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Ukraine's Defense: Russian Suit Part of a "Broader Strategy of Aggression"

posted by Mark Weidemaier

It has taken several months, but the Russian Particulars of Claim and Ukraine's Defence (akin to complaint and answer in U.S. civil procedure) have now been filed. Distilled to its essence, Ukraine's response, as the Financial Times notes, is that "if you wanted your money back you should not have invaded our country." Or as Ukraine's lawyers put it in the Defence: "The [Russian] claim forms part of a broader strategy of unlawful and illegitimate economic, political and military aggression ... aimed at frustrating the will of the Ukrainian people to participate in the process of European integration." 

Russia's version of events is straightforward and looks like any other debt case: Russia lent the money, Ukraine committed a breach of contract by not repaying. Ukraine, by contrast, will have a harder time translating its defenses into the dry language of legal doctrine. But it can be done. As I have written here at Credit Slips, and in more detail elsewhere, contract law provides Ukraine with a number of potentially viable arguments. Now that we know the arguments asserted by Ukraine, here are some preliminary thoughts.

Duress: Ukraine argues that it only borrowed the money because the Russian government, intent on preventing Ukraine from entering a new Association Agreement with the European Union, took a number of steps in the course of 2013 to politically destabilize Ukraine and disrupt its access to capital markets. These steps included imposing unlawful trade restrictions, threatening to cut off supplies of natural gas, and making unsubtle threats to annex territory and support internal insurrection if Ukraine deepened its ties with Europe. The effect, according to Ukraine, was to deny access to capital markets, effectively driving Ukraine into Russia's arms.

It's... plausible? It seems to me that each of Ukraine's arguments faces two fundamental problems. First, a judge might hesitate to take sides in a dispute over whether Russia has acted wrongfully, say by breaching international law. This isn't an insurmountable barrier; judges do make such rulings. But my intuition is that Ukraine has the greatest chance of success on arguments that can be framed in terms that are (reasonably) neutral on the underlying politics. Second, a judge might want some assurance that a ruling in Ukraine's favor will not have broader, destabilizing implications for other agreements between governments. It isn't yet clear whether this is true of Ukraine's duress argument. Agreements between governments (or the entities they control) are not arms-length, commercial transactions. Russia's conduct was hardly admirable, but was it really so unique? 

Lack of capacity: Ukraine argues that the loan is void because the process by which it was contracted violated Ukrainian law. As an example, the Cabinet Ministers of Ukraine allegedly approved legislation authorizing the loan without following procedural requirements imposed by Ukrainian law. I can't speak to the underlying merits of this argument, but it has the advantage of being purely technical. The court can resolve it without judging Russia's motivations in making the loan or assigning blame for the annexation of Crimea, the conflict in Ukraine's east, etc. On the other hand, even if the defense succeeds, wouldn't there be a presumption that Ukraine must make restitution? Resolving that question might require the court to engage with some of the politically-sensitive question skirted by the lack of capacity defense itself. 

Prevention and Impracticability: For some time, I have been suggesting that Ukraine might prevail on these arguments. This article provides the most detail. The argument under prevention doctrine is straightforward: If one party to a contract makes it difficult or impossible for the other to perform its duties, the latter's failure to perform is excused. Russia's annexation of Crimea, support for armed rebels in the east, and general policy of destabilizing Ukraine's economy has made it impossible for Ukraine to repay, at least while complying with its IMF support program. If one accepts that version of events, the argument is a slam dunk. The problem is that the court will have to weigh in on precisely the kinds of politically-charged questions that (in my view) judges would prefer to avoid. 

The doctrine of impracticability excuses non-performance in certain cases when a post-contract event contradicts a fundamental assumption of the contract and makes it difficult or impossible for one party to perform. Ukraine argues that Russia has damaged its economy, deprived it of access to capital markets, required it to turn to the IMF for support, and in other respects made it difficult or impossible to repay. Again, I have written about these arguments extensively elsewhere. (As an aside, Ukraine frames these arguments as "implied" terms of the contract, in the sense that Russia made "implied" promises--i.e., the contract doesn't actually say this, but we will pretend otherwise--not to deliberately interfere with Ukraine's ability to repay or to demand repayment when impracticable. This is simply a different way of expressing the concepts underlying the doctrines of prevention and impracticability.) 

Breach of obligations under international law: Ukraine makes several arguments based on the claim that Russia's conduct (annexation of Crimea, etc.) violates international law. One is that the contract contains an "implied" promise not to enforce the loan in such cases. A second, related argument is that Russia's violations are such that Ukraine should be able to withhold payment as an appropriate countermeasure (i.e., a sanction, authorized by international law, imposed until Russia starts to comply with international law).

Summary: It should be clear that none of these arguments are slam dunks; far from it. But some are plausible, or even clearly meritorious if--and it's a big if--the court makes the appropriate findings of fact. It's also worth noting that arguments founded on international law might provide a basis for delaying Russia's efforts to enforce the loan. The countermeasures argument is an obvious example. If Ukraine succeeds on this argument, it will be entitled to withhold payment until Russia conforms its conduct to international law. Ukraine doesn't specify all the steps Russia would have to take, but presumably it envisions the cessation of support for pro-Russian rebels in Ukraine's east, the return of Crimea, and other steps that are not likely to happen any time soon. Thus, the countermeasures argument is essentially an argument for permanent non-payment. More subtly, by making arguments founded in international law, Ukraine may create reasonable grounds for delaying this litigation until the outcome of proceedings before other tribunals. As an example, Ukraine has elsewhere asserted that Russia's conduct with regard to Crimea constitutes a violation of the United Nations Convention on the Law of the Sea. It isn't hard to imagine an English court, reluctant to rule on whether Russia has violated international law, delaying proceedings until another tribunal decides such questions. Delays of that sort work in Ukraine's favor.

Comments

What about offsetting the value of property seized (i.e. the Crimea) against the amount of the loan?

If you lend somebody money, then occupy their front garden, beat up their kids and throw stones through their windows, you should lose the right to any claims you may have.

I can't claim any special expertise in international law, but if Russia wants to make this a "straightforward" contract case, so be it. Ukraine may have failed to pay, but Russia's first act was a self-help repossession of noncollateral. Aside from being unlawful and damaging of itself, this act also interfered with Ukraine's ability both to cure the default and perform going forward. Talk about breach of the inherent obligation of good faith and fair dealing.

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