Hard Cases – Taking Stock of How Trader Defaults and Geopolitical Events Shaped LC Court Decisions

This is Part 2 of this article series. View Part 1 here

During 2019 and 2020, the Singapore commodity trading market was dealt a heavy blow as a number of local household names among the Singapore trader market ran into financial problems and went bankrupt. Fraud arguably played a role in huge losses of around USD 6-7 billion suffered by creditors that included many of the main banks financing commodity trades. Many, but not all, trades involved payment through letters of credit.

A number of these trades involved side contracts, including “round tripping”/repo-type arrangements where participants in existing trade flows erected structures where the same goods acquired in a first transaction (Transaction 1) by Seller A would be sold through several pairs of hands in a second transaction engineered by Seller A (Transaction 2) on a “flash sale” basis. That is, the title to the goods acquired by Seller A in Transaction 1 would pass through a number of hands in Transaction 2 before returning (usually instantaneously) to the ownership of Seller A, enabling it to pass title on to the next purchaser in Transaction 1.  Often the purpose of these “round trip” transactions was to allow much-needed credit to be injected into the transaction at the point where Seller A became involved. Singapore’s trading market relied to some extent on the existence of structures like this at the time to keep the market liquid. Certain structures involved even big-name international trading companies.

Some banks were allegedly blindsided by the existence of these structured trades. Many were probably aware that they existed, if unaware of the specific details. Backed into a corner facing staggering losses, some banks resisted claims under LCs by alleging beneficiary fraud. Others sought to limit or reverse losses by looking for inventive ways to hold other transaction participants accountable.

To see such a rush of cases testing the limits of existing defences to payment under LCs is a relatively rare event. Cases have been closely watched by the international trading community. Some Singapore cases have challenged the boundaries of the so-called “fraud exception” to payment under a letter of credit and the ability of banks to refuse payment when fraud is involved somewhere in the transaction. The impact of the significant losses was severe, prompting some banks to sharply scale back on commodity trade finance and other to withdraw from the market entirely. There has also been some criticism of Singapore business culture and accounting diligence as big firms went bust with apparently little warning. The background of the commodity trading defaults has to an extent concentrated attention on the country’s courts to show that Singapore remains a solid place to transact international trade. Here is a selection of cases which came to judgment in recent years.