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The Supreme Court [2017] UKSC 64 (Lords Neuberger, Mance, Clarke, Sumption and Hodge)

The decision of the Supreme Court was as follows:

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:

  1. 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
  2. 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).
  3. 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 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:

  1. 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.
  2. 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:

  1. 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.
  2. 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).
  3. 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 l/cs preclude the granting 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:

  1. 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).
  2. 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)
  3. 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.”
  4. 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:

  1. Lord Mance 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 Supreme Court held that the receivership order ought to be restored:

  1. 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)

Summary

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 [1981] 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.

Please see Part One here.

This article was originally posted here.