Documentary Credit World

Following issuance of the Crédit Agricole v. PPT Energy Trading Co. decision in which the Singapore Court of Appeal turned away an issuing bank’s LC fraud claim but that the beneficiary had breached its warranty under a letter of indemnity (case summary at p. 15), DCW sought to gauge local reaction and lessons learned from the case. DCW sources reported the following comments from LC specialists in Singapore:

• An LC asking for a Letter of Indemnity should be treated as a “so-called” green clause LC because there is “so-called” shipment effected based on the indemnity wording;


• I would not be agreeable to an LOI containing a condition stating: “The validity of this [LOI] shall expire upon our presentation to you of the aforesaid shipping documents or one year after bill of lading date” because of the requirement to perform sanctions check;


• As most of the transaction will be Free On Board (FOB), therefore the applicant is the party who will be chartering the vessel and it is the issuing bank’s due diligence duty to find out from their customer before deciding whether the LC to be issued should ask for an LOI;


• Since the LOI is the document issued by Beneficiary, if there is no shipment, the beneficiary should be held liable since it is their certified LOI on which the issuing bank is relying;


• It is the consideration of the Issuing Bank in issuing an LC asking for a full set of BL with the intention of having security of the goods through a Trust Receipt (TR) but with LOI. There are possibilities that redemption of the LOI against the presentation of a full set of BL, especially if it is endorsed to the order of the issuing bank, endangers having the BL already spent at the time when the title is passed on to the issuing bank;


• My hope is that banks in Singapore will strictly respect the spirit of the Code of Best Practices for Commodity Financing (November 2020), especially in relation to redemption of the LOI within a reasonable period of time;


• Presentation of the LOI is acceptable, provided a copy of the BL issued must also be presented;


• Since the Beneficiary is paid under the LC against an LOI instead of the BL, the issuing bank must create a credit risk exposure on the beneficiary, in the event of beneficiary’s failure to redeem the LOI;


• I wonder how many of us bankers know and understand the legal implications of LOI wordings;


• I have seen many LOIs that have slight differences in wording;


• I would not agree to an LC stating that the LOI must be counter-signed by the beneficiary’s bank.

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