Supreme Court rules on third party debt and receivership orders (Taurus Petroleum Ltd v State Oil Marketing Company)

01 Nov 2017

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Guy Blackwood QC, of Quadrant Chambers, examines the Supreme Court’s judgment in Taurus Petroleum Ltd v State Oil Marketing Company (SOMO) and what the principles are for enforcing international arbitral awards by intercepting funds payable under letters of credit.

Original news

Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64, [2017] All ER (D) 132 (Oct)

The Supreme Court has allowed an appeal by petroleum company Taurus Petroleum Ltd against SOMO. The appellant had attempted to enforce an arbitration award against SOMO by means of a combination of third party debt and receivership orders. SOMO contended that the debts created by letters of credit were situated in New York and the High Court therefore had no jurisdiction to make third party debt orders (TPDOs) in respect of them, and that the debts were immune from execution as they were the property of the Republic of Iraq.

Enforcing an arbitral award—Supreme Court rules on third party debt and receivership orders, LNB News 25/10/2017 78

What was the background to the case?

The appellant had entered contracts with the respondent for the sale of crude oil and liquid petroleum gas. After disputes arose, the appellant obtained an international arbitration award against the respondent.

The respondent failed to honour the award, and so the appellant applied without notice to the High Court for leave to enforce the award as a judgment of the court and for interim third-party debt orders and the appointment of a receiver by way of equitable execution to bring in funds receivable under the unconfirmed letters of credit issued by the London branch of Crédit Agricole at the request of a customer which had bought crude oil from the respondent.

Although the letters of credit named the respondent as beneficiary, they also contained an obligation owed to both the respondent and to the Central Bank of Iraq to make payment into a specified account in New York.

The High Court granted the without-notice applications.

The respondent challenged the orders on the grounds of want of jurisdiction and state immunity.

The Commercial Court found that the debt owed under the letters of credit was situated in London, the domicile of the issuing bank, and not New York, the place of payment. It further found that the respondent was not entitled to sovereign immunity, as a supposed emanation of the State of Iraq or because it was exercising sovereign authority. However, the court went on to find that the debt due under the letters of credit was owed jointly to both the respondent and to the Central Bank of Iraq, but that debts which were jointly owed could not be attached and even if they could be, the interest of the Central Bank in the debt attracted sovereign immunity under sections 13and 14 of the State Immunity Act 1978.

The Court of Appeal found that the debt owed was situated in New York, the place of payment, and, by a majority, that the sole creditor under the letters of credit was the Central Bank of Iraq. It followed from Société Eram Shipping Co Ltd v Cie Internationale de Navigation [2003] UKHL 30, [2003] 3 All ER 465 that there was no jurisdiction to make the third-party debt orders. It also held that the receivership orders should not have been granted because the respondent’s connection with the jurisdiction was tenuous and because such an order would interfere with the Central Bank of Iraq’s interest under the letters of credit.The appellant appealed to the Supreme Court.

What issues were before the Supreme Court?

The principal issues were:

whether the debt was situated where the issuing bank resided or at the place of payment
whether the respondent was the sole creditor under the letters of credit
whether Crédit Agricole’s obligation to the Central Bank of Iraq under the letters precluded the making of a third-party debt order
whether a receivership order ought to have been granted

What did the Supreme Court decide?

On the first issue, the court unanimously decided that the debt owed under the letters of credit was situated where the issuing bank resided, ie London. It held that there was no basis for departing from the ordinary rule, that the location of the debt was where the debtor resided. It thereby overruled the decision of the Court of Appeal in Power Curber International Ltd v National Bank of Kuwait SAK [1981] 3 All ER 607 which had stood for 35 years.On the second issue, the court concluded by a majority of three to two that the creditor under the letters of credit was the respondent alone and that only a separate collateral obligation was owed by Crédit Agricole to both the respondent and the Central Bank of Iraq to make payment in a specified manner.On the third issue, the court concluded by a majority of three to two that the existence of the Central Bank of Iraq’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 was necessarily subject to the implicit qualification that the funds had not been intercepted by judicial intervention. Lord Sumption recorded that the effect of third-party debt orders was to override personal obligations and that the collateral obligation owed to the Central Bank of Iraq to make payment in the specified manner depended on the continued existence of the debt owed to the respondent. Once it had been discharged by operation of law by payment to the judgment creditor in accordance with the third-party debt orders, there was no subsisting debt to be paid by the issuing bank into the New York account. Lord Hodge held that the discharge of the debt would discharge the ancillary obligation as to the mode of its payment, leaving the Central Bank of Iraq with no claim for damages or otherwise against the issuing bank.On the fourth issue, the court held by a majority of four to one that the receivership orders ought to be restored. It found that the international oil trade was conducted predominantly by means of letters of credit, enormous numbers of which were issued by international banks from their London branches. In the circumstances, the respondent would have foreseen that many of the letters of credit against which it sold oil would be issued out of London and subject to English law. Therefore the respondent’s trade involved a long-term connection with the jurisdiction.

To what extent is the judgment helpful in clarifying the law in this area?

The Supreme Court has dispensed with the unreasoned distinction for the situs of debts under letters of credit created by the decision of the Court of Appeal in Power Curber.

The court also interpreted the constraints on 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.

Lord Sumption clarified that the essential point about a third-party debt order was that it modified purely personal obligations.

How does the decision fit in with other developments in this area of law?

The Supreme Court has re-emphasised the clear policy to ensure the efficient recognition and enforcement of arbitral awards and agreed that it would be inconsistent to allow an international arbitration award to be turned into an English judgment for the purpose of enforcing the award and then to limit the means available for enforcement on the grounds of an allegedly insufficient connection with the jurisdiction.

What are the implications of the decision for practitioners and, in particular, arbitration practitioners?

The courts of England and Wales are the appropriate forum to intercept funds due under unconfirmed letters of credit issued by the London branch of a bank, irrespective of the place of payment.

The existence of a fourth party interest in the credit, in this case the collateral obligation owed to the Central Bank of Iraq, is not necessarily a bar to execution.

Guy Blackwood QC appeared for the appellant in this case with Gordon Pollock QC, of Essex Court Chambers. They were instructed by Jeremy Davies and Sarah Hunt, of Holman Fenwick Willan, Geneva.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.