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BlackStone & Gold: Transferring marketable title under LOIs used for LC payments

Law firm focuses on a recent judgement which is significant for clarifying scope of fraud exception to payments under LCs and the construction of payment LOIs frequently used in oil trading.

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BlackStone & Gold lawyers recently provided Singapore-based bunkering publication Manifold Times comments on the recent Crédit Agricole v PPT Trading judgment from the Singapore Court of Appeal, which clarified the scope of the fraud exception to payments under LCs and the construction of payment LOIs frequently used in oil trading:

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

Crédit Agricole v PPT Energy (Appeal)

The aftermath of trade fraud scandals has resulted in a number of significant cases concerning letter of credit (“LC”) payments being heard before the Singapore courts recently, with banks trying to avoid liability to pay for trades which did not occur. Another judgment on this theme from the Singapore Court of Appeal came out last week. In Crédit Agricole Corporate & Investment Bank, Singapore Branch v PPT Trading Energy Co. Ltd [2023] SGCA(I) 7, the Court of Appeal reversed the first instance decision, and found that Crédit Agricole Corporate & Investment Bank, Singapore Branch (“CACIB”) was entitled to recovery of losses from having paid its beneficiary, PPT Trading Energy Co. Ltd (“PPT”). PPT was found to have breached its warranty as to “marketable title” in the payment letter of indemnity (“LOI”) that it presented to receive payment under the LC. The decision is significant for clarifying the scope of the fraud exception to payments under LCs and the construction of payment LOIs frequently used in oil trading.  

Facts

The facts and the first instance decision are covered in our earlier update (here). Briefly, Zenrock had created a fictitious trade to raise financing. The trade involved a string of FOB contracts from Totsa to Socar to Zenrock and back to Totsa. Zenrock was financed by ING in this chain. Zenrock created a circular trade within this string and another (fabricated) sale contract purporting to sell the same cargo again to Totsa. The circle involved Zenrock selling the cargo it got from Socar to Shangdong, who would sell it to PPT, before the cargo came back to Zenrock. Zenrock then purported to sell this cargo to Totsa a second time over under the fabricated contract at an inflated price of Platts plus 3.60 (while the actual sale contract to Totsa priced the cargo at Platts minus 3.60). CACIB financed Zenrock’s purchase from PPT. As is common practice in oil trading, PPT presented its invoice and a payment LOI (in lieu of original bills of lading) for payment. CACIB did not reject this presentation. Before the due date for the LC payment however, CACIB suspected double financing, having received Totsa’s confirmation that Zenrock had assigned the receivables from the Zenrock-Totsa contract twice. At first instance, the SICC found CACIB liable to pay PPT, as it was not satisfied that PPT’s presentation of documents under the LC was fraudulent. The SICC also found that CACIB could not invoke a breach of warranties in PPT’s LOI, as the warranties were only triggered in consideration of payment by CACIB “at due date”, which CACIB failed to make. In any event, the court found no breach of warranties. 

Finding on appeal

The appeal raised two main issues. First, whether CACIB could rely on Zenrock’s undoubted fraud to set aside and avoid liability to pay under the LC issued in favour of PPT. The Court of Appeal found that it could not, explaining that an LC creates a contract between the bank and the beneficiary that is separate and autonomous from the underlying sale contract. The established common law exception for avoiding an LC payment requires the beneficiary to be a party to the fraud. CACIB’s arguments to the contrary were found to be unsupported by authority, and liable to undermine the “whole system of documentary credits”. Allowing a bank to decline payment on the basis of a fraud committed by an LC applicant would in the court’s view have the effect that no beneficiary could be assured of payment without investigating the integrity of the issuing bank’s customer in its relationship with the issuing bank, which is a practical impossibility. 

