Indifference to the Truth: Does a Beneficiary’s Reckless Presentation under LCs amount to Fraud?

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.

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 maker 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 incentivized, 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.

Insights

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Webinar: Fraud, Fictious Trades & Letters of Credit – Where does the buck stop?