Taurus Petroleum Limited (Appellant) v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (Respondent)
[2017] UKSC 64
Michaelmas Term
[2017] UKSC 64
On appeal from: [2015] EWCA Civ 835
| JUDGMENT |
Taurus Petroleum Limited (Appellant) v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (Respondent)
before
Lord Neuberger
Lord Mance
Lord Clarke
Lord Sumption
Lord Hodge
JUDGMENT GIVEN ON
25 October 2017
Heard on 21 and 22 March 2017
Appellant Respondent
Gordon Pollock QC Graham Dunning QC Guy Blackwood QC Dan Sarooshi Siddharth Dhar (Instructed by Holman (Instructed by Vinson & Fenwick & Willan LLP) Elkins LLP) LORD CLARKE: (with whom Lord Sumption and Lord Hodge agree)
Introduction
1. The underlying claim in this appeal arises out of a series of contracts between the appellant, Taurus Petroleum Ltd (“Taurus”), a Swiss domiciled oil trading company, and the respondent, State Oil Marketing Company of Iraq (“SOMO”), for
the sale of crude oil and LPG. Disputes arose between the parties which were referred to UNCITRAL arbitration in accordance with the contracts. Although the seat of the arbitration was Baghdad, by agreement all hearings took place in London before Mr Ian Hunter QC as sole arbitrator. It was nevertheless agreed that the seat remained in Baghdad. In due course a partial final award was made on 23 October 2012 and a final award was made on 13 February 2013, whereby SOMO was ordered to pay Taurus US$8,716,477. SOMO declined to honour the award and has paid nothing towards it, save that the debt has been reduced by set off of orders for costs made in favour of SOMO at first instance and in the Court of Appeal in these proceedings.
2. SOMO made an application to set aside the partial final award before the
Iraqi courts on the basis that it was “not fair and failed to recognise justice”. The
application was dismissed by a judgment of the Iraqi court dated 27 December 2012 on the ground that the application was premature because the partial final award did not deal with all the issues between the parties and because neither SOMO nor Taurus had asked the Iraqi court to ratify the award. Since then, neither SOMO nor Taurus has taken steps to have either award ratified in Iraq and SOMO has made no further challenge to either award in the Iraqi courts.
3. Taurus is now seeking to enforce the award in England. The issue in these proceedings is whether Taurus is entitled to enforce the award or judgment by means of a combination of third party debt orders and/or receivership orders to recover moneys owed to Taurus. Under CPR 72 it is the pre-requisite to the making of a
third party debt order that there should be a “debt due or accruing due to the
judgment debtor from the third party.”4. I can take the underlying facts from the judgment of Moore-Bick LJ in the Court of Appeal: [2015] EWCA Civ 835; [2016] 2 All ER Comm 1037. Taurus learned that a company in the Shell group (in the event Shell International Eastern Trading Co) had purchased two parcels of crude oil from SOMO, the price of which was to be paid under letters of credit issued by the London branch of the French
bank Crédit Agricole SA (“Crédit Agricole”). 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 1966, for an interim third party debt order and for the appointment of a receiver in respect of the funds receivable by SOMO under the letters of credit. On 11, 13 and 22 March 2013 the High Court made orders in those terms and on 22 March 2013 Crédit Agricole paid the sum of US$9,404,764.08 into
court. SOMO has not challenged the order under section 66(1) or the court’s
jurisdiction to make it. SOMO did however challenge the other orders. It originally did so principally on the grounds of want of jurisdiction and state immunity but also on the true construction of the letters of credit.
5. In summary, each of the letters of credit provided for payment to be made in New York to the Iraq Oil Proceeds Account at the Federal Reserve Bank of New York and each contained a separate promise on the part of Crédit Agricole in favour
of the Central Bank of Iraq (“CBI”) to make payment in that way. SOMO contended
that the debts created by the letters of credit were therefore situated in New York and that the High Court had no jurisdiction to make third party debt orders in respect of them. SOMO also argued that the debts were the property of the Republic of Iraq and were therefore immune from execution.
6. On 18 November 2013 Field J ([2014] 1 All ER (Comm) 942) held that the debts were situated in London rather than New York and that SOMO was a separate entity from the state of Iraq and did not contract as its agent. As a result, if the debts under the letters of credit had been owed to SOMO alone, they would not have been immune from execution. However, each letter of credit contained a single joint promise in favour of SOMO and CBI and thus a joint debt in respect of which the court could not make a third party debt order. He also held that the debts, being the property of CBI as the Central Bank, were in any event immune from execution under sections 13(2) and 14(4) of the State Immunity Act 1978. He therefore set aside the interim third party debt orders and the receivership orders. He also granted permission to appeal and ordered a stay of execution. Both parties appealed to the Court of Appeal, comprising Moore-Bick, Sullivan and Briggs LJJ. They dismissed the appeals and the cross-appeal on 28 July 2015, albeit (as explained below) in some respects for different reasons. The Court of Appeal made the same orders as the judge but refused permission to appeal. Permission to appeal to this Court was subsequently granted by Lord Neuberger, Lord Toulson and Lord Hodge.
The international background
7. As Moore-Bick LJ, who gave the leading judgment, explained, as was well known, in 2003 the United Nations Security Council passed a Resolution imposing sanctions on Iraq under which the proceeds of sales of oil by Iraq were to be paid into an account held by CBI at the Federal Reserve Bank in New York designated the Oil Proceeds Receipts Account. The bulk (95%) of receipts was to be used for development within Iraq; the balance (5%) was to be used to provide reparations to Kuwait. By 2011 the formal requirements of the sanctions regime had been relaxed in relation to the use of funds for the benefit of Iraq, but the government of Iraq decided to continue the existing arrangements under which it used the Oil Proceeds Receipts Account to receive the proceeds of export sales of oil and gas from which 95% would be transferred to a separate account in the name of CBI and 5% would continue to be paid into the UN compensation fund for Kuwait. The decision was confirmed by a Note Verbale dated 29 April 2011.
The letters of credit - construction
8. It is convenient to consider first the construction of the letters of credit, an issue which divided the Court of Appeal. It was submitted by Mr Pollock QC on behalf of Taurus that letters of credit are intended to be self-contained, in the sense that they stand apart from the commercial transactions which they are intended to support and must therefore be construed in accordance with their terms without taking into account the wider background. For that reason, he argued, the arrangements made by Iraq for receiving and disposing of its oil revenues were of no relevance to the construction of these letters of credit. Moore-Bick LJ said (in para 5) that in his view that approach was broadly correct. Although a bank must carefully assess the creditworthiness of its own customer before agreeing to open a letter of credit at its request, the actual process of doing so is essentially mechanical. The terms of the credit are likely to be determined largely, if not entirely, by the seller and will be communicated by the buyer to its bank. The bank in its turn will then issue the credit in the terms required, undertaking a liability to the beneficiary against which it will seek an indemnity from its customer. Moore-Bick LJ added that one should therefore be very cautious before construing letters of credit by reference to extraneous circumstances of the kind he described and there was no evidence before the court of the extent to which those engaged in financing the trade in Iraqi oil were or were not generally aware of the arrangements to which he had referred. Moore-Bick LJ further added that in those circumstances he was not persuaded that they provide any assistance in construing the letters of credit, the terms of which were prescribed by the standard form of sale contract used by SOMO. I agree.
