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Note: To enforce an arbitral award of USD 8,716,477 in its favor against State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (Seller/Judgment Debtor), Taurus Petroleum Limited (Buyer) commenced judicial proceedings in England against a third party bank, the London branch of Crédit Agricole (Issuer) that had issued two letters of credit in favor of Seller/Judgment Debtor in connection with another transaction. The LCs named Seller/Judgment Debtor as “beneficiary” but also contained a joint engagement to Beneficiary and the Central Bank of Iraq (CBI) that payment was to be made into an account at the New York Federal Reserve Bank pursuant to an international agreement regarding payments for Iraqi oil.

Buyer obtained permission to enforce the arbitral award through interim third party debt and receivership orders issued by the High Court of Justice, Queen’s Bench Division, Commercial Court, England. On Seller’s application to set aside the interim debt order and appointment of a receiver with respect to the proceeds of the LCs, the trial court discharged the interim debt and receivership orders that had been issued. Buyer appealed to reinstate the interim debt order and receivership. The Court of Appeal (Civil Division) in a judgment by Moore-Bick, LJ., (dissenting) in which Sullivan and Briggs, LJJ., concurred, dismissed the Buyer’s appeal.

The Court of Appeal reviewed four issues: (1) whether Seller was the sole beneficiary of the letters of credit; (2) the legal situs of the debts whether it be in New York or London; (3) whether the High Court correctly dismissed the receivership order in favor of Seller; and (4) whether the debt pursuant to the letter of credit was immune from execution under the State of Immunity Act of 1978.

Seller/Judgment Debtor argued that it was not the beneficiary of the LCs, a position with which the trial court agreed, because the LCs were issued jointly in favor of CBI and Seller/Beneficiary with instructions to make payments into a bank account controlled by the Iraqi ministry. Briggs, and Sullivan, LJJ. of the appellate court concluded that Seller/Judgment Debtor was not the beneficiary of the LCs because the unusual terms of the LCs made CBI the sole creditor and owner of the debt and merely established a right of action for Seller/Judgment Debtor to sue for breach of contract. Moore-Bick, LJ writing the judgment but dissenting from the majority stated, “I accept that [Seller/Judgment Debtor] is the beneficiary of these letters of credit in the conventional sense and is therefore, in the absence of a clear statement to the contrary, the party to whom [Issuer] incurred the primary obligation to make payment. The fact that it was required to discharge that obligation by making payment to the account of CBI does not detract from that position. Nor does the fact that it also entered into a separate, independent, obligation to CBI to pay the funds due under the letters of credit to its account in New York.”

Seller/Judgment Debtor argued that the situs of the debt under the letters of credit was located in New York because location is dictated by where the payment is to be made to the sole beneficiary. Buyer, on the other hand, contended the location of the debt arising under the LCs was England because permission to enforce the arbitral award through interim third party debt orders could only be granted by the appellate court if the debts arising under the LCs were situated in England. The court concluded that the situs of the debt was located in New York because the language of the LCs provided that Issuer owed the relevant debt under the LCs to the beneficiary to be drawn from its account in New York.

The appellate court affirmed the dismissal of the receivership although Issuer was located in England. The opinion explained that imposition of a receivership would be an, “exercise of an exorbitant jurisdiction” because Seller/Judgment Debtor was not located within the court’s jurisdiction and a receivership against CBI would unjustly affect its joint obligations pursuant to the LCs text.

Seller/Judgment Debtor argued that the debt was exempt from execution under the State Immunity Act of 1978 providing for sovereign immunity as it was a functioning, sovereign entity of Iraq. The appellate court agreed with the trial court that the debt was not immune because Seller/Judgment Debtor functioned strictly as a commercial entity within Iraq but not as an, “exercise of sovereign authority.”

Buyer’s appeal, to reinstate the interim third party debt and receivership orders, was dismissed by the majority of the appellate court because Seller/Judgment Debtor was ruled not the sole beneficiary under the LCs. Despite being labeled as the beneficiary in the LCs text, both Sullivan and Briggs LJJ., concluded Seller/Judgment Debtor was barred from placing the proceeds into its own account as a result of the joint engagement with CBI. Furthermore, the appellate court affirmed the trial court’s discharge of the orders because it established the location of the debt arising under the LCs as New York and thus had no jurisdictional authority to reinstate Buyer’s permission previously granted by the High Court of Justice, Queen’s Bench Division, Commercial Court, England.

TEXT OF THE LCS:

Each of the letters of credit was issued by Crédit Agricole in London and was sent in the form of a telex typical of this kind of business. It was addressed to CBI and provided, so far as material, as follows:

“Please advise our following irrevocable documentary credit to Oil Marketing Company (SOMO) after adding your confirmation:

We hereby establish our irrevocable documentary letter of credit Number ####.

By order of: …

In favour of: Oil Marketing Company (‘SOMO’).

For a maximum amount of USD …

Expiry: 20 April 2013 at the counters of Central Bank of Iraq, Baghdad.

This letter of credit is available by deferred payment at thirty (30) days from bill of lading date … against presentation not later than 20 April of the following documents at the counters of the Central Bank of Iraq, Baghdad for negotiation.

 …

This letter of credit is not assignable or transferable.

…

[A] 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 with Federal Reserve Bank New York, with reference to ‘Iraq Oil Proceeds Account’. These instructions will be followed irrespective of any conflicting instructions contained in the seller’s commercial invoice or any transmitted letter.

[B] We hereby engage with the beneficiary and Central Bank of Iraq that documents drawn under and in compliance with the terms of this credit will be duly honoured upon presentation as specified to credit C.B.I. A/c with Federal Reserve Bank New York.

This credit is subject to the Uniform Customs and Practice for Documentary Credits (2007 Revision) International Chamber of Commerce Publication No. 600.

Special Instructions to Central Bank of Iraq:

Upon receipt of your authenticated telex/SWIFT confirming that you have taken up documents in strict conformity with credit terms and conditions and couriered them to us, we undertake to effect payment at maturity as per your instructions, provided that such telex/SWIFT is received at least 1 New York/London banking day prior to due date. Otherwise, payment will be made1 New York/London banking day later.

If our cover does not reach you in time to reimburse you for your payment under the credit on due date, we hereby undertake to compensate you for any loss of interest incurred by you due to this delay.”

[MJK]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.