UK: Location, Location, Location – Situs Of The Debt Owed Under Letters Of Credit – Taurus Petroleum Limited V. State Oil Marketing Company Of The Ministry Of Oil, Republic Of Iraq [2017] UKSC 64

Last Updated: 14 November 2017
Article by Felicity Ewing, Celia Gardiner, Alexandra Doucas and Alexander Hewitt

This judgment of the Supreme Court was given in the context of proceedings to enforce an arbitration award. It is interesting in its consideration of:

  • the law relating to the situs of a debt owed under letters of credit (LoCs);
  • the proper construction of two LoCs which, while unusual, were concluded on standard terms; and
  • the appropriateness of making a third party debt order where it might affect the rights of another party.

Factual background

In February 2013, the appellant before the Supreme Court, Taurus Petroleum Limited (Taurus), obtained a final award in arbitration proceedings against the respondent, State Oil Marketing Company of Iraq (SOMO). SOMO did not pay the US$8,716,477 that it was ordered to pay pursuant to the award. Taurus then learned that a company in the Shell group was to purchase two parcels of crude oil from SOMO, the purchase price for which was to be paid under LoCs issued by Crédit Agricole. The relevant sums were to be paid into an account of the Central Bank of Iraq (CBI) 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 two special provisions designated [A] and [B] by the Court of Appeal and Supreme Court. Those provisions read as follows:

"[A] Provided all terms and conditions of this [LoC] are complied with, proceeds of this [LoC] will be irrevocably paid in to your account with the Federal Reserve Bank New York, with reference to 'Iraq Oil Proceeds Account'.

[B] 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 A/c with Federal Reserve Bank New York."

Taurus applied for: (i) leave to enforce the arbitration award as a judgment; (ii) an interim third party debt order (TPDO) over the proceeds of sale to be paid pursuant to the LoCs; and (iii) the appointment of a receiver in relation to those funds. Crédit Agricole duly paid the sums into court. The interim TPDO and receivership order obtained by Taurus were set aside following a hearing, and the matter proceeded to the Court of Appeal, and then the Supreme Court.

Issues

There were four broad issues before the Supreme Court:

  • what was the situs of the debts due pursuant to the LoCs?
  • what was the proper construction of the LoCs?
  • did the position of CBI mean that no TPDO should be granted in any event?
  • how much connection with the jurisdiction was needed in order for the court to make a receivership order?

A. Situs of the debt

Lord Clarke summarised the proprietary nature of the TPDO as a remedy, because it operates to discharge the debt and release the debtor from his or her obligation. The English court therefore generally lacks jurisdiction to make a TPDO in respect of debts situated outside the jurisdiction.

In terms of determining where the debt was situated, there were two competing propositions. One was the general position, which is that a debt is situated where the debtor is resident, because that is the jurisdiction where the debt is recoverable. As the LoCs were issued by the London branch of Crédit Agricole, the provisions of the UCP meant that the London branch should be treated as a separate bank to the French arm of the bank, and the situs of the debt would be England.

The competing proposition was based on settled law in a Court of Appeal decision, Power Curber International Ltd v. National Bank of Kuwait SAK1, in which there was held to be an exception in the case of LoCs to the general position summarised above. The reasoning behind the decision in Power Curber was not set out in detail. It stated, however, that the situs of the debt due under a LoC was the place where it was payable against documents, a LoC being "different from ordinary debts".

The Supreme Court agreed unanimously that Power Curber was wrong in principle, and that the ordinary means of identifying the situs of a debt should apply to LoCs too, Lord Neuberger adding that "such unreasoned distinctions do the common law, and in particular, commercial law, no favours". On that basis, the debt due in this case was situated in England, and a TPDO was available in relation to it.

B. Construction of the LoCs

A key issue was whether the special condition shown as [A] above created a debt obligation only to SOMO, only to CBI, or to SOMO and CBI jointly. This was important, because a TPDO will only be granted where there is a debt due or accruing due to the judgment debtor alone. If the payment obligation was owed to CBI instead of or as well as SOMO, no TPDO could succeed.

The Supreme Court was split on this issue. Lord Clarke (with whom the majority agreed) found that the LoCs contained two separate obligations: the debt obligation was owed to SOMO alone, but Crédit Agricole owed a collateral obligation jointly to SOMO and CBI to pay the proceeds into the specified account. Breach of the collateral obligation would sound in damages, but the provision did not have the effect of substituting CBI for SOMO as the beneficiary under the LoC. Lord Clarke emphasised the importance of giving effect to the UCP, in view of its worldwide use – he noted that the UCP identified the beneficiary under a LoC as the party in whose favour it was issued. This was SOMO, and Lord Clarke was unwilling to disturb that definition.

