Yanukovych’s debt: trial in London
In about half a year, the Supreme Court of Great Britain will announce a decision in the case of the 3 billion Russian loan to Ukraine. What will it be?
- The Supreme Court of Great Britain has completed the hearing in the case between Ukraine and The Law Debenture Trust Corporation PLC (Law Debenture) — an English trust that, in the interests of Russia, demands the return of “Yanukovych’s debt” of $3 billion with interest.
- We’d like to remind you that at the end of 2013, in exchange for refusing European integration, Russia promised to provide Ukraine with a loan of $15 billion, divided into several tranches. The then government of Azarov placed Eurobonds worth $3 billion through Law Debentures, 100% of which were bought by Russia. In fact, it was the first tranche, outwardly presented as raising funds on the capital market.
- The hearing of this case began on December 9 and ended on Thursday, December 12. The dead lawyer Sashko Melnyk was in the courtroom all 4 days (indisputable proof will follow) and together with the equally dead Mykola Yurlov, who was covering for him from the office of Vasyl Kisil and partners in Kyiv, dissected the process to the bone.
- In terms of the legal text, the text is somewhere in the top ten (out of ten). Dear reader, in order not to irritate you a lot with long sentences, here are a few abbreviations: we will have the High Court of Justice as HCJ, the Court of Appeal of England and Wales as COA, and the Supreme Court of Great Britain as UKSC.
We have not found the written arguments of the parties before the UKSC publicly available, so we only write what we heard at the hearings and read in the decisions of the courts of previous instances. It is rash and unprofessional to make predictions, but in the end, we will risk our reputation and give timetables for resolving the dispute.
So, let’s go
Who is who
We had to read Russian news such as “The Law Debenture Trust Corporation represents the interests of Russia”. Therefore, to begin with, let’s state the balance of forces: who is suing, with whom and against whom.
Plaintiff: Law Debenture
Russia is not formally a plaintiff in this case.
The Law Debenture Trust Corporation P.L.C. is an English trust that has been accompanying various investment deals as an intermediary for more than 130 years.
Formally, the Trust holds bonds worth 3 billion from Yanukovych’s “debt”, regarding which the dispute arose. Their real holder is Russia, represented by its Ministry of Finance, which ordered Law Debenture to start this dispute in 2016. Ukraine has a long history of cooperation with Law Debenture: from 2000 to 2013, sovereign state securities were placed through it 31 times.
The Trust’s legal advisers are Norton Rose Fulbright, and immediately before the court, its interests are represented by barristers from Brick Court Chambers: Mark Howard QC (and he was the only one who appeared before the court) and Oliver Jones.
We were unable to find Ukrainian advisers to the Trust: for some reason, no Ukrainian firm boasted of its victory when the HCJ initially satisfied Russia’s claim. Although Russia did not formally participate in the process, it is known that Russia itself (a third party) was consulted by Cleary Gottlieb.
Defendant: Ukraine
Or more precisely — Ukraine represented by the Ministry of Finance, which acts according to the instructions of the Cabinet of Ministers.
Legal advisers to Ukraine were Quinn Emanuel (just read this press release — their support and love for Ukraine are at the level of Vyatrovych).
Ukraine’s position was represented directly in court by barristers from Fountain Chambers: Bankim Thanki QC (only he appeared before the UKSC) and Simon Atrill, as well as Malcolm Shaw QC from Essex Court Chambers. Yes, this is the same author of the textbook on international law, familiar to many people, and one of the best English international lawyers in the world. He began to represent states at the ICJ in 1990 when most Ukrainian lawyers had not yet been born, and the Ukrainian legal market did not yet exist). Asters (Svitlana Chepurna, Oksana Lehka, Katya Kylyvnyk and Olena Nikolenko under the watchful eye of Svyriba and Khachaturyan) acted as advisers on Ukrainian law, which they already managed to announce after the hearings.
During the summary hearing before the HCJ (January 17–19, 2017), an expert report and witness statements were submitted. Our expert on Ukrainian law was Professor William E. Butler from Penn State Law. We were also surprised, but the professor has a diploma from the Kyiv University of Law, which is attached to the Academy of Sciences, and he also studied in Russia, as well as at Harvard and London. The witnesses were Oleksandr Danyliuk — Minister of Finance in 2017, Olena Zubchenko from Lavrynovych and Partners, who was an advisor to the Ministry of Finance during the bond issue in 2013; officials from the Ministry of Finance and the Cabinet, a partner of Queens and the director of the Trust.
