Third party debt orders and letters of credit
13 November 2017
The Supreme Court decided that the legal ‘location’ (situs) of a debt due under a letter of credit is the place of residence of the debtor, not where the debt is due to be paid. The decision opens the door for third party debt orders over letters of credit issued by London-based banks, even if payment is made abroad. The court also allowed a third party debt order despite a pre-existing contractual interest of a fourth party that the debt would be paid into an account of that fourth party. Only proprietary interests of fourth parties are sufficient reason not to grant a third party debt order. The decision will be of interest to those engaged in international commerce, particularly commodities trading utilising letters of credit issued by London-based banks or branches: Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq  UKSC 64.
Taurus Petroleum Ltd (Taurus) sought to enforce an arbitration award against the State Oil Marketing Co. of the Ministry of Oil, Republic of Iraq (SOMO). Taurus requested a third party debt order over letters of credit issued by Crédit Agricole SA, London branch, in payment for oil supplied by SOMO to Shell.
SOMO challenged the order. Under the terms of the letters of credit, the sums were to be paid into a specific account held by the Central Bank of Iraq (CBI) at the Federal Reserve Bank in New York. This requirement stemmed originally from UN sanctions requirements imposed on the sale of oil by Iraq, namely that all proceeds from such sales had to be paid into this account and be used for specific limited purposes (95% for development in Iraq, 5% for reparations to Kuwait). Even though the sanctions had ceased to apply, Iraq opted to continue to receive all oil payments through the CBI account. On the basis of this payment structure, SOMO argued that CBI was the beneficiary of the debt under the letters of credit, not SOMO. As a result, SOMO argued, the English court could not issue a third party debt order, as the debt under the letters of credit was not due to the award debtor (here, SOMO). SOMO further argued that the debt under the letters of credit was located in New York and, therefore, the English courts did not have jurisdiction over the debt. Taurus contended that it was entitled to the third party debt order as SOMO was the beneficiary of the debt and the situs of the debt was England.
The task for the court was, therefore, to determine whether CBI or SOMO was the beneficiary under the letters of credit and the situs of the debt. The court also considered whether it could issue a receivership order, an issue which is not covered in this article. State immunity, which was considered by the Court of Appeal and is covered in a previous issue, 1 was not pursued before the Supreme Court.
Construction of the letters of credit
In the letters of credit, SOMO was designated as the “beneficiary”, and there was also an undertaking by Crédit Agricole to SOMO and the CBI that the debt would be paid into the CBI account.
In construing these provisions, the majority of the court decided that SOMO held the legal and beneficial interest in the debt. CBI only had, at most, a contractual right that the debt amount would be paid into the correct CBI account; therefore the debt under the letters of credit was owed to SOMO.
The situs of the debt under a letter of credit is the place of residence of the debtor
The Supreme Court overturned the Court of Appeal decision and Power Curber International Ltd v National Bank of Kuwait SAK  1 WLR 1233, and held that the situs of a debt under a letter of credit is the place of residence of the debtor (London), not the place of payment (which was New York). The letters of credit incorporated the Uniform Customs and Practice for Documentary Credits (UCP) 600. The UCP is a set of contractual rules published by the International Chamber of Commerce aimed at standardising the terms of letters of credit. Applying UCP 600, the court held that the London branch of Crédit Agricole was to be treated as a separate bank for the purposes of the letters of credit and, therefore, the situs of the debts was London. As a result, the court found that it had jurisdiction over the debt, opening up the possibility of issuing a third party debt order.
Third party debt orders can be issued unless a fourth party has a proprietary interest in the debt
Although the members of the Supreme Court were in agreement that the situs of the debt was London, the court was still divided as to whether a third party debt order could be ordered. The majority found that a third party debt order could be made provided that the judgment debtor (here, SOMO) had the entire legal and equitable interest in the debt. The majority considered that CBI had a contractual interest sounding in damages only. This non-proprietary interest was insufficient to prevent a third party debt order being issued.
The decision changes English law on the situs of a debt under a letter of credit. It is now the position that the situs of the debt will be the place of residence of the debtor. This will mean that payments made under letters of credit issued by a London-based bank (or branch of a bank if using UCP 600) can be the subject of an English court third party debt order, even if the debt is to be paid outside the jurisdiction.
Moreover, the majority decision on third party debt orders clarifies the circumstances in which third party debt orders are available. Only a proprietary interest of a fourth party will be sufficient reason not to grant the order. A contractual interest alone will not be enough. As a result, parties should take care that all legal and equitable interests in the debt are properly reflected in the underlying document, particularly if the amounts due are being paid into an account that is not held by the ‘beneficiary’ with the intention that the ‘beneficiary’ would not be able to deal with the monies after they had been paid under the letter of credit.
For a judgment creditor, this decision may provide a new avenue to pursue in recouping amounts owed under a judgment or arbitration award. Parties using letters of credit frequently turn to London-based banks or branches. This decision makes it easier for third parties to intercept payments made under such letters of credit. Provided there is no proprietary interest of a fourth party in the amounts paid, a third party (for example an award creditor as in this case) can now obtain a third party debt order even if the amounts are to be paid outside of the jurisdiction and into an account held by a fourth party.