News

  • Relief and confidentiality - Nevil PhillipsView More

    Mon, 20 November, 2017

    Relief and confidentiality: Sowden v Smyth-Tyrrell and UMS Holdings Ltd v Great Station Properties SA

    By Nevil Phillips

    (This blog was first published on the Practical Law Arbitration Blog on 3 November 2017. To view the original post. please click here.)

    Two recent decisions of the High Court have provided salutary illustrations, reminders and guidance as to substantive and procedural aspects of English arbitration law: one in the context of the requirements for relief under section 68 of the Arbitration Act 1996 (AA 1996), and the other as regards arbitral confidentiality and the extent to which that may survive (or be protected in) a challenge process via the High Court.

    Relief under section 68

    In Sowden v Smyth-Tyrrell, the court was concerned with a statutory arbitration. The decision reminds us of five things.

    First, the AA 1996 is no less applicable to statutory/mandatory arbitration than to consensual arbitration (see paragraph 56, citing Compton Beauchamp Estates Ltd v Spence per Morgan J at paragraph 37.

    Second, that for the purposes of sections 57 and 70(2) of the AA 1996, where, on a fair reading, the application to the tribunal under section 57 seeks in substance the clarification which is relevant to the subsequent application under section 68, the fact that it may not have done so in so many words will not bar the latter by reason of section 70(2) (see paragraph 22).

    Third, for the purposes of section 68, it must be shown that what has happened is “so far removed from what could reasonably be expected of the arbitral process” (per the Departmental Advisory Committee on Arbitration (DAC) Report at paragraph 280) that the court can answer “yes” to the question: “Is this so unfair that it cannot reasonably have been expected of the process?”. Without that, there will have been no “substantial injustice”: see paragraphs 55-60.

    Fourth, where a party seeks to argue that section 68 is triggered because of a failure of the tribunal to address an argument advanced before it, “Arbitrators do not have to deal with every argument on every point raised; they should deal with essential issues” (per Morison J in Fidelity Management SA v Myriad International Holdings BV at paragraph 9). As stated by Clarke J in Van der Gieesen-de-Noord v Imtech Marine at paragraph 14:

    “A failure to deal with an issue is not the same as a failure to set out the reasoning for rejecting a particular argument.”

    Fifth, the fact that the tribunal admits to an irregularity for the purposes of the section: see paragraphs 21, 25 and 38.

    Confidentiality

    Meanwhile, in UMS Holdings Ltd v Great Station Properties SA, Teare J provided guidance on the scope of arbitral confidentiality in the context of a challenge to an arbitral award in the High Court (there, under section 68 of the 1996 AA 1996, further to a reference under the London Court of International Arbitration (LCIA) Rules).

    The respondents challenged an award under section 68, and the hearing of that challenge was heard in public (further to an order of the court). The challenge under section 68 failed and the resulting judgment was also treated as public.

    The respondents contended that the claimants remained under an obligation of confidentiality under Article 30 of the LCIA Rules and that the challenge process under section 68 AA 1996 (and any judgment or order made as part of that process) did not serve to discharge that. They therefore applied for an order to the effect that the award may not be used by that party for any purpose other than the proceedings.

    Teare J (applying NAB v Serco Limited at paragraphs 26 and 36) concluded that, by the section 68 process, the award had entered the public domain: see paragraph 20.

    Against that backdrop, Teare J therefore concluded that the obligation under Article 30 of the LCIA Rules (which he concluded, on balance, gave rise to an undertaking “to keep confidential” all awards) no longer continued to exist: see paragraph 21.

    However, the judge was “troubled by the suggested conclusion that the Claimants should therefore be able to do with the Award as they wish”. This was especially so “in circumstances where the court does not know what the Claimants intend to do with the Award” and where “The Award was a confidential document and has only entered the public domain because the court considered, having regard to the principle of open justice, that the section 68 challenge should be heard in public”: see paragraph 22.

    Accordingly, as part of the court’s “inherent jurisdiction to regulate the consequences of its order that the section 68 challenge be heard in public”, Teare J made the order sought by the respondents, stating, at paragraphs 22 and 23, that:

    “It does not appear to me to follow that where the Award has entered the public domain because of the court’s own order the Claimants should be free to do what they like with the Award. Some uses of the Award (for example, showing it to a business associate) would be inimical to the confidentiality which normally attaches to awards”.

    Nevil Phillips

    Nevil Phillips has been listed for many years as a Leading Junior in Shipping, Commodities, and Trade & Customs by The Legal 500, Chambers UK, Chambers Asia-Pacific, and Who's Who Legal, and Best Lawyers where he has been variously cited as "an outstanding advocate, incredibly fast thinking and a real problem solver", and "a very polished advocate, who gets results through his preparation and through his clear and compelling presentation of the client's case". Nevil was Acquisition International's "Best Shipping Barrister – UK" in their 2015 Legal Awards.

    He has featured as successful counsel in a number of recent high-profile commercial and shipping cases. These include SBT Star Bulk and Tankers (Germany) GmbH Co KG v Cosmotrade SA (The Wehr Trave) [2016] EWHC 583 (Comm) (the leading case regarding the scope of charterers' rights under a time charter trip), Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2015] EWHC 718 (Comm) (the leading case regarding renunciation under time charters and whether payment of timely advance hire is a condition), and Libyan Navigator Ltd v Lamda Maritime Holdings Sp. z. o. O [2014] EWHC 1399 (Comm) (the leading case regarding the interpleader procedure in the context of liened sub-hires and sub-freights.

    Nevil's practice envelops all aspects of commercial and shipping advisory and advocacy work, encompassing the broadest spectrum of contractual, international trade, commodities, shipping, maritime, energy, insurance, reinsurance, banking, and jurisdictional disputes and associated areas and remedies. He appears regularly in commercial arbitration (both domestic and international, with experience before a wide variety of arbitral institutions, bodies and trade associations, including LMAA, GMAA, LCIA, ICC and associated bodies), the Commercial Court, and the appellate courts.

    He has substantial experience as an arbitrator, and has also given expert evidence on English law to courts in other jurisdictions. He has also written and/or contributed to a number of leading text books in his fields, including his own authoritative work on "The Merchant Shipping Act 1995 – An Annotated Guide".

    Nevil is a popular and regular choice as a presenter/speaker at legal and corporate functions, seminars and lectures.

    > View Nevil's full profile
    nevil.phillips@quadrantchambers.com

  • COMI Factors and Improper Motive Reviewed - Liisa LahtiView More

    Fri, 17 November, 2017

    Thomas v Frogmore: COMI Factors and Improper Motive Reviewed

    By Liisa Lahti

    This article was originally published in International Corporate Rescue, Volume 14 Issue 5, 2017.  Please click here to read the original article.

    The recent case of Thomas & another v Frogmore Real Estate Partners & others [2017] EWHC 25 (Ch) provides useful guidance for analysing the centre of main inter- ests (‘COMI’) of a company not registered in the UK or other EEA state and therefore of the circumstances in which UK courts will allow insolvency proceedings to be instigated within the jurisdiction in the relating to such a company.

    Further the judgment is one of only a few cases to comment on the scope of the ‘improper motive’ provi- sion, contained in paragraph 81 of Schedule B1 to the Insolvency Act 1986 (the ‘Act’), which provides that the court may terminate an administration where the appointor had an ‘improper motive’ for making the appointment.

    The facts

    The case involved three companies, FREP (Knowle) Limited, FREP (Ellesmere Port) Limited and FREP (Belle Vale) Limited (the ‘Companies’). The Companies form part of Frogmore group, which specialises in real estate investment  and management  in the  UK.

