The SHC proceedings

As we mentioned in our previous client alert, the Bank’s claims against Glencore before the SHC were based on allegations that: (a) the Sale Contract was a “sham or fictitious transaction”; and/or (b) Glencore had committed fraud or deceit against the Bank. The SHC rejected the Bank’s allegations. It held that the agreements were not sham or fictitious transactions. The transactions: (a) involved a physical cargo purchased by Glencore, ensuring that it obtained its interest in time to be able to transfer title to Hin Leong; and (b) were for the purpose of providing finance.

The Bank also alleged that Glencore made the following false representations which induced the Bank to make payment under the LC, namely that:

1. Glencore intended to, and would, locate and surrender to Hin Leong the original missing shipping documents (the Expanded First Representation).
2. There was a genuine purchase (or only a purchase) of goods by Hin Leong from Glencore (the Expanded Second Representation).

The SHC decided that Glencore did not make the Expanded First Representation. There was no representation that Glencore had intended to surrender the BLs to Hin Leong in all instances (as opposed to only “if the circumstances required it”). The autonomy principle relating to letters of credit meant that Glencore’s documentary presentation under the LC (and the LOI in particular) did not include a representation to the Bank in relation to Glencore’s intentions regarding the underlying Sale Contract.

The SHC also rejected the Bank’s claim based on the Expanded Second Representation. Such a representation did not exist. The SHC found that (a) Glencore was not obliged to inform the Bank about the Buyback Contract and (b) the Bank would not have viewed Glencore’s LOI and invoice as making representations about whether Hin Leong had sold the cargo back to Glencore.

The appeal

In its appeal, the Bank alleged that in presenting the LOI on 2 December 2019, Glencore had fraudulently represented to the Bank by stating that it intended to locate and surrender the BLs. The Bank’s allegation was that Glencore did so with the intention of inducing the Bank to make payment under the LC. On this basis, the Bank argued that it was entitled to recover the payment made under the LC. The Bank did not appeal against the following findings of fact made by the SHC, namely that:

1. The Sale Contract was not a sham. The mere fact that Glencore and Hin Leong had structured the transactions as a simultaneous sale and buyback did not make the Sale Contract a sham.
2. The Sale Contract and the Buyback Contract taken together were not sham or fictitious transactions.

The CoA distilled the issues arising in the appeal as follows:

1. As a preliminary question, did the fraud exception apply in this instance?
2. Was a representation made by Glencore to the Bank?
3. If Glencore had made a representation to the Bank, what was its substance and scope? And did the representation fall within the fraud exception?

The appeal

The CoA held that the fraud exception did not arise because there was no fraud on the documents. The Glencore LOI was a genuine payment LOI signed by Glencore’s authorised representatives. The sale transaction was not fraudulent. As stipulated under its LOI, Glencore would have surrendered the BLs to Hin Leong if Hin Leong had required it to do so.

The Bank failed to establish that Glencore was liable based on the tort of deceit

• Firstly, as a preliminary point, the CoA disagreed with the Bank’s assertion that it was one of the classes of people to whom the alleged representations contained in the Glencore LOI were addressed. The CoA took the view that the Glencore LOI (issued in the form prescribed by the LC) was addressed to Hin Leong and not the Bank. The CoA emphasised that the Bank could have, but did not, structure the payment LOI in terms that the BLs be delivered to the bank; instead, it was content to accept a payment LOI addressed to Hin Leong as stipulated in the LC. The Bank was therefore found to have accepted the risk that came with such a payment LOI. As a non-party to the LOI, the Bank was prevented from relying on promises by Glencore to Hin Leong and no representation would have been made by Glencore to the Bank.
• Secondly, the CoA agreed with the SHC’s finding that Glencore’s representation, properly construed, was that it intended to locate and deliver the BLs to Hin Leong only “if the circumstances require[d] it”. Even if the Bank’s argument was accepted, the CoA stated that the Expanded First Representation would have been true. Glencore had secured financing to complete the repurchase of the goods by way of an irrevocable credit issued by its bank, Banco Bilbao Vizcaya Argentaria (BBVA), under which payment could be made upon presentation of an LOI addressed to BBVA for the account of Glencore (the HL LOI). Under the HL LOI, BBVA could require Hin Leong to demand the BLs from Glencore. It could not, therefore, be said that Glencore knew that Hin Leong would never ask for the BLs.
• Thirdly, there was no fraud on the facts. In any case, the CoA took the view that the sale and buyback arrangement was a legitimate transaction. The commercial arrangement between Glencore and Hin Leong had a genuine commercial purpose to optimise Hin Leong’s working capital. The mere fact that Glencore had used well-established avenues of commercial trading and financing to its advantage was not a fraudulent scheme. Furthermore, the SHC found that Glencore had taken steps to ensure that it had title to pass to Hin Leong at the time of the transaction. Glencore meanwhile was not privy or party to Hin Leong’s fraud against the Bank.
• Fourthly, the loss suffered by the Bank was not attributable to Glencore. When issuing the LC to Glencore, the Bank laboured under the misapprehension that the cargo was unsold due entirely to Hin Leong’s concealment of the fact that it had sold the cargo back to Glencore. However, once issued, LCs are autonomous from the underlying sale contracts and are irrevocable. So, Glencore’s representations could not have caused the Bank’s loss.

The CoA rejected the Bank’s case that it was deceived by Glencore.

Implied representations from promises to perform

The CoA also held that whether or not a promisor also makes an implied representation of intention when making a promise is a matter of fact that turns on “what had been said and the context in which it had been said”.

Outcome

The CoA upheld the SHC’s decision and dismissed the Bank’s appeal, ordering it to pay Glencore costs in the sum of SGD 100,000.

What does this decision mean for you?

The CoA’s decision follows closely after the CoA decided Crédit Agricole Corporate & Investment Bank, Singapore Branch v. PPT Energy Trading Co Ltd and another appeal [2023] SGCA(I) 7 (Credit Agricole) (covered in our earlier client alert), which involved similar issues, albeit in the context of circular trading and the use of LCs.

Unsurprisingly, the CoA once again upheld the principle that (a) LCs are autonomous and (b) fraud by an applicant does not allow a bank to refuse to make payment to a beneficiary upon a valid presentation by the seller if it is not a party to fraud.

In the Credit Agricole case the beneficiary was liable to the bank for damages under the terms of the LOI addressed to the bank. The terms of the particular LOI were the basis for the beneficiary’s liability towards the bank in that case.

Meanwhile, structuring sale and buyback transactions for the purpose of financing requires attention where third parties and LCs are involved. The risk to a beneficiary under such LCs is that the issuing bank may well not be aware of the purpose of the transaction, notwithstanding its legal nature as a true sale, nor of the existence of the contingent transaction, which may give rise to potential claims by the issuing bank.

In transactions of this kind, extra consideration needs to be given to (among other things) the terms of LOIs presented in lieu of original “title” documents. It may not be possible for the beneficiary to ascertain what promises were made or representations given to an issuing bank by the applicant. There are several ways in which this can be addressed. In any event, a standard form LOI may not always be appropriate given the risk of indemnities in the LOIs being breached. Additionally, it is worth considering whether LOIs should be worded in a way that ensures that issuing banks are on notice of the buyback of the goods in question, not least, to mitigate the risk of litigation. 

In-depth 2023-285