Back-to-Back Transactions and Letters of Credit – Court Considers Effect of Letters of Indemnity and Endorsement of Bills of Lading

Introduction

In maritime trade, a letter of credit (“LC“) is a crucial payment method that assures sellers of payment while providing buyers with a secure way to fulfil payment obligations via an issuing bank. While LCs are ordinarily payable against presentation of the relevant shipping documents, including the original bill of lading (“BL“), there is a prevalent practice of using letters of indemnity (“LOIs“) to facilitate payment under LCs. This is particularly common in chain contracts involving back-to-back transactions of the same cargo through multiple parties, where the shipping documents will not be in the possession of every seller in the chain.

What then is the effect of a LOI in the context of such LCs? Does it contain representations of fact made to the issuing bank? For the purposes of a claim in deceit, how should the contents of the LOI (including a statement as to the existence of BLs endorsed to the issuing bank) be construed? Does the issuing bank of the LC acknowledge that it will no longer have control over delivery of the cargo, and does this have bearing on the timing of the endorsement of the BL? These were the questions faced by the Court of Appeal in Banque de Commerce et de Placements SA, DIFC Branch and another v China Aviation Oil (Singapore) Corp Ltd [2025] SGCA 33.

The Appellant in this case was the issuing bank of a LC under which payment had been made to the Respondent, which was one of the parties in a chain of back-to-back transactions. The disbursement was made upon the Respondent’s presentation of a LOI (rather than the relevant original shipping documents) in which the Respondent warranted the existence, authenticity and validity of the shipping documents, including the endorsed BLs. When the expected receivables did not materialise due to the cargo having in fact been sold to another party, the Appellant sought to claim against the Respondent in deceit, submitting that the representation in the LOI constituted a fraudulent misrepresentation.

The Court of Appeal found in favour of the Respondent, holding that the representation in the LOI was neither false nor made fraudulently. The Court was of the view that the representation should not be construed literally to warrant the actual existence of BLs already endorsed to the Appellant at the time of presentation of the LOI, but rather should be construed contextually to mean that the original BLs had been issued, but were not available in that they had yet to be endorsed to the bank, and that the Respondent would endorse them to the bank once received. This meant that the receipt of the endorsed BLs would no longer be time-sensitive.

This decision provides guidance on the interpretation of representations in LOIs within chain contracts, the assessment of fraud in the context of ambiguous representations, and the application of the law of deceit in trade finance.

The Respondent was successfully represented by Toh Kian Sing, SC, Nathanael Lin, Marcus Chiang, Tan Zhi Rui and Muhammad Salihin bin Mohd Zahrin of Rajah & Tann Singapore LLP.

Brief Facts

The dispute arose from a circular transaction initiated by Zenrock Commodities Trading Pte Ltd (“Zenrock“) for a parcel of gasoil (“Cargo“). The title to the Cargo was passed through a series of three parties, comprising Golden Base Energy Pte Ltd, Shandong Energy International (Singapore) Pte Ltd (“Shandong“), to the Respondent, China Aviation Oil (Singapore) Corp Ltd (“CAO“), and then back to Zenrock.

Zenrock approached the First Appellant, BCP Dubai, to finance its purchase under its contract with CAO, on the basis that the Cargo had already been on-sold to PetroChina International (East China) Co Ltd (“PetroChina“), and that the receivables due under the PetroChina sale would be used to directly reimburse BCP Dubai’s funding.

BCP Dubai was a branch of a Swiss bank of which the head office was the Second Appellant, BCP Geneva. Pursuant to Zenrock’s instructions, BCP Geneva issued a LC (“Geneva LC“) in favour of CAO. The Geneva LC prescribed that CAO was entitled to claim payment by presenting original copies of a set of shipping documents (“Shipping Documents“), including BLs endorsed to the order of BCP Dubai. Alternatively, if the Shipping Documents were not available for presentation, CAO could claim payment by delivering its signed invoice alongside a LOI.

After the Cargo was loaded, CAO received copies of a non-negotiable BL, as well as copies of documents verifying the Cargo. CAO then received a LOI from Shandong stating that Shandong would make all reasonable efforts to obtain and surrender the Shipping Documents to CAO.

CAO later issued its signed invoice and LOI (“CAO LOI“) to claim payment under the Geneva LC. In the CAO LOI, CAO was required to “represent and warrant the existence, authenticity and validity of the [Shipping Documents, including the BLs endorsed to the order of BCP Dubai]” (“Representation“). Accordingly, BCP Geneva paid the price of the Cargo, which was disbursed to CAO.

BCP Dubai later learned that the contract between Zenrock and PetroChina had been cancelled. As such, BCP Dubai did not receive its expected repayment in the form of the receivables from the PetroChina sale. Zenrock was then wound up, upon which it emerged that there were no endorsed BLs (i.e. BLs endorsed to the order of BCP Dubai) in existence. The Appellants thus commenced proceedings against CAO, claiming inter alia that the Representation constituted a fraudulent misrepresentation.

The High Court Judge dismissed the Appellants’ claim, finding that:

• • The Representation was not false, not fraudulently made, not made to the Appellants, not relied upon by the Appellants and did not cause the Appellants’ loss; and
  • BCP Dubai had no standing to sue CAO.

For further details on the Judge’s decision, please see our earlier Legal Update here.

The Appellants appealed against the Judge’s decision.