The second issue before the Court was whether CACIB could decline payment on the basis of PPT’s breach of warranties in its LOI. PPT’s LOI mirrored LOIs typically used in oil trade, containing reference to a shipment of the relevant cargo; the fact that PPT was unable to provide the full set of original BLs; and PPT’s warranties “in consideration of [CACIB] making payment” for the shipment “at the due date for payment [under the PPT/Zenrock sale contract]”. Among other things, by way of its LOI, PPT warranted that “at the time property passed under the contract, [PPT] had marketable title to such shipment, free and clear of any lien or encumbrance”, and it agreed to indemnify CACIB from any losses arising from a breach of its warranties. 

At first instance, the SICC was of the view that PPT’s LOI never came into effect since CACIB had not made payment “at the due date” under the PPT/Zenrock sale contract. The Court of Appeal disagreed, and found that the LOI was effective from the moment of its issue. Examining the underlying arrangements, the Court noted that in the absence of original BLs, PPT had no choice but to provide an LOI and CACIB could not decline payment if an LOI had been presented. Further, PPT could not withdraw the LOI once it had been presented or once CACIB had indicated that it was accepting it. The Court considered that CACIB making payment “at the due date” of the underlying sale contract was not a condition precedent to the effectiveness of the LOI, as the obligation of timely payment is not a condition that makes time of the essence. If CACIB’s obligation to pay by the due date was not a condition under the LC, it would be “strange”, the Court concluded, to construe the equivalent obligation under the LOI as a condition. 

Having found that the LOI was effective from the date of its issue, the Court proceeded to consider whether PPT had breached its warranty of marketable title. The Court clarified that the words “marketable title” had to be given their own effect, instead of being equated to “free and clear of any lien or encumbrance”. In this regard, the Court clarified that marketable title is a title that may at all times and under all circumstances be forced on an unwilling buyer, as opposed to a title which will expose the buyer to litigation of hazard. On the facts, PPT’s title was not found to be free from litigation or hazard. The title that Shandong obtained from Zenrock and PPT from Shandong was of uncertain value in circumstances where Zenrock had granted inconsistent floating charges to CACIB and ING over the same goods, floating charges had crystallised by reason of Zenrock’s fraud, Zenrock was not a seller acting in the ordinary course of business in its fraudulent endevaours, and PPT was not a bona fide purchaser for value. The Court of Appeal considered that “PPT was hardly a bona fide purchaser” in light of factual findings made below, in particular, the finding that PPT was aware of the round-tripping and Zenrock’s position as both seller and buyer, and of Zenrock wanting to conceal its presence at more than one place in the chain from financing banks. As such, the court found that there were well founded concerns about the marketability of the title held by PPT. 

Comment

It was somewhat of a missed opportunity as CACIB did not appeal the judge’s findings that PPT’s presentation under the LC was not fraudulent – the Court of Appeal noted this against the backdrop of the judge’s findings relating to PPT’s ignorance of even the general level of market price and its disinterest in what was going on, which the Court of Appeal found “remarkable”. 

Since this appeal was heard, the High Court in Winson Oil v OCBC (see our update here) disagreed with the test of fraud applied by the first instance decision in Credit Agricole v PPT, and instead held a reckless indifference as to the truth or falsity of representations in documents presented under an LC, to fall within the fraud exception. 

The Court of Appeal’s decision on marketable title arises from the premise that PPT’s title was indeed subject to litigation given the inconsistent charges that had crystallized as well as the findings of the first instance judge as to PPT’s conduct which led the Court of Appeal to conclude that PPT was not a bona fide purchaser. Putting the recent cases of Credit Agricole v PPT and Winson Oil v OCBC next to each, the message to traders is the same: do not insert yourself blindly into a string of trades and ignore its peculiarities seeking comfort in an LC. That may turn out be cold comfort in the circumstances.

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

Photo credit: BlackStone & Gold LLC
Published: 2 November, 2023

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Opinion

Gard: Charterparty considerations for wind-assisted propulsion

As wind-assisted propulsion is gaining traction as a means to decarbonise, there are contractual issues that should be sorted to avoid potential disputes between shipowners and charterers, says Gard.

