The collapse of notable local commodities trading companies, such as Hin Leong Trading (Pte) Ltd and Zenrock Commodities Trading Pte Ltd, has given rise to a series of litigation concerning letters of credit. The Singapore Courts have recently had the opportunity to consider claims by banks seeking to resist payment under letters of credit. The Courts have considered the proper ambit of the 'fraud exception', traditionally accepted as the only defence to payment pursuant to a compliant presentation by a beneficiary, and also whether issuing banks can rely on a beneficiary's negligence to resist payment. 

Credit Agricole Corporate & Investment Bank, Singapore Branch v PPT Trading Energy Co. Ltd [2022] SGHC(I)(1) ("CACIB v PPT")

CACIB v PPT is a decision of the Singapore International Commercial Court ("SICC"), which is a division of the General Division of the High Court. It is a decision of the Honourable  International Judge Jeremy Lionel Cooke ("Cooke IJ").

This case involved a dispute between Credit Agricole Corporate & Investment Bank ("CACIB"), the issuing bank of a letter of credit ("LC") issued pursuant to an application made by Zenrock Commodities Trading Ltd ("Zenrock"), and PPT Energy Trading Co Ltd ("PPT"), the beneficiary under the LC. On its face, the LC appeared to be for the financing of  Zenrock's purchase of cargo from PPT. Zenrock represented that it would then on-sell the cargo to Total Oil Trading SA ("TOTSA"). Under the terms of Zenrock's LC facility with CACIB, Zenrock assigned the proceeds of this on-sale to TOTSA to CACIB.

In reality, however, the situation was more complex and involved various round tripping transactions. It transpired that the cargo originated from TOTSA, was sold to SOCAR Trading SA ("SOCAR"), then to Zenrock, then to Shandong Energy International (Singapore) Pte Ltd ("Shandong"), then PPT, then back to Zenrock, and ultimately, back to TOTSA.

Zenrock's first purchase of the cargo from SOCAR was financed by an LC issued by ING Bank. The second purchase from PPT, which was the subject of the SICC's decision, was financed by the LC issued by CACIB. Zenrock purported to assign the proceeds of its final sale back to TOTSA to both ING and CACIB. In addition, it transpired that Zenrock had presented to CACIB a fabricated sales contract between Zenrock and TOTSA, which falsely represented the sale price to be higher than the actual contact, thus deceiving CACIB into issuing the LC. Zenrock's fraud came to light when TOTSA highlighted to ING and CACIB that it had received competing notices of assignment in relation to the proceeds of the sale contract between Zenrock and TOTSA, and informed CACIB of the true terms of the Zenrock-TOTSA contract.

The key issue before the SICC was whether CACIB was entitled to decline payment to the beneficiary, PPT, under the LC. While the original bills of lading were stated to be documents necessary for presentation under the LC, the terms of the LC provided that PPT may present a commercial invoice and a letter of indemnity (" LOI") in the terms of a draft set out in the LC in the absence of original shipping documents. CACIB argued that there was fraud on the part of PPT , because PPT's commercial invoice and LOI contained representations that there was a genuine transaction between PPT and Zenrock, that PPT had marketable title to the cargo, and that PPT was entitled to receive the original shipping documents. CACIB argued that these representations were false and that they were made fraudulently as it claimed that PPT knew that the underlying transaction was a "sham".

The SICC held that CACIB was not entitled to refuse payment under the LC to PPT. The Court held that there was no fraud on the part of PPT in relation to the transactions. Even though the SICC found that PPT was "hardly an innocent bystander", it declined to find that PPT was a participant in Zenrock's fraudulent scheme. This was notwithstanding PPT's knowledge of the round tripping – that Zenrock had previously purchased the same cargo from SOCAR, before the series of transactions which led to Zenrock purchasing the cargo again from PPT.

The SICC also held that the underlying transaction was not a "sham". The Court held that for a transaction to be a "sham", all the parties to that transaction needed to have a common subjective intention of creating a pretence of a transaction to deceive others, when there was to be no such transaction. In this case, the Court found that the parties to the transactions intended to enter into genuine sale and purchase transactions, relating to specific cargo, and intended for property in that cargo to pass in accordance with the terms of these contracts. Each party intended to pay or receive the purchase price for the cargo through the LC. This was so even though parties may have never expected original shipping documents to be provided.

