Partner Singapore
"This is another commodity trading case arising out of the collapse of Hin Leong, in which Winson Oil, the beneficiary under two LCs issued by OCBC and Standard Chartered Bank respectively, commenced proceedings for non-payment under two LCs."
The recent decision in Winson Oil Trading Pte Ltd (“Winson Oil”) v Oversea-Chinese Banking Corp Ltd (“OCBC”) & another ([2024] SGCA 31), in which the Singapore Court of Appeal reaffirmed the High Court’s decision to dismiss Winson’s Oil claim against OCBC and Standard Chartered Bank for non-payment under two letters of credit (“LCs”) provides helpful clarity on the requirements of the fraud exception (the “Fraud Exception”).
Background
This is another commodity trading case arising out of the collapse of Hin Leong, in which Winson Oil, the beneficiary under two LCs issued by OCBC and Standard Chartered Bank (the “Banks”) respectively, commenced proceedings for non-payment under two LCs.
These LCs were issued to finance Hin Leong’s purchase of two parcels of gasoil from Winson Oil. It later came to light that the sales by Winson Oil to Hin Leong were the final legs of circular trades that took place at, or around, the same time.
The relevant trades were as follows:
a. Hin Leong sold two parcels of gasoil to Trafigura, shipped on board the vessels Ocean Taipan and Ocean Voyager (the “Vessels”);
b. Trafigura sold the same quantity of gasoil to Winson Oil; and
c. Winson Oil sold the same quantity of gasoil back to Hin Leong in two shipments.
It transpired that the Bills of Lading (“BLs”) in circulation were forgeries that had been signed by a staff member at Hin Leong and that no gasoil parcels were actually shipped onboard the two Vessels, as had been represented in the letters of indemnity (“LOIs”) that were presented to the Banks by Winson Oil.
First Instance Decision
"Fraud is proven where it is shown that a false representation was made: (i) knowingly; (ii) without belief in its truth; or (iii) recklessly, i.e. carelessly as to whether it is true or false."
The Singapore High Court dismissed Winson Oil’s claim against the Banks for non-payment under the LCs on the basis of the Fraud Exception, holding that Winson Oil had made false representations when making presentations to the Banks for payment under the LC as:
a. there was no evidence that the gasoil parcels were ever loaded, as there was an absence of any loading documents; and
b. the original counterparts of the BLs relied upon by Winson Oil in its LOIs were forgeries.
Further, the High Court ruled that these false representations were made by Winson Oil fraudulently, meaning either with the knowledge that they were false, or recklessly without care as to whether they were true or not.
Accordingly, the High Court concluded that the Banks were not obligated to make payment under the LCs.
Issues at appeal
Winson Oil appealed the first instance decision and sought to argue that the High Court had erred in applying the principles of the tort of deceit into the Fraud Exception and, as such, had erred in holding that the Fraud Exception may be made out where the beneficiary under an LC made a false representation recklessly, without caring whether it is true or false.
Further, Winson Oil argued that the representations in its LOI were not false, nor did it make the representations fraudulently.
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"The law should 'call a fraud a fraud'."
The Court of Appeal’s Decision
The Court of Appeal dismissed Winson Oil’s appeal and affirmed the High Court’s findings that the Fraud Exception had been established because the representations made by Winson Oil were false, and Winson Oil was reckless in its conduct regarding several clear red flags, such as: (i) the fact that the circular trades were pre-structured; and (ii) the absence of any loading documents.
In its decision, the Court of Appeal ruled that the earlier decision in CACIB v PPT [2022] 4 SLR 1, in which the Court found that recklessness could not engage the Fraud Exception when dealing with letters of credit, was incorrect, as it mistakenly conflated negligence with recklessness. Instead, the Court of Appeal decided that recklessness is only made out where there is an actual indifference to the risk.
Finally, the Court of Appeal confirmed that a consistent approach should be taken with respect to fraud. Fraud is proven where it is shown that a false representation was made: (i) knowingly; (ii) without belief in its truth; or (iii) recklessly, i.e. carelessly as to whether it is true or false.
"Beneficiaries of LCs should note that they cannot simply ignore or claim ignorance to the realities of the underlying trade, 'ostrich-like in the sand'."
These same parameters will apply to the Fraud Exception, whether that be in relation to LCs or otherwise, and these same knowledge requirements will apply when seeking to establish fraud under the tort of deceit. Accordingly, the law should “call a fraud a fraud”.
Conclusion
Following the collapse of Hin Leong and other commodity traders such as Zenrock, the Singapore Courts have recently considered the ambit of the Fraud Exception in several cases.
However, this judgment is of note as it makes clear that beneficiaries of LCs, most typically traders, cannot validly demand payment thereunder where false representations have either been made knowingly, or where it is evident that they are indifferent to the truth of the same.
Beneficiaries of LCs should note that they cannot simply ignore or claim ignorance to the realities of the underlying trade, “ostrich-like in the sand”.
Accordingly, in line with our previous advice on this subject matter, commercial parties should take care to ensure, or at least undertake reasonable steps to ensure, that they possess a reasonable belief in the truthfulness of any representations made in presented documents. These steps may include checks with all relevant parties on the background to the underlying transaction (such as whether the cargo has indeed been shipped in accordance with the relevant bills of lading) and to promptly make further enquiries and/or request additional documents where information is lacking or appears inconsistent.
Please do get in touch if you would like to discuss any of the issues canvassed in this article further.
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