Chronology of the case
- December 24, 2013 — the Minister of Finance of Ukraine signs an agreement on the placement of bonds, Russia pays a tranche of $3 billion (for 2 years at 5% per annum) in exchange for Ukraine’s rejection of European integration. Meanwhile, the Christmas tree has already stopped being decorated on the Maidan.
- February 21, 2014 — “Yanukovych’s debt” remains a debt without Yanukovych, who took a French leave in the direction of Rostov.
- December 18, 2015 — Yatsenyuk’s Cabinet imposes a moratorium on debt payments (the payment deadline was December 21, 2015). After three days, Ukraine does not pay the debt. The prime minister says he is ready to sue the Russians.
- February 16, 2016 — the Russian Ministry of Finance orders the Trust to start the process. The following day, a lawsuit was already filed with the HCJ — they demanded the return of $3.075 billion with interest (to date, the Russian Ministry of Finance has already charged an additional $1.5 billion).
- March 29, 2017 — after three days of hearings in January, Judge Blair of the HCJ (Tony Blair’s brother) upholds the Trust’s claim, hears the case on summary judgment and rejects Ukraine’s arguments. We are appealing.
- September 14, 2018 — after five days of hearings in January, a three-judge panel of the COA upheld Ukraine’s appeal on one argument (there was and still is coercion and pressure from Russia) — the case should be heard in full. Both sides are appealing the decision to the UKSC to support their arguments.
- December 9–12, 2019 — the UKSC heard the case and now has six months to make a decision.
Hearings in the UKSC
Law Debenture’s claim against the decision of the COA related to two issues: (1) objection to the duress imposed by the COA on Ukraine by Russia, which is allegedly a matter of international law and should not be considered by English courts, and (2) objection to a possible stay of proceedings if the court will establish that it lacks jurisdiction over “international” issues.
Ukraine did not agree with the COA on four issues: (1) Ukraine’s legal capacity as a state is not unlimited, although English law says otherwise, (2) the Minister of Finance #just_did_not_have_authority to sign the Trust agreement, (3) non-payment of debt is a countermeasure to Russian aggression, (4) “other good reasons” — the lawsuit is a method of continued pressure on Russia, so it should be considered according to the full, not simplified, procedure.
Russia’s position
Law Debenture appealed this part of the decision to the UKSC. There, its representatives continued to defend Russia’s position, although #they_are_not_there. So, for example, a representative of the Trust even stated that duress would theoretically take place “if they threatened to kill the Minister of Finance of Ukraine so that he would sign the documents” (as if anyone doubts that Russia could do such a thing). And in general, according to the Trust, in duress, everything boils down to an assessment of whether actions were morally or socially acceptable, and these categories cannot be applied to states.
Well, we didn’t doubt it. Where is the modern Russian Federation, and where are socially or morally acceptable actions?
At the same time, this did not prevent Law Debenture from saying that Russia’s relations with Ukraine are a very serious and separate area that is not related to this dispute. For example, on the first day of the hearings, President Zelensky met with Putin, Merkel, and Macron. Lord Carnwath, the judge, even asked whether the leaders there had sometimes agreed on the same issue while we were all sitting here. The representative of the Trust laughed with everyone but did not answer — well, where is the Law Debenture, and where are the serious questions of international politics?
The duress argument is central to this dispute. Only thanks to it the COA overturned the HCJ’s decision and gave the case a chance for a full trial. It is also important in that it gives the case the opportunity to develop in three directions: (1) full trial (if the UKSC simply supports the decision of the COA), (2) stay or suspension of the proceedings during the consideration of the interstate dispute between Ukraine and Russia (if the UKSC confirms the importance argument, but states that the English courts lack jurisdiction to consider it) and (3) return to HCJ summary judgment zrada [Ukrainian for treason] (if the UKSC does not uphold the COA). This issue has been given the most time in the UKSC proceedings, and, in our humble opinion, 99% of the outcome of the dispute depends on it. With modest optimism, we prefer Ukraine here and hope for the implementation of scenarios (1) or (2).
