In the Law Debenture Trust Corporation Plc v Ukraine [2023] UKSC 11; [2023] WLR(D) 127, SC(E) (Lord Reed PSC, Lord Hodge DPSC, Lord Lloyd-Jones, Lord Kitchin JJSC, Lord Carnwath) the debenture holders sued Ukraine for moneys owing under certain debenture notes. Ukraine defended the claim, inter alia, on the basis that it had no inherent capacity to enter the transaction, only harbouring such powers as its constitution and laws provided. The UK Supreme Court concluded that Ukraine did not garner legal personality by the law of Ukraine – including its constitution and other local laws which allegedly impacted upon its ability to enter transactions such as that sued upon – but rather by domestic recognition under international law. The court wrote that “a recognised foreign state does not lack capacity to make and perform a contract governed by a system of municipal law, irrespective of the provisions of its own domestic constitution and laws.”
Four members of the Supreme Court of the United Kingdom wrote:
1. The Law Debenture Trust Corporation plc (“the Trustee”), a company incorporated in England and Wales, is the trustee of Notes with a nominal value of US$ 3 billion, maturing on 21 December 2015, and carrying interest at 5% per annum through maturity (“the Notes”). The Notes were issued by Ukraine represented by its Minister of Finance, acting upon the instructions of the Cabinet of Ministers of Ukraine (“the CMU”), and constituted by a trust deed dated 24 December 2013, to which the parties were the Trustee and Ukraine (“the Trust Deed”). The Trust Deed is governed by the law of England and Wales, with the courts of England and Wales having exclusive jurisdiction (subject to the Trustee’s right of election to arbitrate, which has not been exercised). The sole subscriber of the Notes was the Russian Federation. Although the Notes were tradeable, the Russian Federation has retained the Notes since their issue.
2. Ukraine’s pleaded case is that the Notes are voidable (and have been avoided) for duress. Ukraine contends that the Russian Federation applied massive unlawful and illegitimate economic and political pressure, including threats to its territorial integrity and threats of the use of unlawful force, to Ukraine in 2013 to deter the administration led by President Yanukovych from signing an Association Agreement with the European Union (“the Association Agreement”) and to induce acceptance of the Russian Federation’s financial support instead, in the form of the Notes. Following the decision by Ukraine not to sign the Association Agreement, protests in Ukraine grew and ultimately President Yanukovych fled, reportedly on 21 February 2014. Shortly afterwards, the Russian Federation invaded Crimea and purported to annex it. Ukraine maintains that the Russian Federation has since supported separatist elements in eastern Ukraine and has interfered militarily and succeeded in destabilising and causing huge destruction across eastern Ukraine. The court has not been asked to consider events subsequent to the hearing of this appeal, which was concluded prior to Russia’s invasion of Ukraine in February 2022.
3. The Trustee does not accept Ukraine’s pleaded case in this regard. The Trustee maintains that in any event, even if Ukraine’s account of what has occurred were accurate, it would be irrelevant to a debt obligation governed by English law, such as that which is the subject of the present appeal.
4. Ukraine also maintains that it lacked capacity to enter into the Trust Deed and issue the Notes, and that the Trust Deed was signed and the Notes were issued by the Minister of Finance in the absence of actual authority under Ukrainian law to do so. It contends that:
(1) Ukrainian law imposed a limit, in the Budget Law of 2013, in relation to Ukraine’s external borrowing during 2013 and the issue of the Notes caused that limit to be exceeded.
(2) An expert opinion required for the CMU to deliberate validly was not provided to the Ministers of the CMU at the time when the borrowing was approved in the course of a meeting on 18 December 2013.
(3) The CMU invalidly delegated consideration of some material terms of the Notes to the Minister of Finance.
The Trustee does not challenge those factual allegations for the purposes of the summary judgment application which is the subject of the present appeal.
