The Singapore Court of Appeals ruled that a Chinese oil trader did not need to reimburse its client’s lender, a Swiss bank, which claimed the oil trader had made fraudulent representations in documents related to a letter of credit.
The judgment clarifies the high bar to be cleared for fraud in trade finance in a case reminiscent of Trafigura’s win last month, when the London High Court similarly ruled in favour of the party accused of fraud.
Banque de Commerce et de Placements SA (BCP), a Swiss finance provider, claimed that its client’s supplier, China Aviation Oil (Singapore, had made a fraudulent misrepresentation in a letter of indemnity, which BCP had allowed China Aviation Oil to use to receive payment in lieu of bills of lading if these were unavailable.
BCP’s client, Singaporean oil trader ZenRock, later filed for insolvency, and BCP found that the bills of lading – which were intended to be temporarily replaced by the letter of indemnity – had in fact never been endorsed to the order. This led BCP to sue China Aviation Oil for what it argued was fraudulent representation, or tort of deceit, and to recover the £14 million that had been disbursed under the letter of credit.
The court sided with China Aviation Oil, finding that the representation that had been made in the letter of indemnity was not false, as BCP claimed. Because the letter of indemnity is inherently used when shipping documents are unavailable, the representation had to be viewed and interpreted in this context.
Any reasonable institution in BCP’s position would have known that “the contents of these documents were not directed at nor promised to BCP,” said the judgment, making the claims not false in the relevant sense (“when understood from the perspective of the representee,” or BCP).
Even if the statement had been false, however, this would not be enough to prove fraud or tort of deceit, said the judgment. The test for fraud must look at “the representor’s subjective understanding of a representation” rather than a hypothetical objectively correct interpretation of a statement. Because China Aviation Oil had not made the statement dishonestly and genuinely expected the correct documents to eventually be supplied, the fraud claim would have failed anyway.
The judgment again shows the high bar set for fraud cases by courts in countries with a common law legal system. In June, the London High Court similarly ruled in Rasmala Trade Finance Fund v Trafigura that Trafigura could keep £16 million the Dubai-based fund had given it, as the commodities trader had acted in good faith and been unaware of any forgeries.
The cases show the complexities of cases involving alleged fraud in trade finance, which can take several years – the initial payment involved in the case was made over five years ago – and span multiple jurisdictions. The Court of Appeals’ decision sheds light on courts’ handling of trade finance documents and the statements they contained, which do not stand on their own but must be viewed in their commercial context.
This case, as many involving alleged trade finance fraud, further highlights the need for the digitalisation of trade documents: current paper-based forms are liable to delays, loss, and forgery, making dishonesty easier than in many industries. Even though electronic bills of lading and other digitalised trade documentation have been around for years, uptake is still estimated at around 1% – often impeded by legislation that doesn’t recognise digital trade documents or complicates their adoption.
