Tougher Verification Protocols for Beneficiaries in Letter of Credit Payments

In Singapore, it is an accepted position in law that a confirming bank owes a contractual obligation to the seller to honour an LC as long as the documents presented to the confirming bank conform on its face with the requirements of the credit as notified to the seller by the confirming bank.

The rationale for this is to give sellers an assured right to be paid before they part with control of the goods that does not permit any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment.

An exception to this rule exists where a beneficiary, for the purposes of drawing on the credit and in presenting documents for payment, fraudulently presents the bank with documents that contains representations which the beneficiary knows to be untrue, or where he makes the representation “without belief in its truth”. This is known as the Fraud Exception.

In August this year, in the case of Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corporation Limited [2023] SGHC 220 (“Winson Oil”), the Singapore court considered the question slightly further: Is a bank obliged to make payment out under letters of credit (“LCs”), where, to draw on an LC, a beneficiary makes a representation recklessly, without caring whether the representation is true?

Facts

Winson Oil Trading Pte Ltd (“Winson”) commenced proceedings against Oversea-Chinese Banking Corporation (“OCBC”) and Standard Chartered Bank (“SCB”) for non-payment under LCs issued to finance the purchase of gasoil from Winson by Hin Leong Trading (Pte) Ltd (“Hin Leong”).

The sales were circular trades that took place in the same afternoon on 27 March 2020. In these sales, Hin Leong sold a quantity of gasoil in two shipments to Trafigura Pte Ltd. Trafigura Pte Ltd then sold the same gasoil in two shipments to Winson. Winson then sold the same quantity of gasoil back to Hin Leong.

Using documents from this trade, Winson attempted two presentations for payment to OCBC and SCB. The first presentation by Winson to OCBC was for cargo on board the vessel Ocean Voyager, and the first presentation to SCB was for cargo on board the vessel Ocean Taipan. OCBC rejected the first presentation on the ground that it found that no cargo had been shipped. Upon receipt of this rejection, Winson prepared a second presentation to OCBC and SCB, after switching the names of the vessels in the documents. This second presentation to OCBC was for cargoes on board the Ocean Taipan, and to SCB was for cargoes on board the Ocean Voyager. Winson sued the banks for payment pursuant to these second presentations.

The banks contended that there was no cargo shipped for these transactions and argued that the copy non-negotiable Bills of Lading (“BLs”) were forged. The banks relied on the Fraud Exception to resist the claim for payment under the LCs by Winson and contended that the sale between Winson and Hin Leong was a sham, and that no cargoes had been shipped in any event.

These were the representations of material fact that were asserted by the respective banks as untrue:

Whether the representations were false

The shipment information in the Letters of Indemnity (“LOIs”) provided for by Winson was based on two copy non-negotiable BLs that Winson received. There was no dispute between the parties that the BLs which were relied on were not authentic BLs.

There was evidence from the IJMs for Hin Leong that the BLs in question were marked “null and void”, with no endorsements on the reverse side of the BLs, and were signed by Hin Leong staff rather than the Master/ carrier. There was also evidence that the cargo onboard both vessels were meant for a third party, Unipec.

The Court found as fact that the copy non-negotiable BLs and the original counterparts of the BLs were forgeries, and therefore there were no valid BLs pursuant to which cargo was shipped for the Winson-Hin Leong sale. Winson’s representations to the banks, as set out in the table above, were thus false.

The next question to be determined was thus, where the representations were false, whether Winson had made them fraudulently.

Whether Winson acted fraudulently

In determining a party’s state of mind at a point in time, events both before and after that point may be relevant. In testing whether Winson held an honest belief in the truth of the representations made in its LOIs, the Court considered how reasonable that belief would be in the circumstances[1].

