Supreme Court overturns 35 year old decision to help party enforce arbitration award

Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq ([2017] UKSC 64; 2017 WL 04791779)

Supreme Court 25 October 2017

Summary

Parties looking to enforce an arbitration award should take note of the Supreme Court's significant ruling in Taurus Petroleum Limited (Taurus) v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (SOMO). Faced with the uphill battle of enforcing an arbitration award against SOMO (domiciled in the Republic of Iraq) Taurus applied ex parte to the English High Court to intercept funds due to SOMO under letters of credit by way of a third party debt order and appointment of a receiver. Following a hard fought battle that reached the Supreme Court and led to a change in the law concerning the place of a debt arising out of letters of credit, Taurus succeeded.

Background

A dispute and subsequent arbitration between Taurus and SOMO arose out of a series of contracts between them for the sale of crude oil and liquefied petroleum gas. The arbitral tribunal made an award in favour of Taurus but SOMO failed to pay the award.

Taurus became aware that SOMO had sold two parcels of crude oil to another party, the price of which was to be paid under letters of credit issued by the London branch of Credit Agricole. The letters of credit provided for payment to be made into an account at a New York bank and included a separate promise in favour of the Central Bank of Iraq (CBI) to make the payment in that way.

Taurus applied to the High Court without notice for leave to enforce the award as a judgment under section 66(1) of the Arbitration Act 1966, for an interim third party debt order and for the appointment of a receiver in respect of the funds receivable by SOMO under the letters of credit.

The High Court

In March 2013 the High Court made the ex parte orders Taurus had applied for (without notice) and funds were paid into court.

SOMO challenged the third party debt order and appointment of a receiver and contended that the debts created by the letters of credit were situated in New York and that therefore the High Court had no jurisdiction to make third party debt orders in respect of them. SOMO also argued that the debts were the property of the Republic of Iraq and were therefore immune from execution.

In November 2013, following a contested hearing, the High Court held that the debts were situated in London (being the residence of the debtor – the London branch of Credit Agricole) rather than New York (the place of payment) and that SOMO was a separate entity from the State of Iraq and did not contract as its agent. As a result, if the debts under the letters of credit had been owed to SOMO alone, they would not have been immune from execution by way of the State Immunity Act 1978.

However the High Court also held that, because each letter of credit contained a single joint promise in favour of SOMO and CBI, the debt was therefore a joint debt and the court could not make a third party debt order. In addition it was held that the debts were the property of CBI and therefore immune from execution under the State Immunity Act 1978. The interim third party debt orders and the receivership orders were therefore set aside.

The Court of Appeal

Both parties appealed to the Court of Appeal. The appeal and the cross-appeal were dismissed in July 2015, albeit in some respects for different reasons.

One of the key and unanimous decisions by the Court of Appeal was that the High Court was wrong in deciding where the place (or situs) of the debt under the letters of credit was and that the court was bound by the previous decision in Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233 (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. 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.

In relation to the questions relating to state immunity and the construction of the letters of credit it was held:

  1. Unanimously that SOMO was not entitled to state immunity as an emanation of the State of Iraq or because it was exercising sovereign authority. (This point was decided unanimously and not re-run in the Supreme Court)
  2. By majority that the sole creditor under the letters of credit was the CBI and that the interest of CBI as sole creditor precluded execution pursuant to the State Immunity Act 1978. Lord Neuberger in his Supreme Court Judgment considered that Moore-Bick LJ (in the Court of Appeal judgment) was correct that state immunity would apply to CBI but not to SOMO.)

The Supreme Court

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 his judgment Lord Neuberger said of the decision in Power Curber that “such unreasoned distinctions do the common law, and in particular commercial law, no favours” (para 125).

By a majority of 3:2, the Supreme Court held that the creditor under the letters of credit was SOMO alone and the fact that there was a separate collateral obligation owed to SOMO and the CBI jointly was merely an ancillary obligation as to the manner of payment.

The Supreme Court held that the ancillary contractual right of CBI was "no more than the conduit pipe" to have payment made in a certain way and discharge the debt due to SOMO and was no bar to the granting of third party debt orders. 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.” (para 79).

In summary therefore the Supreme Court decided that the third party debt order could be enforced and that Taurus’ appeal should be allowed.

Comment

Under English law, the general principle is that the situs of a debt is the debtor’s residence, where the debt is recoverable. However since the Court of Appeal decision in 1981 in Power Curber, letters of credit have been treated differently. The decision in Taurus has overturned this and brought the law in relation to letters of credit in line with the general principle. In doing so, the Supreme Court has opened the door for the first time to letters of credit issued by London banks but payable overseas being amenable to attachment as assets located within English jurisdiction. Given London's status as one of the major financial centres of the world from which letters of credit are frequently issued, it would not be surprising if other award creditors follow Taurus' lead and we see an increase in enforcement efforts against letters of credit issued by London banks regardless of where they are in fact payable.