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Supreme Court clarifies situs of debts represented by letters of credit

25 October 2017

In a judgment given on Wednesday 25 October 2017 the Supreme Court has overturned the Power Curber decision and has held that there is no special rule relating to debts represented by letters of credit and that the situs of such debts is, as is usually the case, where the debtor is. The Court also clarified the circumstances in which a receivership order could be made by way of equitable execution.

Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64

In February 2013 Taurus Petroleum Limited (“Taurus”) obtained an arbitration award against the State Oil Marketing Company (“SOMO”) in the sum of US$8,716,477. The arbitration was, by agreement of the parties, heard in London, although the official seat of the arbitration remained in Baghdad. The award was for various demurrage and other claims arising out of Taurus’s purchase from SOMO of crude oil and sale to SOMO of LPG under contracts which dated back to 2005 to 2007.

SOMO failed to honour the award. Consequently, Taurus applied to the High Court without notice for leave to enforce the award as a judgment under section 66(1) of the Arbitration Act. At the same time it sought a Third Party Debt Order (“TPDO”) and the appointment of a receiver by way of equitable execution over funds receivable by SOMO under a letter of credit. The letter of credit had been opened by a branch of Crédit Agricole in London on behalf of Shell International Eastern Trading Co. The orders were made by the High Court and as a consequence, the sum of US$9,404,764.08, being the award plus interest and estimated future costs of enforcement, were paid into court by Crédit Agricole, to await the confirmation of the High Court order.

The letter of credit was in the standard form required by SOMO in their crude oil contracts. Although it named SOMO as beneficiary (and SOMO issued the corresponding invoice) the letter of credit required payment to be made to the Iraq Oil Proceeds Account belonging to the Central Bank of Iraq (“CBI”) at the Federal Reserve Bank of New York in New York.

SOMO challenged the orders on the grounds of want of jurisdiction and state immunity and on the grounds that the letters of credit required payment to be made to the CBI, not to SOMO, and consequently it did not represent a debt due to SOMO.

In the High Court SOMO’s arguments on state immunity were dismissed but Field J held that the debt due under the letter of credit was owed jointly to SOMO and the CBI and as it was owed jointly it was not an asset of SOMO’s that could be arrested. He therefore ordered the discharge of the orders but he gave permission to appeal and ordered a stay of execution pending the Court of Appeal’s decision.

In the Court of Appeal SOMO’s arguments on state immunity were once again dismissed. By a majority the Court of Appeal held that the sole beneficiary under the letter of credit was the CBI, not SOMO at all, a rather surprising finding, given that SOMO was the seller and had required payment by letter of credit in its contract and was indeed named as beneficiary in that letter of credit. The dissenting judge, Moore-Bick LJ, held that SOMO was the beneficiary and therefore the letter of credit was able to be arrested as a debt due to SOMO. However, he found himself bound by an earlier Court of Appeal decision in the Power Curber case (Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233) which held that, contrary to the normal rule of the situs of a debt being where the debtor was, in the case of a letter of credit, the situs of the debt was where the letter of credit was payable (i.e. in this case in New York). Hence Moore-Bick LJ held that the English court did not have jurisdiction because the debt was not situated in London but New York and a TPDO, being a proprietary remedy, could not be issued over foreign debts.

The issues before the Supreme Court were therefore:-

  1. Where was the situs of the debt under the letter of credit. Was it where the debtor was, i.e. the place of issuance (London), or was it the place of payment (New York)?
  2. As a matter of construction of the letter of credit, was the beneficiary SOMO, in which case the TPDO could stand, or was it the CBI or was it jointly SOMO and the CBI, in either of which latter case the TPDO would have to be discharged.
  3. Was there a principle of “honest dealing” which would prevent the Court making the TPDO in circumstances where Crédit Agricole had given an undertaking to the CBI to pay the proceeds of the letter of credit into the designated account in New York.
  4. Should the receivership order be permitted to stand in any event.

All of these questions were resolved in favour of Taurus.

As to (1), the Supreme Court held unanimously that the situs of the debt was London. Power Curber was overruled. Their Lordships saw no reason why there should be a difference so far as situs is concerned between letters of credit and ordinary debts. This clarifies the position and will allow creditors to enforce arbitration awards and judgments by effectively arresting letters of credit opened in London in favour of overseas beneficiaries (providing that they have not been confirmed elsewhere). Since a number of other common law jurisdictions had followed Power Curber, it is likely that the law in those jurisdictions will also change, when the issue comes up for consideration.

As to (2), the majority of the Court held that the sole beneficiary under the letter of credit was SOMO. The requirement to pay the CBI was the channel by which the debt was to be discharged but it did not give the CBI any proprietary right in respect of that debt. Furthermore the letter of credit expressly forbade any assignment. Consequently the most that the CBI could have was a claim in damages against Crédit Agricole for failing to comply with its undertaking but that claim would fail because of the overriding order of the court which discharged the debt owed by Crédit Agricole.

It is perhaps interesting that the three Lordships, who found that SOMO was the sole beneficiary, were commercial judges who were used to dealing with letters of credit, as was the dissenting Judge in the Court of Appeal, Moore-Bick LJ. Reference was made to the established commercial practice relating to letters of credit; how they are a stand alone contract separate from the sale contract and how they are regulated by UCP 600, which clearly supported the view that SOMO was the sole beneficiary under the letter of credit.

The third issue of “honest dealing” was given short shrift by Lord Clarke, with whom Lords Sumption and Hodge agreed. Lord Clarke agreed with the analysis of Moore-Bick LJ in the Court of Appeal.

As to (4) and the question of receivership, the issue was whether there was sufficient connection between SOMO and the English jurisdiction to warrant the granting of the order. Lord Clarke had no difficulty in finding that there was a sufficient connection and that therefore, had a TPDO not been available, a receivership order could have been made which would not have infringed the rights of Crédit Agricole. Lords Sumption, Hodge and Neuberger all agreed with Lord Clarke. Lord Mance appears to do so as well.


In deciding that the situs of a debt represented by a letter of credit is where the issuing bank is situated, the Supreme Court has clarified where funds payable under letters of credit can be arrested. Since many letters of credit in commercial transactions are issued in London, where litigation and arbitration often takes place, this judgment will make it easier for creditors to use the English jurisdiction to enforce arbitration awards and judgments. Singapore, being a common law jurisdiction, is likely to follow the Supreme Court decision, as will other common law jurisdictions.

Even if a TPDO is not available, the decision also paves the way for applications to be made for receivership orders, it having clarified the grounds on which such applications can be made and the connection that there has to be with the English jurisdiction.

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