Holding of the Court of Appeal

The Court dismissed the Appellants’ appeal. It held that the Representation was neither false nor made fraudulently. As such, the tort of deceit was not made out. The Court also clarified the position regarding standing in cases involving bank branches.

General law

In the tort of deceit, a court must first assess whether the representation was false, and then whether it was made fraudulently.

• • In assessing falsity, the court will have regard to the sense in which the representation would be understood by a reasonable person in the position of the representee. 
  • In assessing fraud, the court will have reference to the representor’ssubjective understanding of the statement made. However, if an interpretation is destitute of all reasonable foundation, this would in and of itself suffice to show that it was not really entertained, and that the representation was a fraudulent one.

The Court further set out the principles applicable to a case where a representation made is ambiguous and capable of multiple interpretations.

• • The onus will be on the representee to demonstrate in which of the possible senses it understood the statement, and that in that particular sense, the representation was false.
  • In determining whether there is a finding of fraud, the court will refer to the meaning of the statement as subjectively understood by the representor, provided the representation and the facts are capable of supporting that meaning. Further, the onus will be on the representee to prove that the representor intended for the ambiguous statement to be understood in that false manner.
  • The representation in question will be interpreted contextually bearing in mind the surrounding circumstances. The Court is not confined to adopting a literal reading of the representation.

Falsity of the Representation

At the core of the dispute was the meaning of the Representation in the CAO LOI, which warranted the “existence, authenticity and validity” of the Shipping Documents, including BLs endorsed to the order of BCP Dubai. The Appellants argued for a literal interpretation, claiming CAO warranted the actual existence of such endorsed BLs at the time of presentation. CAO argued for a contextual interpretation, asserting the Representation only warranted the existence of the unendorsed BLs and an intention, at the time of presenting the CAO LOI, to duly endorse them to BCP Dubai once they were received from CAO’s seller Shandong.

Applying the contextual approach, the Court preferred CAO’s interpretation of the Representation, taking into account the commercial context of chain contracts and the purpose and effect of LOIs in such transactions and under LCs. It found that the CAO LOI did not warrant the immediate existence of endorsed BLs upon presentation, but rather that CAO would endorse the BLs to BCP Dubai once received.

The Court provided guidance on the context of LOIs against the backdrop of a series of back-to-back sale transactions where title to a parcel of cargo is passed sequentially and instantaneously through the sale chain. In such circumstances, if an issuing bank that is financing a sale in the chain agrees to accept a LOI in lieu of the shipping documents, the bank acknowledges that it no longer has control over the delivery of the cargo.

Therefore, by agreeing to accept delivery of the Cargo and make payment to CAO without having been provided with the endorsed BLs, the Appellants accepted that the receipt of the endorsed BLs would no longer be time sensitive for the purpose of making payment under the Geneva LC, as Zenrock would already have taken delivery of the Cargo without having been provided the original BLs endorsed to BCP Dubai. Thus, it would make no commercial sense for the Appellants to assert that BLs had to be endorsed to its order at the time of presentation.

Further, CAO’s interpretation of the Representation was consistent with how chain contracts are intended to be carried out, and the fact that BLs are negotiable by nature. In particular, the successive parties down the sale chain would endorse the BLs to the next party when BLs come into their possession.

Based on this interpretation, the Representation was not false. The Appellants failed to prove that CAO had no intention to endorse the BLs to the order of BCP Dubai once it received the BLs from Shandong. 

Fraudulent intent

The Court held that, even if it had accepted the Appellants’ interpretation of the Representation and found that it was false, it would not have found that the Representation was made fraudulently.

The Court rejected the Appellants’ submission that CAO’s understanding of the Representation was “completely destitute of all reasonable foundation”, instead finding on the evidence that CAO had an honest belief in the truth of the Representation, in the manner that it subjectively understood it. This was because:

• • CAO had entered into genuine sale and purchase contracts relating to the Cargo.
  • CAO had taken various operational steps to verify the truth of the Representation in the CAO LOI, including (i) ensuring its risk management measures were complied with; (ii) appointing independent cargo surveyors; and (iii) receiving regular updates on the Cargo, copies of the Shipping Documents, and a LOI from its seller Shandong.
  • CAO carried out its due diligence at every stage of the transaction, and there was no basis to claim that CAO was reckless as to the truth of the Representation.

The Court was thus of the view that CAO genuinely believed that there was shipment of the Cargo, and that the original BLs were in the course of being delivered to it. There was no dishonesty on CAO’s part, and the Representation was not fraudulently made.

Standing of bank to sue

The Court also clarified the issue of loss suffered by a bank and its standing to sue. Here, the Court held that BCP Geneva had standing to sue, as loss is suffered as soon as funds are paid out in reliance on a representation. Although BCP Dubai (a branch of BCP Geneva) had been debited by BCP Geneva for the sums disbursed to CAO, under Singapore law, branches are not separate legal entities from the head office. Any loss incurred by BCP Dubai was legally a loss incurred by BCP Geneva.

Concluding Words

The decision provides a helpful to guide to how the court will approach a claim in deceit, particularly on the principles on construing ambiguous representations capable of multiple interpretations, and assessing falsity and fraudulent intent.

On the practical side, the Court was cognisant of the commercial realities in back-to-back transactions in a chain of contracts. The decision demonstrates that transacting parties should be aware of the content of statements made in a LOI and ensure the veracity of its representations. Conversely, financing banks should be aware of the effect of accepting a LOI in lieu of relevant shipping documents when making payment under a LC.

For further queries, please feel free to contact our Team members set out on this page