Traders Beware: Transferring Marketable Title under Letters of Indemnity used in Letters of Credit – 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.  


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.


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



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