9. Each of the letters of credit was issued by Crédit Agricole in London and was
sent in the form of a telex (as Moore-Bick LJ put it) typical of this kind of business.
It was addressed to CBI and provided, so far as material, as follows:
“Please advise our following irrevocable documentary credit to
Oil Marketing Company (SOMO) after adding your credit Number GBRM3000017
confirmation. Our reference GBRM300017
By order of: … [Shell]
In favour of: Oil Marketing Company (‘SOMO’).
For a maximum amount of USD …
Expiry: 20 April 2013 at the counters of Central Bank of Iraq,
Baghdad.
This letter of credit is available by deferred payment at thirty
(30) days from bill of lading date … against presentation not
later than 20 April 2013 of the following documents at the counters of the Central Bank of Iraq, Baghdad for negotiation.
SOMO’s duly signed original commercial invoice …
…
This letter of credit is not assignable and not transferable.
…
All banking charges within Iraq are for beneficiary’s account
whereas all charges outside Iraq are for applicant’s account.
…
[A] Provided all terms and conditions of this letter of credit are complied with, proceeds of this letter of credit will be irrevocably paid in to your account with Federal Reserve Bank
New York, with reference to ‘Iraq Oil Proceeds Account’.
These instructions will be followed irrespective of any
conflicting instructions contained in the seller’s commercial
invoice or any transmitted letter.
[B] We hereby engage with the beneficiary and Central Bank of Iraq that documents drawn under and in compliance with the terms of this credit will be duly honoured upon presentation as specified to credit CBI A/c with Federal Reserve Bank New York.
[[A] and [B] added]
This credit is subject to the Uniform Customs and Practice for Documentary Credits (2007 Revision) International Chamber of Commerce Publication No 600.
Special Instructions to Central Bank of Iraq:
Upon receipt of your authenticated telex/SWIFT confirming that you have taken up documents in strict conformity with credit terms and conditions and couriered them to us, we undertake to effect payment at maturity as per your instructions, provided that such telex/SWIFT is received at least 1 New York/London banking day prior to due date. Otherwise, payment will be made 1 New York/London banking day later.
If our cover does not reach you in time to reimburse you for your payment under the credit on due date, we hereby undertake to compensate you for any loss of interest incurred
by you due to this delay.”
In the course of the argument particular attention was paid to the two provisions which I have italicised above, which were referred to by Moore-Bick LJ in para 8 of his judgment as A and B respectively.
10. As Moore-Bick LJ said at para 7, Mr. Pollock submitted that, although these letters of credit included some clauses that are not routinely to be found in documents of this kind, their basic structure follows the pattern which has been established over many years for documentary credits incorporating the Uniform
Customs and Practice (“UCP”). The opening section contains the instructions to the
advising bank, in this case CBI, to notify a named party, in this case SOMO, after adding its own confirmation, that a documentary credit has been established in terms which are then set out in the body of the letter. There follow the basic terms of the
issuing bank’s undertaking, identifying the person on whose instructions the credit
has been opened, the person in favour of whom it has been opened, the expiry date, the place at which documents are to be presented and a detailed description of the documents that are required.
11. Moore-Bick LJ added at para 8 that Mr Pollock further submitted that SOMO was the sole beneficiary of each of the letters of credit. He expressed the view that in conventional terms that was correct. The opening section states that the credit is opened in favour of SOMO and to regard SOMO as the beneficiary of the
undertaking is consistent with the way the term “beneficiary” is used in the special
conditions in contradistinction to CBI. However, he noted that that leaves open the question of the meaning and effect of the special conditions A and B quoted above.
12. Moore-Bick LJ then noted at para 9 that Mr Pollock emphasised that the issue of a documentary credit ordinarily gives rise to a bundle of separate bilateral obligations reflecting the relationships between the different parties involved in the transaction. None of them, however, constitutes a joint obligation. On that basis Mr Pollock submitted that the two conditions contained nothing more than a collateral promise by Crédit Agricole in favour of SOMO and CBI which is separate from the primary obligation to make payment under the letter of credit. That obligation was owed to SOMO alone as the beneficiary. It followed that CBI had no interest of a proprietary nature in the debt due under the letter of credit; it was simply the beneficiary of a separate promise on the part of Crédit Agricole that the debt to SOMO would be discharged by making a payment into the designated account in New York.
13. In para 10 Moore-Bick LJ summarised the position of Mr Dunning QC on behalf of SOMO. Mr Dunning did not challenge Mr Pollock’s analysis of the rights
and obligations which arise under an ordinary letter of credit, but he submitted that the special conditions included in this particular letter of credit prevented SOMO from being anything more than a nominal beneficiary. It was unable to vary any of the terms governing the method of payment, which made it impossible for it to receive any of the funds due under them itself. In truth, SOMO was not really the
beneficiary of Crédit Agricole’s obligation; there was in substance one obligation to
make payment, which was owed to CBI alone. No one other than CBI could take
the benefit of it and enforce it.14. The critical part of Moore-Bick LJ’s judgment is set out at his paras 11 and
12, which can be summarised thus. He agreed that in the ordinary way a documentary credit gives rise to a bundle of separate bilateral obligations of the kind described by Mr Pollock, none of which is joint in nature. That is because in almost all cases each of the parties to the transaction is a person or company acting solely
on that party’s own behalf. He could see no reason in principle why a letter of credit
should not be issued in favour of joint beneficiaries, as for example if goods or property were being sold by joint owners. However, that was not much help in interpreting the special conditions in these particular letters of credit.
15. He described the first difficulty as being to identify who is the beneficiary of the promise contained in condition A. The telex from Crédit Agricole was sent to CBI, not to SOMO, but since it contained a request to notify SOMO of the terms of
the bank’s undertaking, it must be taken to have been addressed principally to
SOMO rather than CBI. He thus concluded that that paragraph was to be read as directed to SOMO and as containing an undertaking to pay the sum due under the
letter of credit to CBI’s Iraq Oil Proceeds Account at the Federal Reserve Bank in
New York. He added that whether that made CBI an agent for collection in the usual sense did not matter for present purposes.
16. The reference to “the beneficiary” in condition B, on the other hand, must be to SOMO and accordingly it was clear that that paragraph did contain a joint promise in favour of SOMO and CBI that the proceeds of the letter of credit would be paid
into CBI’s account in New York. Moore-Bick LJ accepted that letters of credit, like
other commercial contracts, must be construed as a whole in accordance with established principles, but he did not think that, when dealing with such a well- recognised and familiar form of financial instrument, it was right to ignore the established structure within which the parties must be taken to have been working. He accepted that SOMO was the beneficiary of these letters of credit in the conventional sense and was therefore, in the absence of a clear statement to the contrary, the party to whom Crédit Agricole incurred the primary obligation to make payment.
17. Again critically, he added that the fact that Crédit Agricole was required to discharge that obligation by making payment to the account of CBI did not detract from that position. Nor did the fact that it also entered into a separate, independent, obligation to CBI to pay the funds due under the letters of credit to its account in New York. In these circumstances he concluded that Mr Pollock was right to submit that each of the letters of credit gave rise to two separate obligations: an obligation to pay the proceeds into the account of CBI in New York, which was owed to SOMO alone and sounded in debt, and a separate collateral obligation to pay the proceeds into that account which was owed to SOMO and CBI jointly and sounded in damages.
