By Claire Milhench and Natalia Zinets
LONDON/KIEV (Reuters) - Britain's court of appeal ruled on Friday that Ukraine had a justiciable defence in a $3 billion (2.29 billion pounds) Eurobond case that was originally brought by Russia and said the case should be allowed to go to full trial.
The decision in effect sets aside a lower court judgement that went in favour of Russia in March 2017, when a judge ruled the case, centred around money Moscow lent to Kiev in 2013, should not proceed to trial because Ukraine had not offered a defence that was justiciable - capable of being settled in court.
The latest ruling found that one of the four arguments presented by Ukraine met this test. It gives both sides the right to turn to the UK Supreme Court, and Ukrainian Finance Minister Oksana Markarova said her country would take that step.
If the Supreme Court, which is likely to hold a hearing in the first half of 2019, also agrees that the case should go to full trial, it will be heard at the UK's High Court.
The debt is structured as a Eurobond governed by English law. Moscow wants the bond to be repaid in full but Kiev argues that Russia should have participated in a 2015 restructuring of other Ukrainian Eurobonds.
Ukraine disputed the validity of the loan on various grounds but the appeal court ruled that one of its arguments, related to duress arising from Russian aggression, particularly with regard to Crimea, was justiciable.
DEFENCE OF DURESS
"It would be unjust to permit ... Russia to proceed to seek to make good the contract claim without Ukraine being able to defend itself by raising its defence of duress at trial," the court of appeal judges said in their judgement, given on Friday.
They said it was desirable for the case to go to trial "to allow the whole pattern of alleged threatening behaviour by Russia to be assessed in its full context".
A statement from Ukraine's legal counsel, Quinn Emanuel Urquhart & Sullivan UK LLP, said: "The Court of Appeal ... has in allowing Ukraine's appeal unanimously overturned the decision of Mr Justice Blair, and found that Ukraine's defence of duress is justiciable and should be the subject of a trial."
The judgement comes against a backdrop of heightened tension between Moscow and London over the attempted murder of a former Russian spy in Salisbury.
Britain has charged two Russians with the poisoning, alleging state involvement. Russia said the two men were civilians, and innocent.
Ukraine also won a stay on the debt repayment until the Supreme Court decision, and the court ordered that interim costs paid to Russia following the earlier ruling should be repaid to Kiev.
THREE ARGUMENTS REJECTED
Russia's government, the sole holder of the notes, is represented by Cleary Gottlieb Steen & Hamilton LLP.
Moscow played down the significance of the ruling, with Finance Minister Anton Siluanov noting the court had backed only one of Ukraine's four arguments.
Aside from arguing that the debt was contracted under duress, Ukraine had based its defence on the argument that the borrowing, agreed by then-president Viktor Yanukovych, had not been properly authorised and had been subject to terms and conditions that were not spelled out in the contract.
It had also argued that non-payment was a countermeasure against interference in its economy and territory following Moscow's 2014 military intervention and annexation of Crimea from Ukraine.
The prices of Ukraine's bonds rose across the curve after the news, with issues maturing in 2024 and 2026 up around half a cent.
Ukraine is in talks with the International Monetary Fund on a new standby deal to replace its current $17.5 billion assistance programme. This could give it breathing space as it has struggled to fulfil some of the conditions of its existing deal.
(Reporting by Claire Milhench; additional reporting by Marc Jones and Sujata Rao in London and Darya Korsunskaya in Moscow)