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.
On 22 June 2020, Hin Leong’s interim judicial managers issued a report which documented, among other things, details of 27 back-to-back transactions for cargo that did not exist, including the three transactions for which the LCs were issued.
The Bank sued the Beneficiary to rescind the three LCs and recover the sums paid, relying on four causes of action:
(a) negligence, i.e., negligent misrepresentation/misstatement;
(b) fraud, i.e., deceit and/or fraudulent misrepresentation;
(c) conspiracy (with Hin Leong’s directors); and
(d) unjust enrichment.
The Beneficiary applied to strike out the Bank’s claims in their entirety. At first instance, the Registrar struck out parts of the Bank’s claims. Both parties appealed. On appeal, the Court decided that the Bank should be allowed to proceed with all aspects of its claims, as it would not be possible to conclude that the Bank’s claims were obviously unsustainable.
Can it be reasonably argued that the Bank should be repaid the proceeds of the LCs because of the Beneficiary’s negligence?
The Court answered this question in the affirmative. In the Court’s view, the issue of whether the Beneficiary owes the Bank any duty of care, particularly in relation to documents prepared by the Beneficiary, should not be summarily determined against the Bank on a striking out application. In the event, the Court came to the view that the Bank’s claim in negligence against the Beneficiary did have some prospect of success.
Even though it is settled law that a beneficiary’s negligence is not generally an exception to the autonomy principle, which applies to letters of credit, the Court considered it to be arguable for a beneficiary to owe a duty of care to a bank in the context of a claim by the bank against the beneficiary. In other words, even though a bank cannot refuse to honour a negligent documentary presentation, it may argue that it has a claim against the beneficiary if it can show negligence. Therefore, a bank may well be obliged to ‘pay now’ notwithstanding the beneficiary’s negligence, but retain the ability to later sue in respect of such negligence.
In reaching this view, the Court took into account, among other points, the following:
(a) it is arguable that a beneficiary owes a duty of care to a bank in the context of a claim by the bank against the beneficiary, even though a beneficiary’s negligence is not an exception to the autonomy principle, which applies to letters of credit. In other words, even though a bank cannot refuse to honour a negligent documentary presentation, it may argue that it has a claim against the beneficiary if it can show negligence;
(b) it is recognised that a beneficiary is under a duty of care in the preparation of documents that it has itself issued (in the present case, the Beneficiary had prepared commercial invoices and letters of indemnity) to obtain payment from the bank; and
(c) it is arguable, on the application of the principles under Singapore law governing the imposition of a duty of care, that the Beneficiary did owe the Bank a duty of care in relation to the Beneficiary’s commercial invoices and letters of indemnity which were presented to the Bank.
Although the position is nuanced, the thrust of this aspect of the decision appears to be that Singapore law might be prepared to recognise a duty of care owed by a beneficiary to a bank which is considerably broader than the narrow duty of care owed by a beneficiary to a bank under English law.
Does the Bank have a reasonable cause of action in fraud in the present case?
The Court held that the Bank has a reasonable claim against the Beneficiary based on fraud. Accordingly the claim based on fraud was not struck out.
The Bank’s argument here rests on two limbs.
First, the Bank claims that it was led to believe that the LCs related to genuine transactions for the sale of goods by the Beneficiary to Hin Leong, when that was allegedly not the case. The Bank was not aware that the underlying sale was a sale and buy back arrangement purely to provide finance to Hin Leong.
In this regard, the Court decided that it was arguable that the sale and buy back transactions were to be characterised as loans from the Beneficiary to Hin Leong. Such a fact, if proven at trial, might be relied upon by the Bank to show that the Beneficiary had the requisite fraudulent intent.
Second, the Bank contended that the Beneficiary had represented that the cargo that was the subject of the sale and buy back arrangements had existed even though that was not the case, that the Beneficiary knew or ought to have known that the cargo in question did not exist, and therefore that the Beneficiary had made the representation under the LCs falsely, recklessly or without an honest belief in the truth of what it was saying.
On this point, the Court took the view that the Bank had an arguable case that the Beneficiary acted fraudulently, at least in the sense of it being reckless in not caring whether or not the goods existed and/or lacking an honest belief in the existence of the goods.
In view of the points above, the Court concluded that the Bank’s claim in fraud was not one that was obviously unsustainable, and therefore ought not to be struck out.
The Bank’s claim in conspiracy
The Bank alleged, in the further alternative, that the Beneficiary, together with Hin Leong, Ocean Tankers, and their directors, acted wrongfully and/or dishonestly, and with intent to injure the Bank by unlawful means, in conspiring to effect the allegedly fictitious sale and buy back arrangement and/or to procure that the Bank issue the LCs and/or make payment to the Beneficiary thereunder.
The Beneficiary’s complaint in relation to the conspiracy claim was one of insufficient pleadings. In particular, the Beneficiary sought to argue that the Bank had failed to fully particularise the facts and allegations in support of the conspiracy claim, and that the conspiracy claim ought therefore to be struck out.
The Court however disagreed and declined to strike out the Bank’s conspiracy claim.
The Bank’s unjust enrichment claim
The final cause of action pleaded by the Bank against the Beneficiary was that the Beneficiary had been unjustly enriched at the expense of the Bank. There are two aspects to this claim.
First, the Bank alleged that the Beneficiary had been unjustly enriched at the expense of the Bank, insofar as the Beneficiary received payment under the LCs as a result of the fraudulent misrepresentations made by the Beneficiary to the Bank. In essence, the Bank relied on the fraud exception to the autonomy principle – that a bank’s obligation to pay the beneficiary is not engaged where there is fraud or knowledge of fraud on the part of the beneficiary. At first instance, the Registrar declined to strike out this aspect of the Bank’s claim, and on appeal the Court agreed with the Registrar’s decision.
The second aspect of the Bank’s unjust enrichment claim rests on the argument that it had made payment under the LCs to the Beneficiary under a mistake of fact – the mistake being the Bank’s belief that the cargo existed when, in fact, it did not. The Registrar struck out this aspect of the Bank’s claim, apparently on the basis that the law did not permit a bank to recover payment made under a letter of credit in the absence of fraud on the part of the beneficiary. On appeal, however, the Court reached a different view, and considered that it is arguable that an unjust enrichment claim by a bank against the beneficiary of a letter of credit might not be limited to cases where there is fraud, but that it could possibly also arise where payment by the bank was made under a mistake of fact. The Court therefore reversed the Registrar’s decision and reinstated this aspect of the Bank’s unjust enrichment claim.
Under Singapore law, there is no further right of appeal against the decision of the Court to reinstate all aspects of the Bank’s claims against the Beneficiary. Accordingly, the Bank is entitled to pursue its claims in their entirety against the Beneficiary to trial, where it remains to be seen whether the Bank will ultimately succeed in any or all aspects of its claims against the Beneficiary.
This case gives rise to important issues whose determination may have far reaching consequences for banks and beneficiaries under Singapore law-governed letters of credit. Depending on how far the Singapore courts go in deciding these issues, the decision could potentially redefine the relationship between banks and beneficiaries by imposing a duty of care on beneficiaries in the documents they prepare and/or tender for the purpose of obtaining payment under letters of credit. The burden on beneficiaries and traders could be far reaching if the Singapore courts hold that such a duty of care exists.
Author: Adrian Aw, Collin Seah (Resource Law LLC)