…
16. Ukraine submits that it had no capacity to issue the notes because of flagrant breaches of fundamental requirements of Ukrainian constitutional law governing the manner in which the government may bind Ukraine to contractual relations, which rendered the ensuing transaction a nullity as a matter of Ukrainian law. It submits that a state does not have unlimited capacity to contract in breach of its own constitutional law and that, if a state is denied a defence of lack of capacity under its constitutional law, the outcome of a claim may be determined solely by the venue in which the litigation is heard. It submits that such an approach would reflect an outdated conception of the nature of a state when entering into a commercial contract under municipal law and would impose that conception on all states irrespective of their constitutional arrangements. Furthermore, it would involve an absence of comity or respect to states that choose to limit the power of those holding office in the state from time to time. In Ukraine’s submission the rule of law requires that powers are exercised by a state only insofar as they fall within the scope of its constitution.
17. Ukraine’s capacity defence is based on two strands of Ukrainian law which, it maintains, constrained its contractual capacity. First, it was prohibited from borrowing more from external sources than the limits specified in the then-current Ukrainian Budget Law of 2013. It maintains that the purported bond issue exceeded the mandatory borrowing limit specified in the Budget Law of 2013. Secondly, it submits that Ukraine’s Constitution imposes additional restrictions on the means by which Ukraine may agree to borrow money. The CMU only has power to approve borrowing in accordance with certain constitutional and administrative law principles and rules of conduct, including its own Procedural Rules. Relying on the evidence of its expert, Professor Butler, it submits that there were breaches of those requirements in at least two respects. In breach of mandatory requirements, the CMU was not provided with an obligatory expert opinion regarding the draft Decree. In addition, the CMU was not aware of and did not consider all the material terms of the proposed borrowing as was legally required. For the purposes of summary judgment, the Trustee did not dispute Ukraine’s case that, as a matter of Ukrainian law, these would be breaches which would deprive Ukraine of contractual capacity with the result that the contractual arrangements were a nullity.
(1) Personality and capacity of states in international law
18. Ukraine is a sovereign state and as such it is a subject of international law and possesses legal personality in international law. Sir Robert Jennings and Sir Arthur Watts explain (Oppenheim’s International Law, 9th Ed (1992, reprinted 2011), at pp 119-120) that states are the typical international persons in the sense that it is the rights, duties and powers normally possessed by states which are together regarded as constituting “international personality of the fullest kind” (p. 120). A condition for the existence of a sovereign state is that there must be a sovereign government.
“Sovereignty is supreme authority, which on the international plane means not legal authority over all other states but rather legal authority which is not in law dependent on any other earthly authority. Sovereignty in the strict and narrowest sense of the term implies, therefore, independence all round, within and without the borders of the country.” (at p 122)
19. A subject of international law is a legal person in that it is capable of possessing rights and duties in international law. However, personality must be distinguished from capacity. The fact that an entity is clothed with personality in international law does not, of itself, say anything about which capacities it possesses. Professor D P O’Connell explains that if an entity is recognised as having the capacity which it claims to have “it means that a series of acts performed by the entity in question in the field of international affairs are allowed to be legal acts, and the entity is admitted to have the capacity to perform them. Capacity implies personality, but always it is capacity to do those particular acts. Therefore ‘personality’ as a term is only shorthand for the proposition that an entity is endowed by international law with legal capacity.” (O’Connell, International Law, 2nd ed (1970), 81, original emphasis).