    The Companies were special purpose vehicles, formed for the acquisition of three shopping centres. Each of the Companies owns a shopping centre located in England (‘the Shopping Centres’). The Companies were registered in Jersey (which is not a EEA state). However, they did not carry on any trading operations in Jersey, did not have employees of their own, their principal assets (namely the Shopping Centres) were situated in England and the sole shareholder of the Companies, Frogmore Real Estate Partners GP1 Limited (the ‘Share- holder’), was an English company.  Further each of  the Shopping Centres was managed by Frogmore Real Estate Investment Managers Limited (‘FREPIM’), an English company with its registered office and base in London

    Nationwide Building Society (‘Nationwide’) had advanced substantial sums to the Companies under a facility agreement (the ‘Facility Agreement’). Security in respect of this loan had been provided by the Compa- nies by a combination of debentures (the ‘Nationwide Debentures’). Pursuant to these arrangements, the Companies owed and were required to repay over £106 million to Nationwide on 1 October 2016. They failed to do so. Therefore in November 2016 administrators were appointed by Nationwide under floating charges granted in its favour. There had also been on-going pro- ceedings since December 2014 between the Companies and FREPIM against Nationwide, after Nationwide decided to transfer its economic interest in the loans to another company (the ‘2014 Litigation’).

    The issues

    It was common  ground  that  for  the  administrators to be validly appointed the Companies had to have their COMI in England and Wales. The administrators applied for a declaration as to the location of the Com- panies’ COMI.

    Further, the Companies applied for an order termi- nating the administrators’ appointment arguing that Nationwide had had acted with an improper motive   in that the purpose of appointing the administrators had been to stifle the progress of the December 2014 litigation.

    Therefore the issues were (1) the location of the Companies’ COMI and (2) whether the administrators’ appointment should be terminated on the basis of an improper motive on Nationwide’s part.

    Issue 1: COMI

    The starting point is that a company’s COMI is where its registered office is located. Paragraph 111(1B) of the Act and Article 3 of the EC Regulation together create a rebuttable presumption that the location of the regis- tered office of a company will be its COMI.

    Existing case law, in particular the decisions of the European Court of Justice, in Re Eurofood IFSC Ltd (Case 341/04) [2006] Ch 508 and Interedil Srl v Fallimento Interedil Srl (Case C-396/09) [2012] Bus LR 1582 provide guidance as to what might rebut the presumption.

    In Eurofood the European Court of Justice explained that the COMI must be identified by reference to crite- ria that are both objective and ascertainable by third parties.

    ‘[The] presumption in the second sentence of article 3(1) of  the Regulation may be rebutted, however, where, from the viewpoint of third parties, the place in which a company‘s central administration is lo- cated is not the same as that of its registered office. As the court held in In re Eurofood IFSC (Case C-341/04) [2006] Ch 508, para 34, the simple presumption laid down by the European Union legislature in favour of the registered office of that company can be rebutted if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at that registered office is deemed to reflect’ (Interedil, para. 51).

    Further

    ‘[t]he factors to be taken into account include, in par- ticular, all the places in which the debtor company pursues economic activities and all those in which it holds assets, in so far as those places are ascertainable by third parties’ (Interedil, para. 52).

    Applying the existing case law and guidance the court held that the COMI of all three of the Companies was in England rather than in Jersey where the Companies were registered.

    The day-to-day conduct of the business was in the hands of an agent (namely FREPIM) that was an English company, appointed in England, pursuant to an English law governed agreement. The actions of FREPIM were not just limited commercial activities but included the types of function that one would expect a head office to discharge, including working on investment strat- egy and business plans for the Companies, instructing lawyers, surveyors and consultants for them, negotiat- ing the purchase and sale of properties on their behalf and so on. Similarly, the day-to-day dealings with third parties were carried out from the offices of FREPIM in London. For example the companies’ VAT returns stated that the FREPIM London office was the business address for the Companies.

    Further the Facility Agreement and Nationwide Debentures were governed by English law and made ref- erence to Nationwide’s ability to appoint administrators under the Act. Nationwide was the Companies’ largest creditor, and therefore its views were important when deciding the issue of the Companies’ COMI.

    The Companies sought to establish that their COMI was in Jersey and relied on the fact that Board meetings were held in Jersey. However the court did not find this persuasive. A third party would not know where Board meetings are taking place. In any event the location of the board was of limited importance in circumstances where the day-to-day  conduct and business dealings  of the Companies were carried out through FREPIM in London.

    This aspect of the decision serves as an important reminder, for debtors and creditors alike, of the court’s objective approach in ascertaining the COMI of a com- pany not registered in the EEA but operating in the UK.

    Though the starting point is to look at a company’s reg- istered address that is not the end of the matter. A case and fact specific analysis needs to be carried out.

    Issue 2: Improper motive

    In respect of the second issue, the Companies submit- ted that Nationwide had acted with an improper motive in that the purpose of appointing the administrators had been to stifle the progress of the December 2014 litigation.

    Paragraph 81 of Schedule B1 of the Act provides:

    ‘(1) On the application of a creditor of a company the court may provide for the appointment of an administrator of the company to cease to have effect at a specified time.

    (2) An application under this paragraph must allege an improper motive (a) in the case of an admin- istrator appointed by administration order, on the part of the applicant for the order, or (b) in any other case, on the part of the person who appointed the administrator.
    On an application under this paragraph the court may -

    • adjourn the hearing conditionally or unconditionally;
    • dismiss the application;
    • make an interim order;
    • make any order it thinks appropriate (whether in addition to, in consequence of or instead of the order applied for).’

    This provision was introduced as an amendment to the 1986 Act the by the Enterprise Act 2002, Schedule 16, paragraph 1. The court observed that there was little in the way of explanation as to what lay behind this amendment. No guidance was to be found in the mate- rial published by the relevant government departments and agencies which sponsored the amendment nor was there any debate on the provision recorded in Hansard. The court held that it was invidious to attempt to pinpoint precisely what form the motivation must take for the statutory jurisdiction to be invoked. The test is whether there is a motive that is not in harmony with the statutory purpose of administration and that is causative of the decision to appoint. If there is no dis- harmony it is difficult to see why the motive should be treated as a material matter militating towards termination of the administration.

    Further, following the reasoning in the Northern Irish case of Cursitan v Keenan [2011] NICh 23, the court held that even where there is a finding of an improper motive, the court has a wide discretion as to whether to terminate an administration.

    ‘If the statutory purpose of administration would be likely to be achieved, notwithstanding the motives of the appointor, like McCloskey J. in Cursitan it seems to me that this would normally be the main touch- stone for the court. The existence of an improper motive may become of relative insignificance in such circumstances, particularly where the appointor’s improper objective was not actually achieved.’ (para. 47 of the Judgment).

    The court did not find a improper motive on the facts of the case. The date of repayment for Nationwide’s loans had been set as October 2016 for some years, Nationwide had offered to extend the date for repayment by six months and the deadlines set had not been unreasonable. Further, even if there had been an im- proper motive, there was no satisfactory evidence that the statutory purposes of the administration were not likely to be achieved. Therefore the court did not inter- fere with the administrators’ appointment.

    This aspect of the decision is likely to be welcomed by administrators and potential appointors alike because it provides certainty. Essentially as long as the statu- tory purpose of administration is reasonably likely to be achieved, the motivation for the appointment is irrelevant. Therefore it appears that courts will only interfere with appointments in limited and somewhat extreme circumstances.

