation plc (the Claimant) by the Commercial Court.

The Claimant brought the claim as the trustee of notes with a nominal value of US$3 billion (the Notes) after Ukraine defaulted on the payment of principal and the final instalment of interest. The sole subscriber of the Notes was the Russian Federation (Russia).

In allowing the appeal in part, the Court found that there was a good arguable case that the public policy exception applied to the foreign act of state doctrine and that Ukraine's defence of duress - based on allegations of breaches of ius cogens norms of international law and treaty provisions by Russia - was therefore justiciable.

Ukraine's defences to the summary judgment application also raised in the appeal

The Claimant issued proceedings in 2016, and obtained summary judgment at first instance on the basis that Ukraine had no real prospect of success on any of its defences. In its appeal, Ukraine again put forward a number of defences, in particular that:

1. it lacked capacity, or, alternatively, its representatives lacked authority to issue the Notes;
2. the issue of the Notes was procured by duress arising from allegedly unlawful threats and pressure from Russia so as to vitiate Ukraine's consent;
3. it was an implied term of the Notes that the holder (i.e. Russia) would not prevent or hinder Ukraine's ability to repay; and
4. if, contrary to the above, Ukraine had breached a valid contractual obligation, it was entitled to decline to make payments to Russia under the Notes as a "countermeasure" under public international law. Ukraine also argued that, irrespective of its prospects of success, there were compelling reasons to proceed to trial.

Decision of the Court of Appeal

In its judgment, the Court upheld the appeal with regard to Ukraine's duress defence, and therefore partially allowed the appeal. This had the effect of reversing the Commercial Court's summary judgment and permitting Ukraine to proceed to a full trial on that point. Each of Ukraine's four arguments was considered in detail and is summarised below.

Capacity and authority

Ukraine had submitted evidence to the effect that certain of its Ministers had failed to comply with legal requirements as a matter of Ukrainian law that were essential to the validity of the Notes. This evidence was not contested, and it was accepted for the purposes of the proceedings that Ukraine lacked capacity to issue the Notes as a matter of Ukrainian law. However, the Court found that this would not affect their validity in the proceedings unless the capacity of Ukraine to issue the Notes was, as a matter of English law, to be governed by those principles of Ukrainian law. Following a detailed consideration of the nature of a foreign state as a matter of English law, including comparison with the nature of a foreign corporation, the Court concluded that this was not the case. Once a foreign state is recognised as a state by the UK, it enjoys unlimited capacity. Where it enters into a contract governed by English law, a foreign state will not lack capacity to make and perform the contract, irrespective of its own domestic constitution and laws. Ukraine's appeal was therefore denied on this point.

The Court also concluded that Ukraine was bound by the ostensible authority of the Minister of Finance and the Cabinet of Ministers of Ukraine, noting also that the Claimant was not put on notice of any of the breaches of Ukrainian law on which Ukraine relied. Whilst it did not have to determine the point, the Court found that the issue of whether Ukraine, as principal, had ratified the acts of its agent was not suitable for summary determination.

Duress

The Court considered: (1) was there a "domestic foothold" (in other words, a basis in legal analysis under English law), which requires or permits the court to examine Ukraine's case that Russia made threats which were unlawful as a matter of international law or otherwise illegitimate? (2) if so, was the issue nonetheless beyond the competence of the English courts to resolve?; and (3) if there was a domestic foothold but the issue was beyond the competence of the English courts to resolve, should the court grant an unlimited stay of proceedings or strike out the claim because, as a result, it cannot fairly be tried?

As to (1), the Court found there was a domestic foothold: it was common ground for the summary judgment application (although full rights were reserved on the point for trial) that any alleged duress exerted by Russia may affect the rights relied upon by the Claimant and provide Ukraine with an arguable defence. The Court then looked (2) at whether, despite the domestic foothold, Ukraine's pleas of duress, which allege breach of ius cogens norms of international law and various treaty obligations, should be treated as non-justiciable. The Court referred to Belhaj v Straw [2017] UKSC 3, which set down three rules regarding non-justiciability over acts of foreign states. The third of those rules (found relevant in the present case) applies where there are issues involving a challenge to the lawfulness of acts of a foreign sovereign state of such a nature that a domestic judge cannot or ought not to rule on it. This rule is based on judicial self-restraint and is purely derived from common law, and not international law, but is subject to an exception where it is inconsistent with fundamental principles of public policy.

The Court considered that this rule prima facie applied in this case, but that Ukraine succeeded in establishing a good arguable case that a public policy exception should apply to allow the Court to determine the claim. The Court relied on six points:

1. Russia's choice of English law and jurisdiction in the deed "made the argument for self-restraint by the English court significantly weaker";
2. To the extent that the foreign act of state doctrine reflects the principle of comity, comity points in both directions (towards both Russia requesting the court to exercise self-restraint, and Ukraine requesting the court to determine the matter);
3. Russia has indicated that it wishes the English court to determine this claim by procuring that it is brought by the Claimant. As a matter of basic justice, Russia could not expect there to be a determination of the contractual claim without an analysis of the merits of Ukraine's defence.
4. There is nothing inherently non-justiciable or unmanageable in the legal standards which the court would be called on to apply in determining whether Ukraine's duress defence was made out. English courts were well capable of construing treaty obligations and other obligations of states under international law and assessing their application.
5. There was no risk of usurping or cutting across the proper role of the executive government in carrying on the UK's foreign affairs. The UK government was on notice of the proceedings and had had an opportunity to intervene if it saw fit.
6. It is an especially strong public policy in the UK that no country should be able to take advantage of its own violation of norms of ius cogens. The Court noted that there was no norm more fundamental to the system of international law and the rule of law than that set out in Article 2(4) of the United Nations Charter (all Members shall refrain from the threat or use of force against the territorial integrity or political independence of any state).

There was therefore a good arguable case that the public policy exception has effect so to disapply the rule of foreign act of state on which the Claimant relied. On this basis, it was unnecessary to decide on Ukraine's request for a stay (3).

Countermeasures, implied terms and affirmation

The Court held that Ukraine was not able to rely on the counter-measures doctrine as it operates on an international law level and, in the absence of a domestic foothold (as described above), the English Court had no proper basis to examine or pronounce on Ukraine's arguments under the doctrine. The Court also rejected Ukraine's arguments on implied terms on the basis that the English legal test for implication of terms was not satisfied. Finally, in response to the Claimant's argument that even if the defence of duress was justiciable, Ukraine affirmed the Notes after it was free of the alleged duress, the Court determined that a trial on the evidence was required to determine whether (i) Ukraine had the requisite knowledge of its right to avoid the contract under English law, and (ii) the issue of continuing duress and its effect.

Comment

This decision is a useful addition to the body of English authority on the foreign act of state doctrine, in particular drawing on the pertinent aspects of the decisions of the Supreme Court in Shergill v Khaira [2014] UKSC 33 and Belhaj v Straw [2017] UKSC 3. The decision suggests to the capital markets that the English court is willing to interpret private commercial relations in light of public international law rules concerning state conduct where appropriate. Moreover, the parties to transactions involving a state may consider significant the Court's emphasis on the choice of English law/English court jurisdiction. Although it was not determinative, the choice was a relevant factor in the Court's conclusion that it was arguable that the public policy exception applied.

For further information please contact Andrew Cannon, Partner, Hannah Ambrose, Senior Associate, or your usual Herbert Smith Freehills contact.

The authors are grateful to Pedro Martins for his assistance in writing this post.