Letters Of Credit

Letters of credit and documentary credits continue to be a mainstay of international trade transactions. Letters of credit are also often used in financing transactions, either as a form of collateral or issued by a bank in connection with an acquisition or another transaction being financed. A recent case, Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2013] EWHC 3494 (Comm) relates to letters of credit in a trade transaction and serves as a useful reminder of some of the key issues to be borne in mind.

It should be noted that the case is subject to an appeal to the Court of Appeal.

Background

Taurus had been awarded $8 million under an arbitral award against the State Oil Marketing Company of the Ministry of Oil ("SOMO"), the Iraqi state entity with sole authority for the export and import of oil and gas products from and to Iraq. The case related to two letters of credit issued by Crédit Agricole in respect of an oil transaction between a Shell entity and SOMO. Taurus was seeking an order such that part of the payments by Crédit Agricole under the letters of credit could be paid to Taurus direct, instead of SOMO, to satisfy the arbitral award.

Points to note

The points to note in the context of financing transactions arising from the case are:

1. Always ensure that the letter of credit specifies the governing law of the letter of credit.

   The two letters of credit issued by Crédit Agricole did incorporate the Uniform Customs and Practise for Documentary Credits (UCP) 600; but not a governing law clause. The court held that where a letter of credit does not specify governing law, its governing law is to be determined pursuant to Article 4(2) of Rome I. Under this Article, the governing law is the law of the country where the characteristic performer has its habitual residence. In this case, on the presentation of conforming documents, Crédit Agricole in London made payment by instructing JP Morgan in New York to make payment at the counters of the Central Bank of Iraq ("CBI") in Baghdad to CBI's account at the Federal Bank New York ("FRBNY"). The Judge held that the characteristic performer is Crédit Agricole making payment steps in London and therefore the credit is governed by English law.

   The Judge also held that the lex situs of the debt is English law (not New York where payment was to be made by crediting CBI's account with FRBNY). The Judge applied the general rule that a debt...