The UK Supreme Court has laid down important principles for the enforcement of international arbitral awards and, specifically, for the interception by an award creditor of funds payable to an award debtor under letters of credit. An issuing bank’s London branch had undertaken to make payment to the award debtor (under an unrelated sale and purchase contract), under letters of credit, through a conduit account abroad in the name of a third party. The Court held that a promise to pay a debt to a named beneficiary via a nominated bank account in another’s name did not mean that the latter was substituted as beneficiary. The award creditor was, therefore, able to enforce its award against the debt which the Court regarded as property of the award debtor situated in England.
A Swiss oil company (“Taurus”) obtained an UNCITRAL arbitration award (the “Award”) against an Iraqi oil company (“SOMO”). When SOMO declined to honour the award, Taurus sought to enforce it. Taurus discovered that SOMO was due to be paid by a third party on an unrelated contract via two letters of credit issued by the London branch of a French bank (“Crédit Agricole London”) and payable to the Federal Reserve Bank of New York (“BNY”) in favour of the Central Bank of Iraq (“CBI”). Each letter of credit identified SOMO as the beneficiary, but was addressed to CBI and contained a promise on the part of Crédit Agricole London to make payment to CBI’s account with BNY irrespective of any conflicting instructions which might be given by SOMO.
Taurus obtained an order from the High Court permitting the Award to be enforced as a judgment in England, which SOMO did not challenge. Taurus also applied on a without notice basis for, and obtained, (i) an interim third party debt order (“TPDO”) (a proprietary remedy which attaches the property of a judgment debtor – the debt owed to the judgment debtor by a third party – in favour of the judgment creditor) in respect of the proceeds due under the letters of credit, to satisfy SOMO’s judgment debt to Taurus, and (ii) an order for the appointment of a receiver (authorising a named individual, often a licensed insolvency practitioner, to collect in assets belonging to a judgment debtor in order to aid the enforcement of a judgment) in respect of the funds (the “Orders”).
SOMO challenged the Orders on the ground that the court had no jurisdiction to make them, and had wrongly construed the letters of credit. SOMO argued that the letters of credit named SOMO as beneficiary, but were addressed to CBI. The letters stipulated that Crédit Agricole London was to pay the debts to CBI through BNY, irrespective of any conflicting instructions from SOMO. Accordingly, the debts created by the letters of credit were situated in New York, so the English court had no jurisdiction to make a TPDO in respect of them. Moreover, the debts were the property of the Republic of Iraq, and were therefore immune from execution. Finally, the connection between SOMO and the English jurisdiction was too tenuous to justify the exercise of the receivership jurisdiction.
Decisions of the Lower Courts
The High Court dismissed SOMO’s state immunity arguments, but otherwise agreed with SOMO and set aside the Orders. The Court of Appeal upheld the High Court’s ruling, albeit for different reasons.
Decision of the UK Supreme Court
Construction of the letters of credit
SOMO was, and remained, the beneficiary of the letters of credit (as identified by their language) and was therefore the sole owner of the debts that they created. Crédit Agricole London’s primary obligation to make payment was owed to SOMO alone. A promise to pay a debt to a named beneficiary via a nominated bank account in another’s name did not mean that the latter was substituted as beneficiary. That conclusion is consistent with the notion of “beneficiary” in Arts. 2 and 18 of the Uniform Customs and Practice for Documentary Credits (UCP), a code of rules which establishes uniformity in the handling of letters of credit and commands worldwide support. CBI had no proprietary interest in Crédit Agricole London’s debt. Any promise made to CBI or SOMO as to how the debt would be paid was no bar to it being taken in execution by a judgment creditor. The manner of payment was a separate and ancillary obligation which was owed to CBI and SOMO. The TPDO was, therefore, restored.
SOMO did not pursue the argument, which had been rejected by the lower courts, that it was entitled to state immunity as an emanation of the State of Iraq or because it was exercising sovereign authority.
Location of the debt
Under UCP Art. 3, branches of a bank in different countries were considered to be separate banks. The London branch of Crédit Agricole, as the issuer of the letters of credit, was therefore to be treated as an English bank. The debts were located in England because that was where the debtor, Crédit Agricole London, resided and where the debts were therefore recoverable. Accordingly, the court was able to make a TPDO in respect of the debts.
Crédit Agricole London’s obligations to CBI
The unpaid debts under the letters of credit were not CBI’s property. Further, Crédit Agricole London owed only a collateral obligation to CBI, which was to discharge the former’s primary obligation to SOMO by a particular payment method (payment into CBI’s account with BNY). Once the primary obligation was discharged, the collateral obligation fell away. Compliance with the TPDO would consequently discharge Crédit Agricole London from its liabilities to the extent of its payment. As a result, Crédit Agricole London’s obligations to CBI could not prevent the court from making the TPDO.
A receivership order was appropriate because (i) it was predictable, in all the circumstances, that SOMO would be sued (as it was) in England, under English law, for the purpose of enforcing the Award if SOMO declined to honour the Award, (ii) domestic and international policy favoured the efficient recognition and enforcement of arbitration awards, and (iii) it would be inconsistent to treat the Award as a judgment of the English courts for enforcement purposes, whilst limiting the available enforcement methods on the basis of an insufficient connection to this jurisdiction.
The decision provides valuable guidance to judgment creditors seeking to enforce their judgments against third party debts owed to judgment debtors. It is important because it overrules an established precedent (under Power Curber v National Bank of Kuwait SAK  1 WLR 1233 (CA)) that a debt due under letters of credit was situated where payment was to be made. The Supreme Court held that that was incorrect: the fact that a debt due under letters of credit is payable abroad is no bar to getting a third party debt order in respect of that debt in this country if the debt can be enforced here. The Supreme Court also adopted a flexible approach to the constraints to the exercise of the Court’s discretion when considering whether to issue a receivership order, so as to reflect the commercial reality.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm of approximately 750 lawyers practicing throughout a network of 14 offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy and technology sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.