Lord Sumption agreed, but added his own reasoning. This included the fact that the LOCs were expressed not to be assignable or transferrable. In circumstances where SOMO was the beneficiary under the LOCs, this indicated that there had been no assignment of the debt to CBI. Lord Hodge also agreed, placing emphasis on the UCP's definition of "beneficiary".

Lord Neuberger and Lord Mance disagreed, Lord Mance saying that the majority view overrode rights deliberately given to CBI, in an attempt to make these particular LoCs fit into a preconceived model. In this regard, as Lord Hodge noted, the minority placed less emphasis on the importance of the UCP. Lord Mance stated that it was "important not to be mesmerised by the term beneficiary or by the normal expectations which it generates". Having considered the principles governing the making of TPDOs, he proceeded to consider the construction of the LoCs. In Lord Mance's and Lord Neuberger's view, the LoCs created a debt in favour only of CBI – the debt would never become due to SOMO, the parties having agreed at the outset that it was due to CBI. This also meant, in Lord Mance's view, that the non-assignment provision in the LoCs was irrelevant, as the debt to CBI was created at the outset.

C. Even if Crédit Agricole did not owe any debt to CBI under the LoCs, did its obligation to CBI preclude a TPDO being made?

SOMO argued that, because it had no interest in or rights over the account of CBI into which the LOCs provided that the debt should be paid, no TPDO was available to it. This argument was based on In re General Horticultural Co, Ex p Whitehouse2, in which the court held that an order of that kind could only charge "what the judgment debtor can himself honestly deal with".

Lord Clarke held, however, that this did not create an independent principle in relation to honest dealing – looking at the circumstances of the case, it only reaffirmed that a TPDO could not be made in relation to property not belonging to the judgment debtor.

Lord Sumption agreed. He said that it was necessary in this regard to distinguish between arrangements: (i) between the judgment debtor and a third party (here CBI) under which a proprietary interest in the debt passed; and (ii) which created a purely personal obligation to the third party. A TPDO could affect obligations in the second category, but not the first. He held that, in this case, the obligation owed by Crédit Agricole to CBI was personal, as to the manner of discharge of the debt.

This was relevant to another area where there was disagreement between the members of the Supreme Court, as to whether the TPDO would serve to discharge Crédit Agricole's obligations to CBI as well as SOMO – if it did not, it was agreed that no such order should be made. Both Lord Sumption and Lord Hodge held that, once the debt was discharged, the obligation owed by Crédit Agricole to CBI (which was essentially an ancillary one) would have no content, and there would therefore be no claim by CBI against Crédit Agricole.

This was a point on which Lord Neuberger and Lord Mance again disagreed. Lord Neuberger said that, even on the interpretation of the LoCs adopted by the majority, there could be two possible outcomes. Either: (i) the TPDO discharged Crédit Agricole of its obligations to CBI, in which case Taurus would have succeeded in obtaining a right over the sums due under the LoCs that was superior to CBI's, which predated it; or (ii) CBI would retain the benefit of the rights it had under the LoCs, which would mean that Crédit Agricole would be liable in damages to CBI (in practice for a sum equal to those it was obliged to pay to Taurus). Lord Neuberger took the view that either outcome would be an abuse of the court's powers.

D. Receivership order

The Court of Appeal (divided on other issues) took the view unanimously that it would be inappropriate to make an order appointing a receiver in relation to the debts due under the LoCs, on the basis that there was insufficient connection with the jurisdiction to justify it. The Supreme Court disagreed, having held, unlike the Court of Appeal, that the relevant debt was situated in England.

Lord Clarke's remarks on this point are interesting. He held that, given the importance of London as a financial centre, it would have been entirely obvious to SOMO that many LoCs pursuant to which it sold oil would be subject to English law, and that there was therefore a long-term connection between SOMO's business and England. He held that it was also foreseeable that SOMO would be sued in an English court if it failed to honour an arbitration award. Further, he agreed with Taurus that it would produce an inconsistent result if it were allowed to enforce the award as an English judgment (which SOMO did not dispute), but the full range of enforcement remedies usually available to judgment creditors were to be limited because of an insufficient connection with the jurisdiction.

Conclusions

On the point of most general relevance in this case, the situs of debts due pursuant to LoCs, the Supreme Court was unanimous – it is the debtor's place of residence, not the place where the sums due under the LoC are payable. Lord Neuberger noted that 35 years of mistaken practice in this regard provided some argument for continuing with it, but not enough.

As regards the construction of the LoCs, not only was there dissent between the members of the Supreme Court, but they reached conclusions which are, in many respects, diametrically opposed. This means, predictably, that there is considerable force in either approach. It is interesting to note, however, that the majority placed more emphasis on the UCP, and the importance of consistency in interpreting standard terms.

Footnotes

1. [1981] 1 WLR 1233

2. (1886) 32 Ch D 512

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