18. I agree with Moore-Bick LJ’s construction of the letters of credit and prefer
it to that advanced by Sullivan and Briggs LJJ and indeed Lord Neuberger and Lord Mance. The language of the letters of credit seems to me to bear out Moore-Bick
LJ’s approach. It begins as follows:
“Please advise our following irrevocable documentary credit to
Oil Marketing Company (SOMO) after adding your confirmation. Our reference GBRM300017
We hereby establish our irrevocable documentary letter of credit Number GBRM3000017
By order of: … [Shell]
In favour of: Oil Marketing Company (‘SOMO’).”
A little further down the letters of credit expressly refer to “SOMO’s duly signed
original commercial invoice” as one of the documents to be presented at the counters
of CBI in Baghdad.
19. The letters of credit thus identify SOMO throughout as the sole “beneficiary”
of the letter of credit, which, as Moore-Bick LJ observed was clear from the
expression “We [ie Crédit Agricole] engage with the beneficiary and CBI”. This
view is also supported by the provision that the credit was subject to UCP 600, in
which “Beneficiary” is defined in article 2 as “the party in whose favour a credit is
issued”. UCP 600 also contains many other references to the expression
“beneficiary”. In article 18 it states that, subject to one irrelevant exception, a
commercial invoice “must appear to have been issued by the beneficiary”. As I see
it, it follows from UCP 600 that SOMO was the sole beneficiary in this case.
20. This is in my opinion of some importance because UCP 600 commands world wide support. In its foreword it describes its objective as follows:
“The objective, since attained, was to create a set of contractual
rules that would establish uniformity in that practice, so that practitioners would not have to cope with a plethora of often conflicting national regulations. The universal acceptance of the UCP by practitioners with widely divergent economic and
judicial systems is a testament to the rules’ success.”
21. What then was the status of CBI under the letters of credit? I agree with Lord
Mance that the references to “you” and “your” in the letters of credit are references
to CBI. However their role was said in the first sentence of the letters of credit quoted
above to be to advise “our (ie Crédit Agricole’s) following irrevocable documentary
credit to … SOMO after adding your (ie CBI’s) confirmation”. Thus one possibility
is that CBI was to be a confirming bank, which is defined in article 2 of UCP 600 as
meaning “the bank that adds its confirmation to a credit upon the issuing bank’s
authorisation or request”. In fact it appears that, whatever was originally intended
CBI was simply a notifying bank and did not in the event add its confirmation.
22. In para 57 Briggs LJ expressed these conclusions in respect of each letter of
credit: “its unusual terms make CBI not SOMO the only creditor in
respect of the money promised to be paid, and therefore solely entitled to property in the debt thereby created, and that it conferred on SOMO (rather than CBI) only a non-proprietary right to seek damages for breach of contract. That would of course have been fatal to the imposition of a TPDO in relation to the debt, regardless of the rule as to situs in Power Curber [infra]. The knock-on consequence of that view is that I would also have concluded that, since the debt was the property of CBI and not SOMO, it was therefore immune from execution under section 14(4) of the [State Immunity] Act [1978]
including by way of equitable execution.”
23. In my opinion, given that it is clear that SOMO was and remained the beneficiary of the letters of credit, I do not think that it is correct to conclude that the debt was the sole property of CBI and not SOMO. As I see it, Moore-Bick LJ was correct to hold that in the absence of a clear statement to the contrary, SOMO was the party to whom Crédit Agricole incurred the primary obligation to make payment. Moore-Bick LJ expressed his conclusion thus at the end of para 12, which I have summarised in para 15 above. In short, each of the letters of credit gave rise to two separate obligations: an obligation to pay the proceeds into the account of CBI in New York, which was owed to SOMO alone and sounded in debt, and a separate collateral obligation to pay the proceeds into that account which was owed
to SOMO and CBI jointly and sounded in damages. I accept Mr Pollock’s
submission that it is a startling proposition that a promise to pay a debt owed to a named beneficiary via a nominated bank account in the name of another substitutes the latter for the former as the only beneficiary under a letter of credit. In my opinion it does not.
24. This is an important conclusion because, as Field J said at para 13, if Crédit
Agricole’s obligation to pay under the credits was owed to SOMO and CBI jointly,
the debt due under that promise could not be attached by a third party debt order
pursuant to CPR Part 72.2(1) because the words “any debt due or accruing due to the judgment debtor from the third party” connote a debt owed solely to the
judgment debtor. Field J added at the end of para 13:
“Otherwise, since payment to the judgement creditor in
compliance with a TPDO discharges the debt owed to the judgement creditor (CPR 72.9 (2)), the joint promisee would be cut out of his interest in the debt. Nor in my view could execution be made in respect of the debt under the letters of credit by virtue of the receivership order because either CBI would be deprived of its interest as a joint promisee or Credit Agricole would have to pay twice, once to Taurus and again to
CBI.”
25. Given that conclusion on the construction of the letters of credit, Moore-Bick LJ did not have to consider a further submission made by Mr Pollock that, even if
CBI was the beneficiary of the bank’s promises to pay under these letters of credit,
they were not promises which it could enforce, because they were not supported by consideration. He did not consider this point in any detail but did say that he would be loath to hold, particularly in a commercial context, that a promise which both parties intended should be relied on was unenforceable for want of consideration. So would I.
26. For the reasons given above, I would allow the appeal on the true construction of the letters of credit and hold that SOMO was the beneficiary of and thus the sole owner of the debts created by the letters of credit and the sole entity to which Crédit Agricole incurred the primary obligation to make payment.
27. In all the circumstances I would accept Mr Pollock’s submission that CBI
had no proprietary interest in the debt and that any promise made to SOMO or to CBI as to how the debt in favour of SOMO would be paid was no bar to those debts being taken in execution at the instance of Taurus as a judgment creditor of SOMO. Lord Sumption and Lord Hodge reach similar conclusions for similar reasons, with which I agree and need not repeat here.
State Immunity
28. Before the judge and the Court of Appeal SOMO argued that it had state immunity against execution on the ground that it was an emanation of the Iraqi state. However that argument was rejected in both courts below and is no longer pursued.
Situs of the debts
29. It is common ground that all property, whether tangible or intangible, has a situs for legal purposes. It is further common ground that, as Moore-Bick LJ put it in para 14, in Société Eram Shipping Co Ltd v Cie Internationale de Navigation [2003] UKHL 30; [2004] 1 AC 260 the House of Lords held that a third party debt order is a proprietary remedy, which, when complied with, operates to discharge the debt and to release the debtor from his obligation. Since it involves dealing with property, the English courts do not have jurisdiction to make such an order in respect of debts situated outside the jurisdiction, unless by the law applicable in that place an English order would be recognised as discharging the liability of the third party to the judgment debtor: see, in particular, per Lord Bingham of Cornhill at para 26. The parties agree that it is therefore necessary to identify the situs of the debts which Crédit Agricole owes to SOMO.
30. Taurus’ argument is that in the case of debts the rule chosen and applied by
English law is that the situs of a debt is the debtor’s residence, the place where the
debt is recoverable. This is a long standing rule which goes back at least to the beginning of the last century. As Mr Pollock correctly put it, its nature and application were explained in detail by Lord Hobhouse in Société Eram Shipping Co Ltd v Cie Internationale de Navigation [2004] 1 AC 260, 287-288.