Although PPT was aware that Zenrock was engaged in round-tripping of the cargo, the Court found that it was not aware that the prices in the transaction were well above market price. In addition, there was no evidence to suggest that PPT thought it did not have marketable title to deliver to Zenrock.

Citing the High Court's decision in DBS Bank Ltd v Carrier Singapore (Pte) Ltd [2008] 3 SLR(R) 261 ("DBS v Carrier"), the SICC held that a beneficiary does not owe a duty of care to an issuing bank in its presentation of documents. Accordingly, the SICC reasoned that even where a beneficiary makes a representation recklessly, without investigation as to the circumstances underlying the representation, this would not vitiate a complying presentation under the LC. In so doing, the SICC reaffirmed the accepted principle in relation to the fraud exception that, in order for a bank to refuse payment under a LC, the beneficiary would have to act dishonestly, presenting "otherwise facially compliant documents either with the knowledge that what is contained therein is false, or without belief that what is contained therein is true."

The Court's categorical rejection of any duty of care owed by a beneficiary to an issuing bank means that an issuing bank cannot rely on the beneficiary's negligence as a defence to payment under the LC. The same reasoning applies to the bank's ability to recoup payment, which was what happened in this case, as CACIB made payment on the LC, despite declining initially. This decision stands in contrast to the recent interlocutory decision of the General Division of the Singapore High Court in Bank of China Ltd, Singapore Branch v BP Singapore Pte Ltd [2021] SGHC 120.

Bank of China Ltd, Singapore Branch v BP Singapore Pte Ltd [2021] SGHC 120 ("BOC v BP")

BOC v BP is a case which relates to Hin Leong Trading (Pte.) Ltd ("HLT"). HLT was the applicant in relation to 3 LCs issued by Bank of China ("BOC"), with BP Singapore Pte Ltd ("BP") as the beneficiary. The 3 LCs related to purchase contracts for HLT to purchase gasoil from BP.

Unbeknownst to BOC, the 3 purchase contracts were part of back-to-back contracts, where HLT purported to sell cargo to BP and then purported to buy back the same cargo for a higher price. It also appeared, from the reports prepared by HLT's interim judicial managers ("IJMs"), that the cargo in the underlying transactions for these 3LCs did not exist. The IJMs reported that the back-to-back sales appeared to be part of a scheme by HLT to raise liquidity.

BOC commenced a suit against BP to recover the sums it had paid under the 3LCs, and against 3 members of the Lim Family, who were the shareholders and directors of HLT prior to the collapse. BOC asserted 4 causes of action against BP: (i) fraudulent misrepresentation; (ii) negligent misrepresentation; (iii) conspiracy (between BP and HLT/ the Lim Family); and (iv) unjust enrichment. In its negligence claim, BOC argued that BP owed BOC a duty of care to ensure that the representations made in its letter of indemnity and invoices were true and accurate. In its unjust enrichment claim, BOC argued that BP had been unjustly enriched or benefited by the bank's payment under the LCs, and this payment was made under the mistaken belief that the underlying transactions were genuine, and the underlying goods existed.

BP applied to strike out all of BOC's claims against it. At the first instance, the learned Assistant Registrar allowed BP's striking out application in part, striking out the negligence claim, and parts of the unjust enrichment claim which were not grounded in fraud. The AR's reasoning was premised on the application of the fraud exception, and an application of the case of DBS v Carrier, where it had been held that the fraud exception precluded an issuing bank from relying on a beneficiary's negligence to refuse payment under an LC or to recoup sums paid out. Both BP and BOC appealed to the General Division of the High Court.

In the General Division of the High Court, the Honourable Judicial Commissioner Andre Maniam ("Maniam JC") allowed BOC's appeal and held that no part of BOC's claim should be struck out.

The High Court held that it was arguable that a bank could rely on negligent misrepresentation to recover payments made under an LC.