     

    Liisa Lahti

    Liisa has a broad commercial practice work covering banking & finance, international trade, shipping and insurance. She is commended in the latest editions of the legal directories as: "very intelligent and very to the point."..."hard-working, bright, commercially minded and a real joy to work with."...."proactive, very responsive and someone whose legal analysis is very good" and that she "grasps the issues, has a good handle across the piece and is good at suggesting routes forward".

    Before coming to the Bar Liisa spent two and a half years at Freshfields Bruckhaus Deringer, where she gained experience in the Corporate, Finance and Litigation Departments and spent time on secondment to ExxonMobil.

  • Do not fret over air-freight - the freight rule applies to freight earned in carriage by airView More

    Tue, 14 November, 2017

    Schenker Ltd v Negocios Europa Ltd (6th October 2017) Moulder J (unreported) - Jonathan Chambers

    In an under-reported judgment the English Courts have finally confirmed the oft-presumed position that the English freight rule applies to carriage by air.

    The common law rule does not require contractual incorporation. It provides that a claim in respect of damage, loss or delay to cargo cannot be asserted by way of deduction from a freight invoice. Thus a cargo claimant must pay freight in full notwithstanding that his cargo may not have arrived or have arrived damaged or late. The rationale for the rule is that there should be prompt payment, avoidance of delay, protection of cash flow and some assurance that a carrier is not disadvantaged in providing credit.

    The English common law “freight rule” has been established for more than 100 years in carriage of goods by sea (The Brede [1974] Q.B. 233 & The Aries [1977] 1 W.L.R. 185) and has been extended to domestic and international road haulage (United Carriers Ltd v Heritage Food Group (UK) Ltd [1996] 1 W.L.R. 371).

    Despite the significant difference between the time and cost of transportation by air and sea, the English Court held there was no logical or sensible distinction to be made between different forms of transport and applied the common law rule.

    The effect is that summary judgment for freight will now be a potent weapon in the hands of air carriers where cargo claimants seek to withhold payment.

     

     Jonathan Chambers

    Jonathan has a broad practice covering all aspects of commercial and transport law.  He is consistently ranked by Chambers UK and Legal 500 as a Leading Senior Junior  with Chambers UK (2016)  commenting that he is  “Noted by peers for his meticulous preparation, strong advocacy skills and easy manner with clients” and Legal 500 (2016) describing him as “Very well prepared”.

    Jonathan has a strong international practice and he is qualified to practise in England & Wales, Northern Ireland (practising) and Australia (currently non-practising). He has also advised on disputes involving Australia, Canada, the Channel Islands, Hong Kong, Northern Ireland, Scotland, Singapore, and the United States of America.

    > View Jonathan's full profile

    jonathan.chambers@quadrantchambers.com

  • International Arbitration Newsletter Issue 05 - Winter 2017View More

    Fri, 10 November, 2017

    Quadrant Chambers is delighted to announce the Winter 2017 issue of our International Arbitration Newsletter.

     Click the image to view the newsletter

    Ruth Hosking provides the editorial of this 5th edition on information technology and how it can continue to facilitate the use of international arbitration as a dispute resolution mechanism.

    This issue includes a guest article by Omar Omar, Head of the Transport & Insurance Department and Partner at Al Tamimi & Company on the opening of the Emirates Maritime Arbitration Centre in Dubai.

    Quadrant’s Simon Rainey QC looks at two recent cases that provide a reminder of the fundamentals of good practice by members of arbitral tribunals, and the consequences of forgetting those fundamentals.

    Please click here to view the publication.

     

    Previous Publications - Please click on the publication below to view

  • Retired Supreme Court Judge The Rt Hon Lord Clarke Joins Arbitrators at 10 Fleet StreetView More

    Tue, 07 November, 2017

    Arbitrators at 10 Fleet Street is honoured to welcome The Rt Hon Lord Clarke as an Arbitrator. Lord Clarke, who was one of the first Supreme Court Justices, retired from the Supreme Court in September this year and is now accepting appointments as arbitrator in commercial disputes. 

    Lord Clarke has had an illustrious career, first at the commercial bar, before being appointed a High Court Judge in 1993, sitting in the Admiralty, Commercial and Crown Court. He was appointed to the Court of Appeal and Privy Council in 1998 and was Master of the Rolls from 2005 to 2009. He was the first High Court judge to be appointed directly to the Supreme Court. He was appointed to the Court of Final Appeal in Hong Kong in 2011 as a non-permanent judge.

    We are delighted that The Rt Hon Lord Clarke has chosen to join Arbitrators at 10 Fleet Street. His outstanding experience, legal ability and unfailing charm will no doubt make him a much sought after arbitrator for international commercial disputes”. Luke Parsons QC, Head of Quadrant Chambers

    To appoint Lord Clarke, please contact John Walker or Megan Parker on 0845 262 0310.

    "Arbitrators at 10 Fleet Street" is a separate arbitrator wing set up by Quadrant Chambers. Full-time arbitrators include Sir David Steel, David Steward, Richard Lionberger and His Honour Harvey Crush. Additionally, a number of members of Quadrant Chambers regularly accept appointments as international commercial arbitrators.

  • Unjust Enrichment and the Direct Transfer Rule - Claudia Wilmot-SmithView More

    Fri, 03 November, 2017

    Unjust Enrichment and the Direct Transfer Rule: Investment Trust Companies v Revenue and Customs Commissioners

    By Claudia Wilmot-Smith

    This article was originally published in International Corporate Rescue, Volume 14 Issue 5, 2017.  Please click here to read the original article.

    On 11 April 2017 the Supreme Court handed down judgment in Investment Trust Companies v Revenue and Customs Commissioners [2017] UKSC 29 [2017] 2 WLR 1200. This judgment, given by Lord Reed, provides a welcome analysis of the requirement that a defendant must have been unjustly enriched ‘at the expense of ’ a claimant if he is to claim restitution from him.

    The basic requirements of a claim in restitution are well established. A claimant must establish that: (1) the defendant has been enriched; (2) at the claimant’s expense; and (3) the enrichment was unjust. If these factors can be made out, and the defendant has not been able to rely on any defences, his claim will succeed.1 Where the claimant directly conferred the benefit on the defendant, the application of this test is, in principle, straightforward.

    Complications arise, however, where the claimant has not dealt with the defendant directly. In these circumstances, a question arises as to what it means to say that a defendant’s enrichment has been ‘at the expense of ’ the claimant. Recovery in these circumstances was recently allowed by the Supreme Court in Menelaou v Bank of Cyrpus UK Ltd [2015] UKSC 66.

    In that case the defendant bank had lent the appellant’s parents money, secured by a charge over their home. They decided to sell and purchase another property, which they wanted to (and in the event did) gift to the appellant (Melissa). The bank agreed to release its charges on their property so that the sale could go through, on the condition (inter alia) that they have a legal charge over the new property. The solicitors confirmed that these conditions would be complied with. A legal charge was drawn up, purportedly signed by the appellant.

    The charge had not been signed by Melissa and, so, was not enforceable against her. She was thus better off than she would have been if her parents had complied with the terms of their agreement with the bank. The issue was whether she was required to make restitution to the bank in respect of this gain. The gain was a result of two separate transfers:

     – First, from the bank to the appellant’s parents. This transfer was defective: the Menelaous subsequently failed to comply with its conditions.

    – Second, from Melissa’s parents to her. This transfer was not defective. The property was gifted to her, and it was accepted that she had no knowledge of her parents’ dealings with their bank.

    In these circumstances the Supreme Court found that the bank had been unjustly enriched at her expense.

