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BlackStone & Gold: Does a beneficiary’s reckless presentation under LCs amount to fraud?

Law firm highlights Singapore’s Winson v OCBC case which clarifies that even if a sale contract in a trade was not a sham, banks may be able to resist payment under LCs by relying on representations about the underlying trade that a beneficiary makes to the bank recklessly as to their truth or falsity.

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The following article by law firm BlackStone & Gold LLC was shared with Singapore-based bunkering publication Manifold Times discussing whether an LC beneficiary that makes representations to the bank about a commodities trade it seeks payment for without regard to their truth or falsity should bear the risk of trade fraud. 

The law firm highlighted the recent case of Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corporation in Singapore and highlights how the judgement clarifies that even if a sale contract in the trade was not a sham, an LC issuing bank may able to deny payment by relying on representations about the underlying trade that a beneficiary makes to the bank recklessly as to their truth or falsity:

By Baldev Bhinder, Managing Director, and Ramandeep Kaur, Associate Director of BlackStone & Gold

Who should bear the risk of fraud in a commodities trade to be paid by letter of credit ("LC”)? The bank issuing the LC or the reckless beneficiary making representations to the bank about the trade it seeks payment for, without regard whether these statements and the documents underpinning the trade, are true or false? 

In April last year, the Singapore Court in Credit Agricole Corporate & Investment Bank, Singapore Branch v PPT Energy Trading Co Ltd and another suit [2022] 4 SLR 1 (“CACIB v PPT”), held that a beneficiary’s recklessness as to the statements it was making was not enough to establish fraud when PPT presented documents for payment relating to a fictitious trade created by Zenrock. In our earlier update, we took the view that such a narrow formulation of the “fraud test” was inconsistent with other Singapore cases and highlighted that fraud includes not just actual knowledge but also a reckless indifference to the truth or falsity of statements being made. A year later, the opportunity to rectify the fraud test presented itself in Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corporation and another [2023] SGHC 220, when the LC banks refused to pay out on fictitious trade by Hin Leong. 

While Credit Agricole did not succeed in refusing to make payment under its LC because it could not demonstrate the underlying contracts as a sham, Winson Oil v OCBC clarifies that even if the sale contract was not a sham, the bank is able to rely on representations made by the beneficiary to it: that the cargo in question has been shipped according to the BL presented; that the beneficiary had title to that cargo and passed good title to that cargo to its buyer. The basic premise is quite simple: if a third party was doing the same trade at the time of presentation, then the statements made by the beneficiary as to valid shipping documents such as BLs, shipment of and title to the cargo would be false. And if such statements were made by the beneficiary who was recklessly indifferent to the truth or falsity of the statements, then a bank should be able to deny payment through the fraud exception.

The facts

Winson Oil Trading Pte Ltd (“Winson”) sued OCBC Ltd and Standard Chartered Bank (Singapore) Ltd (“SCB”) for non-payment under LCs that the banks had issued to pay for gasoil that Winson had sold to Hin Leong Trading (Pte) Ltd (“Hin Leong”) under two sale contracts. 

The sales by Winson to Hin Leong were the final legs of circular trades, involving the following chain of sales: Hin Leong – Trafigura – Winson – Hin Leong. The banks argued that no cargo was shipped for the transactions (in particular, the Winson – Hin Leong sales) and that the copy of non-negotiable BLs which purportedly showed such shipments were forgeries. 

Winson had relied on those copy BLs in preparing the payment letters of indemnity (“LOIs”) which it presented to the banks for payment. Payment LOIs are documents unique to the oil trade which a seller presents in lieu of the original BLs to obtain payment. By way of a payment LOI, amongst other things, the seller typically represents that cargo was shipped pursuant to valid BLs; warrants that it has good title, the right to transfer title to the buyer, and that it is entitled to receive original BLs from its supplier and transfer them to the buyer (and thus, pass possession of that cargo on board the vessel).  

The falsity: (1) No valid BLs; (2) Cargo not shipped as described in the LOIs 

The banks argued that the sale contracts were sham; and in any event, no cargoes had been shipped for the sale – contrary to the representations made by Winson. The court did not have to decide whether the sale contracts were sham as it was satisfied that no cargoes had been shipped for the Winson – Hin Leong sales as described in the LOIs. In considering whether the cargo had been shipped on board the vessels (Ocean Voyager and Ocean Taipan), pursuant to valid BLs as described in the LOIs, the court examined two issues: (a) whether there were valid BLs for the transactions; and (b) whether the cargo described in the LOIs were shipped onboard the vessels in question. 