A sovereign state, by contrast with certain other subjects of international law, enjoys the fullest capacity afforded by international law. In the Reparations for Injuries Suffered in the Service of the United Nations case [1949] ICJ Rep 174 at p 178, the International Court of Justice (“ICJ”) concluded that the United Nations is an international person capable of possessing international rights and duties and that it has capacity to maintain its rights by bringing international claims. Contrasting the capacities of the United Nations with those of a state, the ICJ observed:
“It must be acknowledged that its Members, by entrusting certain functions to it, with the attendant duties and responsibilities, have clothed it with the competence required to enable those functions to be effectively discharged. … Whereas a State possesses the totality of international rights and duties recognised by international law, the rights and duties of an entity such as the Organisation must depend upon its purposes and functions as specified or implied in its constituent documents and developed in practice.” (at pp 179, 180, emphasis added)
(2) Personality and capacity of states in English law
20. While international law governs questions as to the personality and capacity of states on the international plane, it says nothing concerning the personality or capacity of states to act on the domestic plane. In the United Kingdom it has been established since the nineteenth century that questions of the personality and capacity of a foreign state to act within the municipal law of the United Kingdom depend on the attitude of the executive. If a body politic claiming to be a state is not recognised as such by His Majesty’s Government, courts in this jurisdiction regard it as non-existent and deny efficacy to its institutions, law and activities (subject to possible exceptions in matters of a purely private nature). It does not exist as a legal person before the municipal courts. (See F.A Mann, “The Judicial Recognition of an Unrecognised State”, (1987) 36 ICLQ 348; Shaw, International Law, 9th ed (2021), pp 398-409.) By contrast, where the entity is recognised as a state by the executive, it is regarded as having the status of a legal person for the purposes of domestic law in this jurisdiction.
21. Dr Geoffrey Marston, in his magisterial survey of the development of the law on this subject, The Personality of the Foreign State in English Law (1997) 56 CLJ 374, explains that “it is executive recognition which creates capacity for a foreign State to act at the plane of English law” (at p 405). He explains that, whereas previously most states were monarchies which permitted a sovereign monarch to be recognised as having personality, it was the emergence of non-monarchical bodies politic in early nineteenth century litigation which was the factual trigger for the English courts’ acknowledgment of foreign states as legal persons (p 415).
22. The issue was resolved in 1867 by the decision of the Court of Appeal in Chancery in United States of America v Wagner (1867) LR 2 Ch App 582. The United States of America sought to sue in its own name for an account and for recovery of movable property in this jurisdiction. The defendants filed a demurrer maintaining that the plaintiff ought to be represented by either the President or some other individual member of the government. The Court of Appeal in Chancery overruled the defendants’ demurrer, emphasising that by its terms the court was bound to take judicial notice of the existence and title of the United States of America as a sovereign power. Lord Chelmsford LC said (at p 587):
“In a monarchy all the public rights and interests of the nation are vested in, and represented by, the monarch. In a republic they are the property of the state. When a foreign monarch sues in the Courts of this country it is not as the representative of his nation, but as the individual possessor of the rights which are the subject of the suit. Why should a republic be precluded from asserting in its own name, similar rights vested in it?”
Turner LJ said (at p 591):
“The right of a foreign state which has been recognised by Her Majesty, whether it be a monarchy or a republic, to sue in the Courts of this country for public property belonging to the state, has not been, and cannot be, denied.
Lord Cairns LJ said (at pp 593-594):
“The sovereign, in a monarchical form of government, may, as between himself and his subjects, be a trustee for the latter, more or less limited in his powers over the property which he seeks to recover. But in the Courts of Her Majesty, as in diplomatic intercourse with the government of Her Majesty, it is the sovereign, and not the state, or the subjects of the sovereign, that is recognised. From him, and as representing him individually, and not his state or kingdom, is an ambassador received. In him individually, and not in a representative capacity, is the public property assumed by all other states, and by the Courts of other states, to be vested. In a republic, on the other hand, the sovereign power, and with it the public property, is held to remain and to reside in the state itself, and not in any officer of the state. It is from the state that an ambassador is accredited, and it is with the state that the diplomatic intercourse is conducted.”
