Defences To Payment In Letter Of Credit Transactions

Published date09 March 2022
Subject MatterFinance and Banking, Corporate/Commercial Law, Criminal Law, Financial Services, Corporate and Company Law, Contracts and Commercial Law, White Collar Crime, Anti-Corruption & Fraud
Law FirmShook Lin & Bok
AuthorMr Jamal Siddique and Jason Leong

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...

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