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In an important judgment given on Wednesday 25 October 2017, the Supreme Court has laid down important principles for the enforcement of international arbitral awards and specifically for the interception of funds payable under letters of credit

Issues:

  1. 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?
  2. Whether 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).
  3. Identification of the creditor under letters of credit.
  4. 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.
  5. Whether such interest as the Central Bank of Iraq (“CBI”) had in the letters of credit was of itself a bar to execution.
  6. 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)?
  7. The circumstances in which a receivership order ought to be made.

A copy of the judgment can be found here.

Background:

In February 2013 Taurus Petroleum Limited (“Taurus”) obtained an international arbitration award against the State Oil Marketing Company (“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 contracting state).

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:

  1. The principal obligation to make payment was owed to SOMO alone, as the named beneficiary, which obligation sounded in debt.
  2. A collateral obligation was owed to SOMO and the CBI jointly, to make payment in a certain way, which sounded in damages.

High Court [2014] 1 All ER (Comm) 942 (Field J)

SOMO challenged the orders on the grounds of want of jurisdiction and state immunity. Field J held as follows:

  1. 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 [1981] 1 WLR 1233).
  2. That SOMO was not entitled to sovereign immunity as an emanation of the State of Iraq or because it was exercising sovereign authority.
  3. The debt due under the letter of credit was owed jointly to both SOMO and to the CBI.
  4. The principle of “honest dealing” was no independent bar to execution.
  5. Joint debts could not be garnished.
  6. The CBI’s interest as joint creditor attracted state immunity from execution pursuant to ss 13(2) and 14(4) of the 1978 Act.
  7. A joint debt could not be brought in by a receivership order.

Court of Appeal [2016] 2 All ER (Comm) (Moore-Bick, Sullivan and Briggs LJJ)

The decision of the Court of Appeal was as follows:

  1. 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 [2003] UKHL 30; [2004] 1 AC 260, this was fatal to the granting of third party debt orders.
  2. 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).
  3. 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.
  4. 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.
  5. The interest of CBI as sole creditor precluded execution (Sullivan and Briggs LJJ).
  6. 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.
  7. 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).

Please see Part Two here.