Letters of Credit | Fieldfisher
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Letters of Credit


United Kingdom

Letters of credit and documentary credits continue to be a mainstay of international trade transactions.

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Letters of credit and documentary credits continue to be a mainstay of international trade transactions.  Letters of credit are also often used in financing transactions, either as a form of collateral or issued by a bank in connection with an acquisition or another transaction being financed.  A recent case, Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2013] EWHC 3494 (Comm) relates to letters of credit in a trade transaction and serves as a useful reminder of some of the key issues to be borne in mind.

It should be noted that the case is subject to an appeal to the Court of Appeal.


Taurus had been awarded $8 million under an arbitral award against the State Oil Marketing Company of the Ministry of Oil ("SOMO"), the Iraqi state entity with sole authority for the export and import of oil and gas products from and to Iraq.  The case related to two letters of credit issued by Crédit Agricole in respect of an oil transaction between a Shell entity and SOMO.  Taurus was seeking an order such that part of the payments by Crédit Agricole under the letters of credit could be paid to Taurus direct, instead of SOMO, to satisfy the arbitral award. 

Points to note

The points to note in the context of financing transactions arising from the case are:

1. Always ensure that the letter of credit specifies the governing law of the letter of credit. 

The two letters of credit issued by Crédit Agricole did incorporate the Uniform Customs and Practise for Documentary Credits (UCP) 600; but not a governing law clause.  The court held that where a letter of credit does not specify governing law, its governing law is to be determined pursuant to Article 4(2) of Rome I.  Under this Article, the governing law is the law of the country where the characteristic performer has its habitual residence.  In this case, on the presentation of conforming documents, Crédit Agricole in London made payment by instructing JP Morgan in New York to make payment at the counters of the Central Bank of Iraq ("CBI") in Baghdad to CBI's account at the Federal Bank New York ("FRBNY").  The Judge held that the characteristic performer is Crédit Agricole making payment steps in London and therefore the credit is governed by English law.

The Judge also held that the lex situs of the debt is English law (not New York where payment was to be made by crediting CBI's account with FRBNY).  The Judge applied the general rule that a debt situate is where it is recoverable. 

2. Always ensure that the identity of the beneficiary is clear. 

In this case, the beneficiary of the letter of credit was clearly SOMO and this was not disputed.  CBI was identified as advising and confirming bank (although it did not confirm the credit).  In addition, various statements were made to CBI in the letter of credit.  These included statements such as "proceeds of this letter of credit will be irrevocably paid into your account with [FRBNY] and "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…".  On the basis of the text in the letter of credit, the Judge held that CBI was also a joint promisee of the letter of credit and equally entitled to the debt owed by Crédit Agricole.

Separately, SOMO argued that it had been acting as agent of the Republic of Iraq and that therefore the Republic of Iraq could enforce letters of credit as an undisclosed principal.  The Judge rejected this on the basis that SOMO was not acting as the agent of the Republic of Iraq and also held that the terms of the credit would preclude enforcement by an undisclosed principal because (i) UCP 600 plainly contemplates the beneficiary being the sole party who can enforce the issuing bank's payment obligation made to the beneficiary and (ii) credits were expressed to be non-transferrable.

3. Letters of credit are autonomous transactions, independent of the underlying sale contract. 

In this case, SOMO submitted that since under Iraqi law title to oil and all proceeds in respect of disposals belong to the government (other provisions supplement this by requiring a portion of proceeds to be paid into a separate United Nations compensation account), SOMO did not have title to the oil and therefore did not have entitlement to receive the sale proceeds at the counters of the Central Bank of Iraq ("CBA") in Baghad.  The Judge rejected this argument as having a bearing on the letters of credit as matters that impacted upon the sale contract for the oil itself but not the letters of credit which stood independently of that contract.  On the terms of the letter of credit, SOMO does have title to enforce the debt constituted by Crédit Agricole's promise to pay on the terms of the credit.  Autonomy of letters of credit is a rule as a matter of general English law and also reiterated under Article 4 of UCP 600.

4. Always ensure the letter of credit is clear on the requirements for the presentation of documents.

This final point is not specifically addressed in the case.  It is always critical to ensure that the terms of the letter of credit are clear as to the documents which are to be delivered in order for the obligations to honour the credit to be triggered, the place of presentation and any time limits upon their presentation.