    Commenting on the Supreme Court’s judgment in Menelaou in an earlier edition of this publication, the present writer noted that the basis upon which the Supreme Court had made this finding was unclear; and lamented the lack of guidance as to what it meant to say that the defendant’s enrichment has been ‘at the expense of ’ a claimant with whom he has had no direct dealing.2  

    Happily, the Supreme Court has since had the opportunity to consider the matter afresh. Lord Reed’s judgment in ITC v Revenue and Customs Commissioners directly engages with the issue, with a rigour which earlier case law has lacked.

    ITC: the facts  

    Varies investment companies (the ‘Managers’) had made supplies of investment management services. These supplies were treated as taxable, as a result of the incorrect transposition of an EU VAT directive into UK law Their customers (the ‘Companies’) paid the amounts charged,

    The Managers received these amounts, and in turn accounted to the Commissioners in respect of the same. In carrying out this accounting process, the Managers deducted from the tax chargeable on its supplies (known as ‘input tax’) the tax which it had itself paid on taxable supplies received for the purposes of its business (known as ‘output tax’). It paid to the Commissioners the remaining surplus, if any.  

     Thus, for example, if the Managers made supplies to an ITC, and charged £100 VAT, but had purchased taxable supplies during the relevant period on which the VAT was £25, the Manager would apply the £25 against the £100, and pay the Commissioners the balance (£75).

    The Managers’ obligation to account for VAT was triggered by the supply of the relevant services, rather than the VAT being charged to, or paid by, the Customer. The Customers’ liability was contractual.

    The Managers had statutory claims against the Commissioners for repayment of the VAT which they had accounted for, under the Value Added Tax Act 1994. They successfully claimed back the VAT they had accounted for in respect of the amounts paid by them to the Customers, with two exceptions:

    – They were unable to claim in respect of accounting periods ending on or after 4 December 1996, which were time-barred under s.80 of the Value Added Tax Act 1994;

    – The amounts repaid to the Managers were calculated on the basis that, under s.80(2A), it was necessary to set the amount of input tax which they had deducted against the output tax for which they had accounted. Taking the notional figures set out above, the Managers were entitled to repayment of the £75 which they had actually paid to the Commissioners, but not the £25.

    The Managers passed on the amounts they were repaid to the Customers, with the result that they obtained a refund of the amounts they had paid, subject to these two exceptions.

    The customers’ claims against the commissioners  

    The Customers brought proceedings against the Commissioners, claiming restitution of the amounts covered by the two sections above – i.e., they claimed:

    – the full £100 in respect of payments made during periods which were subject to the statutory time bar; and

    – the £25 which they had paid to the Managers, but which the Managers had not paid over the to the Commissioners because of the accounting process referred to above.

    The 3 key questions before the Supreme Court were identified by Lord Reed as follows:

    – Did the claimants have a common law claim against the Commissions in principle (subject to any statutory exclusion)?

    – If so, did s.80 of the 1994 VAT Act bar such a claim?  

    – If there was no claim, or any such claim was barred, was this result compatible with EU law?

    This casenote addresses the first of these questions, which raises the issue outlined above.

    Recovery of the £25  

    It was accepted that the Commissioners were enriched by the notional £75 which they received from the Managers. Both heads of claim required the Court to consider whether they were also enriched by the notional £25. It held that they were not. This conclusion turned on the way in which VAT is accounted for and since the question is unlikely to arise in other cases, it will not be covered here. Suffice to say, the Supreme Court held that any argument that the Commissioners were enriched by moneys which they did not actually receive depending on establishing that the Managers were entitled to factor the VAT received on the relevant supplies into their input and output tax calculations. This was inconsistent with the claim to recover the £75 on the basis that it was not due. If the Commissioners were required to repay the notional £25, they would in fact be £25 worse off.

    Recovery of the £75  

    Of broader interest is the question as to whether the Commissioners’ receipt of the £75 enriched them at the expense of the Claimants. The relevant facts were as follows:

    The Managers accounted to the Commissioners for their output tax liability in respect of the relevant periods.

    When doing so, they took into account the £100 that they had received from the Claimants.

    The net result, therefore, was that the Commissioners were better off as a result of the Claimants’ payments to the Managers (and the Claimants were, of course worse off).

    However, the Claimants had not directly paid anything to the Commissioners.

    Moreover, the Managers liability to account for the £100 arose because they had charged the Claimants this amount in respect of the services, not because the Claimants had actually paid it.

    Enrichment ‘at the expense of’ a claimant  

    When considering whether a defendant has been enriched ‘at the expense of ’ a claimant with whom he has not directly dealt, Lord Clarke, in Menelaou,  stated that ‘the question in each case is whether there is a sufficient causal connection, in the sense of a sufficient  nexus or link, between the loss caused and the benefit received by the defendant. ’ (at [27])

    However, this does not tell us what type of nexus or link will be considered sufficient. Lord Reed criticised the ‘test’ in Menelaou  as being ‘too vague to provide clarity … [it] leaves unanswered the critical question, namely, what connection, nexus, or link is sufficient[to justify such a remedy]?’ (at [37])3  

    When considering a claim in unjust enrichment, the Court must determine whether it can justify compelling the defendant to pay his gains over to the claimant. The requirement that the defendant’s enrichment be ‘at the expense of ’ the claimant is directed at this question: it is designed to ensure that such disgorgement can be justified.

    Further, he noted:

    ‘the questions [e.g. whether the enrichment is at the expense of the claimant] are not themselves legal tests, but are signposts towards areas of inquiry involving a number of distinct legal requirements. In particular, the words ‘at the expense of ’ do not express a legal test, and a test cannot be derived by exegesis of those words, as if they were words of a statute.’ (at [41])4  

    Lord Reed underlined the necessity for a careful legal analysis of individual cases, by reference to the purpose of the law of unjust enrichment, namely, to correct normatively defective transfers, usually by restoring the parties to their pre-transfer positions (at [42]). To this end, the requirement that the enrichment be ‘at the expense of ’ the claimant is designed to ensure that there is a transfer of value from the claimant to the defendant, with the claimant having suffered a loss, which loss has benefitted the defendant (at [43]).

    If the law of restitution is about reversing defective transfers, it is not immediately obvious that the remedy should be allowed in a three party case, especially if only one of the transfers is defective (as in Menelaou ).

    Lord Reed recognised that ‘it has often been suggested that there is a general rule, possibly subject to exceptions, that the claimant must have directly provided a benefit to the defendant’ if he is to claim that the latter has been unjustly enriched at his expense (at [50]).

    He set out the following examples of cases in which a claimant will have a remedy in unjust enrichment, despite not having dealt directly with the defendant:

    – Where one or both parties have dealt through an agent. Here, the series of transactions is legally equivalent to a direct transaction between the claimant and defendant. (at [48])  

    – Where the right to restitution has been assigned, the claimant assignee stands in the shoes of the assignor. He is, therefore, treated as if he had been a party to the relevant transaction, and the transaction is treated as if it were a direct one (at [48]).

     – An intervening transaction may be created in order to conceal the connection between the claimant and the defendant. If it is found to be a sham, the arrangements may be treated as ‘equivalent to a direct payment’ (as in Relfo Ltd v Varsani (No 2)  [2014] EWCA Civ 360, see that case at [103] and [115]).

