International lawyers Reed Smith have published a detailed analysis of the recent decision by the Singapore International Commercial Court (SICC) to dismiss a claim by Crédit Agricole that PPT Energy Trading was a participant in a fraud perpetrated by collapsed Zenrock Commodities and therefore was not entitled to receive US$23.6 million under the bank's letter of credit (L/C).

The court determined that while oil trader PPT Energy was hardly an "innocent bystander", it was not a participant in Zenrock's fraudulent scheme.

The lawyers explain that the ruling relates to L/Cs, fraud exception, letters of indemnity (LOIs) and round-tripping while the case highlights four points of significance for commodities market participants, including financiers.

L/C autonomy and fraud exception

Reed Smith's analysis concludes that the court's judgment is a strong reinforcement of the principle of the autonomy of L/Cs. Banks must pay on presentation of documents that are compliant on their face with the terms of the L/C.

The case also serves as an illustration of the limitations of the so-called 'fraud exception' according to the lawyers. They say the scope for looking behind otherwise compliant documents and avoiding payments based on the underlying facts is generally limited only to cases of fraud by the beneficiary.

Circular trading and LOIs

The lawyers say the case underscores the legitimacy of circular or string trading in general and rightly does not focus on the motives of the relevant parties to such transactions or their purpose. Instead, it focuses on whether the parties can transfer good title and whether title is, in fact, transferred.

Finally, Reed Smith concludes the case reiterates that LOIs, as unilateral contracts, are accepted only by way of full and not partial performance of the payment obligations to which they refer or relate. Only once full payment has been made do the warranties and indemnities in the LOI take effect.

Reed Smith's analysis of the case, Singapore High Court blocks Crédit Agricole recoupment after Zenrock fraud, can be found here.

A PDF detailing Crédit Agricole's allegations, PPT's defence, the SICC's decision, and the reasoning can be downloaded from the same page.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.