UniCredit Bank AG v Glencore Singapore Pte Ltd

Banks Beware! The Autonomy of Letters of Credit and Ambit of the Fraud Exception
UniCredit Bank AG v Glencore Singapore Pte Ltd
[2023] SGCA 41, [2023] 2 SLR 587

I. Executive Summary

A letter of credit (“LC”) is an integral part of international trading and finance. It is an assurance made by the bank that the seller will receive timely payments, on the condition that certain documents are presented pursuant to the terms of the letter. According to the “principle of autonomy of letters of credit”, the banks have an obligation to make payment to the beneficiary under the LC unless there was fraud in connection with the documents presented in connection with the transaction (the “fraud exception”).

The basis of the fraud exception is essentially to prevent dishonest litigants from using the court process to commit fraud. It is typically invoked where the documents on their face seem to be correct, but the seller may have shipped goods that do not conform with the relevant documents or had not shipped any goods at all, or the bills of lading were forged or falsified.

In UniCredit Bank AG v Glencore Singapore Pte Ltd [2023] 2 SLR 587, the buyer in this transaction Hin Leong Trading (Pte) Ltd (“Hin Leong”) had applied to UniCredit Bank AG (“UniCredit”) to issue a LC in favour of the seller (“Glencore”), to finance Hin Leong’s purchase of high-sulphur fuel oil (“the goods”). UniCredit subsequently issued an LC with Glencore being the beneficiary.

Unbeknownst to UniCredit, there was also an underlying sale and buyback arrangement between Hin Leong and Glencore (the “Sale and Buyback Arrangement”), whereby Glencore would eventually buy the goods back from Hin Leong. At the time that Hin Leong applied to UniCredit for the LC, Hin Leong stated that the LC was for unsold cargo, even though by that time Glencore had already agreed to buy back the goods under the Sale and Buyback Arrangement. UniCredit subsequently made payment under the LC and related documents when Glencore presented the required documents.

The question the Court of Appeal (“CA”) eventually addressed was whether Glencore’s actions, including entering into the Sale and Buyback Arrangement, would allow UniCredit to invoke the fraud exception, allowing UniCredit to recover payments made under the LC and related documents. The CA decided they were not, under the circumstances of the case.

II. Material Facts

In November 2019, UniCredit granted Hin Leong banking facilities for the sum of US$85m, to obtain letters of credit to finance the purchase of oil, petroleum products and other commodities. Hin Leong then applied to UniCredit for an irrevocable LC in the sum of US$37,209,550.35, to finance its purchase of the goods from Glencore.

At the same time, Glencore and Hin Leong also created the Sale and Buyback Arrangement. Hin Leong would purchase the goods shipped onboard the oil tanker “New Vision” (“Sale Contract”) and Glencore would subsequently buy the goods back from Hin Leong (“Buyback Contract”). The parties also effectively agreed that title to the goods would pass from Glencore to Hin Leong at 0001 hours on 2 December 2019, and then immediately back to Glencore.

Subsequently, UniCredit asked for documents, including the Sale Contract between Hin Leong and Glencore. Hin Leong responded that its application for the LC was for unsold cargo (although Hin Leong had already contracted to sell the goods back to Glencore). Hin Leong provided UniCredit with a copy of the Sale Contract, but failed to disclose the Buyback Contract. UniCredit later issued the LC in favour of Glencore as beneficiary (the “November LC”).

The credit under the November LC would be available once Glencore presented various documents, including a signed commercial invoice and a full set of three original bill of ladings (“BLs”). The trigger for payment under the November LC included “a full set 3/3 original BLs issued or endorsed to the order of UniCredit.” However, if the necessary documents were unavailable at the time of presentation, payment would be effected against the beneficiary’s commercial invoice and duly authorised letter of indemnity issued in the agreed format. Glencore subsequently presented the commercial invoice and a letter of indemnity addressed to Hin Leong (“Glencore LOI”), but not the BLs.

UniCredit informed Hin Leong that the documents under the November LC were presented and that UniCredit had determined the documents to be a complying presentation. UniCredit then issued Glencore the relevant sums. At this point, UniCredit still did not know that Glencore had already bought back the goods. Even after the LC matured, Hin Leong continued to represent to UniCredit that the goods had remained unsold (which was untrue).

UniCredit later issued a notice of demand to Hin Leong, demanding repayment of the outstanding sum arising out of UniCredit’s financing of Hin Leong’s purchase of goods. Unfortunately, Hin Leong then went into insolvency and liquidation. This left UniCredit without repayment from Hin Leong and without possession of the goods or the original BLs as security for Hin Leong’s indebtedness to UniCredit. UniCredit thus turned to Glencore for redress, suing it in the High Court (“ HC”) for, among other things, fraud and/or deceit.