31. As explained above, the letters of credit were issued by the London branch of Crédit Agricole, which also had places of business in France. Insofar as there was a relevant account, it would have been the account of the opener of the letters of credit, Shell, with Crédit Agricole in London. In the case of letters of credit the position of a bank with different branches has been specifically addressed by the
UCP 600, which provides by article 3 that “Branches of a bank in different countries are considered to be separate banks.” I would accept Mr Pollock’s submission that
on this basis it follows that for the purposes of the letters of credit the London branch of Crédit Agricole is to be treated as a separate bank, and that therefore the sole residence of the debtor under the letters of credit is London. It further follows that, in accordance with the general rule as to the situs of debts the situs of the debts due under the letters of credit is England.
32. The Court of Appeal did not however resolve this issue on that basis because of the decision of the Court of Appeal in Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233, where it was held by a majority that in the case of debts due under letters of credit the situs of the debt was the place of payment. Lord Denning MR and Griffiths LJ comprised the majority on this point, with Waterhouse J dissenting. The Court of Appeal in this case was bound by that decision but we are not. Mr Pollock invites us to hold that Power Curber was wrongly decided and submits that we should not follow it. I would accept that invitation. The reasoning of the majority was not extensive.
33. The case involved a sale of goods paid for under a letter of credit. There were issues as to whether (a) the proper law of the contract and (b) its situs were North Carolina or Kuwait. Payment of the price was to be made against presentation of documents in North Carolina. The National Bank of Kuwait was the paying bank which was held to be in default. The Court of Appeal held that the proper law of the contract was the law of North Carolina. However, we are concerned only with what was said about the lex situs.
34. Lord Denning said this at p 1240F:
“Nor can I agree that the lex situs of the debt was Kuwait. It
was in North Carolina. A debt under a letter of credit is different from ordinary debts. They may be situate where the debtor is resident. But a debt under a letter of credit is situate in the place where it is in fact payable against documents. I would hold therefore that Parker J. was right in giving summary judgment against the National Bank of Kuwait for the sums
due.”
The reasoning of Griffiths LJ was similarly brief. He said at p 1242G:
“Secondly, it was submitted that payment was unlawful
according to the lex situs of the debt which it is said is Kuwait. But this is a debt that is owed in American dollars in North Carolina; I do not regard the fact that the bank that owes the debt has a residence in Kuwait as any reason for regarding Kuwait as the lex situs of the debt. The lex situs of the debt is North Carolina, and this ground for giving leave to defend
cannot be supported.”
35. Waterhouse J agreed with the majority as to the result of the appeal but on the lex situs point he said this at p 1244B-D:
“The more difficult issue for me has been that relating to the
lex situs of the debt.
A debt is generally to be looked upon as situate in the country where it is properly recoverable or can be enforced and it is noteworthy that the sellers here submitted voluntarily to the dismissal of their earlier proceedings against the bank in North Carolina. We have been told that they did so because of doubts about the jurisdiction of the North Carolina court, which was alleged in the pleadings to be based on the transaction of business by the bank there, acting by itself or through another named bank as its agent. As for the question of residence, the bank has been silent about any residence that it may have within the United States of America. In the absence of any previous binding authority, I have not been persuaded that this debt due under an unconfirmed letter of credit can be regarded as situate in North Carolina merely because there was provision for payment at a branch of a bank used by the sellers in Charlotte: and I do not regard the analogy of a bill of exchange
or a security transferable by delivery as helpful.”
36. We were not referred to any other English case which has considered Power Curber. The only English text to which we were referred was para 22-033 of the 15th ed (2012) of Dicey, Morris and Collins on the Conflict of Laws, which shows no enthusiasm for the decision. It says that, according to the decision of the Court of Appeal in Power Curber a claim under a letter of credit is situate where it is
payable against documents, “even if (it seems) the debtor is not resident there”. It
adds, by reference to the short passages from the case quoted above:
“This exception to the general rule appears to have been laid
down for reasons of policy. Under the general rule, it is more
likely that the debt would be situate in the buyer’s country;
under the exception, it is more likely to be situate in the seller’s
country. The effect of the exception is, therefore, to increase
the seller’s security, since the courts of his country are less
likely to interfere with payment (by seizing or attaching the
debt) than those of the buyer’s country. To attain this policy
objective, however, it was necessary to sacrifice the link between situs and recoverability. In the Power Curber case, the issuing bank was a Kuwaiti bank. The place of payment (and hence, according to the Court of Appeal, the situs of the debt) was North Carolina. The bank apparently had no branch there. When it failed to pay (because the debt had been attached by a court in Kuwait), the plaintiff initially brought proceedings in North Carolina, but these were discontinued. Instead it sued in England, where the bank had a branch. It seems that there was some doubt whether the courts of North Carolina had jurisdiction; so the debt was probably not recoverable there. In view of this, it could be argued that it was wrong to regard the
debt as situate there.”
In the last part of that passage the editors specifically refer to part of the judgment of Waterhouse J noted above. I detect a distinct lack of enthusiasm for the majority view. For my part, I prefer the general rule identified in paras 30 to 31 above, which is supported by the UCP.
37. It is fair to say that Mr Dunning provided the court with a review of the position in other common law jurisdictions on the situs of a debt under a letter of credit. Many of them apply both the same general principle as is applied in England for the situs of a debt and the same exception as was derived in England from Power Curber.
38. The respondent’s note addresses five jurisdictions: (i) Singapore; (ii)
Australia; (iii) Malaysia; (iv) New Zealand and (v) Canada. Halsbury’s Laws of
Singapore, Australia and Malaysia all state that the situs of a debt under a letter of credit is the place where it is payable. However, Power Curber is the only, or primary, authority cited in support of this statement. So none of them provides support for the reasoning in Power Curber. It is accepted on behalf of the respondent that the situs of a debt under a letter of credit does not appear to have been addressed
under New Zealand law. The passage cited in Butterworths’ The Laws of New
Zealand does not specifically address the position under New Zealand law as to the situs of a debt under a letter of credit.
39. Canada is the only jurisdiction referred to in the note in which the principle in Power Curber appears to have actually been applied. The two cases in which it has been applied are both decisions of the Superior Court of Quebec. In neither of them did the case turn exclusively on the question of where the debt was situated. In HL Boulton Co v Banque Royale du Canada [1944] JQ 1448 and [1995] RLQ 213 the defendant asked the court to decline jurisdiction under article 3135 of the Civil Code, which provides that even though a Quebec authority has jurisdiction to hear a dispute, it may exceptionally decline jurisdiction if it considers that the authorities of another country are in a better position to decide. It was agreed that the Quebec court was competent to hear the dispute, as the defendant had its head office in Montreal. The question was whether British Columbia was a more appropriate forum. The court decided it was. The only link between the case and Quebec was the registered office of the defendant. The confirmation of the letter of credit was in Vancouver and payment was to take place in Vancouver where the
respondent’s place of business was. All the witnesses from both sides were in British
Columbia. The court stated that in addition, under private international law, the situs of a LC was where it was payable. It cited only Power Curber and a Canadian text on conflict of laws as authority, but did not provide any analysis of its own.
