Article

Note: OMV Petrom SA/Rafirom (Buyer) contracted with Glencore International AG (Seller) for the purchase and sale of 14 shipments of Iranian Heavy crude and 18 shipments of Gulf of Suez Mix (GOSM) from 1993 to 1996. Petrolexportimport SA (Buyer’s Agent) assisted Buyer in obtaining commercial LCs that were issued by Banco Romana de Comert Exterior SA (Issuer), a Romanian Bank in favor of Seller to pay for the crude oil.

The LCs required presentation of a commercial invoice, bill of lading, certificate of insurance, certificates of quality and quantity, certification of conformity, and other documents including time sheets, master’s receipt for samples, and ullage report. The LCs provided for payment 90 days from sight.

When drawing on the LC, “[Seller] granted 90 days credit from the bill of lading date, but in the case of nearly all the claim cargoes, at the time when notification was being given to the bank issuing the relevant letter of credit of an intention to draw down on the letter of credit in due course, the original bills of lading and other shipping documents had not yet arrived at the bank. In such cases [Seller] would provide to the bank in telex form its commercial invoice which represented in each case that the cargo was Iranian Heavy or GOSM and a letter of indemnity providing that in consideration of the bank and [Buyer’s Agent] releasing payment, [Seller] warranted that it had title in the cargo which again it represented to be Iranian Heavy or GOSM and that it would use its utmost to produce the original documents as soon as possible. The letter of indemnity provided that it would become null and void upon presentation of the original documents to the bank. On the basis of those representations, in each case the bank paid under the letter of credit.”

In connection with this process, Seller created false documents when shipping crude to Buyer or in some cases, stopped the shipment mid transport at the Bosphorus to replace correct documents for false ones. The Seller’s purpose in falsifying the documents was to deceive Buyer’s Agent, Buyer, and Issuer regarding the quality of the oil and allow Seller to be paid on the LCs. The method of the scheme is described in the opinion:

“[Seller] created or caused to be created a suite of false documents which were designed to give the impression (and did give the impression) to those in Romania who received and acted upon them that the cargo in question was in each case Iranian Heavy or GOSM.”

“On some occasions the bill of lading originally issued described the cargo as “Iranian Heavy Blend”, but [Seller] stopped the vessel in the Bosphorus to substitute replacement bills which described the cargo falsely as Iranian Heavy and it was these replacement bills which arrived in copy with the vessel in Romania and the originals of which were in due course presented to the bank which had provided the letter of credit.”

“In the case of the purported GOSM cargoes, the shipping documents (including the bills of lading) described the cargo as “Gulf of Suez Crude Oils Blend” but in the certificates of conformity and commercial invoices [Seller] issued, it described the cargo as GOSM, as it did in the letters of indemnity provided to banks which had issued letters of credit where original shipping documents were not yet available. Accordingly, [Seller] clearly intended that [Buyer’s Agent], [Buyer] and the [Issuer] should regard the descriptions “Gulf of Suez Crude Oils Blend” and “Gulf of Suez Mix” as interchangeable.”

“[T]he use of the word “Blend” was not sufficient to alert [Buyer’s Agent] or [Buyer] to the fact that what was being delivered was not Iranian Heavy or GOSM at all, not least because Iranian Heavy is often a blend of various Iranian crude oils and GOSM as its name suggests is a blend of various Egyptian crude oils. Also, the word for “Blend” in Romanian is the same word as for ‘Mix’.”

After learning about the presentation of fraudulent documents from Buyer’s Agent, Buyer sued Seller to recover damages for the difference between the values of crude contracted for and the fraudulent blend that was received. The High Court of Justice Queen’s Bench, Flaux, J, found Buyer liable for the tort of deceit. Expert witnesses testified that the difference between the value of the contracted for crude and that of the various crude blends to be USD 40,071,913 and the Judge granted recovery of this amount to Buyer.

Seller had argued that Buyer’s Agent was aware of the fraud and had participated in the deception of Buyer. The Judge stated, “I am quite satisfied, as were the arbitrators before me…that [Buyer’s Agent] was unaware of the fraud that was being perpetrated on it and its principals [Buyer], until it was informed of the fraud by a former trader from [Seller] in May 2002.” He also found that “[Buyer’s Agent] could not have discovered that the 32 cargoes were bespoke blends.”

The Seller also attempted to argue that there was no reliance. The Judge stated that he had “no doubt that [Buyer] did rely upon the fraudulent representation in the documents and was induced to pay for the cargoes by those representations.”

[SJD]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.