As to the validity of BLs, the court noted findings of Hin Leong’s interim judicial manager (“IJM”), who had found original counterparts of the copy BLs used for these transactions. The originals were marked “null and void” and had no endorsements on the reverse side. The IJM had also commented on shipments (including those involving the vessels Ocean Voyager and Ocean Taipan) where Hin Leong had sold the same cargo to more than one party.

The first leg involved Hin Leong selling the cargo to the counterparty, providing documents such as an invoice and original BLs or LOI. 

BlackStone & Gold: Does a beneficiary’s reckless presentation under LCs amount to fraud?

But the second and third legs were fictitious: they involved Hin Leong selling the same cargo to one/ more counterparties with another BL being prepared and Hin Leong buying the cargo back, an arrangement which appeared to be created purely for financing purposes. The BL used for such second or third legs was typically signed by an employee of Hin Leong and not the carrier or mater of vessel. In line with this modus operandi, the copy BLs used for the sales in question were also signed by a staff of Hin Leong. 

There was also evidence from the liquidators of the Owners of Ocean Voyager that they had not issued the copy BL in question. What Winson therefore had was copy non-negotiable BLs, the authenticity of which was disputed by the banks. Winson did not seek to prove their authenticity by calling the maker of the documents and the court concluded that these were forgeries signed by an employee of Hin Leong. Given that the copy BLs were found to be forgeries, there were no valid BLs pursuant to which cargoes were shipped for the sales from Winson to Hin Leong. As such, the representations to the banks as to the existence of the full set of 3/3 original BLs were false.

The court also found that the cargoes described in the LOIs were not shipped on board the vessels as described. The cargoes were first sold to another company (“Unipec”), and in another suit where the liquidators of Hin Leong sued Hin Leong’s found OK Lim, his son and daughter, Mr Lim had admitted that these cargoes were meant for sale to Unipec. Further, the court found the contrast between the documentation available for the Hin Leong-Unipec sale and that of the contracts involving Winson was stark in particular when considering the absence of loading documents such as an inspector’s report or certificates of quantity or quality. While the IJM’s position that Unipec was the first buyer of the cargoes was supported by documents, such as original BLs and loading reports for the cargoes, there were no documents for loading under the Trafigura-Winson sale contracts - despite the fact that the sale contracts contemplated an internationally recognised inspector determining quantity and quality at the load port.

The fraud: reckless indifference as to the existence of shipping documents

Where a beneficiary fraudulently presents documents containing material representations of fact which are false, a bank is entitled to decline payment under an LC. The well-established common law formulation of fraud includes situations where a false representation is made knowingly, without belief in its truth or recklessly without caring whether it is true or false. The SICC in CACIB v PPT however had taken the position that a beneficiary’s recklessness as to the truth or falsity of the statements it makes to bank is insufficient to establish the fraud exception for purposes of a bank declining payment under an LC. Disagreeing with CACIB v PPT, the court in this case found that a beneficiary would also be acting fraudulently if he made a false representation recklessly, without caring whether it be true or false.

In assessing whether at the time of the presentations, Winson honestly believed in the truth of the representations, the court reasoned that it was relevant to consider how reasonable (or unreasonable) such belief would be in the circumstances prevailing. Unreasonableness of the grounds of supposed belief would, the court held, be evidence from which fraud may be inferred.

Having found that the cargoes had not been shipped as described under the Winson-Hin Leong sale contracts, the court went on to consider whether Winson had made the presentation under the LCs fraudulently. Considering a number of red flags, the court found that by the time of the second presentation, Winson was fraudulent, at the very least indifferent as to whether its representations were true or false, based on various circumstances of the case (among other things) that:

  • Winson never received original BLs nor copies of the reverse side of the BLs showing any endorsements. 
  • Winson’s first presentation under the LC to OCBC was for the Ocean Voyager, and that to SCB was for the Ocean Taipan. OCBC rejected the first presentation on basis that “was no physical cargo that was shipped to the Ocean Voyager”. This was a serious issue for the bank to raise but Winson did not even inquire why OCBC was saying so. 
  • Instead, Winson prepared new invoices and LOIs on the same day as OCBC’s rejection to make second presentations by switching the vessels – its second presentation to OCBC was for the Ocean Taipan, and that to SCB was for the Ocean Voyager. Making those second presentations allowed Winson to try to avoid the issues OCBC had raised with the Ocean Voyager cargo. An honest trader in Winson’s position however would have sought to check if OCBC’s position was in fact the case. 
  • Winson never received any loading documents such as an independent inspector’s report, certificates of quality and quantity (or equivalent documents), and Winson was never told that an independent inspector had been appointed or that inspections had taken place. 
  • Based on previous shipments, Winson should have received the loading documentation by the time of the second presentations.  
  • The BL quantity shipped on the Ocean Taipan was changed after the BL had been issued and the vessel sailed, which was not common. Winson however did not ask for, nor was given any explanation or documents to support the change. 
  • Discussions between OCBC and Winson revealed that Winson was unwilling to repurchase the cargo, although one might expect a trader who had sold a cargo to be open to repurchasing it if the price was right. 
  • During these discussions, Winson expressed its willingness to help find a buyer for the cargo, but repeatedly emphasised the need to check if title to the cargo was clean, which the court concluded in the context to mean whether Trafigura had passed clean title to Winson, and Winson in turn to Hin Leong. Winson therefore had doubts about title transfer. 
  • On Winson’s own case, despite OCBC rejecting the first presentation on the basis that “no physical cargo…was shipped”, Winson took no steps to confirm if cargo had been shipped as represented in its LOIs, before proceeding to issue them. Winson’s checks (e.g, IMB vessel checks) after OCBC’s rejection would only have confirmed that the vessels were not travelling unladen; they did not address OCBC’s concern about the cargo not being shipped as described. 
  • Winson did not seek to check with either Hin Leong or OTPL whether the cargo had been shipped as described.

In our view, the case rightly puts the burden on reckless traders seeking payment from banks under LCs despite red flags underpinning the purported trade. This is particularly acute where traders might be incentivised, for an easy margin to participate in transactions that might not have all the hallmarks of a genuine physical trade as to valid documents, good title and entitlement to possession of cargo.

Related: Winson Group loses claims against OCBC, Standard Chartered over Hin Leong trade

 

Photo credit: BlackStone & Gold LLC
Published: 28 August, 2023

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Business

VPS launches Maress Summer Campaign Dashboard to track progress of vessels

Dashboard will enable the maritime industry to follow the development of its maritime emissions saving campaign, Maress Summer Campaign 2024, which is aimed at saving 15,000 tons of CO2.

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VPS launches Maress Summer Campaign Dashboard to track progress of vessels

Marine fuels testing company VPS on Thursday (20 June) said it launched its Maress Campaign Dashboard to enable the maritime industry to follow the development of its maritime emissions saving campaign for this year.

It said the Maress Summer Campaign 2024, which started on 1 June and will run for 90 days, is ongoing and is aimed at achieving the goal of saving 15,000 tons of CO2.

“Since our last update, the number of participating vessels has increased from 278 to 303. This is more than doubling of the vessels that participated in the campaign last year,” VPS said in a social media post.

“The industry-wide effort to drive decarbonisation is showing fantastic results, with innovative initiatives and remarkable engagement from vessels across the board.”

It added the main purpose of the campaign is to create collaboration and awareness around emission reductions. 

“This industry-first tool is now open for everyone in the industry to track the collective progress. Updated daily, it provides a transparent and exciting view of the leaders in each category, showcasing the close race towards efficiency gains,” VPS said on the dashboard.

Note: The new dashboard by VPS for the Maress Summer Campaign 2024 can be found here.

Related: VPS to organise Maress Decarbonisation Campaign in 2024
Related: VPS wins OSJ Annual Environment Award 2024 for Maress Summer Campaign
Related: VPS records 10,000 tonnes of CO2 emission cut from campaign with top OSV players
Related: VPS Decarbonisation to kickstart summer campaign to reduce shipping emissions

 

Photo credit: VPS
Published: 21 June, 2024

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Biofuel

UECC reduces emissions in 2023 by more than doubling bio bunker fuel use

UECC boosted the use of ISCC-certified sustainable biofuel B100 on both owned and time-chartered ships to 14,000 mt last year, up from 6,500 mt in 2022.

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UECC

United European Car Carriers (UECC) recently announced its progress of using alternative bunker fuels and said it was on track to exceed its goal of a 45% emissions reduction by 2030 after more than doubling biofuel usage across its fleet last year.

UECC boosted the use of ISCC-certified sustainable biofuel B100 on both owned and time-chartered ships to 14,000 metric tonnes (mt) last year, up from 6,500 mt in 2022.

The company achieved a total tank-to-wake emissions reduction of over 60,000 tonnes across its 14-vessel fleet in 2023, of which it is estimated increased biofuel use accounted for 40,000 tonnes, with the remainder coming from LNG. This was a near-250% increase on the emissions cut of 24,200 tonnes achieved in 2022.

