Award debtors beware: UK Supreme Court affirms public interest in the recognition and enforcement of arbitral awards

On 25 October 2017, the UK Supreme Court narrowly upheld the appeal brought by an award creditor, Taurus Petroleum Limited (“Taurus”), seeking to attach debts of the State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (“SOMO”). The judgment is available here.

Background and procedural history

On 13 February 2013, an UNCITRAL tribunal granted an award in favour of Taurus and ordered SOMO to pay Taurus approximately USD 8.7M. The underlying dispute arose out of a series of contracts between Taurus and SOMO for the sale of crude oil and liquefied petroleum gas. SOMO declined to honour the award.

Taurus sought leave to enforce the award in England through a combination of third party debt orders (“TPDOs”) and receivership orders to recover debts due to SOMO arising out of an unrelated sale. Relevantly, Taurus had learned of a separate sale by SOMO of crude oil to an unrelated purchaser (a company in the Shell group), which was to pay SOMO under letters of credit issued by the London branch of the French bank Crédit Agricole.

In March 2013, Taurus obtained ex parte an order for leave to enforce the award, an interim TPDO and an order for the appointment of a receiver in respect of the funds receivable by SOMO under the letters of credit. Crédit Agricole duly paid the relevant sums into court. In November 2013, following SOMO’s challenge and a contested hearing, the High Court set aside the third party debt order and receivership order on the grounds of want of jurisdiction and State immunity. In July 2015, the Court of Appeal dismissed an appeal by Taurus against the set-aside of the orders and also dismissed a cross-appeal by SOMO on further issues of State immunity. Taurus successfully appealed to the Supreme Court.

Key findings

Connection with State’s central bank no bar to execution

Unusually, the letters of credit provided for payment in New York not into an account held by SOMO but rather into the “Iraq Oil Proceeds” account held in the name of the Central Bank of Iraq (the “CBI”) at the Federal Reserve Bank of New York. It was accepted that any property of a State’s central bank (such as the CBI) was immune from execution under section 14(4) of the State Immunity Act 1978. Before the Court of Appeal, as a matter of construction, two of the three judges had held that the CBI, not SOMO, was the sole creditor of the moneys to be paid. This conclusion was fatal to the TPDO (which could only be issued in respect of debts due to SOMO) and further triggered State immunity from enforcement under section 14(4).

On appeal, by a narrow majority, the Supreme Court reached the opposite conclusion that the debt under the letters of credit was owed solely to SOMO. Since CBI was “no more than the conduit pipe” to discharge the debt due to SOMO and had no proprietary interest of its own, there was no bar to the TPDO and no issue of State immunity arose.

New rule on the legal situs of debts under letters of credit

Under English law, the general principle is that the situs of a debt is the debtor’s residence, where the debt is recoverable. However, letters of credit have been treated differently since 1981, when the Court of Appeal held in Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233 that the situs of debts under letters of credit was the place where they were in fact payable. Following this binding precedent, the Court of Appeal in Taurus found that the situs of the debt was outside English jurisdiction in New York (where the debt was payable). Accordingly, the Court of Appeal held that English courts had no jurisdiction to grant the TPDO sought over the debt.

The Supreme Court unanimously overturned the Power Curber exception as wrong in principle. The Supreme Court found that there was no reason to depart from the general rule that the situs of a debt is the debtor’s residence, where the debt is recoverable. In this case, since the letters of credit were issued by the London branch of Crédit Agricole, the situs of the debt was in London. The TPDO could therefore be restored.

Clear public policy to recognise and enforce awards

The Supreme Court further restored, by majority, the receivership order against SOMO. In his leading speech, Lord Clarke (with whom Lord Sumption, Lord Hodge and Lord Neuberger agreed on this point) issued a resounding affirmation of the public interest in the recognition and enforcement of awards:

Successful international commerce depends upon the enforcement of contracts, the enforcement of arbitration awards and the enforcement of judgments. Both the international plane, through the 1958 New York Convention and the UNCITRAL Model Law and Rules, and the domestic plane, through the Arbitration Act 1996, evince a clear policy to ensure the efficient recognition and enforcement of arbitration awards.

Even though SOMO itself had no presence in England, Lord Clarke found that its trade “involved a long term connection with the jurisdiction” in so far as it was “entirely foreseeable by SOMO” that a majority of the letters of credit against which it traded oil would have been issued out of London and subject to English law. As Lord Clarke expressly noted:

International trade, and particularly the international oil trade, is conducted predominantly by means of letters of credit. London is one of the two major financial centres of the world and enormous numbers of letters of credit are issued by international banks from their London branches. …

In these circumstances it was predictable that, if SOMO failed to honour an UNCITRAL arbitration award, it would find itself sued in an English court for the purpose of enforcing that award in accordance with international norms.

What about immunity pertaining to SOMO?

Notably, the Supreme Court was not required to consider whether SOMO itself, as a State entity, might enjoy State immunity. The Court of Appeal had previously determined that, on the evidence, SOMO was an organisation independent of the Republic of Iraq (“Iraq”). SOMO appeared to have been incorporated specifically to act as a separate commercial entity to stand between Iraq and the purchasers of oil and gas and appeared to be governed by its own board of directors. There was nothing to suggest that Iraq’s Ministry of Oil dictated the conduct of its day-to-day operations. Further, the Court of Appeal had rejected SOMO’s submission that the sale by SOMO of Iraq’s petroleum reserves could only be an exercise of Iraq’s sovereign authority, thus attracting State immunity. To the contrary, the Court of Appeal held that “[s]elling crude oil and entering into ancillary transactions of the kind represented by the letters of credit are ordinary commercial activities”. These findings were not challenged before the Supreme Court.

Commentary

The Supreme Court’s rulings in Taurus send a clear signal to award creditors and award debtors alike that the United Kingdom remains one of the world’s most attractive pro-enforcement jurisdictions – including for execution of awards against the property of State companies. Under specific circumstances, even debts due to be paid to the central banks of foreign States may be available for attachment. Receivership orders may also be available where an award debtor’s business shows connection with England, even if the award debtor itself has no presence in England.

By unanimously overturning a decades-old precedent on the legal situs of letters of credit, the Supreme Court’s decision renders, for the first time, letters of credit issued by London banks but payable overseas amenable to attachment as assets located within English jurisdiction. Given the central importance of London to international trade as one of the major financial centres of the world from which letters of credit are issued – as the Supreme Court itself recognised – in enormous numbers, the Supreme Court’s decision will likely portend increased enforcement efforts against letters of credit issued by London banks regardless of where they are in fact payable.

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