    – If the property received by the defendant is one into which the claimant can trace an interest, the law will treat the property as if it were the claimant’s. Thus ‘the defendant is therefore treated as if he had received the claimant’s property’. ([48])

    – Where a claimant discharges a debt owed by the defendant to a third party, the defendant is directly enriched

    – not by the payment, but by the discharge of his debt. If the transfer of value is defective, the law reverses it, so far as possible, by subrogating the claimant to the rights formerly held by the third party. ([49])

    – There are also cases in which a series of transactions are treated as if they formed a single scheme or transaction, ‘on the basis that to consider each individual transaction separately would be unrealistic’ ([48])

    Taking Lord Reed’s 5 categories of case:

    – The first three encompass circumstances in which there is in truth a single transfer of value from the claimant to defendant. They are cases which, on analysis, do not fall foul of any general principle that the law of restitution provides a remedy only where the defendant’s gain was the direct result of his dealing with the claimant.

    – In the fourth, the ‘at the expense of ’ requirement is satisfied by dint of the fact that the claimant’s property can be traced directly into the defendant’s hands. Lord Reed sees this situation as one which can be reconciled with the ‘direct benefit rule’ on the basis that the defendant is treated as if he were the recipient of the claimant’s property. If the claimant had an interest in the property at the time it was transferred to the defendant, such a transfer is normatively equivalent to a direct transfer from claimant to defendant.  

    – In cases where a claimant discharges a defendant’s debt owed to a third party creditor, the defendant is directly enriched. Thus, on Lord Reed’s analysis, the claimant has directly provided a benefit to the defendant.

    – The last, however, is problematic.

    Lord Reed acknowledged that, where the defendant has not received a benefit directly from the claimant, and in circumstances falling outwith the first four categories listed above, it is ‘generally difficult to maintain that the defendant has been enriched at the claimant’s expense.’ (at [51]) He clarified that:

    – A ‘but for’ causal connection between the claimant being worse off and the defendant being better off is not sufficient to constitute a transfer of value from one to the other.

    – Nor is the ‘at the expense of ’ requirement satisfied by a connection between the benefit and loss that exists merely as a matter of economic or commercial reality. ‘Economic reality’ is not a criterion that can be applied with any rigour or certainty – especially where there have been chains of suppliers or consumers. As has been recognised in other jurisdictions, it can be extremely difficult to ascertain whether the economic burden of an unjust enrichment has been passed on. Moreover, as Lord Reed highlighted, since unjust enrichment is not concerned with compensation for loss, an approach which seeks to identify the party who ultimately bears a particular loss is not one which accords with the purpose of restitution law (at [60]).

    Despite these difficulties, there are cases where the courts have allowed unjust enrichment claims brought by claimants who have not dealt directly with the defendant (whether through agents, or because any intervening transactions were shams), and who cannot trace their property into the defendant’s hands.

    Lord Reed explains these as cases in which recovery is allowed because the relevant transactions are ‘co-ordinated’, such that it is ‘unrealistic’ to consider them individually. They are instead considered to form part of a single scheme or transaction – to which both claimant and defendant are parties.

    Unfortunately, he did not provide any guidance as to the circumstances in which the courts will hold that it is ‘unrealistic’ to treat each individual transaction in a series as separate transactions. This was treated as a separate category of case from those where the intervening transaction is a found to be a sham.  

    The two examples Lord Reed gave of this category of case were Banque Financiere de la Cite SA v Parc (Battersea) Ltd  [1991] 1 AC 221, and Menelaou .

    – Banque Financiere  is a complicated case, and this case note is not the place to engage in an analysis thereof. Suffice to say, however, that it has been subject to academic criticism – notably by Professor Peter Watts, who described the result as ‘problematic’.5  It is not clear that Lord Reed’s ‘coordinated transactions’ test sheds any further light on the analytical basis for the decision in that case.

    – Lord Reed’s judgment does not help make sense of the result in Menelaou . In particular, there was no explanation as to why the transactions in Menelaou should be treated differently from those in ITC , i.e. why it was ‘unrealistic’ to treat the transactions in one case as if they were a single transfer, but not in the other.

    Without any guidance as to what it means to say that a series of (non-sham) transactions cannot ‘realistically’ be considered to be separate, the breadth of this exception to a general rule that a claimant must have directly provided a benefit to a defendant if the court is to strip the defendant of his gains is unclear.

    This is perhaps unsurprising: Lord Reed thought that it would be ‘unwise to attempt in this appeal to arrive at a definitive statement of the circumstances in which the enrichment of a defendant can be said to be at the expense of the claimant’ (at [38]) and ‘unwise at this stage of the law’s development to exclude the possibility of genuine exceptions [to the direct transfer rule], or to rule out other possible approaches.’ (at [50])

    He was, however, clear that it could not be said that the Commissioners had been enriched at the expense of the Customers. This was based on his rejection of the notion that there had been a transfer of value from the Claimants to the Commissioners.

    – There was a transfer of value from the Claimants to the Managers (the notional £100).

    – There was a further transfer of value from the Managers to the Commissions (the £75).

    Both transfers were defective (the former, because it was made in performance of a contractual obligation which was mistakenly believed to be owed; the latter because it was made in compliance with a statutory obligation which was incompatible with EU law). However, ‘These two transfers cannot be collapsed into a single transfer of value.’ (at [71])

    Given Lord Reed’s warning that he was not seeking to lay down a definitive test, this conclusion should perhaps not be understood as requiring a claimant  in an indirect transfer case to show that a number of transfers can be ‘collapsed’ into a single transfer of value from himself to the defendant if he is to recover. Given the lack of clarity as to the circumstances in which transfers can be so collapsed, this is probably good.

    The scope of the exception will have to be worked out in later cases. However, Lord Reed’s judgment provides valuable guidance to practitioners when considering how to analyse cases involving multiple transfers.   

     

    Claudia Wilmot-Smith

    Claudia joined Quadrant Chambers following the successful completion of her pupillage in 2009.  Since completing pupillage, Claudia has been acquiring experience in a broad range of commercial disputes, and accepts instructions in all areas of Chambers' work.  She has appeared as sole and junior counsel in the High Court and in arbitration proceedings.

    > View Claudia's full profile

    claudia.wilmot-smith@quadrantchambers.com 

  • Top Ranked in Chambers & Partners UK Bar 2018View More

    Fri, 03 November, 2017

    Quadrant Chambers is deligted to be top ranked in the latest edition of Chambers & Partners UK Bar. We are top ranked for Aviation, Shipping & Commodities and Travel (Regulatory & Commercial) and are ranked for commercial dispute resolution.

    We have individual 65 recommendations and 46 barristers recommended across aviation, commercial dispute resolution, energy & natural resources, information technology, insurance & reinsurance, international arbitration, shipping & commodities and travel. 

    Aviation -  Highly distinguished chambers offering a top-tier aviation service with particular depth at junior level. The set is widely regarded as the market leader for high-profile insurance and reinsurance disputes, and routinely handles cases ranging from damaged aircraft to serious injury and fatality claims, as well as allegations of unlawful discrimination. Members act for both claimants and defendants, frequently tackling pioneering points of law in the process. Chambers is also equipped with a wealth of expertise in commercial and financial matters, and has a client base including top airlines and many of the pre-eminent law firms in the market. Two of the set's barristers recently acted in a serious fatality case involving a helicopter which crashed in the Democratic Republic of Congo with 11 passengers aboard. The case introduced novel questions as to the legal responsibility of banks and mining companies to assess the safety record of external transport suppliers.

    Client service: "The clerking is highly efficient." "The clerks are very easy to get hold of, always call back and do their best to get things sorted." The clerking is jointly led by Gary Ventura and Simon Slattery.

