Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64

Taurus sought to enforce an arbitration award against SOMO by means of third party debt and receivership orders over sums payable under letters of credit issued by Crédit Agricole's London branch. The Supreme Court allowed the appeal, holding the debts were situated in England, owed to SOMO, and amenable to enforcement.

Facts

Taurus Petroleum Ltd (a Swiss oil trading company) obtained UNCITRAL arbitration awards against State Oil Marketing Company of Iraq (SOMO) totalling US$8,716,477, which SOMO refused to honour. Taurus discovered that Shell had purchased crude oil from SOMO, payable under letters of credit issued by the London branch of Crédit Agricole. Taurus obtained leave to enforce the award as a judgment under section 66 of the Arbitration Act 1996 and sought interim third party debt orders (TPDOs) and a receivership order against the proceeds of the letters of credit. Crédit Agricole paid US$9,404,764.08 into court.

Each letter of credit identified SOMO as the beneficiary but contained two unusual conditions (A and B): condition A was an irrevocable undertaking to pay proceeds into the Central Bank of Iraq’s (CBI) ‘Iraq Oil Proceeds Account’ at the Federal Reserve Bank of New York; condition B engaged Crédit Agricole with both ‘the beneficiary and Central Bank of Iraq’ to make payment as specified. These arrangements reflected Iraq’s continuation, post-UN sanctions relaxation, of mechanisms to channel oil revenues via CBI’s New York account (95% to development, 5% to the Kuwait compensation fund).

Issues

The Supreme Court had to determine: (1) the situs of the debts created by the letters of credit; (2) whether the debts were owed to SOMO alone, to CBI alone, or jointly; (3) whether the contractual commitment to CBI prevented a TPDO; (4) whether state immunity applied; and (5) whether a receivership order should be made.

Arguments

Taurus (Pollock QC)

Letters of credit must be construed as autonomous instruments. SOMO was the sole beneficiary; conditions A and B amounted only to a collateral promise concerning the manner of payment, not a transfer of the debt to CBI. The London branch was the situs of the debt under UCP 600 article 3. Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233 was wrongly decided. CBI had no proprietary interest. There was no independent ‘honest dealing’ principle barring the TPDO.

SOMO (Dunning QC)

The special conditions made CBI the true creditor or at least a joint creditor; SOMO was only a nominal beneficiary unable to direct payment. The debts were situated in New York under Power Curber. The undertaking to CBI prevented a TPDO consistent with the principle that a TPDO charges only what the judgment debtor can ‘honestly deal with’ (In re General Horticultural Co (1886) 32 Ch D 512).

Judgment

Situs of the debts

The Court unanimously held that the situs of the debts was England. Applying the long-standing rule that a debt is situated at the debtor’s residence (where it is recoverable), and given UCP 600 article 3’s treatment of branches as separate banks, the London branch was the relevant debtor. The majority view in Power Curber, which treated letters of credit as exceptional and located the debt at the place of payment, was overruled as unreasoned and unprincipled, Waterhouse J’s dissent being preferred.

To whom the debt was owed

By a majority (Lord Clarke, Lord Sumption and Lord Hodge; Lord Neuberger and Lord Mance dissenting), the Court held that SOMO was the sole beneficiary and creditor of the primary debt. The letters of credit identified SOMO throughout as beneficiary, were stated to be ‘in favour of’ SOMO, required SOMO’s commercial invoice, and were not assignable or transferable (excluding UCP 600 article 38). UCP 600 article 2 defines ‘beneficiary’ as the party in whose favour a credit is issued. Conditions A and B did not displace SOMO as beneficiary; rather, each letter of credit gave rise to two separate obligations: (i) a debt owed to SOMO alone with the manner of discharge being payment into CBI’s New York account, and (ii) a collateral obligation owed jointly to SOMO and CBI as to the mode of payment, sounding in damages. CBI had no proprietary interest in the debt.

Effect of the commitment to CBI

The majority rejected the argument based on In re General Horticultural Co, holding there is no independent ‘honest dealing’ principle beyond the requirement that the judgment debtor possess a proprietary interest in the debt. Lord Sumption emphasised that a TPDO modifies personal obligations: once the debt to SOMO was discharged by operation of the TPDO, the ancillary obligation to CBI concerning the mode of payment fell away, leaving CBI no surviving claim. Compliance with the TPDO would therefore discharge Crédit Agricole in respect of both obligations, satisfying Société Eram Shipping Co Ltd v Cie Internationale de Navigation [2003] UKHL 30.

State immunity

SOMO’s state immunity argument was rejected below and not pursued. As the debt was owed to SOMO (a separate entity) and not CBI, no immunity arose under sections 13(2) and 14(4) of the State Immunity Act 1978.

Receivership order

The receivership order was restored. Given the situs of the debt was in England, SOMO had a sufficient connection with the jurisdiction. Successful international commerce depends on the enforcement of arbitration awards; it would be inconsistent to allow conversion of the award into an English judgment yet limit the means of enforcement. Crédit Agricole had not objected and CBI suffered no loss capable of grounding complaint.

Dissenting views

Lord Mance and Lord Neuberger considered that conditions A and B made CBI the sole creditor, or at minimum gave CBI an enforceable right inconsistent with a TPDO. Lord Mance emphasised that a TPDO requires a debt presently owed to and recoverable by the judgment debtor, and that the tripartite irrevocable arrangement vested the right to payment in CBI alone. Lord Neuberger considered conditions A and B operated as an irrevocable assignment or novation in favour of CBI, and that even if the debt was owed to SOMO, making a TPDO would either expose Crédit Agricole to double liability or improperly override CBI’s prior contractual rights.

Implications

The decision provides important clarification on several points of commercial and private international law. First, it overrules the majority decision in Power Curber on situs of debts under letters of credit: the situs is now uniformly determined by the residence of the debtor, consistent with UCP 600 article 3. This promotes certainty in international finance and aligns the treatment of letter of credit debts with debts generally.

Second, the decision affirms that, in construing letters of credit, the established framework of UCP 600 and the identification of the ‘beneficiary’ carries substantial weight, and unusual payment-mechanism clauses will not readily be construed as transferring the underlying debt to a third party absent clear words (such as transferability under UCP article 38).

Third, the decision clarifies the limits of the ‘honest dealing’ principle: the central requirement for a TPDO is that the judgment debtor possess a subsisting debt; purely personal obligations owed to third parties concerning the manner of discharge do not bar a TPDO, provided compliance will discharge the third party debtor.

Fourth, the decision is significant for enforcement of arbitration awards: it confirms that the English court’s enforcement jurisdiction under section 66 of the Arbitration Act 1996 can be supported by ancillary receivership orders even where the underlying connection to the jurisdiction arises principally through the location of letter of credit debts. The case matters to international traders, banks issuing letters of credit, judgment creditors, and sovereign or quasi-sovereign entities trading internationally. The strong dissents indicate, however, that the construction of unusual payment-mechanism clauses in letters of credit remains fact-sensitive, and parties wishing to vest the debt in a third party should do so by clear words, ideally by transfer under UCP article 38.

Verdict: Appeal allowed. The Supreme Court restored the third party debt orders and the receivership orders, holding that the situs of the debts under the letters of credit was England, that the debts were owed to SOMO alone (with a separate collateral obligation to CBI sounding only in damages), and that neither CBI’s contractual rights nor state immunity barred enforcement.

Source: Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64