In an important recent judgment (Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq  UKSC 64), the Supreme Court has analysed the legal framework for the enforcement in England of international arbitral awards, and specifically for the interception of funds payable under letters of credit.
- The situs of a debt owed by the issuing bank under an unconfirmed letter of credit: the place where the issuing bank resides or the place of payment?
- Whether the State Oil Marketing Company of the Ministry of Oil (‘SOMO’) was entitled to sovereign immunity, as an emanation of the State of Iraq or because it was exercising sovereign authority (first instance and Court of appeal only).
- Identification of the creditor under letters of credit.
- The principle of “honest dealing” (‘a garnishee order charges only what the judgment debtor can honestly deal with’) as it applies to the issuance of third party debt orders garnishing payments due under letters of credit.
- Whether such interest as the Central Bank of Iraq (“CBI”) had in the letters of credit was of itself a bar to execution.
- If the CBI had a recognisable interest in the letters of credit, was that interest entitled to immunity from execution pursuant to the State Immunity Act 1978 (the “1978” Act), ss 13(2) and 14(4)?
- The circumstances in which a receivership order ought to be made.
In February 2013, Taurus Petroleum Limited (“Taurus”) obtained an international arbitration award against SOMO in the sum of US$8,716,477. The arbitration was, by agreement of the parties, heard in London, although the official seat of the arbitration remained in Baghdad.
SOMO failed to honour the award or any part of it, despite participating in the arbitration.
In the circumstances, Taurus applied to the High Court without notice for leave to enforce the award as a judgment under the Arbitration Act 1996, s 66(1) (it could not rely on the New York Convention 1958, because Iraq is not a party).
Taurus also applied on a without notice basis for interim third party debt orders and the appointment of a receiver by way of equitable execution over debts payable by Crédit Agricole London Branch pursuant to letters of credit which were issued at the request of Shell International Eastern Trading Co (“Shell”) following the purchase of crude oil by Shell from SOMO.
The letters of credit were unconfirmed credits which were expressly made subject to UCP 600. They were addressed to CBI and provided as follows:
“Please advise our following irrevocable documentary credit to Oil Marketing Company (SOMO) after adding your confirmation. Our reference GBRM300017 We hereby establish our irrevocable documentary letter of credit Number GBRM3000017
By order of: … [Shell]
In favour of: Oil Marketing Company (‘SOMO’)
[A] Provided all terms and conditions of this letter of credit are complied with, proceeds of this letter of credit will be irrevocably paid in to your account with Federal Reserve Bank New York, with reference to ‘Iraq Oil Proceeds Account’.
These instructions will be followed irrespective of any conflicting instructions contained in the seller’s commercial invoice or any transmitted letter.
[B] We hereby engage with the beneficiary and Central Bank of Iraq that documents drawn under and in compliance with the terms of this credit will be duly honoured upon presentation as specified to credit CBI A/c with Federal Reserve Bank New York.”
[[A] and [B] added]
Taurus’ submission was that the effect of special clauses [A] and [B] was as follows:
- The principal obligation to make payment was owed to SOMO alone, as the named beneficiary, which obligation sounded in debt.
- A collateral obligation was owed to SOMO and the CBI jointly, to make payment in a certain way, which sounded in damages.
The decision of the High Court
SOMO challenged the orders on the grounds of lack of jurisdiction and state immunity. Field J held as follows ( EWCH 3494 (Comm)):
- The situs of the debt owed under the letters of credit was the residence of the debtor, Crédit Agricole, which was London and not the place of payment, New York (distinguishing Power Curber International Ltd v National Bank of Kuwait SAK  1 WLR 1233).
- That SOMO was not entitled to sovereign immunity as an emanation of the State of Iraq or because it was exercising sovereign authority.
- The debt due under the letter of credit was owed jointly to both SOMO and to the CBI.
- The principle of “honest dealing” was no independent bar to execution.
- Joint debts could not be garnished.
- The CBI’s interest as joint creditor attracted state immunity from execution pursuant to ss 13(2) and 14(4) of the 1978 Act.
- A joint debt could not be brought in by a receivership order.
The decision of the Court of Appeal
The decision of the Court of Appeal ( EWCA Civ 835) was as follows:
- The Court was bound by the previous decision of the same Court in Power Curber to hold that the situs of the debts owed by Crédit Agricole was the place of payment, New York, as opposed to the residence of the debtor, London (unanimously). Following Société Eram Shipping Co Ltd v Cie Internationale de Navigation  UKHL 30;  1 AC 260, this was fatal to the granting of third party debt orders.
- That SOMO was not entitled to sovereign immunity as an emanation of the State of Iraq or because it was exercising sovereign authority (unanimously; this point was not re-run in the Supreme Court).
- That the sole creditor under the letters of credit was the CBI (by majority, Sullivan and Briggs LJJ). Moore-Bick LJ (dissenting) accepted Taurus’ submissions on the construction of the letters of credit, holding that the principal obligation to make payment was owed to SOMO alone, which obligation sounded in debt and that a collateral obligation was owed to SOMO and the CBI jointly, to make payment in a certain way, which sounded in damages.
- That the principle of “honest dealing” did not preclude the making of the third party debt orders, other than by reference to the existence of recognised proprietary interests.
- The interest of CBI as sole creditor precluded execution (Sullivan and Briggs LJJ).
