Craig Shepherd and Janine Mallis of Herbert Smith Freehills LLP comment on Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq.
Sometimes, getting an arbitral award is only half the battle. The successful claimant may need to enforce, and that means finding assets to enforce against. In Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq  UKSC 64, the UK Supreme Court has allowed enforcement against an Iraqi oil company by a third party debt order made against Letters of Credit ("LoCs"). The Supreme Court overturned the judgment of the Court of Appeal, which had previously ruled that the LoCs could not be the subject of a third party debt order. The decision also reverses an earlier Court of Appeal ruling in Power Curber International Ltd v National Bank of Kuwait SAK  1 WLR 1233 and determines that the relevant jurisdiction in respect of LoCs is the residence of the debtor. As the LoCs were issued by the London branch of Crédit Agricole SA, the location of the debts due under the LoCs was England and therefore the English courts had the necessary jurisdiction to make a third party debt order.
We need to briefly set out the facts of the case. In 2013, sole arbitrator Mr Ian Hunter QC issued a final award in UNCITRAL proceedings requiring the Respondent, the State Oil Marketing Company of Iraq ("SOMO"), to pay the Claimant, Taurus Petroleum Ltd ("Taurus"), USD 8,716,477 following a dispute arising out of the sale of crude oil and LPG. Taurus tried to enforce the award in England. It discovered that two LoCs had been issued by the London branch of Crédit Agricole SA to satisfy payment due to SOMO by Shell International Eastern Trading Co for the purchase of two parcels of crude oil. Relevantly, SOMO was identified as the beneficiary under the LoCs, but they provided that payment was to be made in New York to the Iraq Oil Proceeds Account at the Federal Reserve Bank of New York. Under the LoCs, Crédit Agricole promised to make payment in that way, regardless of any conflicting instructions which might be given by SOMO.
The court action
Taurus considered the LoCs to be sums due to SOMO, which Taurus could seize to pay the award. It applied to the High Court for an interim third party debt order, and for the appointment of a receiver in respect of the funds receivable by SOMO under the LoCs. In order to succeed in its application, Taurus was required to satisfy Rule 72.2 of the Civil Procedure Rules ("CPR") that there was a "debt due or accruing due to the judgment debtor from the third party". In Taurus's view, this was fulfilled: under the LoCs, Crédit Agricole undertook to pay the debt owed to SOMO by Shell.
SOMO challenged the order on a number of grounds. In the High Court, it was held that the terms of the LoCs were unusual and benefitted both the Central Bank of Iraq and SOMO. Therefore, a third party debt order could not be granted. The Court of Appeal agreed with that result, but for different reasons. The Court of Appeal found that it was bound by the ruling in Power Curber v National Bank of Kuwait in which it held that LoC debts were situated where they were payable. In SOMO's case, as the debt was situated in New York, the English Courts had no jurisdiction.
The Supreme Court's decision
The Supreme Court was divided 3:2 in its opinion, but the majority judgment commented that the reference to "the beneficiary and Central Bank of Iraq" clearly sought to define SOMO as the beneficiary of the LoCs. Just because the promise to pay a debt owed to SOMO was via a nominated bank account in the name of the Central Bank of Iraq did not mean that the Central Bank of Iraq was substituted as the beneficiary. The Central Bank of Iraq had no proprietary interest in the debt. Rather, discharge of that debt due from Shell to SOMO was simply into the Central Bank of Iraq's account with the Federal Reserve Bank. Indeed, the only reason that this account was the mode of receipt by SOMO was because of the political arrangements put in place in order for Iraq to comply with the United Nations Security Council Resolution relating to Iraqi oil revenues. This point was, however, not unanimously agreed and the dissenting opinions considered that the Central Bank of Iraq's rights were unjustifiably prejudiced. The only party which could be said to have a right to the payment was the Central Bank of Iraq and therefore the only debt which could be said to be due was to the Central Bank of Iraq.
In respect to the location of the debts, the Supreme Court commented that it was under no obligation to follow the ruling in Power Curber v Bank of Kuwait which had considered the place of payment to be the relevant jurisdiction. Where banks had a number of different branches in different locations, each branch was required to be treated as a separate bank. In this case, the LoCs were issued by the London branch of Crédit Agricole and, therefore, the location of the debt owed by Crédit Agricole to SOMO was England.
With the majority having established that (i) SOMO was the beneficiary and (ii) the location of the debt was England, the question turned to whether a third party debt order could, and should, be ordered. The majority held that, notwithstanding the terms of the LoCs and SOMO's inability to control funds in the Central Bank of Iraq's account, a third party debt order would be granted in order to enable Taurus to enforce the award against SOMO. As Lord Clarke commented,
"International trade, and particularly the international oil trade, is conducted predominantly by means of letters of credit…Successful international commerce depends upon the enforcement of contracts, the enforcement of arbitration awards and the enforcement of judgments."
Third party debt orders can be a useful means of enforcing arbitral awards. The test for a third party debt order under Part 47 of the DIFC Court Rules largely mirrors that under England's CPR 72. The question of third party debt orders remains largely untested in the DIFC Courts and it remains to be seen what impact the judgment of the UK Supreme Court in Taurus v SOMO will have on the use of third party debt orders.
As LoCs used in Middle East transactions are commonly issued from London, and often have complex or indirect payment requirements, the decision in Taurus v SOMO could be of very wide ranging significance. It will allow those who hold awards (or judgments) to enforce through the English Courts against a LoC even where the LoC is not to be paid in the UK, and is not to be paid directly to the award/judgment debtor.
This article is reproduced with kind permission from the authors and appeared in Lexology in November 2017.