TheEuropean sustainable shortsea carrier said it has made significant strides in decarbonisation of its fleet of pure car and truck carriers (PCTCs) with the addition of five LNG-fuelled newbuilds and the increased rollout of biofuels in recent years - and this is now showing commercial payback for clients in the light of new green regulations, according to Energy and Sustainability Manager Daniel Gent.

“Consequently, we are well on the way to reach or exceed our 45% emissions reduction target by 2030. This clearly has a positive impact for those bio-supportive cargo owners in terms of reducing costs related to the EU Emissions Trading System (EU ETS),” Gent said.

“Furthermore, 85% of the vessels in our fleet achieved a C-rating last year with the IMO’s Carbon Intensity Indicator (CII) and this year we expect all our ships to achieve this rating or above.”

Gent also pointed out the UECC fleet is already in surplus in relation to the requirement for an average 14.5% reduction in GHG intensity by 2035 under the FuelEU Maritime regulation due to be implemented next year.

The environmental performance of UECC’s current fleet of nine owned and five time-chartered PCTCs has been enhanced through delivery over the past seven years of five eco-friendly newbuilds - a pair of dual-fuelled LNG vessels and trio of multi-fuel LNG battery hybrid units.

The use of LNG reduces emissions of CO2 by around 25%, SOx and particulate matter by 90% and NOx by 85%, while the latest battery hybrid newbuilds exceed the IMO target to reduce carbon intensity by at least 40% from 2008 levels by 2030.

UECC is now looking at sourcing alternative carbon-neutral fuels such as bio-LNG and e-LNG for these vessels to further improve their green performance, according to Gent.

UECC’s adoption of alternative fuels has expanded exponentially since the programme was launched in 2020 with piloting the use of biofuel on its vessel Autosky, bolstered by valuable support from owners of its time-chartered vessels, clients such as BMW, fuel suppliers like GoodFuels, industry partners, and parent companies NYK and Wallenius Lines.

“We are now in the fifth year of running our biofuels programme and it has gone from strength to strength. UECC has sought to take a leading role through early-stage analysis of new biofuels to evaluate their potential in terms of technical suitability, sustainability and commercial viability, both  to deliver the best solution for our customers and give the sector a blueprint for assessment and adoption of such fuels based on these three pillars,” Gent explained.

He added that, in terms of sustainability criteria, the company looks for biofuels with the biggest environmental impact, with a typical minimum 90% reduction in GHG intensity from well-to-wake compared with conventional marine fuels. 

UECC has steadily expanded the use of green fuels to cover 30% of its fleet in 2023, up from 18% in 2022, and is on track to achieve 50% coverage this year towards the goal of 80% by 2030, though Gent is confident of surpassing this figure.

He said being proactive in trialling new alternative fuels has also promoted engagement with fuel providers, which has led to UECC’s latest initiative together with biofuel supplier ACT Group as part of an industry collaboration to test the Cashew Nut Shell Liquid (CNSL)-based biofuel FS.100 that he believes has “great potential for sustainable shipping”.

“Increasing the pool of sustainable drop-in fuels offers a pathway for shipping to achieve rapid emissions cuts on existing vessels. Combining alternative fuels with energy efficiency measures such as hull cleaning and electrification with shore power can further accelerate decarbonisation,” Gent said.

“By progressively advancing the use of alternative fuels, we are reducing emissions exposure for our clients and securing regulatory compliance long into the future, while also promoting industry efforts to reach the net-zero goal,” he concluded.

 

Photo credit: United European Car Carriers
Published: 21 June, 2024

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LNG Bunkering

CMA CGM takes delivery of fourth LNG-fuelled containership

Naming ceremony and delivery of vessel, organised at HD Hyundai Mipo in Ulsan, South Korea, marked entry of the fourth vessel in a series of ten specially designed for Northern Europe feeder services.

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CMA CGM takes delivery of fourth LNG-fuelled containership

French shipping giant on Wednesday (19 June) said it celebrated the naming ceremony and delivery of its fourth LNG-fuelled container ship, CMA CGM Tivoli.

Organised at HD Hyundai Mipo in Ulsan, South Korea, on 16 June, the event marked the official entry of the fourth vessel in a series of ten specially designed for Northern Europe feeder services.

“Featuring optimised features for 45-foot containers, increased capacity for refrigerated containers, and innovative forward accommodation to enhance cargo loading and aerodynamics, CMA CGM Tivoli distinguishes itself with a high ‘length to beam" ratio to maximise hydrodynamic efficiency,” the firm said in a social media post. 

“She departed the shipyard on June 15th, 2024, bound for Busan. We wish fair winds and smooth seas to Captain Artur Dumbrov and his crew.” 

 

Photo credit: CMA CGM
Published: 21 June, 2024

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