Legal Case Summaries

Article

Note: The present case signals the end of a legal battle over the enforcement of an arbitral award by Taurus Petroleum (Award Creditor) as against the State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (Award Debtor/Beneficiary). The arbitral award was issued pursuant to the Arbitration Rules of the UN Commission on International Trade Law (UNCITRAL) in the amount of USD 8,716,477.00.

Award Creditor sought to enforce this award by attaching the proceeds of a series of LCs from unrelated sales transactions for oil between Award Debtor/Beneficiary as seller and Shell Trading and Shipping Co. as buyer (Applicant).

The LCs were issued subject to UCP600 by Crédit Agricole (Issuer) in London in favour of Award Debtor/Beneficiary, upon the presentation of – among other documents – the Award Debtor/Beneficiary's "duly signed original commercial invoice".

The LCs were sent by Issuer via 'telex' to the Central Bank of Iraq (Central Bank), requesting that Central Bank add its confirmation(s). The Lord Justice notes that "whatever was originally intended [Central Bank] was simply a notifying bank and did not in the event add its confirmation."

Central Bank was also, however, the account holder of the designated account at the Federal Reserve Bank at New York to which payment under the LCs was to be effected. Pursuant to a 2003 United Nations Security Council Resolution imposing sanctions on Iraq, this account was designated the 'Oil Proceeds Receipts Account'. After the formal requirements of that sanctions regime were relaxed in 2011, the Government of Iraq chose to continue this arrangement "under which it used the Oil Proceeds Receipts Account to receive the proceeds of export sales of oil and gas from which 95% would be transferred to a separate account in the name of the [Central Bank] and 5% would continue to be paid in the UN compensation fund for Kuwait."

The continuation of this prior regime is critical for understanding why Issuer sent the LCs to the Central Bank in this manner, and why the LCs also contained the following 'Additional Instructions':

"[A] Provided all terms and conditions of this letter of credit are complied with, proceeds of this letter of credit will be irrevocably paid into your [ie Central Bank's] 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] that documents drawn under and in compliance with the terms of this credit will be duly honoured upon presentation as specified to credit [Payee] A/c with Federal Reserve Bank New York."

After initially granting interim third party debt orders and a temporary receivership, into which Issuer paid USD 9,404,764.08 in satisfaction of the LCs, Judge Field in the court of first instance determined that the additional instructions created a "joint debt [between Award Debtor/Beneficiary and Central Bank] in respect of which the court could not make a third party debt order", thereby setting aside the interim debt and receivership orders. The Judge additionally stated that had the debts been owed solely to Award Debtor/Beneficiary it would not have been immune from suit but with the debts being owed to the Central Bank, was "in any event immune from execution under sections 13(2) and 14(4) of the State Immunity Act of 1978."

Four issues were then reviewed by the Court of Appeal in its decision to affirm the ruling of the first instance court and dismiss the appeal: (1) whether Award Debtor/Beneficiary was the sole beneficiary of the LCs; (2) whether the legal situs of the debts owed under the LCs was in New York or London; (3) whether the first instance court correctly dismissed the receivership order in favour of Seller; and (4) whether the debts pursuant to the LCs were immune from execution under the State Immunity Act of 1978.

On appeal to the U.K. Supreme Court, Clarke, LJ, wrote the judgment to which Sumption and Hodge, LJJ., agreed, overturning the judgment of the Court of Appeal and restoring the third party debt and receivership orders that had been granted on a temporary basis by the court of first instance. On the four issues reviewed by the Court of Appeal, the U.K. Supreme Court held the following:

First, on the question of whether the legal situs of the debts was New York or London, the Court of Appeal determined, in accordance with the case of Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233, where a majority held "that in the case of debts due under letters of credit the situs of the debt was the place of payment." Deciding to overturn Power Curber, the Justice chose to follow the general rule under English law that "the situs of the debt is the debtor's residence, the place where the debt is recoverable." The Lord Justice determined, therefore, that since the Issuer, i.e. the 'debtor' under the LCs, was located in London, the legal situs of the debts was in London. In support of this finding, the Lord Justice cited UCP600 Article 3 (Interpretations) that "Branches of a bank in different countries are considered to be separate banks." Thus, the London branch of the Issuer was a separate bank and since it was located in London the Court therefore had jurisdiction.

On the question of whether the Award Debtor/Beneficiary was the sole beneficiary, the Court of Appeal had held that the "unusual terms" in the Additional Instruction 'B' had the effect of substituting Central Bank in place of Award Debtor/Beneficiary as "solely entitled to property in the debt thereby created, and that it conferred on [Award Debtor/Beneficiary] (rather than [Central Bank]) only a non-proprietary right to seek damages for breach of contract."

According to the Lord Justice, this finding was wrong because under UCP600 practice, there is only one beneficiary absent a clear statement to the contrary. The Lord Justice provided essentially a two-fold reasoning to come to this conclusion under UCP600: (1) that according to the definition, “Beneficiary” under UCP600 Article 2 (Definitions) is "the party in whose favour a credit is issued"; and (2) that under UCP600 Article 18 (Commercial Invoice), the commercial invoice "must appear to have been issued by the beneficiary". Therefore, Award Debtor/Beneficiary could be the only beneficiary under the LCs.

Because of this finding, Additional Instruction 'B' was found to "contain a joint promise in favour of [Award Debtor/Beneficiary] and [Central Bank] that the proceeds of the letter of credit would be paid into [Central Bank's] account in New York." This joint promise however, did not amount to a debt owed under the LC, but rather constituted a "separate collateral obligation to pay the proceeds into that account which was owed to [Award Debtor/Beneficiary] and [Central Bank] jointly and sounded in damages" rather than as a debt.

On the issue of state immunity, the Lord Justice agreed with the previous courts' findings that the Award Debtor/Beneficiary was a separate entity from the state of Iraq and did not contract as its agent. Thus, when the Lord Justice overturned the Court of Appeal's determination that the Award Debtor/Beneficiary was a joint beneficiary, the issue of state immunity fell away as it was not argued before the U.K. Supreme Court whether Award Debtor/Beneficiary enjoyed state immunity. As the sole beneficiary that was not an arm of the state, Award Debtor/Beneficiary was not immune from suit.

Finally, in determining to restore the receivership, the Lord Justice stated simply as follows:

"[Central Bank] has no interest of any type in the Letter of Credit debts. Its account is merely the conduit via which moneys paid from [Issuer] at the instance of [Applicant] pass onwards into the Iraqi government budget. If the promise as to the route of payment to [Award Debtor/Beneficiary] is breached because of interception by judicial execution, the [Central Bank] has suffered no loss and could make no complaint, whether against [Issuer] or against [Award Debtor/Beneficiary]. The obligation on [Issuer] to pay in accordance with its promised method is necessarily subject to the implicit qualification that the funds have not been intercepted by judicial intervention."

Comment:

The decision of the U.K. Supreme Court seems to have come to rational conclusions and corrected the lower courts in at least two ways:

First, it almost goes without saying that the named beneficiary in a non-transferable credit without any operation of law should indeed remain the named beneficiary regardless of whether there is a nominated bank account into which payment is to be effected. In the words of one of the advocates before the Court, "it is a startling proposition that a promise to pay a debt owed to a named beneficiary via a nominated bank account in the name of another substitutes the latter for the former as the only beneficiary under a letter of credit."

Second, locating the situs of the debt owed under an LC at the location of the entity which has incurred the debt – whether an issuing bank or a confirming bank – seems sensible from a practical perspective. In the alternative, a bank which issued a credit in London would not need to pay into a receiver located in New York.

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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.