UK Supreme Court rules that debts under letters of credit are located where the issuer resides

UK Supreme Court rules that debts under letters of credit are located where the issuer resides

The Supreme Court recently held that a debt under a letter of credit is situated where the issuing bank (as debtor) resides and not where the debt has to be paid.

The relevant case is Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64 and the judgment can be read by clicking here: http://www.bailii.org/uk/cases/UKSC/2017/64.html

Below we briefly consider the case facts before turning to the Supreme Court’s ruling and the practical implications.

Background

Taurus Petroleum Ltd (Taurus) and State Oil Marketing Company of Iraq (SOMO) entered into contracts for the sale of crude oil and LPG. Disputes arose which were referred to UNCITRAL arbitration, and SOMO was ordered to pay Taurus damages which SOMO failed to pay.

Taurus subsequently discovered that a company in the Shell group had purchased oil from SOMO, with the purchase price payable under letters of credit issued by the London branch of Crédit Agricole SA.

Taurus sought to enforce its arbitral award in England and requested a third party debt order in respect of sums payable under the letters of credit. The High Court made orders in favour of Taurus and Crédit Agricole paid monies into court.

SOMO appealed the High Court’s judgment on various grounds. One of the grounds was that the letters of credit required payment to be made into a bank account in New York. Accordingly, SOMO contended that the debts created by the letters of credit were situated in New York and the High Court did not have jurisdiction to grant third party debt orders in relation to property outside the jurisdiction.

For reasons that go beyond the scope of this alert, both parties appealed to the Court of Appeal, which dismissed the appeals and cross appeal and permission to appeal to the Supreme Court was subsequently granted.

Supreme Court’s decision

The Supreme Court allowed Taurus’ appeal. In doing so, it overruled the long-standing decision of the Court of Appeal in Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233, which provided that a debt under a letter of credit is situated at the place where payment is to be made. In reaching its decision, the Supreme Court noted that there was no other English case which had properly considered Power Curber, and in fact Canada was the only jurisdiction in which the principle in Power Curber appeared to have been applied.

Accordingly the Supreme Court determined that the debts owing under the letters of credit were located in England, where the issuing bank was resident, and not New York, the place for payment. As such, the English courts were found to have jurisdiction to make the relevant third party debt order in Taurus’ favour.

Practical implications

This is a landmark decision which reverses the Court of Appeal’s position over three decades ago in the Power Curber case. The Supreme Court’s decision will provide much encouragement to English judgment creditors wanting to enforce demands under letters of credit through third party debt orders. It also provides welcome reassurance to creditors that claims under letters of credit issued by English resident banks, including those which are branches of an overseas bank, can be legitimately pursued through the English courts.

Letters of credit are by their very nature a common feature of international commercial transactions involving parties based in different parts of the globe. This decision should hopefully save much future time and cost in determining the appropriate jurisdiction in which to bring a claim under a letter of credit issued by an English resident bank. 

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