  1. First, the Court drew a distinction between a bank which was refusing payment and a bank which was suing to recover payment. Maniam JC held that  while an issuing bank may be precluded from declining to make payment under an LC in the absence of fraud, it did not mean that the bank could not sue to recover payment on other grounds. Maniam JC noted that, while LCs provided for certainty of payment to the beneficiary, the applicant (buyer of the goods) was not precluded from suing to disgorge that payment later. The learned Judicial Commissioner opined that the same reasoning may apply to the issuing bank.
  2. Second, the Court held that, even if a beneficiary generally owes no duty of care to an issuing bank in presenting third party documents, he may nonetheless be under a duty of care in the preparation of documents issued by himself.
  3. Third, the High Court's earlier view in DBS v Carrier that a bank cannot sue a beneficiary in negligence was not based on an analysis of the existence of a duty of care, but on equating the grounds for refusing payment to the grounds for recovering payment. The analytical framework for negligence in Singapore, as established by the Court of Appeal in Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR(R) 10, differed from the English formulation and therefore the previous English decisions should be viewed under this lens.
  4. Fourth, there is no local decision on the issue of whether a duty of care can exist vis-à-vis a beneficiary and issuing bank. The local Courts are also not bound by any English authority and are free to chart its own course. The High Court cited, as an example, the autochthonous development of the law on demand guarantees. In a break from the English position, the Singapore Courts accepted that unconscionability on the part of a beneficiary could constitute a separate and distinct ground from fraud for restraining payment under a performance guarantee: Bocotra Construction Pte Ltd and others v Attorney-General [1995] 2 SLR(2) 262 ("Bocotra Construction v AG").
  5. Fifth, although the LOIs were addressed to HLT and the full text may suggest that only HLT should have any rights thereunder, it remained the case that the LOIs were in the form prescribed by BOC and were presented to BOC and therefore could still amount to representations by BP, giving rise to a duty of care.

Relying on similar reasoning, Maniam JC also reversed the lower Court's decision relating to portions of BOC's unjust enrichment claim which were not premised on fraud.

It should be observed that the High Court's decision in BOC v BP was made in the context of a striking out application. The Court will only strike out a claim where it is plain and obvious that it is unsustainable. As long as there is some chance of success, the claim must be allowed to proceed to trial. While the General Division of the High Court has accepted that the arguments put forward by BOC are arguable, it remains to be seen whether these arguments will succeed at the trial of the suit.

The Proper Ambit of the Fraud Exception

In CACIB v PPT and BOC v BP, the SICC and the General Division of the High Court respectively endorsed a different formulation of the proper ambit of the fraud exception.

Fraud has traditionally been recognised as the only exception to the autonomy principle applicable to letters of credit transactions. Ordinarily, issuing banks seeking to refuse payment, or recover payment after having made it, would rely on fraudulent misrepresentation – an allegation that the documents presented contained false representations which were made by the beneficiary knowingly, or without care as to whether they were true or false. The application of the fraud exception, and Article 4 of the Uniform Customs & Practice for Documentary Credits ("UCP 600"), preclude banks from looking at the underlying sales transaction between the applicant and beneficiary.

The foregoing, coupled with the high threshold of proving fraud, provide sellers of goods the commercial certainty that they will receive payment from the issuing bank upon a complying presentation, notwithstanding any dispute between the buyer and seller. This certainty of payment is an important aspect of letters of credit, which have been described by various courts as the "lifeblood" of international commerce. 

The SICC's decision in CACIB v PPT appears to affirm the traditional ambit of the fraud exception. The Court has excluded claims which are not based on fraud. In contradistinction, the High Court's decision in BCP v BP has endorsed the challenge to this traditional position, permitting independent causes of action not based on fraud, including negligence and unjust enrichment.

The distinction drawn in BOC v BP, between an issuing bank which (a) refuses to make payment under the LC and (b) sues to recover payment made under the LC, however, is one which has not been tested before the Court of Appeal and merits further scrutiny. In DBS v Carrier, the High Court was concerned that allowing an issuing bank to sue a beneficiary for negligent misrepresentation (after making payment on the LC) would be to introduce, "by way of a back door", a significant inroad into an issuing bank's strict obligation to make payment of its letter of credit. While the issuing bank would, technically speaking, still be "pay[ing] first and su[ing] later", the possibility that a beneficiary might remain liable to an issuing bank in causes of action such as negligence, potentially erodes the certainty of payment crucial to commercial trade. It is also important to bear in mind that an issuing bank always has recourse against the applicant for the sums paid out pursuant to an LC. The usual situation where an issuing bank finds itself out-of-pocket for a loss is when the applicant becomes insolvent.

