Banque De Commerce Et De Placements S.A. v. China Aviation Oil (Singapore) Corp. [2024]

Factual Summary:

To support its purchase[[1]] of 260,000 barrels of gasoil (± 5%), Zenrock Commodities Trading Pte Ltd. (Buyer/Applicant) applied for and caused Banque de Commerce et de Placements S.A., (Issuer) based in Geneva, to issue a UCP600 letter of credit for USD 20.5 million in favour of China Aviation Oil (Singapore) Corp. (Seller/Beneficiary). The LC was confirmed by UBS Switzerland A.G. (Confirming Bank). In making its undertaking, Issuer believed Buyer/Applicant would on-sell the gasoil to PetroChina International (East China) Co. Ltd. (Second Buyer) and Buyer/Applicant would assign its expected proceeds from Second Buyer to Issuer. This “self-liquidating” transaction would cover Issuer’s financial exposure under the credit.

Apparently, the lead plaintiff, Banque de Commerce et de Placements S.A., DIFC Branch, (Issuer Dubai Office) had a back-to-back LC with Issuer, as Buyer/Applicant was Issuer Dubai Office’s customer.[[2]] The LC was available with Confirming Bank by deferred payment 45 days from B/L date and called for, among other documents, Seller/Beneficiary’s commercial invoice and original B/Ls.[[3]] In the event Original B/Ls (OBLs) and other documents were unavailable at the time of presentation, Seller/Beneficiary could present its invoice and letter of indemnity (LOI) in a form prescribed by LC field 47A(10).

The gasoil had been subject to “a chain of related contracts which each contained indemnities” from one party to its successive buyer. The chain of transactions were “pre-structured” by Buyer/Applicant on a back-to-back basis. Seller/Beneficiary alleged serving as “intermediary” within the chain by offering Buyer/Applicant a more favourable 45 day credit term. (para.8). As it believed there was actual shipment, Seller/Beneficiary attended to “various operational aspects of the transaction” (para.13), such as appointment of an independent cargo surveyor which observed the Cargo loaded via the flange connection to the vessel’s permanent connection. The load port was Melaka, Malaysia on board “the Petrolimex 18” completed 27 January 2020. Surveyors then emailed copies of non-negotiable B/Ls to Seller/Beneficiary.

As the preceding seller claimed it could not timely provide OBLs, Seller/Beneficiary received an LOI from Shandong Energy International (Singapore) Pte Ltd. (Intermediate Seller). On or about 14 February 2020, Seller/Beneficiary presented its LOI (reprinted below) and invoice to Confirming Bank. Confirming Bank forwarded the documents to Issuer; pursuant to the deferred payment terms, Issuer paid Confirming Bank USD 19,091,491.80 on 12 March 2020. The same day, Seller/Beneficiary received USD 19,051,378.28 from Confirming Bank.

Concerns arose when Issuer contacted Second Buyer requesting payment; Second Buyer informed its contract with Buyer/Applicant had been “cancelled” and no payment would be forthcoming. Buyer/Applicant was later placed under judicial management. From subsequent insolvency proceedings, Issuer suspected that it financed a “sham or fraudulent transaction” and that Seller/Beneficiary did not actually transfer title to the Cargo and no OBLs existed.

After Issuer contacted Seller/Beneficiary regarding the B/Ls, Issuer sued Seller/Beneficiary on 30 December 2020 to recover LC proceeds. This initiated a cascade of third party proceedings down the chain of gasoil transactions. The High Court of Singapore, Goh Yihan, J., ruled in favour of Seller/Beneficiary.

Legal Analysis:

Issuer principally alleged a sham transaction,[[4]] i.e. there was no actual delivery of cargo and the alleged sales contracts were merely for Seller/Beneficiary’s financing benefit. The claimed sham was based on two alternative theories; these are referred to as “Series B” (no physical delivery) and “Series A” (partial delivery), reproduced in Judgment paras.22-23 and again in para.127. Apart from its unpleaded allegation of LC fraud, Issuer claimed that the LOI representations and warranties were false as there were no OBLs when Seller/Beneficiary presented its LOI to Confirming Bank.

