Supreme Court Clarifies Situs Of Debts Represented By Letters Of Credit

In a judgment given on Wednesday 25 October 2017 the Supreme Court has overturned the Power Curber decision and has held that there is no special rule relating to debts represented by letters of credit and that the situs of such debts is, as is usually the case, where the debtor is. The Court also clarified the circumstances in which a receivership order could be made by way of equitable execution.

Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64

In February 2013 Taurus Petroleum Limited ("Taurus") obtained an arbitration award against the State Oil Marketing Company ("SOMO") in the sum of US$8,716,477. The arbitration was, by agreement of the parties, heard in London, although the official seat of the arbitration remained in Baghdad. The award was for various demurrage and other claims arising out of Taurus's purchase from SOMO of crude oil and sale to SOMO of LPG under contracts which dated back to 2005 to 2007.

SOMO failed to honour the award. Consequently, 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. At the same time it sought a Third Party Debt Order ("TPDO") and the appointment of a receiver by way of equitable execution over funds receivable by SOMO under a letter of credit. The letter of credit had been opened by a branch of Crédit Agricole in London on behalf of Shell International Eastern Trading Co. The orders were made by the High Court and as a consequence, the sum of US$9,404,764.08, being the award plus interest and estimated future costs of enforcement, were paid into court by Crédit Agricole, to await the confirmation of the High Court order.

The letter of credit was in the standard form required by SOMO in their crude oil contracts. Although it named SOMO as beneficiary (and SOMO issued the corresponding invoice) the letter of credit required payment to be made to the Iraq Oil Proceeds Account belonging to the Central Bank of Iraq ("CBI") at the Federal Reserve Bank of New York in New York.

SOMO challenged the orders on the grounds of want of jurisdiction and state immunity and on the grounds that the letters of credit required payment to be made to the CBI, not to SOMO, and consequently it did not represent a debt due to SOMO.

In the High Court SOMO's arguments on state immunity were dismissed but Field J held that the debt due under the letter of credit was owed jointly...