40. The second case was Alessandra Yarns LLC v Tongxiang Baoding Textile Co Ltd [2015] QCCS 346. This case was about whether the fraud exception to a letter of credit had been met such that the court should issue an interlocutory injunction to prevent the beneficiary claiming under the letter of credit. There were four criteria that had to be met in order to grant the injunction: (1) urgency; (2) a serious question to be tried or a strong prima facie evidence of fraud by the beneficiary of the credit; (3) irreparable harm; and (4) if the prima facie case is doubtful, the balance of convenience favours granting the injunction. The situs of the debt under the letter of credit was a factor that was relevant to the fourth question. The court stated that the situs of a letter of credit is the place in which it is payable citing HL Boulton Co v Banque Royale du Canada but did not provide any further analysis. In addition, the court had already answered questions (1) to (3) in the affirmative, so arguably did not need to answer the fourth question. Those cases do not add to the reasoning in Power Curber, such as it is.
41. None of the references persuades me to alter my conclusion that Power Curber was wrong in principle and should not be followed. As stated above, I would hold that the lex situs of the letters of credit in this case was England.
Honest dealing
42. Under this head at paras 25 to 28 Moore-Bick LJ considered Mr Dunning’s
submission that the existence of the undertaking by Crédit Agricole to CBI to pay the proceeds of the letters of credit into the designated account in New York was itself enough to prevent the court from making third party debt orders in relation to them. Given the conclusion of the Court of Appeal on the lex situs point, this argument did not strictly arise. However, given my conclusion on the point, it does in principle arise. Moore-Bick would have rejected it if it had arisen.
43. He would have done so shortly for these reasons. The argument was based on certain comments to be found in In re General Horticultural Co, Ex p Whitehouse (1886) 32 Ch D 512, which Moore-Bick LJ discussed at para 25. He summarised the position thus:
“In that case Wills, to whom a sum had been allowed in a
winding up for work done for the liquidator, charged the amount due to him as security for the payment of three debts, the total amount of which exceeded the sum due to him from the company. Notice of the first charge was duly given to the liquidator. Some time later Whitehouse obtained a judgment against Wills, which he sought to enforce by garnishee order nisi against the sum due from the company. Later, the second
and third of Wills’ creditors gave notice to the liquidator of
their charges. It was accepted that the interest of the first chargee could not be overridden by the garnishee order, but a question arose whether Whitehouse was entitled to execute on the remainder of the debt, notwithstanding the second and third chargees. Chitty J held that he could not because a garnishee
order ‘charges only what the judgment debtor can himself
honestly deal with’. He pointed out that the assignment by way
of charge between Wills and the second and third creditors was binding as between them and that the equitable doctrine of notice was concerned only to determine priority between competing incumbrancers. To allow the garnishee order to override the charges would enable the judgment creditor to obtain not the property of the judgment debtor, but that of
someone else.”
44. Field J accepted that argument on the basis that, since SOMO had no interest
in or rights over CBI’s account with the Federal Reserve Bank in New York, the
debts which Taurus sought to attach were never within SOMO’s free disposition and
could therefore not be the subject of a third party debt order.
45. Moore-Bick LJ disagreed. In para 28 he accepted Mr Pollock’s submission,
which he set out in para 27, that In re General Horticultural Co does not establish any independent principle of honest dealing; it merely reaffirms that a judgment creditor cannot by means of a third party debt order levy execution on property that does not belong to the judgment debtor. Moore-Bick LJ accepted the submission that in that context it may be said that the judgment debtor cannot honestly deal with a debt which he has assigned to a third party and that the judgment creditor cannot execute on such a debt, but that is because it is no longer the property of the judgment debtor. He also referred to Rogers v Whitely (1889) 23 QBD 236.
46. In para 28 Moore-Bick LJ expressed his reasons for accepting Mr Pollock’s
submission in this way:
“The cases do not support the proposition that there is an
independent principle limiting the scope of third party debt orders to debts with which the judgment debtor can honestly deal, otherwise than by reference to the existence of proprietary interests. Although in the present case SOMO had no control over funds once they reached the account of CBI, CBI itself had no proprietary interest of a recognised kind in the debts arising under the letters of credit until they had been paid. In my view the judge was wrong to hold that the terms of the
letters of credit and SOMO’s inability to control funds in CBI’s
account were sufficient to prevent the attachment of the debts
by third party debt order.”
I agree with those reasons.
Receivership order
47. All three members of the Court of Appeal concluded that the receivership order should be discharged even if the debt was owed to SOMO. The grounds for this view were set out in the judgment of Moore-Bick LJ. His reasoning was twofold: first, that the link between SOMO and the English jurisdiction created by the order under section 66 of the Arbitration Act 1996 was too tenuous to justify the exercise of the receivership jurisdiction; and second, that payment by Crédit Agricole to a receiver would deprive CBI of the benefit of the collateral promise made to it that payment to SOMO would be made by means of a bank account held in the name of CBI.
48. The relevant principles are not in dispute. They were set out by Collins LJ in
Masri v Consolidated Contractors International (UK) Ltd (No 2) [2008] EWCA Civ
303; [2009] QB 450. Moore-Bick LJ set out the key parts of Lawrence Collins LJ’s
judgment in paras 30 to 32 of his own judgment in this case.
49. In particular, he noted the view expressed by Lawrence Collins LJ in para 35 of Masri that the mere fact that an order is in personam and is directed towards someone who is subject to the personal jurisdiction of the English court does not exclude the possibility that the making of the order would be contrary to international law or comity, and outside the subject matter jurisdiction of the English court.
50. In para 31 Moore-Bick LJ set out paras 50 and 51 of Lawrence Collins’
judgment in Masri, which he said followed a reference to the Société Eram case, as
follows:“50. In my judgment, there is no rule that the court cannot ever make a receivership order by way of equitable execution in relation to foreign debts and that the judge did not exceed the permissible limits of international jurisdiction in making such an order in the circumstances of this case.
51. In summary my reasons are that (a) the order has no proprietary effect and acts in personam against the judgment debtor; (b) any adverse effects which the order might have on foreign parties with knowledge of the order are removed by the Babanaft provisos; (c) since the nineteenth century the English courts have recognised the legitimacy of the appointment by the court of receivers in relation to foreign property; (d) the fact that those appointments in the reported cases have been receivers appointed by the court on the application of debenture holders, or receivers appointed prior to judgment, does not affect that conclusion in relation to receivers appointed by way of equitable execution; (e) nothing in the Société Eram
Shipping Co case affects the conclusion.”
51. In para 32 Moore-Bick LJ said that Lawrence Collins LJ added this caveat:
“59. As I have said, the fact that [the court] acts in personam against someone who is subject to the jurisdiction of the court is not determinative. In deciding whether an order exceeds the permissible territorial limits it is important to consider (a) the connection of the person who is the subject of the order with the English jurisdiction; (b) whether what they are ordered to do is exorbitant in terms of jurisdiction; and (c) whether the
order has impermissible effects on foreign parties.”
52. Moore-Bick LJ gave careful consideration to the question whether the order should have been made. He observed that the same obstacles did not exist as in the case of a third party debt order but that some caution was required as noted by Lawrence Collins LJ. One of the factors which led him to conclude that such an order should not be made was that, on his view of the case, as described above, the
debt was not situated in England and Wales. He said in para 33 that SOMO’s connection with this country was tenuous “unless it can be said to be the owner of a
debt which [is] situated in this country and for the reasons I have given I do not think
that is the case”. For the reasons I have given above, I have concluded that the situs of the debt was in this country. It follows from Moore-Bick LJ’s approach that he
would have taken a different view of the connection if he had held as I have done that that was the case. I note in passing that he concluded in para 35 that to make a receivership order in this case would not infringe the rights of Crédit Agricole.