We understand it’s difficult. Well, sorry, you yourself chose this profession. Suffer. Here is a photo of Sashka and a story for warm-up:
Ukraine’s position
(1) Limited legal capacity of the state
Ukraine’s first argument was its lack of capacity to conclude the disputed agreement.
The budget law for 2013 provided for an external debt ceiling of $4.5 billion, which was exceeded. Secondly, the Cabinet of Ministers approved the agreement and instructed the Ministry of Finance to issue the bonds without an expert opinion on their content, which later revealed a violation of the borrowing limit. In the context of English law, Ukraine argued that it should be compared with a legal entity and its Constitution and legislation with the charter of such an entity. Accordingly, the limitations of the Law on the Budget are similar to the limitations of the CEO under the statute.
Law Debenture objected because the domestic law of Ukraine is irrelevant to determining its legal capacity at the international level (including the right to borrow). Under English law, a sovereign state has unlimited legal capacity once it is recognized by the Queen and the Government.
At the same time, the Trust somewhat confused the issues of legal capacity and authority in its arguments, which were the separate argument of Ukraine. At the same time, they asked the court to compare Ukraine by analogy with a natural person, whose legal capacity is generally also unlimited.
In the first instance, to resolve this issue, the HCJ referred to the famous Lotus case, decided by the Permanent International Court of Justice (PCIJ), the predecessor of the ICJ, in 1927.
The Lotus Principle means that sovereign states can take any action not prohibited by international law. This case is very fond of being cited by defendants in all sorts of Jessup-type mutts. As Soroush Kafiabadi — a legendary Jessuper from King’s College London — said after judging the finals of Jessup Ukraine 2017,
“if you don’t know what to claim, cite Lotus”.
It was the Lotus principle that the HCJ referred to when it came to the conclusion that issues of Ukraine’s domestic legislation are irrelevant because its legal capacity is unlimited under international law (§129, HCJ). This conclusion is somewhat controversial because, already in the next argument about duress, the HCJ referred to the impossibility of applying the concepts of international law to assess the behavior of sovereign states as participants in a private legal dispute (§308, HCJ).
The COA drew attention to this inaccuracy (§73, SAA), although it also rejected Ukraine’s argument regarding capacity, but on other grounds. First of all, the COA indicated that sovereign states are sui generis — a unique concept that cannot be compared with individual or legal persons (§54, COA).
The court delved into history and explained that the personality of states began to take shape in the 19th century with the emergence of republics. Before that, English law had no problems with establishing the personality of states because the monarch of another state was its bearer. At the same time, says the COA, legal persons created by the royal authority have unlimited capacity because they come from the sovereign — the Crown (§68, COA). The court even referred to the case of Sutton’s Hospital in 1612 (!), in which, for the first time, a legal person was clearly separated from an individual without including in the inheritance the property transferred by the testator during his lifetime to this person. To sum up, the COA once again confirmed that under English law, the capacity of states is unlimited (§75, COA).
Ukraine continued to rebut this argument before the UKSC. Due to the lack of relevant cases, the position is primarily based on authoritative legal sources, such as Dicey, Morris & Collins on The Conflict of Laws and Oppenheim’s International Law. The last book is a real bible of international law, written by Lassa Oppenheim, who is called the father of the science of international law, for the first time back in 1905. In 2007, its 9th edition was published. The available English cases do not match the facts because the parties were not states but municipalities or state-owned companies. In our very subjective opinion, UKSC judges remained unconvinced that (1) the capacity of a foreign state in English law can be limited and (2) they should apply Ukrainian law to resolve this issue.
In fact, this issue is of fundamental importance to English law and London’s authority as a world financial center. The court should question the capacity of foreign countries in loans and immediately expect new cases challenging sovereign debts raised through the English and Irish stock exchanges. Therefore, let’s agree on capacity with COA and give this argument in favor of the Trust.
(2) #clearly_no_authority
The second argument of Ukraine concerns the lack of authority of the Minister of Finance to sign the contested agreement.