Among other things, UniCredit alleged that Glencore represented that it had agreed to locate and surrender the original missing shipping documents (i.e. the BLs) to Hin Leong, as stated in the Glencore LOI (the “First Representation”). Further, the First Representation meant that Glencore had also intended to and would locate and surrender the original BLs to Hin Leong (the “expanded First Representation”). Second, UniCredit alleged that Glencore represented that there was a genuine purchase of the goods by Hin Leong from Glencore in accordance with the terms of Glencore’s invoice that was being financed by UniCredit’s November LC (the “Second Representation”). Further, the Second Representation meant that not only was there a genuine purchase of the goods, but there was a genuine purchase of the goods by Hin Leong from Glencore (the “expanded Second Representation”).

The HC dismissed UniCredit’s claims. Among other things, it held that the Sale and Buyback Arrangement was not a sham, and the Sale Contract and the Buyback Contract were not sham transactions. The sale was of existing goods identified to be on board the New Vision, and the evidence showed that Glencore had title to the goods and, at the material time, Glencore passed title to Hin Leong. The mere fact that Glencore and Hin Leong had entered into a simultaneous buy-back agreement was not determinative of whether the Sale Contract was a sham.

The HC also found that Glencore had not acted fraudulently. The HC held that neither the First Representation nor the Second Representation was false. As to the First Representation, it was true that Glencore had agreed to locate and surrender the missing original shipping documents to Hin Leong. However, Glencore had not made the expanded First Representation to UniCredit. The most that could be implied was that Glencore had represented to Hin Leong that it intended to fulfil its contractual obligation to surrender the BLs to Hin Leong if the circumstances required it (which they did not). Glencore made no implied representation to UniCredit about its intentions regarding the Sale Contract with Hin Leong.

As to the Second Representation, since the Sale Contract was not a sham transaction, the Second Representation could not possibly be false. There was also never any expanded Second Representation. Glencore did not represent that Hin Leong had not sold the goods, nor did Glencore represent that it had not bought back the goods. Although Hin Leong had misrepresented the position to UniCredit, it did not follow that Glencore did so as well.

UniCredit filed an appeal to the CA.

III. Issues on Appeal

UniCredit did not appeal against the HC’s findings that the Sale and Buyback Arrangement was not a sham, or that the Sale Contract and the Buyback Contract were not sham transactions. However, UniCredit sought to invoke the fraud exception, by claiming under the tort of deceit. Specifically, UniCredit pleaded that Glencore, in tendering the Glencore LOI to UniCredit, had made the above representations to UniCredit as well as to Hin Leong, and that these representations were false representations.

On appeal, the CA addressed the following:

1. Does the fraud exception apply here?
2. Was there a representation by Glencore to UniCredit?
3. If there was a representation, what was the representation of fact and the scope of the representation?
4. Did Glencore’s representation in the Glencore LOI engage the fraud exception to the principle of autonomy of a LC?

A.    The fraud exception did not apply here

The fraud exception applies where the beneficiary of the credit, for the purpose of drawing on the credit, fraudulently presents to the issuing or confirming bank documents that contain expressly or by implication, material representations of fact that to his knowledge are untrue. Thus, the fraud exception usually relates to documents that may be forged or untrue in relation to the consignment of goods to which the documents refer.

The CA noted that to establish the fraud exception here, it had to be proven that at the time of presentation of the documents, Glencore had no intention to locate and surrender the BLs at all (whether to Hin Leong or UniCredit) – contrary to what was represented to UniCredit in the Glencore LOI – while at the same time intending UniCredit to act on the (false) representation knowing that the representation was actually false or without genuine belief that it was true or in reckless disregard of whether it was true or false. There was no such fraud here.

The Glencore LOI was a document that was required under the LC, and it was a genuine document signed by Glencore’s authorised representatives. UniCredit’s alleged representation (i.e. the expanded First Representation) was not one that could be found on the face of the document itself. Pursuant to the Glencore LOI, Glencore would have surrendered the BL to Hin Leong if the latter had required it to do so. The tender of the Glencore LOI and commercial invoice did not lead to any representation to UniCredit that Glencore had agreed to locate and surrender the BLs to Hin Leong.

B.    Glencore made no representations to UniCredit

The CA held that UniCredit was not allowed to rely on the promises that Glencore made to Hin Leong (under the First Representation), because the statements in the Glencore LOI were made to Hin Leong. Importantly, the further promise to indemnify for loss and damage was also made to Hin Leong. Further, as stipulated in the November LC, the Glencore LOI was accepted by UniCredit to be an alternative trigger for payment. UniCredit could have structured the Glencore LOI based on the requirement that the BLs were to be delivered to it, but it had failed to do so. Therefore, UniCredit had accepted the risk that came with such a payment LOI.