- Sullivan and Briggs LJJ held that since on their view the debts were owed to CBI alone, that property was immune from execution pursuant to sections 13(2) and 14(4) of the 1978 Act.
- The receivership order ought not to be grated because the connection between SOMO and the jurisdiction was tenuous (unanimously) and because such an order would interfere with CBI’s collateral right (Moore-Bick LJ).
The decision of the Supreme Court
Issue 1: Situs of debt
By unanimous decision, the Supreme Court overruled the decision of the Court of Appeal in Power Curber which had stood for 35 years, and ruled that the situs of the debt owed under unconfirmed letters of credit is where the issuing bank resides, in this case London. In so doing:
- Lord Clarke recorded that by Article 3 of UCP 600, “branches of a bank in different countries are considered to be separate banks”, with the consequence that
- Lord Neuberger said of the decision in Power Curber, “such unreasoned distinctions do the common law, and in particular commercial law, no favours” (para 125).
- In the case of letters of credit, there was no basis for departing from the ordinary rule, that the situs of the debt is where the debtor resides.
Issue 2: Emanation of State of Iraq
SOMO did not pursue its argument that it was entitled to state immunity, either as an emanation of the State of Iraq or because it was exercising sovereign authority.
Issue 3: Identification of the Creditor
By a majority of 3:2, the Supreme Court held that the creditor under the letters of credit was SOMO alone:
- Lords Clarke (paras 19 to 26), Lord Sumption (paras 61 to 65) and Lord Hodge (paras 74 to 78) accepted Taurus’ submission that Crédit Agricole’s debts were owed to SOMO alone, there being a separate collateral obligation owed to SOMO and the CBI jointly which was merely an ancillary obligation as to the manner of payment.
- Lords Mance and Neuberger dissented, holding that the debts were owed to the CBI alone, which was fatal to the appeal.
Issue 4: ‘Honest dealing’
The Court analysed the principle as follows:
- Lord Clarke (para 46) agreed with Lord Justice Moore-Bick that the principle of “honest dealing” was not an independent principle limiting the cope of third party debt orders otherwise than by reference to recognised proprietary interests.
- Lord Sumption held that the cases were authority “for the straightforward proposition that execution cannot be levied against a debt if the judgment debtor has parted with his interest in it” (para 68).
- Lord Mance (para 90) took the view that the cases illustrated that the court would look at the debtor’s “actual entitlement to sue for the money” (para 90).
Issue 5: Did the interest of the CBI in the letters of credit preclude the grant of third party debt orders?
By a majority of 3:2, the Supreme Court held that the ancillary contractual right of CBI to have payment made in a certain way was no bar to the granting of third party debt orders, which ought to be restored:
- Lords Clarke, Sumption and Hodge all held that the existence of the CBI’s ancillary contractual interest was no bar to the granting of third party debt orders. Lord Clarke held that “the obligation on Crédit Agricole to pay in accordance with its promised method is necessarily subject to the implicit qualification that the funds have not been intercepted by judicial intervention” (para 56).
- Lord Sumption recorded that the effect of third party debt orders was to override personal obligations and that the collateral obligation owed to CBI to make payment in the specified manner “depended on the continued existence of the debt owed to SOMO. Once it had been discharged by operation of law by payment to the judgment creditor in accordance with the Third Party Debt Order, there was no subsisting debt to be paid by the issuing bank into the New York account.” (paras 69 and 70)
- Lord Hodge held (para 79) that “the discharge of the debt would discharge the ancillary obligation as to the mode of its payment, leaving CBI with no claim for damages or otherwise against the issuing bank. I therefore agree that CBI’s rights under the added conditions do not bar the making of a TPDO.”
- Lords Mance and Neuberger dissented, holding that the CBI’s interest was a bar to execution
Issue 6: Central bank immunity
This issue was only addressed in passing by Lord Mance. He held that, on the assumption that only a collateral obligation was owed to the CBI, he “would not exclude the possibility that, on this analysis, the making of a third party debt order against Crédit Agricole might constitute indirect impleading with the right to the proceeds which the State of Iraq would otherwise have enjoyed.”(para 118)
Issue 7: Receivership orders
By a majority of 4:1 (Lord Mance dissenting), the Court held that the receivership order ought to be restored. Lord Clarke (with whom Lords Sumption, Hodge and Neuberger agreed) held that:
- Since the situs of the debts was London, whereas Moore-Bick LJ had been bound to find that the situs was New York, it was open to the Supreme Court to consider the matter afresh (para 53).
- “International trade, and particularly the international oil trade, is conducted predominantly by means of letters of credit. London is one of the two major financial centres of the world and enormous numbers of letters of credit are issued by international banks from their London branches. It would have been entirely foreseeable by SOMO that a majority of the letters of credit against which they sold oil would be issued out of London and subject to English law. SOMO’s trade therefore involved a long term connection with the jurisdiction.” (para 54)
The Supreme Court has dispensed with the unreasoned distinction for the situs of debts under letters of credit created by Power Curber International Ltd v National Bank of Kuwait SAK  1 WLR 1233 and issued third party debt orders notwithstanding the collateral contractual right of the CBI under the l/cs that payment would be made in a certain way. It also interpreted the constraints to the exercise of the Court’s discretion when considering whether to issue a receivership order in a flexible manner, so as to reflect the commercial reality.