The Singapore High Court (the Court) recently delivered a judgment on an application to strike out in the case of Bank of China v. BP Singapore Pte Ltd.1
This is an interesting decision which highlights, for determination at trial, unusual issues in the context of structured trade finance involving the sale and buy back of goods and letters of credit. It is also one of the first judgments in the Singapore courts to decide issues relating to letters of credit arising out of the collapse of Hin Leong Trading (Pte) Ltd (Hin Leong) and Ocean Tankers (Pte) Ltd (Ocean Tankers), albeit here the decision is an interim decision on an application to strike out.
The test for strike out
Under Singapore law, an application to strike out a claim is only granted in plain and obvious cases. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed.
In this case, the Court declined to strike out any of the claims brought by Bank of China (the Bank) against the beneficiary under letters of credit, BP Singapore Pte Ltd (the Beneficiary). Contrary to judicial thinking under English law, the Court held that a beneficiary under a letter of credit may arguably owe a duty of care in negligence to a bank in the context of a claim by the bank against the beneficiary. Given the interim nature of the application, the issues which arise and the arguments all remain to be determined. For now, they have been deemed sufficiently arguable for the Court to require a full trial and to refuse to strike out any of the Bank’s claims.
The Bank financed the business activities of Hin Leong. Pursuant to those financing facilities, the Bank issued three letters of credit amounting to about US$125 million to the Beneficiary (the LCs). The LCs were issued in respect of back-to-back sale and buy back contracts between Hin Leong and the Beneficiary whereby Hin Leong sold gas oil to the Beneficiary which was later sold back to Hin Leong at a higher price. The Bank claimed to be unaware of these back-to-back arrangements. The Beneficiary, on the other hand, describes the transactions as a structured finance arrangement designed to provide liquidity to Hin Leong in return for the benefit of a ‘spread’ to the Beneficiary (i.e., Hin Leong’s seller).
The Beneficiary presented compliant documents to the Bank and received payment from the Bank under the LCs.
Hin Leong was placed under interim judicial management on 27 April 2020. It was then placed under judicial management on 7 August 2020, and subsequently wound up on 8 March 2021. Hin Leong did not reimburse the Bank for the sums which the Bank had paid to the Beneficiary under the LCs.