Background facts
In February 2013, the appellant, Taurus Petroleum Limited (Taurus), obtained a final award in the amount of $8,716,477 in arbitration proceedings against the respondent, State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (SOMO); SOMO failed to pay.
Taurus learned that a company in the Shell group, Shell International Eastern Trading Co was to purchase two parcels of crude oil from SOMO, the purchase price for which was to be paid under two LoCs, issued by the London branch of Crédit Agricole S.A. (CA). The relevant sums were to be paid into an account of the Central Bank of Iraq (CBI) held at the Federal Reserve Bank in New York, designated the “Oil Proceeds Receipts” account.
The LoCs were subject to the Uniform Customs and Practice for Documentary Credits (2007 Revision) International Chamber of Commerce Publication No. 600 (UCP). They were addressed to CBI, but stated that they were “in favour of” SOMO. They also contained these two special provisions:
- Provided the terms and conditions of this LoC are complied with, proceeds of this LoC will be irrevocably paid into your account with the Federal Reserve Bank New York, with reference to “Iraq Oil Proceeds Account”; and
- We hereby engage with the beneficiary and CBI that documents drawn under and in compliance with the terms of this credit will be duly honoured upon presentation as specified to credit CBI’s account with the Federal Reserve Bank New York.
Taurus applied for: (i) leave to enforce the arbitral award as a judgment; (ii) an interim third party debt order (TPDO) over the proceeds of sale to be paid under the LoCs; and (iii) the appointment of a receiver in relation to those funds. CA duly paid the sums into court. However, the interim TPDO and receivership order obtained by Taurus were set aside at the High Court and again at the Court of Appeal because the promise to pay under the LoCs was made jointly to SOMO and CBI.
Taurus appealed to the Supreme Court.
The key issues which the Supreme Court had to consider were:
(i) the situs of the debt due under the LoCs;
(ii) the proper construction of the LoCs—whether SOMO was the sole creditor under the LoCs;
(iii) whether CA’s obligations to CBI under the letters prevented the court from making a TPDO; and
(iv) whether a receivership order was appropriate in the circumstances and how much connection with the jurisdiction was needed for the court to make such a receivership order.
Supreme Court’s Ruling
(i) The location of the debt:
The situs of the debt is a significant consideration in relation to the seeking of a TPDO as a remedy to discharge the debt and the release of the debtor of its obligation under LoCs—English courts usually only have jurisdiction to make a TPDO regarding debts situated in England & Wales.
When determining the location of the debt, the Supreme Court overturned the ruling derived from the Court of Appeal’s decision in Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233, which held that the situs of the debt is the place where the sums due are payable; instead, the Supreme Court unanimously determined the situs of the debt is the debtor’s place of residence. As the LoCs were issued by the London branch of CA, applying Article 3 of the UCP the London branch was considered a separate bank from its French parent and, as such, the situs of the debt was therefore held to be England.
(ii) The proper construction of the LoCs:
Determining whether the debt obligation was owed only to SOMO or jointly to SOMO and CBI was also a key issue, because a TPDO will only be granted where the debt was due or accruing due to the judgment creditor, in this case SOMO, alone. The Supreme Court construed the LoCs as a whole and decided that the principal debt obligation of the issuing bank, CA was owed to SOMO alone, whilst CA also owed a collateral obligation jointly to SOMO and CBI to pay the proceeds into the specified CBI account in New York.
In reaching its decision to allow the making of the TPDO, the Supreme Court also placed emphasis on the significance of giving effect to the UCP in interpreting the LoCs. The relevant provisions in Article 2 and Article 18 of the UCP which define the term “beneficiary” (being the party in whose favour a credit is issued (Article 2) and the party that issues the commercial invoice (Article 18)), together with the explicit identification language used in the LoCs, meant SOMO was the sole beneficiary and holder of the principal debt obligation in this instance.
(iii) Whether CA’s obligations to CBI under the letters prevented the court from making a TPDO:
The Supreme Court reaffirmed the “honest dealing” principle that a TPDO could not be made in relation to property which did not belong to the judgment debtor. The question here was whether the debt ceased to belong to the judgment debtor once it reached CBI’s account and thus would prevent the TPDO from being granted. The Supreme Court considered the obligation of CA to make the payment to CBI’s account a personal one, the fulfilment of which did not transfer title in the debt. CBI, albeit having received the payment in its account, had no proprietary interest in the debt—it remained the property of the judgment debtor until they were fully paid to SOMO. On this basis, the Court permitted the making of the TPDO.
(iv) Receivership order:
Provided that there was sufficient connection with the jurisdiction—in this case, London, where the relevant debt was situated—the Court held that it would be appropriate to make an order appointing a receiver in relation to the debt due under the LoCs. On this point, the Supreme Court held that the receivership order was appropriate because given the importance of London as a financial centre with which SOMO’s business had a long-term connection, it was apparent that the LoCs under which SOMO sold oil would be subject to English law (as noted above), it was also predictable that SOMO would be sued in an English court if it failed to honour an arbitral award.
Analysis
The Supreme Court’s decision establishes important principles for the enforcement of international arbitral awards and specifically for the interpretation of funds payable under LoCs. Its ruling marked a significant development by overturning 35 years of legal precedent in this area and provides clarity as to the situs of debt due under letters of credit, which in the absence of express agreement is deemed to be the debtor’s (i.e., the issuing bank’s) place of residence, not the place where the sums due are payable.