In response, Seller/Beneficiary claimed the actual structure of the transactions was both “circular” and a chain. While it agreed to serve as a financing intermediary, Seller/Beneficiary believed there was actual Cargo and only stood to earn a modest profit. The fraudulent behaviour, unknown to Seller/Beneficiary at the time, was the alleged double financing of ultimately defunct Buyer/Applicant.[[5]]

Alleged Transactions:

Judge's View of Transactions

Standing

Before reaching the substantive allegations, the Judge resolved a threshold question of standing. Issuer Dubai Office, as lead plaintiff, ceased its trade operations in June 2022 and was now a representative office. In its pleadings, Issuer Dubai Office claimed it was a branch of Issuer; without adopting that admission, Seller/Beneficiary cited its change of status to challenge standing. Dubai law was not pleaded to show whether this change effected Issuer Dubai Office’s legal status, thus the Judge applied Singapore law.

In Singapore, a bank branch is legally distinguishable from a representative office; conversely, “branches of a bank are regarded as emanations of the bank such that the head office of a bank and its various branches are regarded as a single legal entity”.[[6]] Issuer argued itself and Dubai Office were the “same legal entity” and the loss suffered due to the sham transaction was incurred by Issuer notwithstanding the legal change to Issuer Dubai Office. (para.35). Notably, the Judge did not accept submissions by Seller/Beneficiary that UCP600 Article 3 regarding bank branches was of relevance: “the question of how commercial parties relate to each other in relation to a letter of credit transaction is conceptually different from the juridical status of a party to sue in a particular court.”

It is worth mentioning that in its 130 pages, the Judgment mentions once that “[i]ndeed, [Issuer] Geneva and [Issuer] Dubai [Office] treated each other as different entities, warranting a back-to-back LC, rights of reimbursement, and separate booking of losses.” (para.37, emphasis added). Under Singapore law, Issuer Dubai Office lacked legal standing to bring its suit and the action should have been commenced solely by Issuer; whether Issuer could have demonstrated a compensable loss, however, would have been a different matter. Despite the lack of standing, the Judge proceeded to review the substantive claims for completeness, although the suit could have been dismissed at this stage.  

Sham Transaction

Issuer argued the transaction between Seller/Beneficiary and Buyer/Applicant was a sham due to: (1) no actual delivery of Cargo; and (2) no genuine transfer of title. Citing relevant case law (also containing similarly alleged fraudulent transactions), the Judge noted that proving sham financing requires “a common subjective intention that the [underlying] transaction documents were not to create the legal rights and obligations which they give the appearance of creating”.[[7]] Proof of both parties having this “common subjective intention” was required.

Furthermore, Issuer carried an additional burden in its claim as the sales contract between Seller/Beneficiary and Buyer/Applicant had been reduced to writing; this created “a strong presumption that the parties intended to enter into the legal relations” purported by the documents.[[8]] The bulk of the Judgment involves determination of whether the underlying transaction was fraudulent (paras.40-142); ultimately, the Judge concluded the contract between Seller/Beneficiary and Buyer/Applicant was not a sham. As Seller/Beneficiary prevailed, it was unnecessary to render formal decisions on each of the cascading indemnification claims lodged by others in the gasoil chain.

What follows is a summation of key findings and what particular evidence the Judge considered persuasive.

The Judge acknowledged, as have other recent Singapore cases, that chain transactions are not ipso facto shams or fraudulent; there are “legitimate commercial reasons for circular trades.” (para.50).

Of the evidence before the Judge, it was clear that Seller/Beneficiary followed its own internal risk management procedures to prevent engaging in an illicit transaction (such as entering transaction details in its system, CXL, see para.56). The conduct of relevant trading personnel also indicated the transaction was genuine; the same consideration was made of the appointed cargo surveyor, referred to as “Inspectorate”. The Inspectorate presumably would have informed Seller/Beneficiary’s relevant office were no actual gasoil loaded onto the vessel.

Critical to the Judge’s decision was preference of the expert opinions forwarded by Seller/Beneficiary’s witness. Issuer’s expert offered several unproven and speculative remarks which caused the Judge to question the expert’s “independence”. (para.73-74). It was also indicative of a genuine transaction that Seller/Beneficiary stood to earn a modest profit by acting as a financing intermediary; it would be odd for a company on the Singapore Exchange to engage in a fraudulent scheme for a small return.