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Maritime protection and indemnity (P&I) club Gard on Tuesday (5 November) published an insight on potential contractual issues in charterparty contracts for vessels using wind-assisted propulsion. The article was written by Jade Park, with assistance from Louis Sheperd and Neil Henderson:

While the industry continues its search for fuels that have less GHG emissions, the age-old method of utilising wind to propel ships is starting to come back into use with newer designs and technology. This is certainly a welcome development, but with new equipment comes new risks and responsibilities. If the risks are not adequately addressed in a charterparty, the good intentions to go green could quickly turn into a red-hot dispute. This article considers the impact of fitting wind-assisted propulsion systems (WAPS) on contractual arrangements between shipowners and charterers.

Time charterparties

Under a typical time charterparty, shipowners have the duty to maintain the ship whilst charterers have the obligation to provide and pay for fuel. This general position should not change due to the installation of WAPS. However, there are some specific issues that may arise from its installation which both parties should consider. Here are some of the contractual issues that should be considered when entering into a time charterparty:

Description of the WAPS installed. There are a number of different types of WAPS in the market. A full description of the type of wind propulsion, its capabilities, and when it can be used will help avoid any confusion and disputes. The description should also include details of what impact it may have, including any reduction in fuel use that may be achieved and in what conditions (this is likely to supplement the speed and consumption warranty). Also consider the WAPS’ impact on the vessel’s air-draft and if it may restrict the vessel’s berthing or other operations.

Installation. If the system is to be installed whilst the vessel is operating under a charterparty, the parties should determine who will pay the cost since this may have an impact on the ongoing hire rate. Further, the parties should consider how the benefits will be allocated. If there are joint contributions to the cost, how will that cost be allocated when the charterparty comes to an end?

Maintenance and repairs. Where shipowners and charterers have shared the cost of installing wind propulsion, the charterparty should clearly set out who is to be responsible for the cost of any periodic maintenance and/or repairs (including any loss of time). Otherwise, the default position will likely be that the burden lies with shipowners under the general maintenance clause.

Breakdown or malfunction. The parties should consider what is to happen if the WAPS breaks down or malfunctions. This will likely require the ship to burn more fuel to continue the voyage, or for the vessel to proceed at a slower speed to achieve the same consumption. The charterparty should clarify which party is to bear the cost of the additional fuel burned or time taken. It should also set out whether the breakdown or malfunction is an off-hire event and if so, how it should be calculated. Another alternative to off-hire could be to have two rates of hire; one for when the system is in use and another for when it is not available for certain agreed reasons. Also consider what rights the owners or charterers may want to have as regard performance during a period of breakdown. For example, if the propulsion system was expected to reduce fuel consumption by 10% in certain conditions, should owners have the right to reduce speed in order to achieve the same consumption?

Performance warranties. The wind propulsion will be installed with the aim to improve the ship’s fuel consumption and possibly its speed as well. The ship’s performance warranties may therefore need updating where wind propulsion is being retrofitted. It may also be necessary to have separate warranties for when the wind propulsion has broken down and the ship is solely propelled by conventional fuel. If different warranties are given for different weather conditions, then consider where evidence of the weather conditions is to be taken. The system may have sophisticated sensors that are more likely to be accurate of the real weather conditions than a weather routing company.

Voyage charterparties

Under voyage charterparties, matters related to bunkers and maintenance typically rest with shipowners. As such, there are fewer implications for voyage charterparties if installing wind propulsion. However, there are some matters that the parties may wish to consider:

Vessel description. It may be necessary to consider whether the WAPS restricts the ports/berths that the vessel can use.

Laytime/demurrage provisions. The running of laytime/demurrage may be disrupted by the breakdown or malfunction of the wind propulsion. Any provisions in the charterparty pertaining to laytime/demurrage, including exceptions to laytime or demurrage running, may need to be adjusted to address what is to happen in such an event.

Due dispatch obligations. Parties should determine what rights they want to have in the event of the breakdown of the WAPS on a voyage. Must the vessel increase the engine’s speed to make up for lack of extra propulsion, or is it permissible for the vessel to slow down to achieve the same emissions without being in breach of the due dispatch obligation?

