Debt Under A Letter Of Credit Is Situated In The Place Where Payment Is To Be Made

In the recent judgement of Taurus Petroleum Ltd v State Oil Company of the Ministry of Oil, Republic of Iraq 1, the English Court of Appeal considered where a debt under a letter of credit is situated. A letter of credit is a guarantee from a bank to a seller that the amount owed for the goods will be paid. Letters of credit are often used to finance import-export transactions.

Facts

A Shell group company had agreed to purchase crude oil from State Oil Company of the Ministry of Oil, Republic of Iraq (“SOMO”). Crédit Agricole was to pay the amount owed to SOMO under a letter of credit (the “CA Letter”). Separately, SOMO had not paid money it owed to Taurus Petroleum Limited (“Taurus”) under an arbitration award. Taurus brought proceedings seeking a third party debt order, called a garnishee order in Ireland, for the funds payable under the CA Letter.

Crédit Agricole had issued the CA Letter in London. However, the CA Letter contained no governing law clause. The CA Letter provided that Crédit Agricole would pay SOMO in a designated account in New York. Taurus sought a third party debt order for Crédit Agricole's debt to SOMO. You would seek a third party debt order where you are owed money by a debtor and a third party owes money to that debtor. The order attaches to the third party debt requiring it to be paid to you instead of to the company or person owed the debt. Courts only have jurisdiction to issue the order if it would be recognised by the courts where the debt is situated.

Judgment

Usually, a debt is situated where a debtor lives, as the generally recognised rules of territorial jurisdiction mean this is the one place where you can seek to recover it without question. As Crédit Agricole's London branch owed the amount due under the CA Letter...