23. Dr Marston observes that all three judges seem to have considered that, leaving aside the demurrer, a recognised non-monarchical state was a legal person at the plane of English law. He notes that United States of America v Wagner did not expressly determine that a state was a legal person in the eyes of English courts, but merely that, assuming that it was, it could sue in the name in which it was acknowledged by the United Kingdom executive. Nevertheless, the proposition that a recognised state, or at least a recognised non-monarchical state, was a legal person was thereafter unchallenged, and foreign republics regularly appeared in litigation (Marston at p 404). In the result, therefore:
“The courts left to the executive the tasks of determining both the criteria of statehood and whether such criteria were fulfilled. Where the executive had decided to recognise a foreign body politic as a State the courts regarded it thereafter as a legal person, notwithstanding that in Page-Wood V-C’s words, [in Prioleau v United States of America and Andrew Johnson (1866) LR 2 Eq 659, 665] it was ‘not a physical but a metaphysical entity’. Executive recognition was therefore not only an acknowledgement of the foreign State’s international legal personality but was constitutive of its domestic personality.” (Marston, at pp 415-416)
24. A foreign state recognised as such by His Majesty’s Government does not, however, thereby become a creature of domestic law in the United Kingdom. It is not a domestic corporation but is simply recognised by domestic law as having legal personality. Similarly, an international organisation which is given the capacities of a body corporate in the United Kingdom pursuant to the International Organisations Act 1968 is not a domestic corporation. It is simply recognised by domestic law in this jurisdiction as having legal personality. Dr Marston, referring to a debt incurred on the domestic plane by a foreign recognised state, observes:
“In English law it seems that you are owed money by an international legal person which, in that capacity, is invisible in the eyes of English courts. On executive recognition, however, it becomes visible but its essence is still international. It gains the status of a legal person at the plane of English law but it does not become an English legal person.” (at pp 416-417. See also p 410.)
Referring to the observation of Lord Templeman in Arab Monetary Fund v Hashim (No 3) [1991] 2 AC 114, 165 that “the English courts can only identify and allow actions by individuals, sovereign states and corporate bodies”, he concludes therefore (at p 417) that the position of a recognised foreign state is sui generis.
25. At first instance in the present case, Blair J observed (at para 113) that legal personality as a matter of English law flows from recognition and that capacity flows from legal personality. The first proposition is undoubtedly correct. However, the second proposition, which was endorsed by the Court of Appeal (at para 65), is in our view potentially misleading. As explained above, it is not possible to derive capacity to perform specific acts from personality alone. In fact, the converse is the case: it is the capacity to perform legal acts which necessarily requires the acknowledgement of personality in the legal system concerned. This certainly reflects the approach of the English courts to such issues. See, for example, JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418 (“the Tin Council case”) where Lord Oliver of Aylmerton considered (at p 504 G-H) that the status of a legal personality of the International Tin Council (“ITC”), separate from its members, was a necessary corollary of the unlimited capacities which were conferred by an Order in Council. Nevertheless, English law acknowledges not only the personality of a foreign sovereign state, which has been recognised as such, but also its full capacity. As a result, municipal law in this jurisdiction reaches the same result as international law. As the Court of Appeal observed in the present case (at para 73), were it otherwise there would be a strong case for re-examining the position in English law.
