The Singapore High Court has affirmed a number of key principles relating to (i) circular commodity sales transactions (including simultaneous sale and buyback transactions), (ii) representations made to issuing banks in letters of indemnity provided in lieu of original documents and (iii) the disclosure to be made when presenting documents for payment under letters of credit.

This decision may be of interest or guidance to participants of the commodities market and financiers dealing with such related issues, as well as courts and tribunals tasked with determining such issues.

What happened between the parties to the case?

On 27 November 2019, Hin Leong Trading (Pte) Ltd (Hin Leong) applied to UniCredit Bank AG (UniCredit) for an irrevocable letter of credit (LC). The LC was for a sum of just over US$37 million to finance the purchase of 150,000 MT of High-Sulphur Fuel Oil (the goods).

That same day, Hin Leong and Glencore Singapore Pte Ltd (Glencore) entered into a series of contracts. Pursuant to these contracts, title to the goods would pass from Glencore to Hin Leong (under the Sale Contract), and immediately back to Glencore (under the Buyback Contract).

On 28 November 2019, Hin Leong submitted a revised LC application to UniCredit, providing a copy of the Sale Contract and stating that the LC application was for “unsold cargo”. This was inaccurate since Hin Leong had by then already contracted to sell the goods back to Glencore.

On 29 November 2019, UniCredit issued the LC subject to UCP 600. The LC stated that the credit thereunder would be available against the presentation of various stipulated documents, including a signed commercial invoice and the original bills of lading (BLs). In the absence of such documents, payment would be effected against the beneficiary’s commercial invoice and signed letter of indemnity (LOI) in the form prescribed in the LC.

On 2 December 2019, Glencore presented the following documents to UniCredit for payment under the LC: (i) Glencore’s commercial invoice for the Sale Contract, addressed to Hin Leong, and (ii) Glencore’s LOI addressed to Hin Leong, in the format prescribed in the LC. The LOI mentioned the Sale Contract but not the Buyback Contract.

UniCredit paid Glencore pursuant to the LC on 3 December 2019. It was not aware of the Buyback Contract.

Hin Leong was placed under interim judicial management on 27 April 2020 and entered liquidation on 8 March 2021. UniCredit therefore found itself without recourse for repayment from Hin Leong, the goods, the BLs or security over the goods or the BLs.

In the circumstances, UniCredit commenced Singapore court proceedings against Glencore to seek, amongst other things, repayment of the amounts paid to Glencore under the LC.

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”.