In finding that Winson did not hold such an honest belief, the Court found on the evidence that:

1. There was a pre-structured circular trade between Hin Leong, Trafigura, and Winson, and that Hin Leong (both original seller and ultimate buyer) would decide on the vessels and cargo with no nomination or substitution rights actually held by Trafigura and Winson;[2]
2. Given the worsening market conditions on the day of the sales, it made no commercial sense for Hin Leong to repurchase the goods at a loss;[3]
3. Winson never received any loading documents for the shipments onboard the vessels, but did not follow up in asking Hin Leong for the documents;[4]
4. There was a change in the BL quantity for the Ocean Taipan BL after the BL was issued and vessel had sailed. This was uncommon. Further, an operator would have been expected to check on the reasons for discrepancy and that the earlier set of BLs with the original quantity had been cancelled. However, Winson did not ask for any explanation or documentation for this change, nor confirm that the earlier set of BLs were cancelled;[5]
5. Winson was not open to a subsequent request by OCBC to repurchase of the Ocean Voyager cargo. Instead, it made multiple suggestions that Winson did not know whether the title to the cargo was clean;[6]
6. When OCBC rejected Winson’s first presentation for payment for the Ocean Voyager on the basis that “there was no physical cargo shipped to the Ocean Voyager”, Winson did not question why this position was taken, nor check if that was the case.[7] Instead, Winson prepared new invoices and new LOIs to make a second presentation to OCBC for Ocean Taipan instead, and to SCB for the Ocean Voyager;[8]
7. Winson did not do necessary checks to confirm that cargo had been shipped to the Ocean Voyager as represented in its LOIs.[9] Winson also never checked with OTPL, which had issued the copy BLs that Winson had relied upon for its LOIs, on the belief that cargo had been shipped as described in the copy BLs, and did not confirm whether cargo had been shipped as stated in the copy BLs.[10] Winson also did not ask OTPL or Hin Leong for the loading documents.

The Court was drawn to the conclusion that Winson did not believe in the truth of the representations in its LOIs by the time it made the second presentation to the banks, or at the very least, was indifferent to whether the representations were true or not, which the Court found showed that it did not believe in their truth.[11] The Court found that the belief Winson claimed to have held in the circumstances at the time was unreasonable, and that Winson’s conduct in responding to the circumstances was similarly unreasonable. As such, the Court found that the false representations in Winson’s LOIs were made fraudulently.

The Court also made the point that recklessness under the Fraud Exception was not based in negligence and did not require showing a duty of care owed to the bank. Instead, recklessness here would be shown where the representor is “recklessly indifferent to the truth or falsity of which he was asserting”, and meant “indifference to the truth”, rather than “failing to take care”.

Comments and conclusions

The Winson Oil case is an important one to note as, practically, it broadens the applicability of the Fraud Exception to the rule that a confirming bank owes a contractual obligation to a seller to honour the LC as long as the confirming bank present documents which conform on its face to the requirements of the LC.

Beneficiaries and companies may no longer be safe in relying on the defence that they did not know about false representations made, and should exercise greater caution prior to presenting documentation for payment under an LC, including ensuring that they have in their records any relevant trail which would assist in confirming the truth or veracity of any representation made in the conforming documents, lest they find themselves in an unenviable position of being denied payment under the LC.

Some problems that a beneficiary may face however are that beneficiaries can only check against the limited information provided by LOIs passing through the chain of contracts and may only be able to perform basic retrospective checks on loading operations. A carrier is not obliged to respond to requests to check on the cargo if the requestor does not possess the bills of lading. It may not be possible for a beneficiary to guarantee the presence of cargo, and even if a beneficiary probes for details to verify representations it must make under an LOI, they may face issues with intermediaries and traders who wish to obscure their trade margins not being forthcoming with information. An exercise in tracing title to the cargo through a long string of sale contracts may be impractical in most cases, particularly if this problem is exacerbated by a lack of time – such as where the LC is about to expire.

This then begs the question as to the threshold to which a beneficiary must carry out the relevant checks. The case of Winson Oil does not appear to suggest any evidential threshold to meet to satisfy the reasonableness requirement. There also does not appear to be a trade-wide accepted checklist for a beneficiary to mark against in trades. To this, we can only suggest that beneficiaries apply their minds carefully as to the representations of fact which they can ascertain, to any extent, and carry out these checks as best as they reasonably can in the circumstances.

[1] Winson Oil at [107].

[2] Id, at [110]

[3] Id, at [111]

[4] Id, at [112] – [114]

[5] Id, at [115]

[6] Id, at [119] – [122]

[7] Id, at [128] – [130], [136]

[8] Id, at [138].

[9] Id, at [144] – [145], [149]

[10] Id, at [159], [160]

[11] Id, at [164]

For further information, please contact:

	Jolene Tan Counsel JTJB Singapore Office E : jolenetan@jtjb.com T : 6220 9388