A Less Odious Alternative? A Comparison of Duress and the Doctrine of Odious Debts in the Context of Law Debenture PLC v. Ukraine

Eric Wendorf

Vol. 40 Associate Editor

Can public international law do a better job than private domestic law of adjudicating sovereign debt disputes? In Law Debenture PLC v. Ukraine, the English Court of Appeal determined that the English common law of duress could be applied to a bond contract between Ukraine’s government and Russia’s Ministry of Finance.[1] However, public international law offers another way of resolving this case: the doctrine of odious debts. Although sovereign nations like Ukraine are liable for debts their governments incur, legal theorists have suggested an exception for so-called “odious debts.”[2]  These debts are incurred by despotic rulers for purposes contrary to the general interests or needs of the state.[3] If appealed, Law Debenture v. Ukraine presents a compelling test case for an application of the doctrine of odious debts.[4] Nonetheless, there are significant impediments to application of this doctrine, including a lack of precedent and the limited institutional capacity of domestic courts.

1. Factual Background

In 2013, Ukraine signed a deal with Russia under which it received 3 billion dollars’ worth of bonds from the Russian Ministry of Finance.[5] This agreement sparked political unrest, and Ukraine’s then-president, Victor Yanukovych, was forced out of office. Shortly thereafter, Russia invaded Ukraine, further destabilizing the nation’s economy.[6] When Ukraine defaulted on the debt contract in 2015, Russia sued in English court to obtain payment.[7] Jurisdiction was proper because Russia had structured the loan through publicly-traded Eurobonds with an English choice of law and forum provision.[8] In the subsequent lawsuit, Law Debenture Trust Corporation PLC v Ukraine, Ukraine raised a common law duress defense against the debt contract.[9] It claimed that Russia had coerced Ukraine to enter the agreement by violating jus cogens and threatening Ukraine’s territorial integrity.[10] Judge Blair of the Commercial Court ruled on summary judgement that duress was non-justiciable.[11] The Court of Appeal, however, reversed, holding that duress was properly before the court.

2. Disadvantages of the Court of Appeals’ Duress Rationale

The Court of Appeal’s willingness to apply common law to an international loan agreement raises a few concerns. Most obviously, it is unclear if a common law contract defense can be analogized to international debt disputes.[12] In its brief to the Commercial Court, Ukraine was not able to cite a single case in which courts had recognized duress as a defense to contracts between sovereign nations.[13] The lack of precedent is troubling, because courts might not be competent to apply the doctrine in such a broad manner. Domestic tribunals’ rulings could also be affected by political or cultural bias within the forum state.[14] Secondly, the fact that duress depends on a finding of unfair pressure ex ante creates practical and theoretical difficulties. In the context of Law Debenture, Russia’s 2014 invasion of Ukraine cannot be properly considered as part of a duress defense to the 2013 loan agreement, because a reviewing court can only consider circumstances prior to contract formation.[15] In the event of a trial, Ukraine will have to provide evidence that Russia threatened its territorial integrity at the time it issued the bonds.[16] This is a steep burden of proof and it could create an unmanageable precedent. Inferring coercion from the historical relationship between the two countries, as the Court of Appeal suggested, is a far cry from the typical “gun-to-the-head” duress scenario of common law.[17] If the historical antagonism between two nations is enough to constitute duress, as the Court of Appeal seems to suggest, where can the line be drawn between duress and geopolitical disagreement? Finally, the decision raises economic concerns. Because the loan was structured through publicly-traded bonds, voiding the contract could short-change hypothetical investors.[18] Theoretically, an unwary third party could have purchased the bonds on the Irish Stock Exchange.[19] If the contract is eventually voided, such an investor would lose the value of their investment.[20] This sort of ruling could undermine the sovereign debt market by imposing additional monitoring costs on creditors.

3. The Odious Debt Doctrine as Applied to Law Debenture v. Ukraine

Could the odious debt doctrine do a better job of addressing these concerns? Although the doctrine has not yet been applied to modern debt disputes, commentators have suggested that Law Debenture presents a potential test case.[21]  Victor Yanukovych, Ukraine’s former president, has been accused of corruption and misappropriating funds received in the debt transaction; therefore, there could be a colorable claim that the bonds are an odious debt.[22] Assuming that the doctrine could be applied in this case on appeal, it presents a couple of advantages as compared to duress. First, because the odious debt doctrine has been conceptualized as an ex post analysis, it avoids the practical and theoretical concerns associated with duress’s ex ante approach.[23] In the context of Law Debenture, a court applying the odious debt doctrine would be empowered to consider circumstances after contract formation. These circumstances include the Ukrainian government’s alleged misuse of funds as well as Russia’s 2014 invasion.[24] Allowing the court to consider the totality of the circumstances surrounding the debt could prevent a broadening and distortion of the British common law of duress. Although creditors and third parties would still bear monitoring costs under the odious debt doctrine, the doctrine could be modified to take the pressure off third parties who purchase bonds in good faith. One potential solution, appealing to comparative fault, would allow the government of the debtor nation to avoid liability by proving that the creditor knew or should have known the government they transacted with was despotic.[25] A reviewing court applying this approach to Law Debenture could spread the cost of the invalidated bonds jointly and severally between the at-fault debtor regime (the Yanukovych government) and the at-fault debtor (Russia).[26] In this scenario, Russia would be held responsible for bearing the cost of Ukraine’s invalidated bonds. Although the prospect of such a harsh outcome for creditors might deter investment in sovereign bonds, it would incentivize creditors to do appropriate diligence in transacting with potentially despotic governments.[27] Furthermore, it would have the general benefit of incentivizing leaders and debtors to act in financially responsible ways.[28] Sovereign leaders and creditors will be less likely to incur or issue debilitating debt if they know they will be held personally liable.[29]