It was also unpersuasive that Seller/Beneficiary did not “chase” for original shipping documents and did not do so within an alleged “reasonable time” after the gasoil was laden on board the vessel. Instead, expert for Issuer eventually conceded that Seller/Beneficiary was “acting entirely in line with industry practice by presenting an LOI for payment without making enquiries about the whereabouts of the OBLs.” (para.84). Without rendering a determination on the matter as Buyer/Applicant (Zenrock) was not party to the proceedings, the Judge commented on the nature of the circular trade and where the fraud originated:

This reality became clear to Issuer when, as mentioned previously, Second Buyer did not pay and represented to Issuer that its contract with Buyer/Applicant had been cancelled. See para.133. In ruling the transaction involving Seller/Beneficiary was not a sham, the Judge considered this conclusion against each of Issuer’s remaining claims, particularly any representations made in the presented LOI.

Fraud Exception

Although not pleaded, the Judge considered Issuer’s belated claim that the fraud exception to LC independence ought to provide it relief regarding the LC proceeds it paid to Confirming Bank. Issuer alleged that Seller/Beneficiary knew its representations and warranties within the presented LOI to Confirming Bank were false or made without belief in their truth and if Issuer had known the same, it would not have paid Confirming Bank (and Confirming Bank would have paid). The opposing parties objected to the unpleaded claim of LC fraud exception and argued Issuer was attempting an end-run-around of its pleaded tort of deceit. Accordingly, the Judge reviewed the law in Singapore regarding letter of credit fraud and what elements a plaintiff need demonstrate (paras.147-155).

As a general matter, the fraud exception arises when an LC beneficiary demands payment and “fraudulently presents to the issuing or confirming bank documents that contain, expressly or by implication, material representations of fact that to [beneficiary’s] knowledge are untrue”, citing Glencore.  In the context of misrepresentations, it is critical that representations in the documents be made to the bank. The distinguishing factor in Glencore which saw judgment go against the bank was that the presented LOI was addressed to the buyer (in that action, Hin Leong), not the issuing bank. A typical fraud exception case involves statements in presented documents, or the documents themselves, critical to the LC terms which form the basis of whether a bank will honour or dishonour (also citing UCP600 Article 5).

Even if the belated allegation of LC fraud were not overly prejudicial to the opposing parties (as it would have altered their defensive pleadings), the Judge would have rejected the claim anyway because, much like in the Glencore case, Seller/Beneficiary’s LOI and invoice were addressed to Buyer/Applicant, not Issuer. Perhaps even more critical, the documents were presented to Confirming Bank for payment:

Rejecting the attempt to invoke an unpleaded LC fraud claim, the Judge turned to the tort of deceit.

Deceit

Seller/Beneficiary’s LOI allegedly represented that original shipping documents existed, that it was entitled to possession of the same and the gasoil cargo, it had title to the cargo, and title was free and clear of any encumbrances. Issuer claimed some or all of these representations were falsely made and Issuer relied on them to its detriment. After reviewing the common law of misrepresentation, the Judge turned to the LOI text (reprinted below). While Issuer argued the text ought to be read literally, i.e. that OBLs had been issued and endorsed to the order of Issuer Dubai Office at the time of presentation, Seller/Beneficiary argued for a “purposive” reading which reflected the reality of circular oil trading: that some documents may be unavailable at the time of presentation but would be available in due course.

The Judge preferred the latter view which aligned “with the commercial purpose of allowing [Seller/Beneficiary] to use an LOI as an alternative to obtain payment, when the original shipping documents, including the [Issuer Dubai Office] OBLs, may be unavailable.” (para.179).

Seller/Beneficiary’s reading of the LOI also aligned with the underlying contract between itself and Buyer/Applicant, to which Issuer was privy. Satisfied with interpretation of the LOI text, the Judge next concluded that Seller/Beneficiary did not make any false representations. (paras.189-192). It was again critical here that the Judge ruled the underlying transaction was not a sham. Perhaps more importantly, Issuer was not the recipient of any representation: the LOI was issued as addressed to Buyer/Applicant and Seller/Beneficiary presented documents to Confirming Bank.

Interestingly, the Judge was also unpersuaded by Issuer attempts to raise drafted text that would have made it LOI addressee: “the LC from [Issuer] Dubai [Office] to [Issuer] was, in essence, [Issuer] Dubai [Office]’s final word on what it required from the LC, the final position taken by [Issuer] Dubai [Office] must have been that it did not require the [Seller/Beneficiary] LOI to be addressed to it.” (para.195).