 

Source: Gard
Photo credit: Aymane jdidi from Pixabay
Published: 11 November 2024

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Vessel Arrest

Malaysia: MMEA detains tanker in Sekinchan waters for anchoring illegally

Investigations found that 13 crew consisting of six Myanmar nationals, four Bangladeshis and three Indonesians, were on board the tanker when detained.

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Malaysia: MMEA detains tanker in Sekinchan waters for anchoring illegally

The Malaysian Maritime Enforcement Agency (MMEA) on Thursday (7 November) said it has detained a tanker for anchoring without permission in Sekinchan waters. 

Selangor MMEA director Captain Abdul Muhaimin Muhammad Salleh said the tanker was detained by a MMEA patrol boat at 9.6 nautical miles southwest of Sekinchan at 5 pm on that day.

Investigations found that 13 crew consisting of six Myanmar nationals, four Bangladeshis and three Indonesians, were on board the tanker when detained.

Further examination of the documents found that the ship's captain failed to present any documents for permission to anchor.

The ship's captain, 56, and chief engineer, 39, have been taken to Selangor MMEA Headquarters for further investigation.

The case is being investigated under Section 491B (1) (l) of the Merchant Shipping Ordinance 1952.

 

Photo credit: Malaysian Maritime Enforcement Agency
Published: 8 November, 2024

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Legal

Four Dutch seafarers charged for alleged roles in causing Singapore oil spill

Four men on Netherlands-flagged dredger “Vox Maxima” were charged under Merchant Shipping Act 1995 on 6 November and will appear in court again on 4 December.

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Martin Klingsick / MarineTraffic

Singapore has brought charges against four crewmen who were working on Netherlands-flagged dredger Vox Maxima for their alleged role in causing the disastrous bunker spill into the republic’s sea, according to a report by The Straits Times on Wednesday (6 November).

Singapore-flagged bunker vessel Marine Honour was hit by Netherlands-flagged dredger Vox Maxima at Pasir Panjang Terminal on 14 June, which resulted in an oil spill in Singapore waters.

The dredger reportedly lost engine and steering control before crashing Marine Honour.

The four men, all Dutch nationals, – Merijn Heidema, 25; Martin Hans Sinke, 48; Richard Ouwehand, 49; and Eric Peijpers, 55 – allegedly failed to ensure that emergency steering was carried out when emergency power was supplied to the vessel’s steering gear pumps, resulting in the allision. 

They were each charged under the Merchant Shipping Act 1995 on 6 November. 

Heidema and Peijpers, who were responsible for the engineering watch, were accused of failing to ensure a sufficient reserve of power was available for Vox Maxima’s steering gear when the engine room was put in a standby condition.

Their cases have been adjourned to 4 December.

Manifold Times previously reported Vox Maxima was found to have serious deficiencies relating to fire safety and life-saving equipment aboard. 

A total of 13 deficiencies were flagged during the 15 June inspection of the dredger. Three out of the 13 warranted detention of the vessel which indicated serious deficiencies that required repairs before it could be permitted to leave the port. 

Related: Thirteen deficiencies flagged during inspection for dredger involved in Singapore oil spill
Related: Singapore oil spill: Minister refutes claim that contractor was slow in preventing further spillage
Related: MPA: Claims exceeding liability of “Marine Honour” owner will be made against international fund
Related: MPA: Owner of bunker tanker involved in Singapore oil spill is liable for pollution damage
Related: Malaysia to look into demands of Johor fisherman affected by oil spill from Singapore
Related: Singapore oil spill: Clean-up enters next phase of cleaning rock bunds
Related: MPA: Clean-up ops continue following oil spill in Singapore, affected beaches closed
Related: Singapore: Oil spill cleanup after allision between dredger “Vox Maxima” and bunker tanker “Marine Honour”

 

Photo credit: Martin Klingsick / MarineTraffic
Published: 7 November, 2024

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