53. In all the circumstances it seems to me to be likely that, if Moore-Bick LJ had concluded that the lex situs was England, he would have taken a different view. As I see it, it is open to us to consider this part of the case afresh. I would accept Mr
Pollock’s submissions on this point as follows.
54. 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. It would have been entirely foreseeable by SOMO that a majority of the letters of credit against which they sold
oil would be issued out of London and subject to English law. SOMO’s trade
therefore involved a long term connection with the jurisdiction. 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.
55. 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. The Arbitration Act 1996 allowed the English court to assert jurisdiction over SOMO for the purpose of enforcing an award as a judgment of the High Court. The court did so, and SOMO has challenged neither that jurisdiction, nor the judgment. I would
further accept Mr Pollock’s submission that it seems inconsistent to allow an
international arbitration award to be turned into an English judgment for the purpose of enforcing the award and then to limit the means available for enforcement on the grounds of an allegedly insufficient connection with the jurisdiction.
56. Mr Pollock further challenges para 37 of Moore-Bick LJ’s judgment as
follows. He concluded that the effect of a receivership order would be to prevent
CBI obtaining the benefit of Crédit Agricole’s promise that the funds would be paid to SOMO via CBI’s account in New York. However, CBI has no interest of any type
in the Letter of Credit debts. Its account is merely the conduit via which moneys paid from Crédit Agricole at the instance of Shell pass onwards into the Iraqi government budget. If the promise as to the route of payment to SOMO is breached because of interception by judicial execution, the CBI has suffered no loss and could make no complaint, whether against Crédit Agricole or against SOMO. The obligation on Crédit Agricole to pay in accordance with its promised method is necessarily subject to the implicit qualification that the funds have not been intercepted by judicial intervention.
57. There appears to me to be some force in that submission. Further, it appears that Crédit Agricole has so far advanced no objection to the making of a receivership order and no evidence has been adduced by SOMO to the effect that the making of the order would in any way prejudice Crédit Agricole. Mr Pollock concedes that Crédit Agricole would in any event have an opportunity to make representations hereafter should it wish to do so.
58. In all the circumstances, I would restore the receivership order. I would only add that, given the above conclusion that the third party debt orders should be restored, I am not sure in what circumstances the receivership orders will be effective.
Conclusion
59. For these reasons I would allow the appeal and restore the third party debt orders and the receivership orders. The parties should make written submissions on the form of order and on costs within 28 days of the handing down of the judgments in this appeal.
LORD SUMPTION:
60. I agree with the disposal proposed by Lord Clarke, and with his reasons. I also agree with the concurring judgment of Lord Hodge. I add a judgment of my own because the Court is divided and it appears to me to be useful in response to some highly intricate arguments to identify the salient points of principle which have led me to this conclusion. In doing so, I shall use the same abbreviations as Lord Clarke.
61. The first question is whether there is a “debt due or accruing due to the
judgment debtor [SOMO] from the third party [Credit Agricole]” for the purposes
of CPR Part 72, which regulates Third Party Debt Orders. This turns on the construction of a most unusual form of letter of credit. For all its unusual features, however, the instrument must be construed as a whole, and as far as possible in such a way as to make each part of it consistent with every other part. Moreover, it must as far as possible be read consistently with the UCP, which are expressly incorporated into it. The UCP may be modified or excluded in specified respects by the terms of the credit, but otherwise it is a code of rules which enables letters of credit to be routinely dealt with by banks across the world on a common basis. It is therefore fundamental to their acceptability in international commerce.
62. The essential obligation of the issuing bank is to pay, conditionally on the presentation of conforming documents. Under the terms of this credit, it is I think
clear that SOMO is the sole beneficiary of the issuing bank’s obligation to pay. The
credit is expressed to be issued “in favour of” SOMO. Under UCP article 2, the party
in whose favour a letter of credit is issued is the beneficiary. The purpose of the credit is to secure a debt identified in the commercial invoice, which is usually one of the documents to be presented, as it was in this case. UCP article 18 provides that
the commercial invoice required to be presented, “must appear to have been issued
by the beneficiary”, ie SOMO. The specified documents in this case included
“SOMO’s duly signed original commercial invoice”. Nothing in Conditions A and
B purports to alter the identity of the beneficiary as that expression appears in the credit itself or in the UCP. Indeed, Condition B is framed as an engagement on the
part of the bank with “the beneficiary and Central Bank of Iraq”, a formulation
which necessarily identifies SOMO and not CBI as the beneficiary. The letter of credit is expressed not to be assignable or transferrable. The effect of this is to exclude the provision expressly made in UCP article 38 for transfer to another beneficiary.
63. In the context of a credit in favour of SOMO, what is the effect of the irrevocable undertaking in Conditions A and B to honour the credit by paying into
CBI’s account with the Federal Reserve Bank New York? There are two
possibilities. The first is that the parties have thereby agreed to treat CBI as the
issuing bank’s debtor, subject to the presentation of conforming documents. But that
cannot be inferred from the mere fact that the money is contractually payable to CBI. This is because the second possibility is that the parties have agreed that the debt is owed to SOMO as beneficiary, but that the manner of its discharge is to be by
payment into CBI’s account with the Federal Reserve Bank. In my opinion the latter
is the better construction of Conditions A and B in this case. It accords better with the insistent identification of SOMO as the beneficiary and the exclusion of assignment or transfer of the credit to any one else.
64. One can infer from the fact that the promise to pay into CBI’s account is
irrevocable and is made to CBI as well as SOMO that CBI must have had some interest of its own in the debt being discharged in that particular way. But nothing can be inferred from the terms of the credit about the nature of that interest. There are a number of possibilities: (i) CBI may have a proprietary interest in the conditional debt created by the credit, in effect by way of equitable assignment of the credit; or (ii) CBI may have stipulated for an equitable interest in the proceeds once they have been paid or, which amounts to the same thing, for there to be no
liability to account to SOMO for the proceeds once it has reached CBI’s New York
account; or (iii) it may have a purely commercial, administrative or political interest in receiving the funds. The issuing bank would be directly affected by (i) but not by (ii) or (iii). Since either (ii) or (iii) would sufficiently explain the existence of the direct undertaking to CBI, I see no reason to assume that there was more to it than that. If the parties had wanted to make CBI the debtor, the obvious way of doing it would have been to make the credit transferrable in accordance with UCP article 38, a possibility which they have ostentatiously excluded. This is why, quite apart from the absence of any basis for it in the terns of the credit, I am unable to accept Lord
Neuberger’s suggestion that Conditions A and B record an assignment or novation
of the credit itself. In my view the credit gave rise to a debt due to SOMO as
beneficiary which was required to be discharged by payment into CBI’s New York
account. It did not give rise to a debt owed to CBI itself.