26. The decision of the House of Lords in the Tin Council case is illuminating in this regard. The creditors of the ITC sought to establish that the states which had established it were legally responsible for its debts as a matter of English law. Article 5 of the Order in Council provided that the ITC “shall have the legal capacities of a body corporate”. One argument advanced in support of the view that the Order in Council had not conferred separate legal personality on the ITC was that the legislature was seeking to do no more by the Order in Council than to establish a framework under which the member states could trade in partnership under the collective name of the ITC. In particular, it was submitted, this was done by conferring on the unincorporated members in association certain capacities so as to enable them to function in the name of the ITC, with the result that it was not necessary to confer on the ITC a separate legal personality. Rejecting this submission, Lord Oliver, with whom Lord Keith of Kinkel, Lord Brandon of Oakbrook and Lord Griffiths agreed, observed:
“But there are a number of difficulties in the way of the suggestion that article 5 did no more than confer capacities on the members. In the first place, the members were sovereign states recognised in English law and having already capacities as such, so that an Order in Council which conferred on them capacities (for instance, to contract, to hold property or to engage in litigation) served no useful purpose.” (at p 503 C-D)
(See also the observations of Kerr LJ in the Court of Appeal in that case at [1989] Ch 72, p 147 E-H.) The passage from the speech of Lord Oliver makes clear that the capacities of a sovereign state recognised as such in English law include the power to contract, and that to confer the legal capacities of a body corporate upon a sovereign state would be a redundancy. Moreover, as Mr Howard KC points out on behalf of the Trustee, Lord Oliver observed elsewhere in his speech that the capacities conferred on international organisations by Article 5 of the Order in Council were “the widest capacities available to any artificial legal persona” (at p 502 B) and “the fullest possible legal capacities, including the capacity to contract in its own right” that can be conferred on a body (at p 504 G). If, therefore, it would not have served any purpose to confer these fullest possible legal capacities on the ITC’s member states, that can only be because they already enjoyed these capacities, including the capacity to enter into contracts. In our view, this reasoning is compelling. Moreover, it forms part of the ratio decidendi of the Tin Council case and the Supreme Court has not been invited to depart from it.
27. Ukraine seeks to draw an analogy for present purposes between the status in English law of a foreign state and that of a foreign public body or corporation. Ukraine submits that the capacity of Ukraine to enter into a contract under municipal law should be determined by the application, directly or by analogy, of Dicey Rule 187 (Dicey, Morris and Collins on the Conflict of Laws, Vol. II, 16th ed (2022), Rule 187 p 1611, para 30R-020) which provides:
“(1) The capacity of a corporation to enter into any legal transaction is governed both by the constitution of the corporation and by the law of the country which governs the transaction in question.
(2) All matters concerning the constitution of a corporation are governed by the law of the place of incorporation.”
28. Ukraine submits, first, that the same reasons justify the application of Rule 187 to states as to foreign governmental entities and corporations. It submits that the justification for looking to the constitutional documents of a corporation is that the corporation exists as such only by virtue of its own constitution and it is those documents which set the scope and limits of its powers. In the same way, it is submitted, under Ukrainian law Ukraine has no inherent capacity and it has only such powers as its Constitution and laws provide. Secondly, it is said that there is support for this analogy as a matter of authority. Thirdly, Ukraine submits that the principle underlying the recognition of foreign states as having legal personality before English courts is the comity of nations. However, treating Ukraine as possessing a capacity that it does not have under its own constitution is said to deprive Ukraine of constitutional safeguards.
29. The most fundamental objection to this submission on behalf of Ukraine is that the subordinate entities with which Ukraine seeks to draw an analogy are each created by a foreign system of national law. In Banque Internationale de Commerce de Petrograd v Goukassow [1923] 2 KB 682 Scrutton LJ observed with regard to foreign corporations (at p 691):
“So in the case of artificial persons, the existence of such a person depends on the law of the country under whose law it is incorporated, recognized in other countries by international comity, though its incorporation is not in accordance with their law.”
Courts in the United Kingdom recognise, as a matter of comity, the power of other sovereign states to create and exercise authority over entities subject to their jurisdiction. Similarly, in Lazard Bros & Co v Midland Bank Ltd [1933] AC 289, Lord Wright explained (at p 297):
“English courts have long since recognized as juristic persons corporations established by foreign law in virtue of the fact of their creation and continuance under and by that law. Such recognition is said to be by the comity of nations. Thus in Henriques v Dutch West India Co, the Dutch company were permitted to sue in the King’s Bench on evidence being given ‘of the proper instruments whereby by the law of Holland they were effectually created a corporation there’. But as the creation depends on the act of the foreign state which created them, the annulment of the act of creation by the same power will involve the dissolution and non-existence of the corporation in the eyes of English law. The will of the sovereign authority which created it can also destroy it. English law will equally recognize the one, as the other, fact.”
