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In 2013, Taurus Petroleum Ltd. (Claimant/ Applicant) under the arbitration rules of United Nations Commission on International Trade Law (UNCITRAL), was awarded USD 8,716,477.00 against State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (Judgment Debtor/Beneficiary) for claims of demurrage, war risk premiums, a performance bond, interest, and costs arising from numerous contracts in which Claimant purchased crude oil from Judgment Debtor. Following the arbitral award, Claimant obtained permission to enforce the award from the High Court of Justice, Queen's Bench Division, Commercial Court, England, and issued Interim Third Party Debt Orders (ITPDOs) against Issuer and Third Party Purchaser, and ordered appointment of a receiver to receive moneys related to a letter of credit issued by Issuer that was designed to satisfy the purchased price of a shipment of crude oil being sold by Judgment Debtor/Beneficiary to Shell Trading and Shipping Company Limited (Third Party Purchaser).

After Issuer acquiesced to a court order to pay USD 9,404,764.08 into court, Judgment Debtor applied to set aside the ITPDOs and the appointment of a receiver on the grounds that the court lacked jurisdiction on the grounds of State Immunity under the "State Immunity Act 1978" and on substantive grounds relating to debts, in addition to a challenge to the jurisdiction of the court to make the ITPDOs due to the situs of the debts being attached. The High Court of Justice, Queen's Bench Division, Commercial Court, Field, J., ruled in favor of Judgment Debtor/Beneficiary and discharged the ITPDOs and the receivership order.

As part of the sale contract between Claimant/ Applicant and Judgment Debtor/Beneficiary, Claimant/Applicant was required to issue two irrevocable letters of credit governed by UCP600 through Issuer whose proceeds were to be paid into the Central Bank of Iraq's (Joint Beneficiary) account at the U.S. Federal Reserve Bank of New York because under the laws of the Republic of Iraq, 5% of all proceeds from the sale of Iraqi oil must be transferred into the UN Compensation Fund Account and the remaining 95% must be transferred into an account controlled by the Iraq Ministry of Finance. In examining the letters of credit, the Judge determined that that Joint Beneficiary was a joint promisee in the letters of credit issued to Judgment Debtor/ Beneficiary because the letters of credit explicitly referenced the Joint Beneficiary, stating that, "PROVIDED ALL TERMS AND CONDITIONS OF THIS LETTER OF CREDIT ARE COMPLIED WITH, PROCEEDS OF THIS LETTER OF CREDIT WILL BE IRREVOCABLY PAID IN TO YOUR ACCOUNT." The Judge concluded that the "promise constituting the debt under each credit is a promise to pay the stipulated sum into [Joint Beneficiary's] account...and it is common ground that [Judgment Debtor/Beneficiary] has no interest in or rights over [Joint Beneficiary'] account...It follows, in my view, that the debts sought to be attached by [Claimant/ Applicant] were never within the free disposition of [Judgment Debtor/Beneficiary] and accordingly the ITPDOs made against [Issuer] cannot stand."

The Judge further determined that Judgment Debtor/Beneficiary was not a duly authorized agent of the Republic of Iraq. The Judge was not persuaded by the argument that Judgment Debtor/Beneficiary was the beneficiary of the letters of credit because under Iraqi law, Judgment Debtor/Beneficiary was not entitled to the proceeds from the sale of crude oil to Third Party Purchaser. Furthermore, the Judge noted that even if Judgment Debtor/Beneficiary was an authorized agent of the Republic of Iraq, the Republic of Iraq would not be able to enforce Issuer's promise to pay as an undisclosed principal because "the terms of the credits precluded enforcement by an undisclosed principal since: (i) the UCP 600 plainly contemplates the beneficiary being the sole party who can enforce an issuing bank's payment obligation made to the beneficiary; and (ii) the credits were expressed to be non-transferable."

The Judge also found that Judgment Debtor/ Beneficiary does not enjoy sovereign immunity as they are a distinct and separate entity from the Republic of Iraq. The Judge noted that Judgment Debtor/ Beneficiary has its own Board of Directors, budget, and signs its own contracts and correspondence under its own name. The Judge stressed that there is a strong presumption that the separate corporate status of should be respected and that Judgment Debtor/ Beneficiary had failed to rebut that presumption. However, the Judge did find that under the State Immunity Act, Joint Beneficiary did qualify for immunity because the "commercial purposes exception provided for in s. 13(4) does not apply to the property of a state's central bank for the purposes of s. 14(4)", the ITPDOs against Issuer must be set aside because Joint Beneficiary had rights under the letters of credit.

On the issue of jurisdiction, the Judge noted that the general rule is that "a debt is situate where it is recoverable." In determining that law governing the letters of credit, English law, was also the lex situs of the debt, the Judge found that even though the payment was being sent to Joint Beneficiary's account in New York, Issuer was being required to take action in London. Therefore, the debt situate was in London and not New York.

[JBB]

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This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.