65. It follows, in my view, that the undertakings given jointly to CBI and SOMO are correctly analysed by Mr Pollock as collateral undertakings sounding in
damages. I do not find this result odd, let alone “pretty strange” or “mystical”. As it
happens, we know that the interest of the CBI was not in fact in the debt, but in the mechanics of its discharge. It had an interest in the use of its account with the Federal Reserve Bank of New York as the prescribed mode of receipt by SOMO, because of the political arrangements made by the state of Iraq to comply with the United
Security Council resolution governing the use of Iraqi oil revenues. CBI’s account
in New York was no more than the conduit pipe used for that purpose. This fact is not relevant to the construction of the credit, which is an autonomous instrument. But it provides a condign warning of the dangers of treating Conditions A and B as a transfer of the conditional debt arising under the credit when that is in reality no more than a speculation about why Conditions A and B might have been (but were in fact not) required under arrangements to which the issuing bank was not privy.
66. On that footing, the next question is whether a purely contractual obligation owed to CBI as to the manner in which the debt owed to SOMO would be discharged is a ground for declining to make a Third Party Debt Order. The argument is that the judgment creditor steps into the shoes of the judgment debtor and cannot succeed to
any right the he did not have. If therefore the judgment debtor’s right to dispose of
some asset is restricted by his contractual engagements to third parties, the judgment creditor cannot be any better off. The principal authority cited for this proposition is the statement of Chitty J in In re General Horticultural Co (1886) 32 Ch D 512, 515
that a garnishee order “charges only what the judgment debtor can himself honestly
deal with.” I would not accept this statement without reservation. The context in
which it was made was the attachment of a debt that had been assigned to a third party, but without notice being given to the debtor. The court held that the assignment was still binding as between the assignor and the assignee, and that notice to the debtor was relevant only to the priorities between competing assignees. It followed that the assignor had parted with his interest in the debt, and the rights of the garnishor were defeated.
67. In Merchant International Co Ltd v Natsionalna Aktsionerna Kompaniia Naftogaz Ukrainy [2014] EWCA Civ 1603, the position was substantially the same. The debt sought to be attached was said to be owed by a bank to the judgment debtor Naftogaz. But the bank had received the money from Naftogaz as the agent bank under a loan agreement for distribution to the loanholders. It was not therefore, in
the bank’s hands, a debt payable to Naftogaz. By comparison, in Rekstin v Severo
Sibirsko Gosudarstvennoe Aksionernoe Obschestvo Koseverputj and the Bank for
Russian Trade Ltd [1933] 1 KB 47 the result was different because the debt sought to be attached represented moneys deposited by the judgment debtor with a bank which had merely received a revocable instruction from the judgment debtor to pay it to another bank. The garnishee order was held to operate as a revocation of that instruction.
68. These cases reflect what is in my view the general rule, namely that the essential condition for the effectiveness of a Third Party Debt Order, as with any process of enforcement against assets, is that there should be a subsisting debt owed to the judgment debtor. They are authority, on more or less complex facts, for the straightforward proposition that execution cannot be levied against a debt if the judgment debtor has parted with his interest in it.
69. In my opinion it is necessary to distinguish between an arrangement between (i) the judgment debtor and a third party which passes a proprietary interest, legal or equitable, in the relevant asset to a third party, and (ii) a purely personal obligation owed to a third party as to the disposal of that asset. The essential point about a Third Party Debt Order is that it modifies purely personal obligations. A third party owes money to the judgment debtor. He has a personal obligation to pay the judgment debtor. The Third Party Debt Order overrides that obligation by requiring it to be paid to the judgment creditor instead. Otherwise a judgment debtor could defeat any process of execution against his assets simply by undertaking for good consideration not to comply with an order by way of enforcement. It is different if the judgment debtor has parted with his interest in the debt by assigning it, in law or equity, to another. In that case, he no longer has the asset against which enforcement is sought to be made.
70. In the present case, on the footing that the debt created by the letter of credit was owed to SOMO, as I think it was, the issuing bank had a personal obligation to
SOMO to pay it by crediting CBI’s New York account. That obligation was
modified by the overriding effect of the Third Party Debt Order. On the footing, which I also think correct, that the obligation owed by the issuing bank to CBI was
to discharge the debt owed to SOMO by crediting CBI’s New York account, that
obligation depended on the continued existence of the debt owed to SOMO. Once it had been discharged by operation of law by payment to the judgment creditor in accordance with the Third Party Debt Order, there was no subsisting debt to be paid by the issuing bank into the New York account.
“conferred on SOMO … only a non-proprietary right to seek damages for breach of
contract”.
136. Although I must confess to having been initially attracted by it, I have considerable difficulty with the conclusion reached by the majority, namely that, as
Lord Clarke puts it, each Letter of Credit “gave rise to two separate obligations: an obligation to pay the proceeds into the account of CBI …, which was owed to
SOMO alone and sounded in debt, and a separate collateral obligation to pay the proceeds into that account which was owed to SOMO and CBI jointly and sounded
in damages”. Where X agrees with Y and Z that a sum of money will be paid to Y,
it is a pretty strange conclusion (unless Z is Y’s principal, trustee or the like) that
the debt is owed to Z (and that Z is the creditor) and Y only has a collateral right in contract to enforce payment. Conceptually, it may be possible for an agreement to have that effect, but to my mind it would require very clear words to rebut the natural presumption, namely that the debt is owed to Y (and that Y is the creditor) and Z is the beneficiary of a collateral contractual commitment from X.
137. In my view, far from rebutting the natural presumption, the terms of the Letters of Credit support it. I have already explained why that is my view, but, in summary terms it is as follows. Conditions A and B spell out the tripartite nature of the arrangement. Condition A, being an irrevocable promise to CBI pay the Sums into its bank account, appears to bear all the hallmarks of identifying the creditor as
CBI: it is a promise to CBI (and CBI alone) to pay and specifically to pay into CBI’s
bank account. Condition B, being a promise to CBI and SOMO to honour this
irrevocable promise “as specified”, bears all the hallmarks of a purely contractual
obligation collateral to that in condition A: it comes after, and refers back to, condition A, and it is a promise to SOMO as well as to CBI. Further, it seems to me somewhat odd to treat each Letter of Credit as imposing on Crédit Agricole an
“obligation to pay the proceeds into the account of CBI … which was owed to
SOMO alone and sounded in debt” when condition A contains a clear commitment to CBI to pay the proceeds into the account of CBI. I appreciate that Lord Clarke’s
analysis is based on the earlier part of the Letters of Credit, but, for the reasons I have given, it does not appear to me that they undermine what appears to me to be the clear effect of conditions A and B.
138. If this conclusion is right, the third issue does not arise. However, in view of
the majority conclusion on this second issue, it does arise. In any event, it would be
right to decide the issue, as it involves a point of some significance.
The third issue: the effect of the agreement with CBI
139. This issue has to be approached on the basis that (as the majority of this court have concluded and contrary to my view) SOMO is owed, and CBI is not owed, the debts created by the Letters of Credit. In other words, this issue must be approached
on the assumption that each Letter of Credit “gave rise to two separate obligations:
an obligation to pay the proceeds into the account of CBI …, which was owed to
SOMO alone and sounded in debt, and a separate collateral obligation to pay the proceeds into that account which was owed to SOMO and CBI jointly and sounded
in damages”, to quote again Lord Clarke’s conclusion.
