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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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MMEA detains Malaysian-registered vessels in illegal STS oil transfer operation

Two cargo ships were caught for illegally transferring diesel without approval near Pulau Mantanani, Sabah; total seizure of vessels and diesel was estimated to be about MYR 80,000.

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MMEA detains Malaysian-registered vessels in illegal STS oil transfer operation

The Sabah and Labuan Malaysian Maritime Enforcement Agency (MMEA) on Tuesday (16 July) detained two cargo ships for illegally transferring diesel without approval near Pulau Mantanani, Sabah.

The two ships were spotted by Arau maritime ship (KM Arau) during a patrol.

Sabah and Labuan MMEA director Maritime First Admiral Datuk Che Engku Suhaimi Che Engku Daik siad the two ships were suspiciously in close proximity.

KM Arau then approached the two vessels believed to be carrying out a ship-to-ship oil transfer.

“Upon inspection both vessels were found to be registered in Malaysia and were operated by eight Malaysian crew,” he said.

Further investigation found both were unable to provide documentation to transfer diesel.

Both ships were brought in for probe under Control of Supplies Act 1961, Customs Act 1987 and Petroleum Development Act 1974.

The total seizure of vessels and diesel was estimated to be about MYR 80,000 (USD 17,141.63 USD).

 

Photo credit: Malaysian Maritime Enforcement Agency
Published: 18 July 2024

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Singapore: Fake oil and bunker trader cheats woman SGD 93,000, sentenced to jail

Victim lodged a police report on 29 May 2023 and authorities arrested Muhammad Sharul Bin Anoor on 8 November 2023; to date, Sharul has repaid SGD 67 to the victim.

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RESIZED state courts

A 30-year-old former deliveryman posing as an oil and bunker trader received a 19-month jail sentence at the State Court of Singapore on Friday (12 July) after pleading guilty to seven cheating charges.

Sometime in 2022, Muhammad Sharul Bin Anoor (Sharul) created a fake profile with the name “Melcolm Tan” and met the 34-year-old victim in late August 2022 on an online dating website; they initially communicated over Telegram, showed documents obtained from the Attorney-General’s Chambers (AGC).

Falsely representing himself as an oil and bunker trader by occupation, “Melcolm” on 26 August 2022 told the victim she could invest in his shipping imports and make guaranteed returns of 3.5% by January 2023.

“Melcolm” told the victim that he would bear any losses, and that she would get her monies back. The victim transferred SGD 5,000 to “Melcolm” via Paynow through his mobile number on the same day but noticed the Paynow number was registered to Sharul after the first transfer.

Following, the victim messaged Sharul through WhatsApp using his Paynow number, but to maintain the deception Sharul lied that he was “Shan” who was an employee of “Melcolm” and would act as an intermediary between the victim and “Melcolm” going forward.

The victim believed Sharul and continued corresponding with “Shan”. Between August 2022 and March 2023, the victim was dishonestly induced to transfer a total of SGD 92,510 to Sharul. She used SGD 50,000 from her own personal savings and took out loans for the remaining amounts.

Sharul dissipated the monies on his renovation, car and credit card repayments. Details of several transactions are below:

Date Amount transferred to Sharul Fales representations by “Shan”
2 September 2022 SGD 8,000 Claimed “Melcolm” lost his credit card and needed funds to pay for his hotel expenses in Indonesia and his return flight to Singapore.
15 September 2022 SGD 6,000 Claimed “Melcolm” wanted to transfer the funds to “Shan”, and asked the victim to transfer the monies on his behalf.
11 October 2022 SGD 20,000 Claimed “Melcolm” needed the funds to close a deal as his friends had cheated him of $340,000.
16 November 2022 SGD 10,000 Claimed “Melcolm” needed the funds to pay customs duties to avoid being arrested.
19 December 2022 SGD 9,500 Claimed “Melcolm” needed the funds to pay his fines so that his lawyer could secure the release of his assets.
22 December 2022 SGD 7,000 Claimed “Melcolm” needed to transfer the funds to “Shan” to help with “Shan”s loans.

From March 2023, the victim attempted to meet “Melcolm” and “Shan” on various occasions to discuss the repayment of the monies, but Sharul repeatedly failed to turn up for these meetings.

Growing suspicious, the victim lodged a police report on 29 May 2023; Sharul was eventually traced and arrested on 8 November 2023.  To date, Sharul has repaid SGD 67 to the victim.

 

Photo credit: Manifold Times
Published: 16 July 2024

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Singapore: Ex-Director of Inter-Pacific Petroleum appeals High Court decision

Dr Goh Jin Hian reportedly appealed against the decision by the High Court that found him to be responsible for up to USD 146 million of the company’s total USD 156 million loss.

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Singapore High Court

The former Director of defunct Singapore bunker supplier Inter-Pacific Petroleum (IPP) has reportedly appealed against the decision by the High Court that found him to be responsible for up to USD 146 million of the company’s total USD 156 million loss, according to media outlets on Thursday (11 July).

Manifold Times previously reported IPP Judicial Managers (JMs) Deloitte Singapore, the plaintiffs, on April 2023 initiated a legal suit against former company Director Dr Goh Jin Hian, the defendant, suing him for over USD 156 million over losses due to alleged breach of his Director’s duties.

The Singapore branch of Maybank is looking to recover an amount of USD 88.3 million while Societe Generale (SocGen) is owed USD 81.3 million that they allege to be due to Dr Goh’s negligence as Director.

Dr Goh has said it is not the responsibility of the Director to authenticate documents from management and he disputes against the banks’ own due diligence and credit risk assessment.

“I am satisfied having considered the evidence and submissions that the plaintiff’s claim has been made out as to the liability of the defendant,” wrote Judge Aedit Abdullah in his Brief Remarks on 24 January obtained by Manifold Times.

Judge Aedit pointed out Dr Goh should have carried out his duties as Director and inquired about the financial position of IPP upon knowing of three ‘red flags’ incurred.

Of the total USD 156 million claimed by the IPP JMs, Judge Aedit concluded claims for the full extent of the sum of USD 146 million (exact: USD 146,047.099.60 and the interest claimed) should be allowed.

Related: Singapore: Ex-Director of Inter-Pacific Petroleum found responsible for up to USD 146 million of firm’s loss

 

Photo credit: Manifold Times
Published: 15 July 2024

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