Letters of credit are sui generis and have developed in response to the needs of international trade and commerce. UCP 600 codifies the body of rules which international parties, across jurisdictions and legal systems, recognise and have ascribed to. It is against this backdrop that the fraud exception to the otherwise autonomous nature of letters of credit exists, as the common law's limited safeguard against the obvious instance of injustice, where there is fraud – characterised as intentional dishonesty on the part of the beneficiary – in the very presentation of documents to the bank. Any extension should be carefully calibrated, with a watchful eye on the mercantile practice, from which the letter of credit derives and which the common law recognises, and developments in other established jurisdictions.

Turning to the decision in BOC v BP, it remains to be seen if the Court, at the full trial of the matter, will accept the causes of action not founded on fraud. If accepted, this would represent a departure from the established principles stated in DBS v Carrier, which was affirmed in CACIB v PPT.

In relation to the application of the fraud exception, the Court is entitled to examine the beneficiary's knowledge and state of mind in deciding whether fraud existed. In CACIB v PPT, the SICC appears to suggest that only actual dishonesty on the part of the beneficiary would be sufficient to satisfy the fraud exception, and that recklessness would not be sufficient. At first glance, this appears to be a higher threshold of knowledge than generally required to prove a claim in fraudulent misrepresentation. In Panatron Pte Ltd v Le Cheow Lee [2001] 2 SLR(R) 435, the Court of Appeal held that a false representation is made fraudulently when it is made either dishonestly – in the sense that the maker knows the statement to be false, or recklessly – without care as to whether the statement is true or false.

However, a closer reading of the SICC's decision suggests that the references to recklessness in the judgment may in fact be references to negligence. The SICC held that "even a reckless failure to ascertain the truth of representations, which are made in the honest belief that they are true, will not amount to fraud for the purposes of non-payment under a letter of credit".1 As the Court highlights, this is because it is an established principle that a beneficiary does not owe the issuing bank a duty of care. This points to an analysis based on negligence, rather than the Court furthering narrowing the established law on the standard of knowledge required to prove fraudulent misrepresentation. Nonetheless, as a different reading of the judgment is possible, and since such a reading would represent a departure from established law, this is an area where clarity from an appellate Court would be of assistance to banks and parties engaged in commerce.

In the closely analogous context of demand guarantees, the Court of Appeal has previously held that it would be fraudulent for a person to make a false representation if he was recklessly indifferent to the truth or falsity of that which he was asserting at the time he made the statement: Arab Banking Corp (B.S.C.) v Boustead Singapore Ltd [2016] 3 SLR 557 ("Arab Banking"). While the SICC distinguished Arab Banking on the basis that it was decided in the context of demand guarantees,2 the Court did not elaborate on the reasons why the same principles should not apply. In this regard, the Court of Appeal held in Arab Banking that there should be no distinction in the operation of the fraud exception in the context either of letters of credit or demand guarantees.3

If causes of actions not founded on fraud are permitted to allow issuing banks to either decline to make payment, or subsequently recoup payment, this would represent a departure from the established principles stated in DBS v Carrier. In Bocotra Construction v AG , the Singapore Courts recognised that unconscionability on the part of a beneficiary calling for payment on a performance guarantee is a separate and distinct ground from fraud for seeking injunctive relief. This is noted to have been a conscious departure from English Law. In the context of letters of credit, it remains to be seen if the Courts in Singapore continue to apply the fraud exception as the only narrow exception to the autonomy principle, or whether further exceptions will be accepted.

Concluding Thoughts

The collapse of prominent traders such as HLT and Zenrock, amidst widespread allegations of fraud utilising documentary credits and the ensuing litigation between issuing banks and beneficiaries, present ripe conditions for the Court of Appeal to consider the proper ambit of the autonomy principle and the fraud exception in Singapore. Another important question for the Court of Appeal's consideration is the degree of knowledge required on the part of a beneficiary for proof of fraud. These are important questions which will undoubtedly have lasting and profound impact on both banking practice and commercial trade.

Footnotes

1. CACIB v PPT at [21]

2. CACIB v PPT at [21]

3. Arab Banking at [65]

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