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English court dismisses 'international law' issues in Ukrainian Eurobond case

Out-Law News | 04 Apr 2017 | 3:03 pm | 3 min. read

Questions of international law raised by Ukraine in a dispute with Russia involving overdue Eurobond repayments cannot be dealt with by the English courts, the High Court has ruled.

Mr Justice Blair granted summary judgment in favour of the trustee of the bonds in the case, effectively finding that Ukraine had no real prospect of successfully defending the trustee's default claim and so avoiding the need for a full trial of the issues it raised in its defence. Ukraine has, however, been granted permission to appeal his judgment.

The judge based his decision on a "fundamental principle" established by previous case law: "that municipal courts have not and cannot have the competence to adjudicate upon or to enforce the rights arising out of transactions entered into by independent sovereign states between themselves on the plane of international law".

"Assessing the trade restrictive measures relied on would inevitably involve adjudication by the court upon transactions entered into between states on the plane of international law," he said. "Effectively, that is what Ukraine seeks to establish as its … defence. The defence falls therefore within the fundamental prohibition."

"Further, assessment of the measures would require interpretation of [certain] treaties/agreements identified by Ukraine. These are not incorporated into English law," he said.

The Law Debenture Trust Corporation, in its role as trustee of the bonds, challenged Ukraine on its default in the English courts as the issuing of the $3 billion bond was governed by English law. The case was brought on the direction of the Russian Ministry of Finance, and the bonds were held on behalf of the Russian Federation.

The bond was issued in December 2013, and Ukraine's finance ministry suspended payments in December 2015. The trustee had argued that the default should be treated as an "ordinary debt claim". Ukraine disagreed, raising a number of arguments including that it had only entered into the bonds in the face of "massive, unlawful and illegitimate economic and political pressure" from Russia.

‘The English court was clear here to distinguish between politics and the substantive claim itself’ said Caroline Hearn, a banking litigation expert at Pinsent Masons, the law firm behind Out-Law.com.

"This case provides useful parameters for understanding what arguments are within the English courts' jurisdiction, and what are subject to international law," she said.

The court heard that the bonds at issue in the case were tradable instruments listed on the Irish stock exchange, constituted by a trust deed and governed by English law. Although tradable in nature, Russia acquired the entire tranche of debt as part of what it announced at the time as its intention to subscribe for up to $15bn of Ukraine debt. Under the terms of the trust deed, Ukraine waived sovereign immunity.

On 18 December 2015, two days before the notes became due, the Ukrainian government approved a moratorium to suspend any payments due under the agreement. No payment has been made since then. In February 2016, the Russian Ministry of Finance ordered the trustee to begin legal proceedings.

The court found that it was not in dispute that the transaction was structured as a standard bond issue. However, it was "not credible to describe this as an ordinary debt claim'", due to the "extraordinary" background to the case. Ultimately, though, although Ukraine had made a "strong case" in its defence, the court had no choice to grant summary judgment in favour of the trustees.

"Ukraine submits that there are compelling reasons to proceed to trial because the claim is in reality a tool of oppression which includes military occupation, destruction of property, the unlawful expropriation of assets, and terrible human cost," Mr Justice Blair said in his judgment. "Ukraine submits that these matters should be the subject of the full rigours of a public trial, and that the summary judgment process is not something to which Russia should be entitled to benefit given its egregious conduct."

"This point was powerfully put by Finance Minister Danyliuk [of Ukraine] in his evidence, and the court has given it careful consideration. However, ultimately, this is a claim for repayment of debt instruments to which the court had held there is no justiciable defence. It would not be right to order the case to go forward to a full trial in such circumstances," he said.