As featured in Trade Treasury Payments
The BCP v China Aviation Oil case raises a critical question in trade finance: Can banks claw back payments made under letters of credit when fraud is later suspected?
The answer, as clarified by the Singapore courts, is far more restrictive than many banks might expect.
The Core Issue: Finality of LC Payments
Letters of credit are treated as the “lifeblood of commerce”, meaning:
• Payments made under LCs are generally final and binding
• Banks face significant difficulty recovering funds after payment
• Legal protections favour certainty and reliability in trade transactions
This creates a high threshold for any clawback attempt.
The Dispute at a Glance
The case arose from the collapse of ZenRock:
• BCP financed an oil trade via a letter of credit
• Payment was made to China Aviation Oil (CAO) based on a letter of indemnity (LOI)
• ZenRock defaulted, leaving the bank exposed
BCP attempted to recover the payment, alleging fraudulent misrepresentation.
The Court’s Key Finding: No Fraud Proven
The courts ultimately ruled against BCP:
• The transaction was not a sham, even though it involved circular trading
• CAO’s representations in the LOI were interpreted in their commercial context
• There was no evidence of dishonesty or fraudulent intent
Even if concerns existed, they did not meet the legal threshold for fraud.
The High Bar for Clawback
The case confirms that to recover LC payments, banks must prove:
• A false representation
• Knowledge of falsity or reckless disregard for truth
• Actual reliance and resulting loss
This is a demanding standard—especially in complex commodity trades.
Commercial Context Matters
A key takeaway is how courts interpret trade documents:
• LOIs are understood within industry practice, not literal wording
• It is common for documents (like bills of lading) to be pending in chain trades
• Courts avoid interpretations that are commercially unrealistic
This protects parties acting in good faith within established trading norms.
Implications for Trade Finance
The decision highlights several important realities:
• Banks cannot easily reverse LC payments—even in suspicious deals
• Beneficiaries are protected unless clear fraud is proven
• The market must rely on upfront due diligence, not post-payment recovery
Risk management must happen before payment—not after.
Conclusion
The BCP v CAO case reinforces a fundamental principle:
• Letters of credit prioritise certainty over recovery
Even where transactions later appear questionable:
• Clawback is only possible in clear cases of fraud
Ultimately, the case highlights that in trade finance: Once payment is made, it is extremely difficult to unwind—unless dishonesty can be clearly proven.
Read the full article at Trade Treasury Payments https://tradetreasurypayments.com/articles/to-claw-or-not-to-clawback-bcp-vs-china-aviation-oil-on-letter-of-credit-payments