    Commercial Dispute Resolution - Barristers from Quadrant Chambers are regulars in the Commercial Court, Chancery Division, and Technology and Construction Court among others, and are particularly proficient at tackling international disputes including conflicts of law cases. The set receives instruction from leading commercial law firms, and is particularly noted for its shipping and energy practices. Notable recent work includes Caterpillar NI v John Holt & Co, the leading case on Retention of Title clauses and Sale of Goods. Peers remark that “the set has a good range of work, is well balanced and has people who do the job very well.”

    Client service: “They're very easy to deal with, and they understand the client's and the solicitor's needs well.” “The clerks are responsive and commercial when it comes to bills and cost estimates.” Simon Slattery and Gary Ventura are the senior clerks.

    Shipping & Commodities - This well-known shipping set has its roots in admiralty law and as such demonstrates masterful expertise in both wet and dry shipping disputes. It has excellent bench strength in the form of both silks and juniors, whom clients describe as "exceptional in their own right" and "willing to listen to solicitors' needs." Arbitration and mediation services are offered in addition to skilled courtroom advocacy. Many members are multilingual, which aids their participation in international cases. Several of them recently appeared in the Court of Appeal in Yemgas FZCO & Others v Superior Pescadores, which hinged upon the meaning of the clause paramount in bills of lading.

    Client service: "The clerks are friendly and efficient but also realistic about availability. Quadrant as a whole has a commercial attitude." Sarah Longden is the business development director. Gary Ventura and Simon Slattery head up the clerking team.

    Travel (International Personal Injury) - Solid travel law set that is well known for its expertise across aviation, regulatory and commercial matters. The chambers is frequently instructed by major airlines and tour operators in cases concerning flight delay disputes, package travel regulations and personal injury claims. It is noted for its "good reputation and undoubted force" in the field. It is also well versed in handling group litigation cases, often arising from package holidays.

    Client service: Senior clerk Gary Ventura heads the team and, according to interviewees, "is very approachable." The team are said "to understand the commercial pressures" and are "highly efficient."

    Quadrant Chambers is renowned for the breadth of its expertise, and has a deep bench of barristers who are at the forefront of regulatory travel matters. Barristers here regularly handle complex claims that take into account legal issues in multiple jurisdictions. They have experience of representing international airlines and tour operators, and possess expertise in aviation, personal injury and travel insurance cases. Recent highlights for the set include handling a test case involving 'missed connections' as well as Nolan & 42 others v TUI UK, a claim by passengers arising from an outbreak of gastroenteritis on a cruise.

    Client service: "The clerking is great." Gary Ventura leads the clerking team, which is considered "really responsive and helpful."

    A full list of the rankings can be found here

  • Expert determination clauses: traps for the unwary? - Jeremy RichmondView More

    Mon, 30 October, 2017

    This article was originally published in Thomson Reuters, Practical Law Dispute Resolution Blog on 30 October 2017.

    Expert determination clauses have proved popular in all sorts of contracts. This is because they offer the prospect of a cheap and relatively fast way of resolving disputes, unlike clauses providing for the resolution of disputes by arbitration or court proceedings. If such clauses also provide that the expert need not give reasons for their decision, it also means, in effect, that it becomes extremely difficult for the losing party to appeal the decision on substantive grounds.The jurisprudential basis for expert determination clauses was placed on a firm footing in Jones v Sherwood, where the Court of Appeal held that as a matter of contract law, where two persons agree an expert determination clause, they are bound by the outcome if the determination is made by the expert honestly and in good faith, even if there has been a mistake in the determination. The Court of Appeal expressly rejected the earlier authorities that had treated such clauses as mere machinery for calculation that could be automatically overridden by the courts if it appeared to be wrong. In light of this seminal case, one might have thought that subsequent litigation concerning expert determination clauses would have been limited, save in cases where dishonesty or bad faith is alleged against the expert. However, there has been a spate of recent cases concerning the logically anterior questions of whether, as a matter of contract:

    • The expert has the jurisdiction (or put another way, has the authority) in fact to determine the dispute referred to them.
    • If so, the circumstances in which a party to the contract could potentially waive their right to refer such a dispute to an expert.

    Chancellor Vos considered the second of these two issues in the February 2017 unreported Chancery Division case George Scarr-Hall v ISS (UK) Limited.

    The “jurisdiction” of the expert

    Before turning to the question of potential waiver, it is instructive to consider the court’s approach to dealing with questions of expert jurisdiction. In short, where the court considers that the expert will act, or is acting, outside their decision-making authority, the court will intervene and, if necessary, enjoin the expert determination process and its purported effect. The court will generally wait until the expert has made a determination before intervening. This is because it may transpire that the expert does not in fact act outside their authority: Director of General Telecommunications and another v Mercury Communications Ltd (per Hoffmann LJ dissenting but whose judgment was approved in the appeal to the House of Lords). The questions of if, or when, the court will intervene is determined on what is just and convenient in the circumstances of the case in question: Barclays Bank v Nylon Capital; MP Kemp v Bullen Developments Limited.

    The potential risk of waiving jurisdiction

    In George Scarr-Hall v ISS (UK) Limited, the claimant, GSH, had sought to claim deferred compensation under a business sale agreement. Deferred compensation was based on a series of post-completion accounts of the target company. Those post-completion accounts were to be prepared without interference by GSH or the defendant, ISS. In the event of a dispute arising from the post-completion accounts, the matter was to be referred to expert determination.

    GSH had commenced court proceedings for deferred compensation. It said that, since ISS had interfered with the preparation of the target company’s post-completion accounts, there were no accounts from which a dispute could be said to arise within the meaning of the expert determination clause. As such, the expert determination clause did not apply to the dispute. ISS filed an acknowledgment of service (but did not contest in that document the court’s jurisdiction to determine the dispute). ISS then served a defence reserving its right to refer the dispute to expert determination. Subsequently, ISS sought to invoke the expert determination procedure and applied for a declaration from the court that it was entitled to do so. GSH opposed the application on the basis that, by failing to dispute jurisdiction under CPR 11, ISS had been deemed to waive its right to expert determination. GSH relied on the submission that the court’s jurisdiction in CPR 11 covered questions of “the court’s power and authority” to determine issues: per Hoddinott v Persimmons Homes.

    The Chancellor rejected GSH’s argument on the particular facts of the case. The judge was concerned, as a matter of case management, that the expert determination procedure should provide an opportunity for the dispute to be resolved before the matter came on for trial. The judge also found that ISS on the facts had not waived its right to refer the dispute to expert determination in the first instance.

    Conclusion

    When a client is faced with concurrent court proceedings (potentially in breach of an expert determination clause) and expert determination proceedings, it must be careful not to waive its right to expert determination. It can protect its position by filing an acknowledgement of service contesting the court’s jurisdiction as appropriate.

    Jeremy Richmond

    Jeremy specialises in commercial and modern chancery law.  He is described in Chambers and Partners as a “superb advocate” whose “expertise in chancery, commercial and banking matters is a useful complement to his insolvency skills”. 

    Jeremy’s practice encompasses a broad range of matters including contentious insolvency (covering a wide variety of cross-border insolvency issues in particular in relation to insolvency / restructuring in Chambers’ core areas of shipping, commodities, insurance and aviation e.g. Jeremy has advised and / or appeared for key parties in OW Bunker, Hanjin Shipping and Arik Airlines), company law (including directors misfeasance), shareholder and joint venture disputes, sale of goods (both international and domestic), fraud (with an emphasis on asset recovery) and all aspects of general commercial law.  He regularly appears in the Chancery Division as well as in the Commercial and Mercantile Courts.  Jeremy often works in conjunction with Counsel from other jurisdictions and with experts. 

    Many of his cases involve a cross-over between ‘modern’ chancery and commercial litigation. 