Unlike capacity, which answers the question of whether Ukraine could be a party to such an agreement, the question of authority determines whether the minister, as a representative of Ukraine, could sign it. Ukraine’s arguments here are similar to capacity: exceeding the limit on borrowing under the Budget Law and non-compliance with the procedures for the approval of the Cabinet of Ministers could not give the Minister of Finance the authority to sign the agreement.
The HCJ also rejected this argument of Ukraine, referring to the doctrine of usual or ostensible authority (§§167, 169, HCJ).
In contrast to the issue of capacity, on this point, the court did not deny that the availability of the minister’s powers should be ascertained from the content of Ukrainian law. If such powers were directly provided for and correctly delegated to the minister, he would have actual authority.
The Court agreed with Professor Butler’s conclusion that the Minister did not have this power because of a conflict with the Budget Law and a breach of procedure (§159, HCJ). At the same time, the court drew attention to the fact that from 2000 to 2013, it was through Law Debenture that Ukraine made 31 placements of its sovereign securities. In each case, the signatory was the Minister of Finance of Ukraine, his deputy or acting minister. (§161, HCJ). According to the court, this indicates that the minister has the usual authority, and this is enough to reject Ukraine’s argument (§167, HCJ).
The SAA again trolled Judge Blair for misinterpreting and applying the common law, but again rejected Ukraine’s argument on other grounds.
“Authority is either actual or ostensible, not usual, as Justice Blair says”, — says СОА (§§90–92, COA). The court also evaluated the previous 31 agreements with the participation of Ukraine and Law Debenture. At the same time, he drew attention to the fact that on September 26, 2014, Yatsenyuk’s Government already stated: “all state debt indicators as at the end of 2013, were within the limits defined by the Law of Ukraine ‘On State Budget for 2013” (§124, COA).
Then the COA says: “If Ukraine was itself asseting in September 2014 that all external borrowing was within budget limits it is impossible to see the basis on which it is said that Law Debenture [an English trust far from local procedures] should have known on or before 24 December 2013 the external borrowing limit was exceeded by the issue of the Notes.” (§124, COA). Considering all these facts, the court decided that the minister had ostensible authority for the agreement (§133, COA).
At the UKSC, the parties again crossed their legal swords over this argument, and again the judges did not appear to accept Ukraine’s position.
Their questions were reduced to: “if not the Minister of Finance, then who should have signed?” The previous practice of interaction with Law Debenture only strengthens the confidence that the minister has powers that are usual and ostensible. Ukraine also argued that the Budget Law and indicators of budget execution are public — the Ukrainian advisers of Law Debenture and Russia should analyze them and pay attention to exceeding the borrowing limit. But even this position, it seems, did not impress the judges. If anything at all can cause admiration in these depths of jurisprudence. Therefore, we again give the argument in favor of the Trust.
(3) Non-payment of debt as a countermeasure to Russian aggression
Even during the consideration of the case at the HCJ, Ukraine stated as a backup argument that it has the right not to pay the “debt” (if the court does recognize it as a debt) as a countermeasure against Russia’s violation of international law, to which Law Debenture stated that it was “simple” bond placement agreement which is governed by English law and an English court has no jurisdiction to deal with countermeasures.
What kind of beast is this, countermeasures?
Articles on the responsibility of states for internationally wrongful acts (ARSIWA) in Art. 22 establish that the wrongfulness of an act of a state that violates international obligations towards another state is precluded if this act is a countermeasure taken against such a state in accordance with Art. 49–54 ARSIWA (they set requirements for countermeasures such as temporality and proportionality). For more details, read the commentary to ARSIWA.
It’s time to stretch again. This is Kolya — the second author of the text and here is his nerdy remark.
Therefore, Ukraine stated that once Russia committed an internationally wrongful act against Ukraine (used force), then Ukraine may not fulfill its international legal obligation to pay the bonds as a proportionate countermeasure directed against Russia until it stops its wrongful acts.
The HCJ noted in §§361–365 that this argument was not given much attention at the hearings and that Ukraine conceded in written arguments that the use of this defense in contractual relations is new (as is the fact that a sovereign state litigates through an intermediary with another in an English court).
But the court referred to the previous decision in the case of Westland Helicopters Ltd. v Arab Organization for Industrialization [1995] 2 WLR 126 (in that case, although countermeasures were considered but under completely different circumstances) and recognized that the court cannot and should not consider such an argument (not justiciable), thus confirming the concept of “English law is law, foreign law is fact, international law is fiction”.
