More Thoughts on Ukraine

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.