In the recent decision of Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corporation and Standard Chartered Bank (Singapore) Limited  SGHC 220 ("Winson v OCBC & SCB"), the Singapore High Court allowed the banks' defences to non-payment on letters of credit on grounds of fraud; the claim against Standard Chartered Bank (Singapore) Limited was for around US$30.4m. This is the first decision following from the collapse of Hin Leong Trading Pte Ltd and Zenrock Commodities Trading Pte Ltd in which a bank has successfully relied on the fraud exception1 to resist payment under a letter of credit.
The Singapore High Court found that the plaintiff trader, Winson Oil Trading Pte Ltd ("Winson"), made false representations in its letters of indemnity ("LOIs"). This included representations as to (i) the existence and validity of the bills of lading, and (ii) the cargoes having been shipped onboard the respective vessels. The Singapore High Court found that the fraud exception was satisfied in this case as Winson had made the false representations fraudulently, i.e. without belief in their truth (which includes recklessness, in the sense of being indifferent as to their truth).
The case was heard before the Honourable Justice Andre Maniam ("Maniam J"), and Shook Lin & Bok LLP represented Standard Chartered Bank (Singapore) Limited ("SCB").
Winson, the beneficiary under the letters of credit issued by the banks, commenced proceedings against the banks for payment under the letters of credit; the claim against SCB was for around US$30.4m. These letters of credit were issued by the banks to finance Hin Leong's purchase of two parcels of gasoil from Winson. However, it was later discovered that the sale from Winson to Hin Leong was just the final leg of a circular trade that took place on or around the same day which included, inter alia, the following trades:
- Hin Leong sold a quantity of gasoil in two shipments, on board the vessels Ocean Taipan and Ocean Voyager respectively, to Trafigura Pte Ltd;
- Trafigura sold the same quantity of gasoil in two shipments to Winson; and
- Winson sold the same quantity of gasoil in two shipments back to Hin Leong.
The banks relied on the fraud exception to resist Winson's claim. They took the position that:
- Winson had made false representations when making presentations
to the banks for payment under the letters of credit, namely:
- No cargo of gasoil was in fact shipped under these transactions, in particular for the final leg (which was financed by the banks). Among other things, the banks argued that there was no evidence that any loading took place; and
- The original counterparts of the copy non-negotiable bills of lading relied upon by Winson in its LOIs were forgeries, and
- These false representations were made by Winson fraudulently, i.e. with the knowledge that they were false, or recklessly without care as to whether they were true or not.
The Court found that Winson was not entitled to payment under the letters of credit because the fraud exception was established.
In discussing the ambit of the fraud exception, the Court considered whether recklessness on the part of the beneficiary would be sufficient to satisfy the requisite mental state. In this regard, although recklessness is sufficient in relation to a claim in fraudulent misrepresentation, the Singapore International Commercial Court in Credit Agricole Corporate & Investment Bank, Singapore Branch v PPT Energy Trading Co Ltd  4 SLR 1 ("CACIB v PPT") recently held that a "reckless failure to ascertain the truth of representations, which are made in the honest belief that they are true" would not be sufficient to establish the fraud exception in a letter of credit transaction.
Maniam J declined to follow CACIB v PPT on this point as the recklessness which the Court in CACIB v PPT had in mind differed from the recklessness which has traditionally formed part of the tort of deceit. The traditional concept of recklessness is such that the representor "can have no real belief in the truth of what he states"; whereas the recklessness contemplated by the Court in CACIB v PPT was compatible with the beneficiary having an "honest belief" in the truth of its representations.
Maniam J therefore found that recklessness, where the representor is "indifferent to the truth", would be sufficient to establish the requisite mental state for the fraud exception.
On the facts, Maniam J accepted the banks' defences and found that the fraud exception was established.
- Winson had made false representations as to the validity and existence of the bills of lading and the passage of good title to the cargo. The bills of lading referenced in Winson's LOIs were found to be based on forgeries and therefore the representations as to their validity and existence were false. In addition, contrary to the representations in Winson's LOIs that the cargoes were shipped on the relevant vessels, the Court found that there was no evidence that any loading took place.
- These false representations were made fraudulently because Winson did not believe in the truth of its representations, or at the very least was indifferent as to whether its representations were true or not.
The decision is the first of its kind in relation to the fraudulent trading practices allegedly perpetrated by Hin Leong and Zenrock. Following the collapse of these companies, the Singapore Courts have had several opportunities to consider the ambit of the fraud exception. Prior to this case, the Courts had generally ruled in favour of the traders who were beneficiaries under the letters of credit, and had found that the fraud exception was not established even where parties were involved in pre-structured back-to-back transactions in which they do not ever receive the original shipping documents (see our earlier articles on UniCredit v Glencore  SGHC 263 and CACIB v PPT  SGHC(I) 1).
Notably, unlike the earlier cases, the bills of lading in circulation between the parties in this circular trade were a forgery, and there was no underlying cargo as represented in the LOIs presented to the banks. Additionally, (i) the fact that the beneficiary knew from the start that it was part of a pre-structured circular trade, and (ii) the events leading up to the operative presentation under the letters of credit, made clear that the beneficiary did not believe in the truth of the representations in its LOIs, or at the very least, was indifferent to whether they were true or not.
Maniam J's decision sends a clear signal that, notwithstanding the permissibility of pre-structured back-to-back transactions, beneficiaries cannot demand payment on letters of credit where false representations are made knowingly, or where the beneficiaries are indifferent to the truth of those false representations.
The Court left open the issue of whether the defences of nullity and unconscionability would apply in the context of letters of credit.
Sarjit Singh Gill, S.C., Probin Dass, Daryl Cheng and Suresh Viswanath of Shook Lin & Bok LLP represented Standard Chartered Bank (Singapore) Limited in these proceedings. Please feel free to contact the undersigned if you have any queries.
The full decision is available at the following link:  SGHC 220.
1. In international trade, the purchase of goods is often financed by letters of credit. A letter of credit constitutes a separate contract from the underlying sale of goods, and functions as "cash in hand" – a bank is obliged to honour the letter of credit even if there is alleged to have been a breach of contract in respect of the underlying sale of goods. Traditionally, the only exception to this principle is where the seller fraudulently presents documents which contain false material representations of fact, i.e. the fraud exception.
Originally published August 22, 2023
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