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More Thoughts on Ukraine

posted by Mark Weidemaier

Having had a few days to digest the ruling awarding summary judgment to the trustee (suing at the direction of the Russian government), I wanted to elaborate on my earlier thoughts about the court's reasoning. As Anna points out, the ruling may be appealed, and in any event the dispute will not be settled for some time. But the recent ruling may be the most significant to come out of the case, so it's worth talking about in a bit more detail. I have already described the defenses Ukraine raised in response to the lawsuit, so I'll skip those details here. In brief, however, Ukraine argued that the loan was made under duress, that the government lacked capacity to enter it, and that the loan included implied terms equivalent to the doctrines of prevention or impracticability--i.e., that Russia implicitly promised not to seek repayment if its own conduct (annexation of Crimea and military intervention in the east) made it difficult or impossible to repay.

The duress argument always struck me as odd. The defense would have required a showing that Russia made wrongful threats that gave Ukraine no reasonable alternative but to assent to the loan. The first of those elements would have required the court to opine on the legality of Russia's conduct, which it was understandably reluctant to do. And in fact, the court ruled the defense was non-justiciable precisely to avoid having to engage this question. But the second element--no reasonable alternative--is also a challenge. To find that Ukraine was forced into the loan, the judge would have had to overlook or explain away some rather inconvenient facts. Given the procedural posture of the dispute, the judge was obliged to accept the truth of Ukraine's factual assertions, and there is plenty of evidence that the Russian government was playing hardball to disrupt Ukraine's ties to the rest of Europe. But there is also evidence that the two governments negotiated over the terms and structure of the loan, and active negotiation is hardly the hallmark of duress. There is also the fact that Ukraine actually made coupon payments and thus arguably ratified the loan even if it was initially the product of duress. All in all, I'm a bit puzzled that this defense featured so prominently in Ukraine's papers.

I don't have much to say about the judge's rejection of the lack of capacity defense. The judge's reason was that sovereign states always have the capacity to borrow. True, the agents responsible for the transaction may not have had the authority to incur the debt. But the important question, in the court's eyes, was whether the Minister of Finance had the "ostensible" or "usual" (i.e., apparent, as opposed to actual) authority to enter the loan. The judge found that the minister had such authority.

I am most perplexed by the part of the ruling rejecting the argument that an "implied" term of the loan was that Russia would not prevent Ukraine from repaying it. As explained in my last post, even though the judge acknowledged that Russia was controlling the Trustee's actions and would be the beneficiary of any payments (p. 66), he ruled that defenses of this sort can't be asserted when the loan is represented by a tradable market instrument. This doesn't make much sense to me. To draw an analogy to the Uniform Commercial Code: A person who meets the definition of a holder in due course takes the instrument free of competing ownership claims and most defenses to payment. But the fact that an instrument might be transferred to a holder in due course doesn't negate defenses when asserted against someone who does not meet the definition. And what possible argument could there be for such a rule? The court's answer is that "the question of the implication of the terms has to be decided at the time of contracting." But this is pure formality. Russia has not transferred the notes--in part, because continuing to hold them has allowed it to play both sides of the street with regard to whether the loan constitutes an official debt. Sure, the law wants to protect innocent purchasers of tradable instruments. But how does it advance that goal to allow an original lender to insist on repayment despite its own culpability? 

To frame the issue a bit differently, suppose that Holder 1 transfers notes to Holder 2, which has no knowledge of any possible defense to payment. Now suppose Holder 2 thereafter decides to fund a private army, which invades the obligor and destroys its ability to pay. I find it hard to believe that English or any other courts would allow Holder 2 to sue to enforce the notes, on the theory that there was no "implied term" forbidding it to demand payment in such circumstances. If Ukraine's version of the facts is taken as true (as it must be at this procedural stage), it isn't clear to me how the Russian government is any differently situated. 


How politized would this legal fight be? I mean, the Argentine pari passu court saga was very obviously politicized (with judge Griesa very openly saying that had the country been ruled by different people he may never have ordered ratable payments; pari passu meaning-interpretatin was thus entirely determined by the nature of the debtor´s political behaviour).
But with Russia the plot thickens. In the case of Kirchnerite Argentina the political lines were clear: leftists were rooting for the debtor, non-leftists were not rooting for the debtor. But nowadays we see a lot of leftists (including people who were let´s say not unfriendly towards the Soviet Union and the Communist Block in the past) savagely criticizing Russia at every step. In the US, you basically can´t these days be a Democratic Party supporter unless you are openly anti-Russia. But in Europe, to be a lefty still implies being for Russia (less and less so though, as the left moves closer to Islamic folks), while Ukraine is certainly seen as a "fascistic" place. By contrast, thus, to be European right wing would mean seeing Russia with suspicion (while conservatives in the US may be more accommodative towards Russia).
If politics have played-are to play any role in this particular legal case, the lines seem much more blurred than with Argentina (in Griesa´s parlance, who would be the obviously recalcitrant party now?)

