Court rules state-owned company cannot rely on state immunity to avoid arbitration award payment
July 30, 2015
The Court of Appeal upheld Mr Justice Field’s decision ( EWHC 3494 (Comm),  1 All E.R. (Comm) 942) which set aside third party debt and receivership orders made to enforce an arbitration award against State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (SOMO) and dismissed Taurus Petroleum Limited’s (Taurus) appeal.
The Court of Appeal’s ruling has important ramifications on the question of the immunity of state-owned companies worldwide and the proper limits of the English Court’s jurisdiction when foreign parties or property are involved.
Key points arising out of the judgment are:
- SOMO has a separate corporate status from the Iraqi State. The Iraqi State owned the oil, but selling it was entrusted to SOMO. This was a commercial act and not one performed in the exercise of sovereign immunity. The debts would be immune if they were the property of the Central Bank of Iraq (CBI). CBI’s contractual right to require the French bank to discharge its obligation to SOMO by making payment to the New York account was not sufficient to give it a proprietary interest in the debt or to justify regarding the debts as CBI’s property.
- A debt due under a letter of credit is situated where payment is made. Power Curber International Ltd v National Bank of Kuwait SAK ( 1 W.L.R. 1233) was followed. The English Court had no jurisdiction to make a third party debt order in respect of letters of credit to be paid in New York.
- Where foreign parties or property are involved, the Court is obliged to consider the proper limits of its jurisdiction and should refrain from making an order that exceeds those limits. Masri v Consolidated Contractors International Co SAL ( EWCA Civ 303,  Q.B. 450) was followed. It was not appropriate to make a receivership order in this case as SOMO’s connection with the jurisdiction was tenuous, and an order would prevent CBI from obtaining the benefit of the French bank’s obligation to pay the sums due into the New York account.
- The process of opening a letter of credit is essentially mechanical. The Court should be very cautious before construing letters of credit by reference to extraneous circumstances.
- There is no reason in principle why a letter of credit could not be issued in favour of joint beneficiaries.
- There is no principle limiting the scope of third party debt orders to debts with which the judgment debtor could honestly deal, otherwise than by reference to the existence of proprietary interests.