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Note: Abilo (UK) Ltd. (Intermediary), a United Kingdom based company, engaged in a set of four back-to-back transactions with Euro-Asian Oil SA (Ultimate Buyer) from 2009 until 2010. Intermediary purchased ultra-low sulphur diesel (ULSD) from Glencore (Ultimate Seller), which required Credit Suisse (Frontend Guarantor) to issue a letter of credit (Frontend LC) in favor of the Ultimate Seller. Ultimate Buyer then purchased the ULSD from Intermediary, which required a letter of credit to be issued in favor of Intermediary (Backend LC). To obtain the letter of credit from Frontend Guarantor, Intermediary collateralized the Backend LC.

On 9 November 2009, Ultimate Buyer obtained its letter of credit from BNP Paribas (Backend Guarantor) which issued it in favor of Intermediary (Backend LC), and, the next day, Intermediary obtained its letter of credit from Frontend Guarantor using the letter of credit issued by Frontend Guarantor in its favor as collateral. Intermediary then purchased a cargo of 20,055 mt ULSD from Ultimate Seller. However, evidence in the opinion shows that the cargo purchased by Intermediary was later sold to DG Petrol (Third Party Company), instead of Ultimate Buyer. Evidence included a sale contract between Third Party Company and Intermediary for the same cargo mentioned in the letter of credit issued by Frontend Guarantor.

Before delivery of the goods under the First Agreement with Ultimate Buyer was due, Intermediary entered into the Second Agreement with Ultimate Buyer. The Second Agreement contained the same terms, and letters of credit were issued in the same manner. Later, Intermediary then fulfilled the First Agreement with the cargo purchased under the Second Agreement. This process is called a “carousel operation." The “carousel operation” allowed Intermediary to fulfill its obligations under a previous agreement with cargo purchased from money collateralized by an LC from a new ULSD agreement with Ultimate Buyer. The “carousel operation” went around three cycles without imploding.

The “carousel operation” stopped with the Fourth Agreement, however, when Intermediary failed to issue a holding certificate in favor of Ultimate Buyer before the letter of credit issued by Backend LC expired. The Fourth Agreement stated that, in the event the shipping documents were not available when Backend LC expired, payment could be demanded on Backend LC through “presentation of the commercial invoice and seller's letter of indemnity (telex/fax documents acceptable) in a format acceptable to buyer and countersigned by a first-class international bank acceptable to buyer." On 7 November 2010, Bank countersigned a letter of indemnity and sent an invoice for USD 15,844,840 under Backend LC and demanded payment. Ultimate Buyer then sought an injunction from Tribunal de premier instance, in Geneva, which was denied. As a result, Backend Guarantor paid out and debited Ultimate Buyer’s account.

In response, Ultimate Buyer sued Intermediary for fraud, breach of contract, and unjust enrichment under the Fourth Agreement and the letter of indemnity. It also sued Frontend Guarantor for breach of warranties issued in the letter of indemnity. The Federal Court of Australia, Cranston, J., entered judgment in favor of Ultimate Buyer on its claims against Intermediary for breach of contract and unjust enrichment. The Judge also found in favor of the Ultimate Buyer against Frontend Guarantor for breach of warranties contained in the letter of indemnity.

Ultimate Buyer had claimed that Intermediary and Frontend Guarantor had breached warranties that were included in the fourth letter of indemnity. The warranties included that Intermediary had a, “marketable title free and clear of any encumbrance to a cargo." However, Ultimate Buyer suggested that the cargo described in the letter of indemnity did not exist because it had already been delivered to fulfill a prior agreement.

In defense of these claims, Intermediary and Frontend Guarantor argued that Ultimate Buyer had agreed to a separate arrangement that included the carousel. Evidence was provided to show that Ultimate Buyer was aware of the carousel and took the risk because of commission payments that were made to Ultimate Buyer.

However, the Judge rejected these arguments. The Judge concluded that obtaining small commissions for such a large risk was commercially impractical. Furthermore, although Ultimate Buyer was aware of the carousel, this knowledge did not imply that Ultimate Buyer and Intermediary had a separate agreement. Intermediary and Frontend Guarantor were found liable for damages capped at the sale price of the ULSD for USD 15,889,500.

[JMC]

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