Could it be said that Seller/Beneficiary was the proximate cause of Issuer’s losses? Made clear throughout the Judgment is Buyer/Applicant’s role in perpetrating the fraud and its subsequent insolvency leading to losses, or more precisely, losses by Issuer Dubai Office: “Thus, even if [Seller/Beneficiary] had falsely made the Representations and Warranties to [Issuer], [Seller/Beneficiary] would still not be liable because the Representations and Warranties did not cause [Issuer]’s loss.” (para.197).[[9]]

Issuer’s remaining claims for negligent misrepresentation, breach of contract, unjust enrichment, and unlawful means conspiracy were all denied for either insufficient evidence or for reasons already addressed. The breach of contract claim is notable in that its alleged basis relies on application of common law contract principles to LC confirmations found in Kuvera Resources Pte Ltd. v. JPMorgan Chase Bank, N.A.[[10]] Issuer claimed its LC was an “irrevocable offer” to Seller/Beneficiary to pay upon a complying presentation, whether that presentation was original documents or the alternative LOI.

In this way, Seller/Beneficiary “knew” the LOI would be “passed down the banking chain” and Issuer would rely on it to honour. Thus, the alleged misrepresentations in the LOI were incorporated into the contract between Issuer and Seller/Beneficiary; alternatively, Issuer cited UCP600 Article 7 as providing a contractual basis. Despite the creative theory, the Judge concluded there was no contract between Issuer and Seller/Beneficiary. Issuing a confirmed LC constitutes a “unilateral offer”: “The contract is formed when the beneficiary makes a complying presentation to the issuing or confirming bank, and the identity of the counterparty to the beneficiary depends on which of the two banks the documents were presented to.” (para.211). UCP600 Article 7(c) also stipulates that the Issuer’s undertaking to reimburse a nominated bank is independent of its undertaking to the beneficiary.

After briefly reviewing the matter of mitigation of losses by Issuer (Seller/Beneficiary claimed Issuer could have sued Second Buyer; notably, the Judge considered it “inexplicable” that Issuer did not do so as some evidence suggested Second Buyer was “an accomplice of” Buyer/Applicant, see paras.222-229), the Judge concluded by dismissing all remaining third party indemnification claims. Their merit rested on Seller/Beneficiary being found liable to Issuer. Absent an agreement on costs, the parties were to provide written submissions. A summary of key conclusions can be found in Judgment para.232.

[[1]]: “FOB” Melaka, Malaysia terms (Incoterms^® version unspecified)

[[2]]: Issuer Dubai Office role discussed further in legal standing section

[[3]]: LC required B/Ls be “made out or endorsed to the order of” Issuer Dubai Office (OBLs)

[[4]]: Specifically, Issuer alleged: (1) LC fraud exception; (2) deceit; (3) negligent misrepresentation; (4) breach of contract; (5) unjust enrichment; and (6) unlawful means conspiracy

[[5]]: It was discovered via insolvency proceedings that Buyer/Applicant engineered the “circular transactions” that preceded the chain and involved Natixis Bank in its double financing

[[6]]: Citing Sinopec International (Singapore) Pte Ltd. v. Bank of Communications Co., [2024] 3 SLR 476 (original citation [2021] SGHC 245 [Singapore], summarised in Nov./Dec. 2021 DCW at 10)

[[7]]: Citing Credit Agricole Corporate & Investment Bank, Singapore Branch v. PPT Energy Trading Co., [2022] SGHC(I) 1 [Singapore] (“round-tripping” contracts not per se sham transactions), abstracted in Mar. 2022 DCW at 14; and UniCredit Bank A.G. v. Glencore Singapore Pte Ltd., [2022] SGHC 263 [Singapore], summarised in May 2023 DCW at 10.

[[8]]: Citing Goodwood Associates Pte Ltd. v. Southernpec (Singapore) Shipping Pte Ltd., [2020] SGHC 242 [Singapore]

[[9]]: Citing with approval the analysis in Standard Chartered Bank (Singapore) Ltd. v. Maersk Tankers Singapore Pte Ltd., [2023] 4 SLR 572 [Singapore], summarised in Apr. 2023 DCW at 12

[[10]]: [2022] SGHC 213 [Singapore], abstracted in Nov./Dec. 2022 DCW at 18