« Levitin's Consumer Finance: Markets and Regulation | Main | Excuse Me? »

Ukraine Wins Appeal in Russian Bond Case

posted by Mark Weidemaier

Ukraine and Russia have been battling it out in English courts over whether Ukraine must repay a $3 billion Russian loan from 2013. The loan was unusual both in structure and in substance. For example, although essentially a bilateral loan, it was structured as a tradable Eurobond and held by the Russian sovereign wealth fund. The indenture trustee has been suing to enforce the loan. In March 2017, the High Court of Justice granted summary judgment for Russia. Although Ukraine had a number of plausible defenses to enforcement of the loan, the judge rejected them all. Here's Bloomberg, with coverage of that decision and of the ensuing appeal. Today, the Court of Appeal reversed that decision, sending the case back for discovery and a trial. Here's the decision, which Russia will appeal according to this Financial Times report.

Perhaps the most noteworthy aspect of the appeal is why Ukraine won. Among other arguments, Ukraine argues that the loan was the product of duress--an argument that requires it to show that the loan resulted from illegitimate pressure applied by the Russian government. I have been skeptical of this argument, in part because my sense is that national judges would prefer not to rule on the legitimacy of Russia's conduct with regard to Ukraine. And indeed, in granting summary judgment for Russia, Mr. Justice Blair ruled that this question was non-justiciable. However, the Court of Appeal disagreed, sending the case back for trial on the duress issue, seemingly with directions to judge Russia's conduct against standards supplied by international law:

It is true that Russia and Ukraine are sovereign states, which means that the test for what might count as morally or socially unacceptable in the context in which they interact with each other is not the usual one appropriate to relations between private parties... Although moral and social standards are more attenuated in the relations between states on the international plane than is the case in a purely domestic commercial context, international law sets out reasonably determinate standards of conduct applicable between states on the international plane. In our view, there is no reason why the law of duress should not treat these as providing an appropriate test of illegitimate pressure in the present case (par. 160).

A couple of other noteworthy aspects of the Court of Appeal's opinion:

  • On whether Ukraine, if ultimately successful, must pay restitution: A party who avoids a contract on the basis of duress may have to return any benefits it received from the contract. This isn't always required, however, and there are substantive reasons why it might not be required here, given Russia's conduct. In a seemingly-offhand, but pointed, comment, the Court of Appeal added a procedural reason for denying restitution. Russia had not "brought an alternative restitutionary or unjust enrichment claim to recover the US$3 billion which was paid to Ukraine, should it transpire that the Notes are vulnerable to being avoided as a contract on grounds of duress."
  • The no set off clause: The loan contract forbids Ukraine to set off amounts owed by Russia against the $3 billion due under the bonds. The Court of Appeal correctly noted that this clause would not apply if Ukraine wins on its duress argument, implying that, because of this, it wouldn't do Russia much good to assert a claim in restitution anyway. (Even if it owed restitution, Ukraine could use one of its many claims against Russia as a set off.)
  • Potential for a stay: If the Court of Appeal's decision is upheld on appeal, the dispute will go back for a trial. That means judicial proceedings related to the case will continue for a long time, potentially years. But we could be in for a long delay even if Russia successfully appeals the duress ruling. That's because of a separate ruling by the Court of Appeals (beginning at par. 182 in the linked opinion). The court concluded that, if English courts indeed lacked power to adjudicate Ukraine's duress defense, then the right thing to do would be to stay further proceedings. After all, it isn't very sporting for Russia to argue that English courts must enforce its contract rights while refusing to consider Ukraine's defenses. That's especially so when there are alternate forums available in which all of the issues could be resolved together. The two states could agree, for instance, to submit the dispute to the ICJ.

Anyway, the decision is big news. If nothing else, it buys Ukraine additional time, potentially a lot. And it paves the way for a sensational trial, in which the key issue will be whether Russia acted unlawfully in making the loan. I suspect it also marks the last time we will see government-to-government loans structured as ordinary Eurobonds enforceable in national courts. In a sense, Russia is getting exactly what it asked for: a loan treated like any other commercial loan. But of course, that's not really what Russia wanted. What it wanted was to have the benefits of both official and private creditor status, without the downsides of either.


An interesting development given the current icy relationship between GB and RUS.

In regards to Ukraine's duress claim, you previously wrote that your "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."

In light of recent geopolitical developments, will the courts be more amenable to politically-tinged arguments?

Ted Edwards: It is interesting to speculate, for sure. Certainly the Russian government isn't trying too hard to make friends in London... And you're right that the judges were more willing to tackle the underlying politics than I had expected. If this goes to trial, it will be hard to avoid those arguments now.

Thanks for this Mark, my question is also on paragraph 160, how does this relate to 'odious debt' arguments? Is the question of duress entirely separate (whereas from my understanding the capacity questions relate more to that)?

Max: Neither is really about odious debt, though the loan to the Yanukovich government has some of those hallmarks. Unlike odious debt, for example, duress doesn't ask about the legitimacy of the borrower government or whether the loan was used to advance citizen welfare.

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.