4. Drawbacks of the Odious Debt Doctrine

Despite its appeal, however, the odious debt doctrine has significant weaknesses. The doctrine does not eliminate, and potentially exacerbates, the problems of judicial bias. The odious debt doctrine’s vague three-prong standard does not sufficiently constrain judicial discretion in determining whether a debt is in the general interests of the state, and when a regime is despotic.[30] And without a clear standard to guide judges, the doctrine does not eliminate problems of political or cultural relativism that existed in the duress context.[31] A related problem is a lack of precedent in international customary law to support the doctrine.[32] Because the leading authority on odious debts is essentially a Restatement of public international law as it existed in the early 20th century, a court applying the doctrine to Law Debenture would essentially be creating definitive law.[33] Because Russia structured the loans as publicly traded bonds, this task is especially hard. A court might be hesitant to label these bonds “odious debts,” fearing that by penalizing a single case of misconduct, it could jeopardize borrowing agreements the world over.[34] Although the odious debt doctrine presents some advantages as compared to common law duress, private domestic law remains a preferable means of adjudicating sovereign debt disputes. A reviewing court applying the odious debt doctrine to Law Debenture would face the dilemma of creating a new doctrine narrow enough to protect the sovereign market, yet broad enough to encompass Russia’s alleged misdeeds. Unfortunately, because of this tension and common law courts’ fear of acting as lawmakers, the odious debt doctrine will likely remain an untested solution for Law Debenture, as well as future sovereign debt disputes.