In the same way, foreign local government bodies are creations of the law of the state in question and are therefore subject to that law of their creation. (See, generally, Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579; [2012] QB 549 per Aikens LJ at para 48.) Moreover, the entity which was recognised in Bumper Development Corpn v Comr of Police of the Metropolis [1991] 1 WLR 1362 was created by the law of Tamil Nadu, the internal law of the state concerned. It is natural that in each case the law which has created the entity should be relevant to a determination of its capacity. By contrast, a foreign state does not derive its personality or its capacity from the sovereign power of a state to create legal persons. Ukraine itself is not created by the law of Ukraine but by international law and is treated as a legal person in municipal law within the United Kingdom by virtue of its recognition as such by the executive. There is, therefore, no reason why the capacity of a sovereign state should be defined by its internal law in the manner suggested by Ukraine.
30. We are unable to find any support for Ukraine’s submission in the authorities on which it relies. The fact that in King of Spain v Hullett (1833) 7 Bli NS 359, 388; 5 ER 808, 818, the Lord Chancellor referred to the King of Spain suing as a “foreign corporation sole” does not advance Ukraine’s case. Nor does the fact that in Prioleau v United States (1866) LR 2 Eq 659, 663, United States of America v Wagner at pp 588, 592, 594 and Republic of Peru v Weguelin (1875) LR 20 Eq 140, 141-142 a foreign state may have been compared to a corporation for the purposes of discovery. Indeed, in United States of America v Wagner the Lord Chancellor (at 588) expressly waived “the consideration of the correctness of the analogy which was supposed to exist between a corporation and a sovereign state”.
31. Ukraine also relies on the recent decision of Marcus Smith J in High Comr for Pakistan in the United Kingdom v Prince Muffakham Jah [2019] EWHC 2551 (Ch); [2020] Ch 421, where the judge addressed the question which law governed the actual authority of the Nizam of Hyderabad in 1948. The judge considered that the Nizam was a personal and absolute ruler of Hyderabad and that no distinction was to be drawn between his personal capacity and his capacity as a ruler. He concluded that whether the question was framed as one of personal capacity, the delegation of authority by a principal to an agent or the authority of a ruler of a state, the same law was indicated: the law of the state where the principal was domiciled or resident or the law of the state the ruler ruled over (at paras 182-183). In our view, however, this does not cast any light on the present issue. In his private capacity, the Nizam was a subject of the law of the state. In his corporate capacity, he seems to have been acting as a governmental entity. No consideration seems to have been given to whether the Nizam was himself the personification of the state. In any event, whatever may have been the historical position in relation to absolute rulers, very different considerations now apply in the case of a sovereign state such as Ukraine.
32. We are, therefore, entirely persuaded that the analogy which Ukraine seeks to draw between a foreign state and a foreign corporation is a false analogy. A foreign state is not a creature of its own domestic law. In our view Dr Marston is correct in his analysis and his conclusion that a foreign state is for present purposes sui generis.
33. Furthermore, we are unable to accept that the recognition by courts in this jurisdiction of the fullest possible capacity of a foreign state could possibly amount to an infringement of principles of international comity. On the contrary, it seems to us that such recognition is a reflection of the sovereignty and independence of sovereign states and fully accords with and promotes the principle of comity.
34. We conclude, therefore, that a foreign state which is recognised as such by the executive in the United Kingdom is considered, for the purposes of municipal law within the United Kingdom, to be a legal person with full capacity. In particular, a recognised foreign state does not lack capacity to make and perform a contract governed by a system of municipal law, irrespective of the provisions of its own domestic constitution and laws. In the present case, it is not arguable that Ukraine lacked the capacity to issue the Notes in the eyes of English law. We turn, therefore, to the distinct question whether the state entities purporting to exercise that power on behalf of Ukraine had the authority to do so.
(emphasis added)