140. At first sight, the conclusion that SOMO is the sole creditor in respect of the debts appears to justify the conclusion that a TPDO can be made in respect of them. But it is argued by SOMO that such an order would be inconsistent with what is sometimes called honest dealing, because it would cut across the rights of third parties. In this case, even assuming that the sum payable under each of the Letters of Credit was a debt owed to SOMO alone, each Letter of Credit also contained a contractual commitment to CBI to pay the sum into its account at FRB in New York.
141. Despite the fact that Moore-Bick LJ and the majority of this Court have
concluded that CBI’s contractual rights as recorded in the Letters of Credit should
not prevent the court making a TPDO, it seems to me that it would be inappropriate for a TPDO to be made. If the TPDO is made, then the debts owing to SOMO under the Letters of Credit would be discharged through payment of the Sums to Taurus
by virtue of the TPDO, but I do not see why that should mean that the “separate”
right enjoyed by CBI under condition A should be treated as discharged by such payment. In other words, even if the TPDO is granted and has effect, I consider that CBI should still be able to sue to enforce its contractual right under condition A to
have the sum paid into its account. The enforcement of CBI’s right, on this
hypothesis, would only sound in damages, but it is hard to see how the measure of damages would not be an amount equal to the sum. In effect, therefore, the making of a TPDO would impose on Crédit Agricole the obligation to pay the sum due under each of the Letters of Credit twice, once as a debt to Taurus pursuant to the TPDO, and once by way of damages to CBI. In my view, if that is the result of the making of a TPDO, then it cannot be right to make such an order. It would, in my judgment,
be an abuse of the court’s power to make a TPDO if it had such an effect. It may
well be that, as I think is suggested by Lord Mance, this conclusion can be justified by reference to a general principle that a TPDO (like its predecessor, a garnishee order) will only be made in respect of a sum which is otherwise due to be paid to the person on whose liability the applicant for the TPDO relies - see eg Webb v Stanton (1883) 11 QBD 518, at pp 526 and 530, per Lindley LJ and Fry LJ respectively.
142. Condition B does not call this conclusion into question, as it is additional to condition A. In fact it provides another ground for the same conclusion. Condition B involves a promise for the joint and/or several benefit of SOMO and CBI to have
the Sums paid into CBI’s account. Given that the promise is for the joint benefit of
SOMO and CBI, it cannot be satisfied by a payment which can only be treated as being for the benefit of SOMO alone.
143. It is right to add that, even if I am wrong in my view expressed in para 141
above that CBI’s contractual claim would survive the grant and enforcement of the
TPDO sought by Taurus, I would still consider it wrong to grant the TPDO. On this
hypothesis, the grant of the TPDO would deprive CBI of its “separate” contractual
right to be paid the sums due under the Letters of Credit. For the court to grant a TPDO would, on this hypothesis, involve enabling Taurus to obtain a right over the
Sums which is superior to the rights of CBI, even though CBI’s rights in relation to
those sums would pre-date those of Taurus, and Taurus would have had notice of
CBI’s rights when the TPDO was granted, indeed when it applied for the TPDO.
That would seems to be contrary to normally accepted commercial practice and legal principle. I agree with Lord Mance that this conclusion derives support from the recent decision of the Court of Appeal in Merchant International Co Ltd v Natsionalna Aktsionerna Kompaniia Naftogaz Ukrainy [2014] EWCA Civ 1603.
144. The argument that the grant of a TPDO would give Taurus a proprietary right
over the debts created by the Letters of Credit, which is superior to CBI’s simple
contractual right to have the debts satisfied by payment into its account at FRB, takes matters no further in my view. It involves Taurus dragging itself up by its own bootstraps: the primary issue is whether a TPDO should be granted, not the effect of a TPDO once it is granted. As at the date that the TPDO was sought, Taurus was simply a creditor of SOMO with no rights in relation to the debts created by the Letters of Credit, whereas CBI had a contractual right to have the sums meeting the debts paid into its account. As I have said, and subject to what I say in the next
paragraph of this judgment, it seems to me that it would be an abuse of the court’s
powers to grant a TPDO to Taurus if it would deprive CBI of its prior and bona fide contractual rights created in the very document giving rise to the debt which Taurus is seeking to divert. And if the TPDO does not prevent CBI from enforcing its contractual rights, then it would still be an abuse, as it would land Crédit Agricole with the obligation of having in effect to pay the same debt twice.
145. In my view, the only way in which Taurus can get round this problem would
be if CBI’s contractual right under the Letters of Credit is no more than a right to
insist on Crédit Agricole complying with its obligations to SOMO under the Letters of Credit. If that were the right analysis, then there would be no problem about making a TPDO: the making and implementing of a TPDO would not represent a
breach of SOMO’s rights, and therefore would not represent a breach of CBI’s
rights. However, I find it very difficult to accept that it is the right analysis. Even if the effect of conditions A and B is to give CBI no more than a contractual right against Crédit Agricole to have the Sums paid into its account, I do not consider that
those conditions can be sensibly interpreted as limiting CBI’s rights to those to
which SOMO is entitled. Condition A is expressed as being an unqualified obligation, and I see no reason for implying into it a limitation of this nature. At least equally tellingly, condition B is expressed as being an obligation to both SOMO and CBI, without any suggestion that either of them is subordinate to the other. The fact that the debts arising from the Letters of Credit are (as I am assuming in connection with the third issue) owed to SOMO does not justify giving the limited effect to
CBI’s rights under the two conditions as, at least in my view, is required if a TPDO
is to be granted.
The fourth issue: state immunity
146. No argument was developed on the issue of state immunity, although it was an issue in the courts below. Given that it is accepted that Moore-Bick LJ was right to conclude that state immunity would apply if CBI was the sole creditor or a joint creditor, but not if SOMO was the sole creditor, this is readily understandable. As explained in para 123(b) above, a TPDO could anyway only be made if SOMO was the sole creditor, so the state immunity issue has no effect on the outcome of this appeal.
The fifth issue: should a receivership order have been made?
147. I have read Lord Clarke’s observations on this issue in paras 47 to 58 above.
The principles are not in doubt, but their application in this case is not easy. I agree
that we can consider the point afresh as Moore-Bick LJ’s decision to refuse a
receivership order was clearly affected by his (inevitable but mistaken) view that the situs of the debts was outside the jurisdiction in New York, whereas it is in London. On balance, I agree with Lord Clarke that a receivership order is appropriate for the reasons which he gives.
Conclusions
148. Accordingly, I conclude that:
a. The situs of the debts created by the Letters of Credit is England and there is therefore no jurisdictional impediment to the grant of the TPDO sought by Taurus;
b. However, the debts are owed to CBI, and not to SOMO, so it is not open to the court to grant a TPDO as it is SOMO, not CBI, which owes money to Taurus;
c. If, contrary to my view, the debts are owed to SOMO, I would still hold that a TPDO could not be granted in the light of CBI’s contractual rights
under the Letters of Credit;
d. As CBI has state immunity, that is another reason why a TPDO cannot be granted; but if the debts were owed solely to SOMO, it would not have state immunity;
e. A receivership order could properly be made against SOMO. 149. Accordingly, in the light of my conclusions in paras 148(b), (c) and (d) above,
I would dismiss Taurus’s appeal so far as it challenges the refusal of the Court of
Appeal to grant a TPDO, but, in the light of my conclusion in para 148(e) above, I
would allow Taurus’s appeal in so far as it challenges the refusal of the Court of
Appeal to make a receivership order.
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