    Jeremy was admitted to the New York Bar in 1996 and has worked as a New York lawyer for blue chip law firms in Manhattan and then the City.  

    > View Jeremy's full profile

    jeremy.richmond@quadrantchambers.com

  • Chambers UK Bar Awards 2017 - Nevil Phillips awarded Shipping Junior of the YearView More

    Fri, 27 October, 2017

    We are delighted to announce that Nevil Phillips was awarded Chambers UK Bar Awards Shipping Junior of the Year at last night's awards ceremony, which took place at the London Hilton, Park Lane.

    Details of the nominations and winners for each category are available via the attached link

    Nevil Phillips

    Nevil Phillips has been listed for many years as a Leading Junior in Shipping, Commodities, and Trade & Customs by The Legal 500, Chambers UK, Chambers Asia-Pacific, and Who's Who Legal, and Best Lawyers where he has been variously cited as "an outstanding advocate, incredibly fast thinking and a real problem solver", and "a very polished advocate, who gets results through his preparation and through his clear and compelling presentation of the client's case". Nevil was Acquisition International's "Best Shipping Barrister – UK" in their 2015 Legal Awards.

    He has featured as successful counsel in a number of recent high-profile commercial and shipping cases. These include SBT Star Bulk and Tankers (Germany) GmbH Co KG v Cosmotrade SA (The Wehr Trave) [2016] EWHC 583 (Comm) (the leading case regarding the scope of charterers' rights under a time charter trip), Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2015] EWHC 718 (Comm) (the leading case regarding renunciation under time charters and whether payment of timely advance hire is a condition), and Libyan Navigator Ltd v Lamda Maritime Holdings Sp. z. o. O [2014] EWHC 1399 (Comm) (the leading case regarding the interpleader procedure in the context of liened sub-hires and sub-freights.

    Nevil's practice envelops all aspects of commercial and shipping advisory and advocacy work, encompassing the broadest spectrum of contractual, international trade, commodities, shipping, maritime, energy, insurance, reinsurance, banking, and jurisdictional disputes and associated areas and remedies. He appears regularly in commercial arbitration (both domestic and international, with experience before a wide variety of arbitral institutions, bodies and trade associations, including LMAA, GMAA, LCIA, ICC and associated bodies), the Commercial Court, and the appellate courts.

    He has substantial experience as an arbitrator, and has also given expert evidence on English law to courts in other jurisdictions. He has also written and/or contributed to a number of leading text books in his fields, including his own authoritative work on "The Merchant Shipping Act 1995 – An Annotated Guide".

    Nevil is a popular and regular choice as a presenter/speaker at legal and corporate functions, seminars and lecture

    > View Nevil's full profile
    nevil.phillips@quadrantchambers.com

  • Guy Blackwood QC wins in Supreme Court: Taurus v. SOMO [2017] UKSC 64View More

    Wed, 25 October, 2017

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

    In an important judgment given on Wednesday 25 October 2017, the Supreme Court has laid down important principles for the enforcement of international arbitral awards and specifically for the interception of funds payable under letters of credit

    Issues:

    1. The situs of a debt owed by the issuing bank under an unconfirmed letter of credit, the place where the issuing bank resides or the place of payment?
    2. Whether SOMO was entitled to sovereign immunity as an emanation of the State of Iraq or because it was exercising sovereign authority (first instance and Court of appeal only).
    3. Identification of the creditor under letters of credit.
    4. The principle of “honest dealing” (‘a garnishee order charges only what the judgment debtor can honestly deal with’) as it applies to the issuance of third party debt orders garnishing payments due under letters of credit.
    5. Whether such interest as the Central Bank of Iraq (“CBI”) had in the letters of credit was of itself a bar to execution.
    6. If the CBI had a recognisable interest in the letters of credit, was that interest entitled to immunity from execution pursuant to sections 13(2) and 14(4) of the State Immunity Act 1978 (the “1978” Act)?
    7. The circumstances in which a receivership order ought to be made.

    A copy of the judgment can be found here.

    Background:

    In February 2013 Taurus Petroleum Limited ("Taurus") obtained an international arbitration award against the State Oil Marketing Company ("SOMO") in the sum of US$8,716,477.  The arbitration was, by agreement of the parties, heard in London, although the official seat of the arbitration remained in Baghdad.

    SOMO failed to honour the award or any part of it, despite participating in the arbitration.

    In the circumstances, Taurus applied to the High Court without notice for leave to enforce the award as a judgment under section 66(1) of the Arbitration Act 1996 (it could not rely on the New York Convention 1958, because Iraq is not a contracting state). 

    Taurus also applied on a without notice basis for interim third party debt orders and the appointment of a receiver by way of equitable execution over debts payable by Crédit Agricole London Branch pursuant to letters of credit which were issued at the request of Shell International Eastern Trading Co (“Shell”) following the purchase of crude oil by Shell from SOMO. 

    The letters of credit were unconfirmed credits which were expressly made subject to UCP 600. They were addressed to CBI and provided as follows:

    “Please advise our following irrevocable documentary credit to Oil Marketing Company (SOMO) after adding your confirmation. Our reference GBRM300017 We hereby establish our irrevocable documentary letter of credit Number GBRM3000017
    By order of: … [Shell]
    In favour of: Oil Marketing Company (‘SOMO’)

    [ A ] Provided all terms and conditions of this letter of credit are complied with, proceeds of this letter of credit will be irrevocably paid in to your account with Federal Reserve Bank New York, with reference to ‘Iraq Oil Proceeds Account’.
    These instructions will be followed irrespective of any conflicting instructions contained in the seller’s commercial invoice or any transmitted letter.
    [ B ] 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 upon presentation as specified to credit CBI A/c with Federal Reserve Bank New York.”
    [[ A ] and [ B ] added]

    Taurus’ submission was that the effect of special clauses [ A ] and [ B ] was as follows:

    1. The principal obligation to make payment was owed to SOMO alone, as the named beneficiary, which obligation sounded in debt.
    2. A collateral obligation was owed to SOMO and the CBI jointly, to make payment in a certain way, which sounded in damages.

    High Court [2014] 1 All ER (Comm) 942 (Field J)

    SOMO challenged the orders on the grounds of want of jurisdiction and state immunity. Field J held as follows:

    1. The situs of the debt owed under the letters of credit was the residence of the debtor, Crédit Agricole, which was London and not the place of payment, New York (distinguishing Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233).
    2. That SOMO was not entitled to sovereign immunity as an emanation of the State of Iraq or because it was exercising sovereign authority.
    3. The debt due under the letter of credit was owed jointly to both SOMO and to the CBI.
    4. The principle of “honest dealing” was no independent bar to execution.
    5. Joint debts could not be garnished.
    6. The CBI’s interest as joint creditor attracted state immunity from execution pursuant to sections 13(2) and 14(4) of the 1978 Act.
    7. A joint debt could not be brought in by a receivership order.