Moreover, the HCJ decided that Ukraine’s argument “has no real prospect of success”.
The judges of the COA supported their colleague from the HCJ and concluded in §189 that the doctrine of countermeasures does not assist Ukraine in any way because it works only at the level of international law, and the English court cannot consider these arguments of Ukraine. At the appeal hearing, this argument was given “very little time” (§187, COA).
In the UKSC, the countermeasures were not even allocated to a separate argument (under the arguments selected by the court, the party was given time for its presentation — about 3 hours, the other party for an answer — 1 hour, and the first party another 15 minutes for a reply).
In our opinion, this fact alone indicates the willingness of the UKSC to take this argument seriously. During the time that the Ukrainian representative presented the position on countermeasures, we did not (and could not) hear anything radically new that would convince the English court to climb into the dark abyss of the UN Charter and ARSIWA.
(4) “Other good reasons” for trial
In the first instance, Ukraine stated the 5th argument, that regardless of the success of the four defense arguments, there should be a full hearing of the case.
Because in fact this claim is:
in reality a tool of oppression which includes military occupation, destruction of property, the unlawful expropriation of assets, and terrible human cost (HCJ, §33).
Therefore, Russia should not receive the benefits of summary judgment.
In the last paragraph of §377, the HCJ noted how the Minister of Finance of Ukraine, Oleksandr Danylyuk, “powerfully” presented this argument in his testimony, noted that the court has given it “careful consideration” but still rejected it because “this is a claim for repayment of debt instruments to which the court has held that there is no justiciable defence [in Ukraine]”.
In §218, COA saw no error in this conclusion, but because the COA allowed the appeal on other grounds, this argument is no longer relevant.
As with countermeasures, “other good reasons” were given little or no time in the UKSC. Therefore, again we have to give this argument in favor of the Trust.
What’s next?
The UKSC went on to write its decision on many dozens of pages, which we will already analyze in 2020. Then we will see which of us are couch oracles and with whom the UKSC will agree — Ukraine, Russia, HCJ, COA, or come up with something so unique that our unfortified legal minds have not yet reached. As before, we see three main development scenarios with different probabilities of their realization.
(1) Consideration by trial
There is a good chance that the UKSC will uphold the COA’s decision and send the case to the HCJ for the full procedure. For Russia, such a scenario is very undesirable for a number of reasons.
First, such a process will focus on the issue of duress, which Russia so wanted to bypass, promoting its idea of a “purely commercial dispute.”
Secondly, the trial in England is public. This means that the English judge will openly listen to witnesses and experts who will explain the impact of Russian aggression and evaluate quotes from Russian officials who publicly and privately pressured Yanukovych and his entourage before the Vilnius summit.
Thirdly, after Salisbury, Russia lost the remnants of its reputation in Britain, where its petrodollars were eagerly awaited. Russian business now always causes caution, although it does not always mean refusal to cooperate with it. A public trial where the president and the highest officials of the country are directly accused of using force and violating the sovereignty of another country is not at all what is needed for the return of the British to business as usual with Russia.
The COA upheld Ukraine’s sole duress argument, which the HCJ erroneously considered under a summary procedure and rejected. Instead, the COA noted, “Ukraine has a good arguable case” (§181, COA), so the chances of the state to compete in the open consideration of the case under the full procedure are also good. Some will say that the English courts here have taken over the function of a world arbiter and are already resolving interstate disputes. And we will say that courts with an almost thousand-year legal tradition and an undoubted reputation are not such a bad place since Russia has decided to surrender itself to the hands of English justice completely and does not want to go to the ICJ. We imagine that this is exactly what the judges of the COA thought when they wrote their decision in a stiff, arrogant, and English manner. Let’s hope that the UKSC does not fail, either.
(2) Stay
The British band Hurts sings “Stay” when asking not to go, and the British courts do the opposite when they send your dispute away from their island.
The stay argument is Ukraine’s alternative argument to duress. The logic is as follows — if the English court can consider the issue of duress on the part of Russia according to the full procedure, then there are no problems, and we will have an interesting process with a lot of witnesses and experts (COA said that it can be — §181). If the UKSC comes to the opinion that the issue concerns the international activities of sovereign states and goes beyond the scope of duress, then, according to the logic of Ukraine and the COA, the proceedings should be stopped (stay) until the interstate dispute between Ukraine and Russia is resolved and it is found out whether the same took place duress (§184, COA).
