An oil company sold cargoes under letters of credit issued by a London bank. The bank had to send the proceeds to an account in New York belonging to the Central Bank of Iraq. When an unpaid arbitration creditor tried to attach the money in England, the court had to distinguish the person entitled to the debt from the person designated to receive payment.
Taurus, a Swiss oil trading company, and SOMO, Iraq’s state oil marketing company, contracted for the sale of crude oil and LPG. Their disputes went to UNCITRAL arbitration. The hearings were held in London, but the seat remained Baghdad. A partial final award of 23 October 2012 and a final award of 13 February 2013 ordered SOMO to pay Taurus US$8,716,477. SOMO did not pay, apart from a later reduction by set-off of costs orders made in its favour in these proceedings.
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A Shell company had bought two parcels of crude oil from SOMO. The price was payable under letters of credit issued by the London branch of Crédit Agricole. Without notice, Taurus obtained leave to enforce the award as a judgment, interim third party debt orders, and a receivership over the sums receivable under the credits. On 22 March 2013 the bank paid US$9,404,764.08 into court. SOMO did not challenge leave to enforce the award as a judgment, but it did challenge the attachment and the receivership.
Whether the debt was owed to SOMO
Under CPR 72, a third party debt order requires a debt due or accruing due to the judgment debtor from the third party. The debt must be owed to the judgment debtor alone. Payment under the order discharges it, so a joint debt cannot be attached without excluding the other creditor or requiring the bank to pay twice.
Each credit was opened in favour of SOMO, called for SOMO’s invoice, was not assignable or transferable, and incorporated UCP 600. Under those rules the beneficiary is the party in whose favour the credit is issued. The credits also promised that the proceeds would be paid in New York into the Central Bank of Iraq’s Iraq Oil Proceeds Account, and engaged with both the beneficiary and the Central Bank to honour complying documents by crediting that account.
Field J held that the debts were in London and that SOMO was separate from the Iraqi state, but that each credit created one joint debt owed to SOMO and the Central Bank. He also held that debt immune from execution as the Central Bank’s property under the State Immunity Act 1978, and set the interim orders aside. The Court of Appeal upheld that result. Moore-Bick LJ nevertheless found a primary debt owed to SOMO alone, with only a collateral promise to SOMO and the Central Bank jointly, sounding in damages. Sullivan and Briggs LJJ held that the Central Bank alone was the creditor.
Lord Clarke, Lord Sumption and Lord Hodge agreed with Moore-Bick LJ. SOMO was the beneficiary, and a direction to pay its debt into another person’s account did not replace it as creditor. The Central Bank had no proprietary interest in the debt. The promise about the route of payment was collateral and was no bar to execution by Taurus. Lord Sumption and Lord Hodge added that discharge of SOMO’s debt under the order would also discharge the ancillary promise about how that debt was to be paid, so the bank would not remain liable to the Central Bank.
Lord Mance and Lord Neuberger dissented on the meaning of the credits. They held that the added conditions made the Central Bank the only creditor, leaving no debt due to SOMO which could be attached. Lord Neuberger would also have refused an order even if the debt were SOMO’s, because it would either leave the bank exposed to a further claim by the Central Bank or override the Central Bank’s earlier contractual rights.
Where the debt was situated
In Société Eram the House of Lords held that a third party debt order is a proprietary remedy and discharges the debt. The English court will not make one over a debt situated abroad unless the foreign law would recognise that discharge. English law places a debt where the debtor resides. UCP 600 treats branches in different countries as separate banks, so the London branch was the relevant debtor and the debts were situated in England. Every member of the Court agreed.
The Court of Appeal had followed Power Curber, which placed a letter-of-credit debt where it is payable against documents. The Supreme Court held that decision wrong in principle and declined to follow it. The reasoning there was brief, and it abandoned the link between the situs of a debt and the place where it can be recovered.
Immunity and receivership
SOMO no longer argued that it was immune as an emanation of Iraq. On the majority construction, immunity attaching to central-bank property did not arise, because the debts were not the Central Bank’s property.
The Court of Appeal had also discharged the receivership, treating SOMO’s connection with England as too slight and the order as depriving the Central Bank of the collateral promise. Lord Clarke held, applying the principles discussed in Masri, that the connection was sufficient once the debts were situated in England. The London issue of the credits and enforcement of the award supplied that connection, and the Central Bank’s account was only a conduit. He would restore the receivership orders, although he was unsure when they would have any practical effect if the third party debt orders took effect. Lord Neuberger agreed that a receivership order could be made. Lord Mance would not have made one on the majority’s analysis, because it would interfere with the Central Bank, which owed Taurus nothing.
Verdict: Taurus’s appeal succeeded by three votes to two. The majority held that the third party debt orders and receivership orders should be restored. The parties were to make written submissions on the form of order and costs within 28 days.
