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Article: February 2018: Attaching Debts Due Under Letters of Credit in the UK

Business Litigation Reports

Introduction
The case of Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64 involved Taurus Petroleum Ltd. (“Taurus”), a Geneva-based oil trading company, and the State Oil Marketing Organisation of Iraq (“SOMO”). Disputes between the parties arose out of a series of contracts for the sale of crude oil and LPG and were referred to arbitration. Taurus obtained a partial final award against SOMO for just over US$8.7 million. When SOMO failed to honor the award, Taurus commenced enforcement proceedings by way of interim third party debt orders and orders for the appointment of a receiver in respect of funds due to be received by SOMO under two letters of credit. The orders were granted ex parte and a series of appeals followed, culminating in the Supreme Court’s decision in October last year. The decision is significant because it overturned a Court of Appeal authority going back more than 35 years; namely, Power Curber International Ltd. v National Bank of Kuwait SAK [1981] 3 All ER 607 (“Power Curber”), which held that, in contrast to the rule for debts generally, the situs of a debt arising under a letter of credit was the place of payment against documents (in this case, New York, which would have deprived the English courts of jurisdiction), rather than the place where the debt is situated. The new position under Taurus v SOMO is that the situs of the debt arising under a letter of credit is consistent with that of any other kind of debt. In this case, it was held to be England since the issuing bank was domiciled in London.

Background
When SOMO failed to pay the sums due under the arbitration award, Taurus applied to the High Court for leave to enforce the award as a judgment under section 66(1) of the Arbitration Act 1996. Having heard that a Shell entity, Shell International Eastern Trading Company (“Shell”), had purchased two parcels of crude oil from SOMO in an unrelated sales transaction and was due to make payment for these parcels under letters of credit, Taurus sought interim third party debt orders under CPR 72 against the issuing bank under the letters of credit, Crédit Agricole SA (“Crédit Agricole”), and orders for the appointment of a receiver in respect of the funds to be received by SOMO under the letters of credit.

Although SOMO was the named beneficiary in the letters of credit, a key factor in the case was that each of the credits contained “special provisions” providing for payment to be made by the advising bank in New York to the Iraq Oil Proceeds Account of the Federal Reserve Bank of New York. In addition, each credit contained a separate undertaking on the part of Crédit Agricole in favour of the Central Bank of Iraq (“CBI”) to make payment in this way. These provisions and the undertakings reflected the requirements of the UN Security Council Resolution imposing sanctions on Iraq by which the proceeds of sales of oil by Iraq had to be paid in this way. Although not strictly enforced at the time when the credits were opened, the Iraqi government had decided to continue the practice in any event.

The orders were granted, ex parte, by the High Court in March 2013, after which Crédit Agricole made a payment of £9,404,764.08 into court and dropped out of the proceedings. SOMO challenged the orders on various grounds - including jurisdiction, sovereign immunity and the true construction of the letters of credit - and the High Court subsequently discharged the orders. Taurus appealed to the Court of Appeal, which dismissed the appeal, and then to the Supreme Court.

The Court Proceedings
To understand the Supreme Court decision, it is helpful to highlight certain points arising out of the Commercial Court and Court of Appeal decisions. In particular, Field J in the Commercial Court held that the debts were situated in London rather than New York, that each letter of credit contained a joint promise in favour of both SOMO and CBI, and that the debt arising from it was a joint debt. Therefore, a third party debt order could not be granted. He also held that the debts, as property of the CBI and Central Bank of Iraq, were in any event immune from execution on the basis of sovereign immunity. Both parties appealed to the Court of Appeal.

On the issue of construction, the Court of Appeal found that the “special provisions” for payment to CBI did not give CBI any proprietary interest in the debt. Rather, each letter of credit gave rise to two separate obligations: an obligation to SOMO alone to pay the proceeds into CBI’s account in New York, and a separate collateral obligation to both SOMO and CBI jointly to pay the proceeds into that account. The first obligation, owed to SOMO alone, sounded in debt, whereas the separate collateral obligation owed to SOMO and CBI jointly sounded in damages. However, the court would not restore the orders on the basis that it was bound by Power Curber, the effect of which was that the debts arising under the letters of credit were situated in New York, where they were payable against documents, and not in London. As a result, the English courts did not have jurisdiction to grant the orders sought.

The Supreme Court granted Taurus’ appeal, holding that Taurus was entitled to the orders sought, and restored the interim third party debt order and the receivership order. The two key issues before the Supreme Court, as considered by the previous courts, were as follows:

a) On the true construction of the letters of credit, were SOMO and the CBI joint beneficiaries under the credit or was SOMO a sole creditor?
The issue here was to whom the debts created by the letters of credit were owed. If the debts were owed to CBI and SOMO jointly, or to CBI alone, as had been decided in the previous proceedings, then a third party debt order could not be granted.

b) Where were the debts arising under the letters of credit situated?
A third party debt order, being a proprietary remedy, could only be granted in respect of a debt within the jurisdiction of the English Courts (or outside the jurisdiction if compliance with that order would be recognised in that jurisdiction as discharging the primary debtor’s liability, which was not the case here). If the debts were situated in New York and not London, the English courts would not have jurisdiction to make the third party debt orders. If the debts were situated in London, being the place where the issuing bank was domiciled, and where the debt was recoverable, then the English courts would have jurisdiction.

On the first issue, the Supreme Court held that, on the true construction of the letters of credit, SOMO was the sole beneficiary of the debts created by the letters of credits and the sole entity to which the issuing bank, Crédit Agricole, incurred the primary obligation to make payment. It rejected previous arguments that the debt was owed jointly to both SOMO and CBI or that it was owed solely to CBI. This was important in enabling the court to grant the third party debt order over the proceeds of the letters of credit in light of the pre-requisite that there is a “debt due or accruing due to the judgment debtor from the third party” (CPR Part 72.2(1)). In other words, the debt must be owed solely to the judgment debtor. If the obligation to pay were owed to both SOMO and CBI, as joint beneficiaries, or to CBI alone, as had been argued in the earlier proceedings, the debt could not be attached by a third party debt order.

On the second issue, the situs of the debt, the Supreme Court overturned Power Curber and held that the place of a debt arising under a letter of credit is not different from any other kind of debt. It is the place where the debtor resides or where the debt is recoverable. In this case, the place of the debt was where the issuing bank, Crédit Agricole, was domiciled—London. The Supreme Court could see no reason to distinguish between a debt arising under a letter of credit and an ordinary debt. Pursuant to UCP 600, which provides that “Branches of a bank in different countries are considered to be separate banks” (article 3), the London branch of Crédit Agricole was treated as a separate bank to any international branches and, therefore, the sole residence of the debtor under the letters of credit was London where the debt could be recovered. As a result, the English courts did have jurisdiction to grant the third party debt order.

Conclusion
The Supreme Court’s decision in Taurus v SOMO is important in that it overruled the decision in “Power Curber.” The effect is that judgment creditors will be able to enforce arbitration awards and judgments by attaching letters of credit opened in London in favour of beneficiaries outside the jurisdiction, provided that those letters of credit are only advised outside the jurisdiction and are not confirmed. This could have wider implications if other common law jurisdictions which have followed Power Curber decide to follow the Supreme Court’s decision. The decision is also significant in that it was made despite the fact that there were legitimate third party interests under the letters of credit.