The problem is that Russia does not show readiness to resolve such an interstate dispute because of its “purely commercial dispute” position. Ukraine, on the contrary, declared during the process that it is ready to refer the dispute to the ICJ (§185, COA). However, the desire and readiness of Ukraine itself are not enough here because in order to transfer such a dispute to the ICJ, the consent of both parties is required. The COA concluded that under such conditions, the English courts remain the only forum where Russia (albeit indirectly) can protect its rights (§186, COA). Again, it is debatable whether it is Russia’s reluctance to resolve the interstate dispute that obliges the English courts to continue its (actual) consideration and to resolve, among other things, issues of international law. Our doubts about the latter should be resolved by the UKSC.
We will very cautiously assume that the UKSC leans towards this very scenario after the hearings.
No matter what happened, consideration of the issue of duress will inevitably put the court before a choice — which of the states did the right thing, or did Russia commit a violation of international law? It is possible to evaluate the behavior of states, even in the sphere of private law, through the evaluation of a foreign act of state, which is not subject to judicial review according to the English doctrine. On the other hand, rejecting Ukraine’s duress argument only because the court has no right to consider it effectively deprives our state of defense in the dispute. This does not meet the standards of fair justice; therefore, the only way out in a similar situation is a stay—stopping the proceedings.
(3) HCJ Zrada
The last, worst, and least likely option is to overturn the decision of the COA and uphold the summary judgment of the HCJ.
The consequences of such a scenario for Ukraine will be very disappointing: the decision will become legally binding without the possibility of further appeal. We have no doubt that Russia will immediately begin the procedure for its implementation in Europe — the Lugano Convention allows this to be done not only in Britain.
Have you heard how Naftogaz is currently pursuing Gazprom’s assets, seizing accounts and shares in various European countries? Ukraine and its state assets may find themselves in the same situation (we hope that there are not so many of them in Europe).
In addition, in the event of a loss, there are already options for offsetting debts in investment disputes of Ukrainian companies against Russia (for example, the won dispute of Oschadbank over Crimea for $1.3 billion) or in the arbitration dispute between Naftogaz and Gazprom.
We do not really believe in such a scenario and drive away bad thoughts with the lines from the decision of the COA, where the judges smashed to pieces a summary judgment of the first instance. Although, to his credit, Justice Blair also agreed with Ukraine’s argument that the dispute should be considered in a wider than merely economic context (§374, HCJ). At the same time, he tied his own hands, rejected the arguments of Ukraine due to their alleged non-justiciability in the English court, and, in fact, decided the dispute in favor of the Trust before the opponent, deprived of any protection. Throw tomatoes at us if the UKSC supports this position, but we refuse to believe it.
* * *
After reading this text, you may get the impression that Ukraine, which took advantage of $3 billion of debt, is trying to simply jump off it, and all this is not very fair. The story about the $3 billion that Yanukovych took out of Mezhyhirya on trucks is more of a PR for the general public but not an argument that the court will believe (such a question did not even arise in the process). Money does not have individually defined features, and “Yanukovych’s debt” was not issued in marked bills that can be traced to Rostov.
So what does Ukraine dispute? - you may ask.
It is Russia, not the Trust, that should collect the owed amount from Ukraine and be ready to defend its position as a party to the dispute. It is Russia and not its depersonalized Trust that created obstacles to Ukraine’s implementation of the agreement due to aggression in Crimea and Donbas. The court must take this into account when determining the procedure for returning funds and the amount of fines.
The COA was genuinely surprised when Russia did not respond to their question about what it would do if the dispute were not resolved in favor of the Trust. Are they ready to personally file a lawsuit for restitution or illegal enrichment because their money is still in Ukraine? Are they ready to face English justice without the cover of the Trust? “We were not given an explanation for this” (§152, COA).
I wonder why Russia was silent, don’t you?
✍️ Oleksandr Melnyk, Mykola Yurlov
The test was written on Dec 17, 2019 and translated on March 16, 2023
