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Supreme Court finds that a third party debt order (“TPDO”) can only be made where the debt is owed solely to the respondent and compliance with it would discharge the third party debtor

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management - Third Party Debt Orders

09-02-2018

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

Facts of the case

– Taurus Petroleum (“T”) entered into a series of contracts with State Oil Marketing Company of Iraq (“SOMO”). Following a dispute between the parties, T was awarded USD 8.7M at arbitration which SOMO failed to pay 

– T learned of two letters of credit issued by the London branch of the French bank Crédit Agricole S.A. (“CA”) to the Central Bank of Iraq (“CBI”) (the “LoCs”) and identifying SOMO as beneficiary. These contained among other things (i) an obligation on CA to make payment into an account in New York held in CBI’s name; and (ii) an obligation on CA in favour of CBI and SOMO jointly as to the manner of payment

– T applied to the High Court without notice for (i) leave to enforce the arbitral award; and (ii) a TPDO and receivership order in respects of sums due under the LoCs

– SOMO challenged the orders on the following bases: (i) the proper construction of the LoCs, in particular to whom the debts created by the LoCs were owed; (ii) that the High Court had no jurisdiction because such debts were situated in New York; and (iii) that the debts were the property of CBI as a central bank and therefore immune from execution under the State of Immunity Act 1978. The argument in relation to state immunity was rejected by both the High Court and Court of Appeal. Only grounds (i) and (ii) were therefore pursued on appeal before the Supreme Court

The decision

– the Supreme Court was unanimous in its finding that the situs of the debts due under the LoCs was England and Wales. This was because the debtor, the London branch of CA, was to be treated for these purposes as a separate bank pursuant to the latest version of the Uniform Customs & Practice for Documentary Credits (UCP 600). In so finding, the Court overturned the reasoning of the Court of Appeal which had concluded that the 12 debts were located where they were payable, rather than where they were recoverable 

– the Court also found by a majority of three to two that:

– a TPDO could be ordered on the basis that (i) the debt created by the LoCs was owed to SOMO only; (ii) the obligation owed by CA to SOMO and CBI jointly as to the manner of payment was a separate, ancillary obligation; and (iii) payment to the judgment creditor under the TPDO would discharge both obligations since their subject matter was the same debt 

– a receivership order was appropriate because (i) the High Court had asserted jurisdiction over SOMO under the Arbitration Act 1996 for the purposes of enforcing the award as a judgment of the High Court; (ii) SOMO had neither challenged that jurisdiction or judgment and (iii) it would be inconsistent to allow an arbitration award to be turned into an English judgment for the purposes of enforcement and then to limit the means available for such enforcement on the grounds of insufficient connection with the jurisdiction 

Analysis and practical advice

– much of the Supreme Court’s judgment was concerned with the question of to whom the debts created by the LoCs were owed. This was necessarily fact specific and turned on the proper construction of clauses which were not only unusual, but in respect of which the Court was split

– however, in relation to TPDOs, the following general principles can be drawn out from the Court’s decision:

– it is a pre-requisite to the making of a TPDO that there is a debt due or accruing to the judgment debtor from a third party in which no fourth party has any other legally enforceable interest 

– a TPDO ought not to be made unless compliance with it would discharge the third party debtor 

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