What did the Singapore High Court decide and why?

The Singapore High Court roundly dismissed all of UniCredit’s claims against Glencore. It found that (i) Glencore was entitled to the payment received from UniCredit under the LC, (ii) Glencore did not defraud or deceive UniCredit, (iii) Glencore did not conspire with Hin Leong to injure UniCredit, (iv) Glencore was not unjustly enriched, and (v) Glencore did not breach any obligation to UniCredit under the LOI. UniCredit was therefore not entitled to rescind the LC or to recover the payment made to Glencore.

We summarise the court’s decision and reasoning below.

Was the Sale Contract a “sham or fictitious transaction”?

UniCredit argued that the Sale Contract was a sham or fictitious transaction since the purpose of Glencore’s simultaneous sale and buyback of goods was to obtain finance.

The court disagreed. It found that neither the Sale Contract, the Buyback Contract nor both contracts taken together were shams or fictitious transactions. It affirmed the following propositions:

1. A “genuine” sale and purchase is one that is not a sham.
2. The motive for a transaction is not in itself determinative of whether the transaction is a sham, and that includes “financing transactions”.
3. A sham transaction is one where the parties had a common intention to create a pretence of a transaction to deceive others.
4. If the documentation appears genuine and there is no evidence that the parties did not intend the rights and obligations to be real ones, the transaction would not be a sham.
5. Circular transactions would not, ipso facto, be “shams”.
6. Similarly, the structure of transactions as a simultaneous sale and buyback (rather than selling the goods to a third party or selling the goods back to the seller at some later point rather than simultaneously) is not determinative of whether the sale and purchase contracts are shams.
7. If the circumstances are such that the parties do not expect to have to perform an obligation (such as the delivery of shipping documents), that does not mean the obligation is a sham.
8. There is a distinction between circular trading transactions in which no delivery of goods is contemplated (which would not constitute a sham) and those in which no trading is contemplated at all (such as where goods were non-existent or not available for trading, which might be evidence of a sham).

The court was convinced by the following facts that the rights and obligations under the Sale Contract were real and that the obligations of title transfer and payment were performed by Glencore and Hin Leong:

1. There was a real cargo of fuel oil that Glencore had purchased from its sister company.
2. Glencore checked that title in the goods would pass to Glencore in time for Glencore to pass title to Hin Leong.
3. Glencore paid its sister company for the goods by way of internal settlement, as an internal set-off against an intercompany account.
4. Even if this internal settlement was not made prior to the stipulated date and time of transfer, Glencore and its sister company could agree that title would nonetheless pass notwithstanding a retention of title provision providing “title and risk shall not pass to Buyer until Buyer has made and Seller has received payment”.
5. To the extent that no delivery (of documents or goods) was contemplated, that does not make the transactions between Hin Leong and Glencore a sham. Since Glencore had bought the goods back from Hin Leong, it might not have expected to have to surrender the BLs to Hin Leong. That did not mean that Glencore never had the obligation to surrender the BLs, or that Glencore never had the intention to fulfil such an obligation if the circumstances required it. The court accepted Glencore’s evidence that it would have surrendered the original BLs if Hin Leong had asked for them. However, Hin Leong never asked for them, so Glencore never surrendered the BLs to Hin Leong.

Did Glencore commit fraud/deceit against UniCredit?

The other main claim brought by UniCredit was of fraud/deceit.

UniCredit pleaded that Glencore made the following false representations:

1. Glencore agreed to, intended to, and would, locate and surrender to Hin Leong the original missing shipping documents (the First Representation).
2. There was a genuine purchase or only a purchase of the goods by Hin Leong from Glencore (i.e., the Sale Contract) in accordance with Glencore’s invoice that was being financed by UniCredit’s LC (the Second Representation).

In relation to the First Representation, the court held that if any representation ought to be implied from a contractual promise, it is not that the promisor intends to do what was promised in all circumstances, but that the promisor intends to fulfil its obligation if circumstances require it. Furthermore, a representation as to intention cannot be implied from a contractual promise if it goes against the actual intention of the parties.