I think the Judge in this case rightly chose to apply contract law in a way that favors global liquidity and the continued operation of debt markets over the geopolitical turmoil between two countries.

This blog post seems to sweep aside as “mere formality” the materiality of the fact that these loans were negotiated and priced as marketable bonds. In the hypo given in the last paragraph, I WOULD believe that even after a military attack rendering a government hard-pressed to make good on its outstanding public debt, that country nevertheless would still have an outstanding obligation to honor its previously issued debt to ANY holder of the security, even the source of the military attack (of course the attacking country may be subject other sanctions but I think on contract grounds it would be free to clip coupons or participate in restructuring like any other bondholder). To me, it’s the alternative that would seem wrong; X can’t collect on a bond he holds, whereas if X sells to Y, Y can collect? Negotiable markets don’t discriminate; money plays.

It’s true that Russia’s decision to hold the bonds seems to be motivated by a desire to opportunistically treat the debt as both private and official. If there’s a winning approach by Ukraine on appeal, I think it will have something to do with emphasizing the bad faith/opportunistic dealings of Russia on this front.

Is there a legal doctrine that says that certain defenses, such as prevention, do not apply if an instrument is tradable? And that too when the instrument has not been traded yet?

[This kind of question must come up with stuff like stolen art]

Plus, there was a strong interest for Russia (its Sovereign Wealth Fund to be precise) to keep the debt in its hands since its ability to enforce (it has tanks) is going to be much higher than that of the average secondary purchaser.

How much does the foreseeability of the eventual conflict affect the "implied" term of the loan? Putting aside the instrument, if both parties could reasonably foresee the possibility that Russia and Ukraine might have a dispute resulting in armed conflict affecting Ukraine's ability to pay, would that make a difference?
Would that mean that the 'risk' of Russian interference however small or large would have been accepted as part of the negotiations by Ukraine as the borrower? Could a sovereign ever accept such an allocation?

I don't doubt the factual reality, that the Ukrainians don't have a strong "duress" defense, but this line struck me as difficult to square with the defense.

"But there is also evidence that the two governments negotiated over the terms and structure of the loan, and active negotiation is hardly the hallmark of duress."

I understand that this language suggests that negotiation merely implies (or is evidence) that there wasn't duress, but at the same time, can't duress be used to force a party to come to the table? We surely can't expect a party forced to the table, so to speak, to stop negotiating for the best deal under the circumstances. In this case, given the immense discrepancy in resources, especially in energy, it seems somewhat difficult to imagine a classically fair negotiation and acceptance. It seems that for duress to work, the Ukranians had to show "Russia made wrongful threats that gave Ukraine no reasonable alternative but to assent to the loan." This seems to be (perhaps) an unworkably narrow rule. Should we broaden duress as a doctrine for cases like this where, as poster MG says, one party has tanks and surely doesn't need to remind the other party of that for it to be an influence on the "negotiation"? Or should we continue to rely on other doctrines to find ways to mitigate that kind of influence? Or should we just let countries with tanks do what they want in contract law and try to limit these types of agreements through other means?

"There is also the fact that Ukraine actually made coupon payments and thus arguably ratified the loan even if it was initially the product of duress"

Could you elaborate on this? I am but a humble 1L, but it seems odd to count cooperation against a duress defense--isn't being forced to cooperate (make the payments) the hallmark of duress? I would agree with you that open negotiation of terms seems to contradict a claim of duress, but treating cooperation as a duress-killer ex ante seems like a strange rule. Is the argument that essentially they were not required to cooperate at that point and chose to do so anyway?

"he ruled that defenses of this sort can't be asserted when the loan is represented by a tradable market instrument. "

What implications does this ruling have in increasingly regulated global trade markets? M.G. astutely points out one example of a non-tradeable instrument might be stolen art. But it seems like administrative agencies, such as the World Trade Organization, are being increasingly vested with the ability to make certain types of debt instruments practically non-tradeable. See: http://www.reuters.com/article/us-usa-trump-trade-wto-idUSKBN1685U5

Does this ruling set a precedent for countries with weaker economies to be strong-armed by groups of world trade leaders, then have legitimate contract defenses removed from their arsenal by supposedly neutral courts?

Thanks for the fascinating posts!

Meddlin Medin (the humble 1L) has a good point it seems. Perhaps the fact that there was cooperation in the form of coupon payments is a sign of further duress.

But, in terms of the application of the duress doctrine, how relevant is the availability of other market options. Sovereign borrowing occurs on a thick and highly liquid market (with lots of options for the borrower -- bonds, loans, IMF, World Bank, structured finance blah blah). Duress seems to be a doctrine that should apply when there are no real options (a hold up problem, in economic terms). It is hard for me to see how Ukraine didn't have other borrowing options here.

