Debt under a letter of credit is situated in the place where payment is to be made.
In the recent judgment of Taurus Petroleum Ltd v State Oil Company of the Ministry of Oil, Republic of Iraq [1], the English Court of Appeal considered where a debt under a letter of credit is situated. A letter of credit is a guarantee from a bank to a seller that the amount owed for the goods will be paid. Letters of credit are often used to finance import-export transactions.
Facts
A Shell group company had agreed to purchase crude oil from State Oil Company of the Ministry of Oil, Republic of Iraq ("SOMO"). Crédit Agricole was to pay the amount owed to SOMO under a letter of credit (the "CA Letter"). Separately, SOMO had not paid money it owed to Taurus Petroleum Limited ("Taurus") under an arbitration award. Taurus brought proceedings seeking a third party debt order, called a garnishee order in Ireland, for the funds payable under the CA Letter.
Crédit Agricole had issued the CA Letter in London. However, the CA Letter contained no governing law clause. The CA Letter provided that Crédit Agricole would pay SOMO in a designated account in New York. Taurus sought a third party debt order for Crédit Agricole's debt to SOMO. You would seek a third party debt order where you are owed money by a debtor and a third party owes money to that debtor. The order attaches to the third party debt requiring it to be paid to you instead of to the company or person owed the debt. Courts only have jurisdiction to issue the order if it would be recognised by the courts where the debt is situated.
Judgment
Usually, a debt is situated where a debtor lives, as the generally recognised rules of territorial jurisdiction mean this is the one place where you can seek to recover it without question. As Crédit Agricole's London branch owed the amount due under the CA Letter, Taurus argued the debt was situated in England. The English Court of Appeal disagreed. It held that a debt under a letter of credit is different from ordinary debts and is situated where you make payment. In this case, the debt was situated in New York as it was payable to an account in New York. There was no evidence that a third party debt order made by an English court would be recognised under New York law. The court could not make the order as it could not be shown that Crédit Agricole's liability would be discharged under New York law.
Conclusion
Banks issuing letters of credit should always include a governing law clause. Most banks and financial institutions will have a governing law clause in their standard terms and conditions. In the absence of a governing law clause, the debt under a letter of credit could be deemed to be situated in the jurisdiction where the payment must be made to a seller.
[1] Taurus Petroleum Ltd v State Oil Company of the Ministry of Oil, Republic of Iraq [2015] EWCA Civ 835
Source: www.lexology.com 4 November 2015