On the facts of the case, the court held that Glencore agreed to locate and surrender the original missing shipping documents to Hin Leong. Glencore did not, however, impliedly represent to Hin Leong (i.e., the promisee in the LOI) that it intended to surrender the BLs to Hin Leong in all circumstances. At most, it could be implied that Glencore intended to do so if the circumstances required it.

Glencore did not impliedly represent to UniCredit (i.e., a third party one step removed from the LOI) anything about its intentions regarding the Sale Contract either. A bank dealing in documents is typically not concerned with or bound by the underlying contract. It would be inconsistent for such a bank to be concerned with the seller’s intentions in relation to the underlying contract, on matters such as delivery of documents or goods to the buyer. In any event, Glencore’s intentions were irrelevant to UniCredit’s obligation to pay Glencore under the LC. UniCredit paid Glencore because the documents presented complied with the LC, not because UniCredit relied on Glencore’s intentions regarding the Sale Contract.

As for the Second Representation, the court found that the prescribed LC did not require Glencore to tell UniCredit anything about any sale of the goods by Hin Leong (whether a sale back to Glencore or a sale to a third party). By presenting the invoice relating to the Sale Contract and the LOI to UniCredit, Glencore represented that Hin Leong had purchased goods from it on the terms of the Sale Contract and that Glencore had agreed to surrender the BLs to Hin Leong. This was what the LC called for.

The court further found that Glencore did not represent that Hin Leong had not sold the goods or that it had not bought back the goods. Glencore was not obliged (under the LC or otherwise) to tell UniCredit anything about Hin Leong’s sale of the goods. This did not amount to a “half-truth”. Glencore had provided information and documents about the Sale Contract as required under the LC truthfully. Not mentioning the Buyback Contract did not make any aspect of what Glencore said about the Sale Contract false.

The court also found that Glencore did not act fraudulently and made the following express findings:

1. There is nothing inherently wrong with a sale and buyback transaction. In fact, UniCredit was aware that Glencore engaged in sale and buyback transactions. UniCredit’s payment to Glencore could not therefore be attributed to UniCredit believing that Glencore would surrender the BLs to Hin Leong in all circumstances or that the goods remained unsold.
2. The court rejected UniCredit’s assertion that Glencore knew or ought to have known that the goods and BLs under the Sale Contract were intended to have been pledged or given as security by Hin Leong to UniCredit.
3. On the facts, UniCredit was looking to receivables (i.e., sale proceeds) rather than to BLs as security.

Residual claims

The court also rejected UniCredit’s claim in conspiracy and claim under the Master Discounting Agreement between UniCredit and Glencore as these were largely based on the allegations of fraud.

In relation to the claim in unjust enrichment, the court found that there was nothing unjust in Glencore having been paid under the LC. Glencore was legally entitled to such payment as it had presented complying documents to UniCredit, and the payment was for a genuine sale of goods by Glencore to Hin Leong.

Lastly, the court found that Glencore did not breach the LOI, which was addressed to Hin Leong. Glencore was not obliged to give BLs to UniCredit under the LOI, and UniCredit was not entitled to enforce the LOI.

What does this decision mean for you?

This case highlights several points of significance for commodities market participants, including financiers:

1. The case underscores the legitimacy of circular commodities sales transactions (including simultaneous sale and buyback transactions). The financing or other motives of the parties to such transactions are not determinative of whether the transaction is a sham.
2. A transaction is not a sham simply because the parties do not expect to perform contractual obligations such as delivering the documents or goods. This can be distinguished from a transaction where the goods are non-existent or not available for trading, which might be evidence of a sham.
3. The case further emphasises that the “fraud exception” remains a narrow one. The underlying contract to an LC is irrelevant to the issuing bank’s obligation to pay under that LC as long as compliant documents are presented. The beneficiary’s intentions regarding the underlying contract are irrelevant.
4. Unless otherwise required by the LC, a beneficiary has no obligation to disclose anything about the buyer’s onward sale of goods. Any such non-disclosure does not amount to a “half-truth”.

1. UniCredit Bank AG v Glencore Singapore Pte Ltd [2022] SGHC 263
2. The Uniform Customs and Practice for Documentary Credits (2007 Revision).

In-depth 2022-362