The CA noted that UniCredit’s argument was effectively an attempt by UniCredit to muscle in, under the guise of the tort of deceit, on a contractual obligation solely between Glencore and Hin Leong. Things might have been different if the Glencore LOI was directly addressed to UniCredit instead of Hin Leong.

C.    If there was a representation, what was the representation of fact and the scope of the representation?

For completeness, the CA also discussed the scope of the representation in the Glencore LOI. The text of the Glencore LOI was essential in determining the sort of representation that may be implied and for whom it was intended. UniCredit argued that a banker in UniCredit’s shoes would have understood that Glencore was representing its intention to locate and surrender the BLs to Hin Leong through the banking channels: i.e. Glencore ought to have been aware that a reasonable banker in the position of UniCredit would expect to receive the original BLs from Glencore as its security for financing provided to Hin Leong. The CA disagreed. Based on the entirety of Glencore’s LOI, what the Glencore LOI contemplated was that in the situation that no BLs were eventually delivered, then Glencore would indemnify Hin Leong against any losses. It could not be said that Glencore had impliedly represented to either UniCredit or Hin Leong that it intended to find and deliver the BLs to Hin Leong.

The CA further agreed with the HC’s interpretation of the representation in the Glencore LOI. The HC had read the representation as Glencore’s intention to locate and surrender the BLs “if circumstances require it”. Though that specific phrase was not in the LOI, the HC was simply explaining the outcome of the eventuality (if it materialised) where Hin Leong asked for the BL and Glencore could not hand them over to them. The indemnity in the Glencore LOI would then be engaged. There was therefore no fraud, or fraudulent intention, on Glencore’s part.

The CA further stressed that a key ingredient in establishing a fraudulent intention on Glencore’s part lay in challenging the legitimacy of the simultaneous Sale and Buyback Arrangement. UniCredit, however, had not challenged the HC’s finding that this was not a sham transaction. In any case, the CA found that the arrangement was a legitimate transaction, with a legitimate commercial purpose: to allow Glencore to optimise its working capital, through a financing arrangement with its bank Banco Bilbao Vizcaya Argentaria (“BBVA”).

D.    Did Glencore's representation in the Glencore LOI engage the fraud exception to the principle of autonomy of a LC?

The CA also held that even if the expanded First Representation had been made, it would have been true. UniCredit’s main contention was that Glencore knew that Hin Leong was not going to ask for the BLs, because of the Sale and Buyback Arrangement. However, the CA considered this argument flawed, as it did not consider how Glencore had secured financing to complete the re-purchase of the goods.

Glencore had secured financing to complete the re-purchase of the goods via an irrevocable credit issued by BBVA (the “BBVA LC”), under which Hin Leong was the beneficiary. The letter of indemnity set out in the BBVA LC was that it had to be addressed to BBVA for the account of Glencore (the “HL LOI”). This was significant: this meant that BBVA was a party to the LOI, and the obligations Hin Leong assumed under it. BBVA could therefore have written to Hin Leong to demand the BLs, which would have resulted in Hin Leong asking Glencore for the BLs. Therefore, it could not be said that Glencore knew that Hin Leong would never ask for the BLs.

Finally, the CA held that the loss suffered by UniCredit could not be attributed to Glencore. When UniCredit had issued the November LC, it was under the false impression that the goods were unsold, because Hin Leong had deliberately lied to UniCredit and concealed the fact that it had already contracted to sell the goods to Glencore. However, Glencore was not party to Hin Leong’s fraud against UniCredit. Further, once UniCredit had issued the November LC, it owed Glencore the contractual obligation to not revoke the November LC. As such, Glencore’s representations could not have caused UniCredit’s losses.

The CA therefore dismissed UniCredit’s appeal.

IV. Lessons Learnt

It is unfortunate that UniCredit was left with neither the goods nor the BLs as a form of security. Furthermore, as the Glencore LOI was directly addressed to Hin Leong instead of UniCredit, UniCredit could not sue for breach of warranty as they were not parties to the Glencore LOI.

In future, banks ought to be careful in structuring the terms within an LC and LOI to mitigate the risks of being left without any recourse. In this case, Glencore was not required to disclose the Sale and Buyback Arrangement. Perhaps such a situation could have been avoided if the LC or LOI was worded in such a way that it included a notice requirement on any buyback of the goods.

Written by: Kenneth He Zhi Jing, Third-Year LLB student, Singapore Management University Yong Pung How School of Law.
Edited by: Ong Ee Ing, Senior Lecturer, Singapore Management University Yong Pung How School of Law.