When Ukraine took the Eurobond notes, didn't it assume the risk that some event, either foreseeable or not, could render the country unable to pay back the debt as planned? And thus, do you think the court have investigated whether there was any bad-faith on Russia's part in Crimea or towards the Ukraine (political and/or economic pressure) to intentionally make the debt more difficult to pay back (while incurring interest)? Do you think the court should have taken a firmer stance on the Russia conduct?

Would reference to the doctrine of Impossibility not work better for Ukraine than its use of impracticability here? It seems more applicable at first glance, since impossibility is made to help a party (Ukraine) be excused for the nonperformance of duties when circumstances- the nonoccurence of which being an underlying assumption of the contract- change in a way that materially affects the performance of a duty. So doesn't this line up with Ukraine's argument that it was implied that Russia wouldn't hinder its ability to repay, which it did here?

I see this goes back to the issue you pointed out about not wanting to injure innocent transferees. But is it actually likely that there will ever be "innocent transferees" in this case at any point?

I understand why the court would be reluctant to "opine on the legality of Russia's conduct," but it sounds odd for a court to avoid this issue in context of a loan agreement between two countries. If a country engages in a loan agreement with another, it has implicitly agreed to allow courts to scrutinize its behavior insofar as it affects its obligations. Furthermore, it seems relevant that Russia filed suit against Ukraine. Can a court agree to enforce a contract, but refuse to grapple with evidence that a party to that agreement has behaved opportunistically? Aren't political questions the kind of questions the court answers with every case in this field?

What can, and what should, a court (or maybe contract law as the correct institution) do to account for tense political realities? There seems to be a huge tension between wanting to encourage the international bond market and recognizing harsh political conditions that have important humanitarian consequences. Should the law reflect any tolerance for extreme situations beyond the doctrines already at play?

How do we resolve the tension between deciding the current issue between the two parties at hand and the possibility in this case of having an impact on future parties. Here there seems to be some value to the notion that this agreement was a tradable option and not a direct loan. With a tradable option we have the possibility that other parties may come in to the dispute and thus we should take into account 3rd party interest with the proposed rule. However there was no transfer here, so how do we weigh resolving the conflict at hand and the fact that we think this decision was wrongly decided between the two parties (because there was no transfer) vs. the fact the decision could be correct in establishing a precedent that will be beneficial to future parties when it is possible they will never be involved?


I agree that the "implied" term argument seems like a sound one and was surprised to see it rejected by the court. It seems obvious from an ex ante perspective that a lender and borrower negotiating in good faith both would intend for the borrower to pay back its debt on-schedule and unimpeded. Where a lender makes it impossible for the borrower to uphold that bargain, it only seems logical that the lender would be estopped from then claiming the borrower breached the contract and reaping the benefits. This might be different if the lender was no longer the party benefiting from holding the borrower accountable, but here that is not the case. It seems to me that the court is providing a rule that rewards Russia for acting opportunistically and that would encourage similar behavior in the future.

Do you expect that the ruling of the court on this issue will stand, or do you think that the "implied" term argument might be more successful if appealed?

To build on MD and AF’s excellent points, is there a sense that the ‘implied terms’ defense was necessarily rejected due to the tribunal’s refusal to engage the duress defense? If inquiring into the possibly coercive nature of Russia’s conduct would invite a non-justiciable issue regarding its legality, the tradability issue is just a necessary sidestep (and why pure formality). It seems that Russia’s "have its cake and eat it too" approach to the private/public character of the loan, in conjunction with its conduct implicating international law, acceptably foreclosed contract defenses that would otherwise have been available to Ukraine (and might be a reason it argued duress when it might have wanted to argue fraud?). Are we incentivizing nations to commit acts of international legal significance to preclude the application of contract law in a dispute, and/or are we delaying legal assessment of these acts by hiding behind contract disputes?

"All in all, I'm a bit puzzled that this defense featured so prominently in Ukraine's papers."

On this point about duress, perhaps the reason that Ukraine relied heavily on that defense in its papers was to appeal to those of us who are not so entrenched in contract doctrine. It seems that this dispute facially appears to be Russia, again, invading Ukraine. This time around it's just by way of its coffers. Of course, tugging at the heartstrings isn't supposed to work in a court - but that's why Ukraine included the other defenses you mentioned. Yet if some broad stroke reporting is done about this dispute, in a less sophisticated fashion than found the Financial Times, a gripping, ongoing theme to this story is that Russia takes advantage of Ukraine. People care about that.

I wonder if Ukraine did this intentionally to garner (even more) support in the court of public opinion, even though it probably knew "the doctrine of duress" would not be its strongest leg to stand on. In issues of sovereign debt and the like, how does public opinion / perception affect judicial outcomes or considerations?

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