    Court of Appeal [2016] 2 All ER (Comm) (Moore-Bick, Sullivan and Briggs LJJ)

    The decision of the Court of Appeal was as follows:

    1. The Court was bound by the previous decision of the same Court in Power Curber to hold that the situs of the debts owed by Crédit Agricole was the place of payment, New York, as opposed to the residence of the debtor, London (unanimously). Following Société Eram Shipping Co Ltd v Cie Internationale de Navigation [2003] UKHL 30; [2004] 1 AC 260, this was fatal to the granting of third party debt orders.
    2. That SOMO was not entitled to sovereign immunity as an emanation of the State of Iraq or because it was exercising sovereign authority (unanimously; this point was not re-run in the Supreme Court).
    3. That the sole creditor under the letters of credit was the CBI (by majority, Sullivan and Briggs LJJ). Moore-Bick LJ (dissenting) accepted Taurus’ submissions on the construction of the letters of credit, holding that the principal obligation to make payment was owed to SOMO alone, which obligation sounded in debt and that a collateral obligation was owed to SOMO and the CBI jointly, to make payment in a certain way, which sounded in damages.
    4. That the principle of “honest dealing” did not preclude the making of the third party debt orders, other than by reference to the existence of recognised proprietary interests.
    5. The interest of CBI as sole creditor precluded execution (Sullivan and Briggs LJJ).
    6. Sullivan and Briggs LJJ held that since on their view the debts were owed to CBI alone, that property was immune from execution pursuant to sections 13(2) and 14(4) of the 1978 Act.
    7. The receivership order ought not to be grated because the connection between SOMO and the jurisdiction was tenuous (unanimously) and because such an order would interfere with CBI’s collateral right (Moore-Bick LJ).

    The Supreme Court [2017] UKSC 64 (Lords Neuberger, Mance, Clarke, Sumption and Hodge)

    The decision of the Supreme Court was as follows:

    Issue 1, situs of debt

    By unanimous decision, the Supreme Court overruled the decision of the Court of Appeal in Power Curber which had stood for 35 years, and ruled that the situs of the debt owed under unconfirmed letters of credit is where the issuing bank resides, in this case London. In so doing:

    1. Lord Clarke recorded that by Article 3 of UCP 600, “braches of a bank in different countries are considered to be separate banks”, with the consequence that
    2. Lord Neuberger said of the decision in Power Curber, “such unreasoned distinctions do the common law, and in particular commercial law, no favours” (para 125).
    3. In the case of letters of credit, there was no basis for departing from the ordinary rule, that the situs of the debt is where the debtor resides.

    Issue 2, emanation of State of Iraq

    SOMO did not pursue its argument that it was entitled to state immunity as an emanation of the State of Iraq or because it was exercising sovereign authority

    Issue 3, identification of the creditor

    By a majority of 3:2, the Supreme Court held that the creditor under the letters of credit was SOMO alone:

    1. Lords Clarke (paras 19 to 26), Lord Sumption (paras 61 to 65) and Lord Hodge (paras 74 to 78) accepted Taurus’ submission that Crédit Agricole’s debts were owed to SOMO alone, there being a separate collateral obligation owed to SOMO and the CBI jointly which was merely an ancillary obligation as to the manner of payment.
    2. Lords Mance and Neuberger dissented, holding that the debts were owed to the CBI alone, which was fatal to the appeal.

    Issue 4, “honest dealing”

    The Court analysed the principle as follows:

    1. Lord Clarke (para 46) agreed with Lord Justice Moore-Bick that the principle of “honest dealing” was not an independent principle limiting the cope of third party debt orders otherwise than by reference to recognised proprietary interests.
    2. Lord Sumption held that the cases were authority “for the straightforward proposition that execution cannot be levied against a debt if the judgment debtor has parted with his interest in it” (para 68).
    3. Lord Mance (para 90) took the view that the cases illustrated that the court would look at the debtor’s “actual entitlement to sue for the money” (para 90).  

    Issue 5; did the interest of the CBI in the l/cs preclude the granting of third party debt orders

    By a majority of 3:2, the Supreme Court held that the ancillary contractual right of CBI to have payment made in a certain way was no bar to the granting of third party debt orders, which ought to be restored:

    1. Lords Clarke, Sumption and Hodge all held that the existence of the CBI’s ancillary contractual interest was no bar to the granting of third party debt orders. Lord Clarke held that “the obligation on Crédit Agricole to pay in accordance with its promised method is necessarily subject to the implicit qualification that the funds have not been intercepted by judicial intervention” (para 56).
    2. Lord Sumption recorded that the effect of third party debt orders was to override personal obligations and that the collateral obligation owed to CBI to make payment in the specified manner “depended on the continued existence of the debt owed to SOMO. Once it had been discharged by operation of law by payment to the judgment creditor in accordance with the Third Party Debt Order, there was no subsisting debt to be paid by the issuing bank into the New York account.” (paras 69 and 70)
    3. Lord Hodge held (para 79) that “the discharge of the debt would discharge the ancillary obligation as to the mode of its payment, leaving CBI with no claim for damages or otherwise against the issuing bank. I therefore agree that CBI’s rights under the added conditions do not bar the making of a TPDO.”
    4. Lords Mance and Neuberger dissented, holding that the CBI’s interest was a bar to execution

    Issue 6; Central Bank immunity

    This issue was only addressed in passing by Lord Mance:

    1. Lord Mance held that on the assumption that only a collateral obligation was owed to the CBI, he “would not exclude the possibility that, on this analysis, the making of a third party debt order against Crédit Agricole might constitute indirect impleading with the right to the proceeds which the State of Iraq would otherwise have enjoyed.” (para 118)

    Issue 7; receivership orders

    By a majority of 4:1 (Lord Mance dissenting), the Supreme Court held that the receivership order ought to be restored:

    1. Lord Clarke (with whom Lords Sumption, Hodge and Neuberger agreed) held that:

    > Since the situs of the debts was London, whereas Moore-Bick LJ had been bound to find that the situs was New York, it was open to the Supreme Court to consider the matter afresh (para 53).

    > “International trade, and particularly the international oil trade, is conducted predominantly by means of letters of credit. London is one of the two major financial centres of the world and enormous numbers of letters of credit are issued by international banks from           their  London branches. It would have been entirely foreseeable by SOMO that a majority of the letters of credit against which they sold oil would be issued out of London and subject to English law. SOMO’s trade therefore involved a long term connection with the jurisdiction.” (para 54)

    Summary

    The Supreme Court has dispensed with the unreasoned distinction for the situs of debts under letters of credit created by Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233 and issued third party debt orders notwithstanding the collateral contractual right of the CBI under the l/cs that payment would be made in a certain way. It also interpreted the constraints to the exercise of the Court’s discretion when considering whether to issue a receivership order in a flexible manner, so as to reflect the commercial reality.      

    Guy was led by Gordon Pollock QC of Essex Court Chambers and was instructed by Jeremy Davies and Sarah Hunt of Holman Fenwick Willan, Geneva.

    Andrew Guy Blackwood

    Guy has a comprehensive commercial practice, which includes large contractual disputes, international arbitration, insurance & reinsurance, banking & finance, civil fraud, energy & utilities, public international law including bilateral investment treaty arbitration, commodities and shipping.

    Much of Guy's time over the last 2 years has been taken up acting as lead advocate for the Hellenic Republic in a series of ICC and ICSID (ARB/16/20) arbitrations, the "Greek Submarines Arbitrations", which have been widely reported on in publications such as Global Arbitration Review. The breadth of Guy's practice is evident from the recent cases in which he has been instructed, including Taurus v. SOMO (Supreme Court,  21/22 March 2017, enforcement, sovereign immunity), The B Atlantic (Supreme Court, March 2018, war risks insurance) and Bilta v. SVS (Financial List, alleged dishonset assistance in carbon trading, 30 day trial fixed for 2018).

    Guy was one of The Lawyer’s Hot 100 for 2016, which noted the “fantastic” year which Guy had in 2015, involving major victories in Court and in arbitration. In Chambers & Partners, Guy has been referred to as “quiet and modest despite very obviously being an intellectual powerhouse."

    > View Guy's full profile

    guy.blackwood@quadrantchambers.com