[1] Law Debenture Trust Corporation PLC v Ukraine, [2018] EWCA Civ 2026 [2] Lee C. Buchheit et al., The Dilemma of Odious Debts, 56 Duke L.J. 1201, 1203 (2007). [3] See id. at 1204-05; Alexander N. Sack, Les Effets des Transformations des Etats sur Leurs Dettes Publiques et Autres Obligations Financieres [The Effects of State Transformations on Their Public Debts and Other Financial Obligations] 157–84 (1927); see also Arbitration Between Great Britain and Costa Rica (1923) 1 U.N. REP. INT’L ARB. AWARDS 369, reprinted in 18 AM. J. INT’L L. 147, 148 (1924). A further condition is that the lender knows that the proceeds of the debt will not benefit the nation. If a debt is determined to be “odious” the political regime who borrowed the debt, not the nation itself, will be held liable. [4] See Robin Wigglesworth & Kate Allen, UK Ruling Sets Stage for Ukraine-Russia ‘Odious Debt’ Battle, Financial Times (September 5, 2018, https://www.ft.com/content/0149e0a2-bb46-11e8-94b2-17176fbf93f; see also Eric Posner, Mitu Gulati: Ukraine’s Odious Debts, Eric Posner International Law Blog (March 10, 2014, http://ericposner.com/mitu-gulati-on-ukraines-odious-debts/ ) [5] Matt Levine, Ukraine Russia Bonds Get English Trial, Bloomberg Opinion, Sept. ‎17‎, ‎2018,‎ https://www.bloomberg.com/opinion/articles/2018-09-17/ukraine-russia-bonds-get-english-trial) [6] Associated Press, Russia Officially Annexes Crimea Away from Ukraine with a Signature by Vladimir Putin, CBS News (March 21, 2014, https://www.cbsnews.com/news/russia-annexes-crimea-away-from-ukraine-with-signature-from-vladimir-putin/) [7] Law Debenture Trust Corporation PLC v Ukraine, [2018] EWCA Civ 2026 [8] Id. at ¶ 175. Although Russia was the de facto creditor, the bonds were held by a British trustee and listed on the Irish stock market. [9] Law Debenture Trust Corporation PLC v Ukraine, [2017] EWHC 655 (Comm) [10] Law Debenture, at ¶ 175; Kamrul Hossain, The Concept of Jus Cogens and the Obligation Under the U.N. Charter , 3 Santa Clara Journal of International Law, 72, 73 (2005). (“Jus cogens, the literal meaning of which is ‘compelling law,’ is the technical term given to those norms of general international law that are argued as hierarchically superior.  These are, in fact, a set of rules, which are peremptory in nature and from which no derogation is allowed under any circumstances.”) [11] Law Debenture Trust Corporation PLC v Ukraine, [2017] EWHC 655 (Comm). [12] See Matt Levine, Ukraine Russia Bonds Get English Trial, Bloomberg Opinion, Sept. ‎17‎, ‎2018,‎ https://www.bloomberg.com/opinion/articles/2018-09-17/ukraine-russia-bonds-get-english-trial) [13] Law Debenture, [2017] EWHC 655 at ¶ 180 (“No authority was cited in which the doctrine of duress had been invoked by a state as regards a contract entered into by the state.”) [14] Matt Levine, Ukraine Russia Bonds Get English Trial, Bloomberg Opinion, Sept. ‎17‎, ‎2018,‎ https://www.bloomberg.com/opinion/articles/2018-09-17/ukraine-russia-bonds-get-english-trial) [15] See Joseph Chitty, Chitty on Contracts (H.G. Beale eds., 32d ed., 2015), § 8-001 (“In outline, a party may be able to avoid a contract for duress where he or she entered it because of a wrongful or illegitimate threat or other form of pressure by the other party, normally because the threat or pressure left him or her with no practical alternative.”) [16] Law Debenture, [2028] EWCA Civ 2026 at ¶ 164 [17] Id. at ¶ 166 [18] Matt Levine, Ukraine Russia Bonds Get English Trial, Bloomberg Opinion (Sept. ‎17‎, ‎2018,‎ https://www.bloomberg.com/opinion/articles/2018-09-17/ukraine-russia-bonds-get-english-trial) [19] Id. [20] Id. [21] Anna Gelpern, Ukraine’s Odious Bonds: Part I, Real Time Economics Watch: Peterson Institute for International Economics (March 14, 2014, https://piie.com/blogs/realtime-economic-issues-watch/ukraines-odious-bonds-part-i) [22] Shaun Walker and Oksana Grystsenko, Ukraine’s New Leaders Begin Search for Missing Billions, The Guardian (Feb. 27, 2014 https://www.theguardian.com/world/2014/feb/27/ukraine-search-missing-billions-yanukovych-russia) [23] See Sarah Ludington et. al., Applied Legal History: Demystifying the Doctrine of Odious Debts, 11 Theoretical Inq. L. 201, 247-81 (2010) (“Taft’s reasoning in Tinoco effectively rejected an ex ante labeling approach to the problem of odious debts”) [24] Robin Wigglesworth & Kate Allen, UK Ruling Sets Stage for Ukraine-Russia ‘Odious Debt’ Battle, Financial Times (5September 2018https://www.ft.com/content/0149e0a2-bb46-11e8-94b2-17176fbf93f; see also Eric Posner, Mitu Gulati: Ukraine’s Odious Debts, Eric Posner International Law Blog (March 10, 2014, http://ericposner.com/mitu-gulati-on-ukraines-odious-debts/ ) [25] See Omri Ben-Shahar & Mitu Gulati, Partially Odious Debts?, 70 Law and Contemp. Problems 47, 49-50 (2007). [26] See id. at 61 (“[A]s a defense to the strict liability of the borrower, creditor liability is based on negligence-that is, on the demonstrated failure of the creditors to take due care. The reason why creditors’ liability ought to be based on negligence (and not be strict) has to so with the purpose of such liability: to induce care, not to shift the cost of the activity.”) [27] See id. at 49 (“[O]ften creditors are better situated than the populace to protect against harm of insolvency.”) [28] Id. at 57 (“Outside states, however, and the international community at large, do not have enough of an incentive to police domestic despotism.”) [29] Michael Kreemer & Seema Jayachandran, Policy Brief 103: Odious Debts, The Brookings Institution (https://www.brookings.edu/research/odious-debt/) (2002). [30] Adam Feibelman, Contract, Priority, and Odious Debt 85 N.C. L. Rev. 728, 758 (2007) (“Determining when a sovereign and its citizens received value or benefit from any particular transaction would obviously present a challenge.”) [31] See Lee C. Buchheit et al., The Dilemma of Odious Debts, 56 Duke L.J. 1201, 1228-29 (2007) (Odiousness — whether of regimes, individuals or certain cooked green vegetables — is a subjective concept. But in this context, it dangerously invites ethnocentrism. [32] See id. at 1230 (“Even the advocates of an odious debt doctrine might hesitate before claiming that it is now part of the “general and consistent practice of states.”) [33] Id. [34] Anna Gelpern, Ukraine’s Odious Bonds: Part I, Real Time Economics Watch: Peterson Institute for International Economics (March 14, 2014, https://piie.com/blogs/realtime-economic-issues-watch/ukraines-odious-bonds-part-i) (“On these criteria, President Putin’s eleventh-hour advance looks like a decent case for repudiation—but so does other borrowing by Yanukovych and billions of dollars in dictator debts the world over.” The views expressed in this post represent the views of the post’s author only.