To claw or not to claw(back)? BCP vs China Aviation Oil on Letter of Credit payments - Trade Treasury Payments

The Singapore Court of Appeal has delivered its decision in Banque de Commerce et de Placements SA, DIFC Branch & Anor v China Aviation Oil (Singapore) Corporation Ltd [2025] SGCA 33, upholding the High Court’s dismissal of Banque de Commerce et de Placements (“BCP”)’s claim to recover sums paid under a letter of credit (“LC“). The appeal decision provides important guidance on the interpretation of representations given in letters of indemnity (“LOIs“), the use of LOIs in oil trade, and the high bar for alleging fraud in LC transactions.

TTP’s Global Advisory Panel member Baldev Bhinder, Managing Director at Blackstone & Gold, alongside Ramandeep Kaur, Director at Blackstone & Gold, explores this decision.

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As we covered in our earlier update on the first instance decision, BCP financed Zenrock’s purchase of an oil cargo from China Aviation Oil (Singapore) Corporation Ltd (“CAO“). BCP issued an LC, confirmed by UBS Switzerland AG, which permitted payment against a payment LOI instead of original bills of lading (“BLs“). CAO presented its LOI, UBS paid, and BCP reimbursed UBS. When Zenrock defaulted, BCP sought to recover the LC payment from CAO, that CAO made fraudulent representations in the LOI as to the “existence, authenticity and validity” of the shipping documents (which under the LOI included BLs issued or indorsed to the order of BCP). A key plank of this argument at first instance was that CAO’s sale contract with Zenrock was sham or fraudulent, on the basis that the underlying oil cargo was sold in a separate parallel trading chain (Petco – Zenrock – Petrolimex) as opposed to the chain involving the CAO-Zenrock contract (Zenrock – 2 intermediate sellers – CAO – Zenrock). 

The High Court rejected BCP’s claim, holding that the CAO-Zenrock contract was genuine because that the two sales chains were not mutually exclusive; and the representations were true and not fraudulently made. The court also found that the representations were made to Zenrock, not BCP, because the LOI was addressed to Zenrock.

The Appeal: LOIs endorsed to the bank at time of presentation? 

On appeal, BCP did not challenge the finding that the CAO-Zenrock contract was genuine. Instead, it focused on the argument that CAO’s representation in its LOI that the shipping documents(which included the full sets of BLs, “issued or endorsed to the order of [BCP Dubai]”) “existed, were authentic and valid” (the “Representation”) required the original BLs to exist and to be endorsed to BCP’s order at the time of presentation of documents under the LOI. 

The Court of Appeal rejected this construction of the Representation, holding that the LOI could not be read in isolation but must be understood in its commercial context. On a proper reading, the Court found that the Representation simply meant the BLs did exist, were genuine and valid, but they had not yet been endorsed to BCP because CAO had not received them from its own seller.

The Court found that BCP’s interpretation was inconsistent with commercial common sense and the nature of chain contracts in oil trading. It was found to ignore the practical reality that the LOI replaced the need for original BLs upfront precisely because the BLs were not yet in CAO’s possession. By agreeing to accept an LOI in lieu of the original BLs, BCP had accepted that it would not gain immediate control over delivery of the cargo (negating the need for endorsed BLs at the time of presentation) and that endorsement of the BLs would follow subsequently once CAO came into possession of them. The evidence at trial also showed that BCP’s witnesses understood this sequencing and knew that CAO’s endorsement would occur only after it received the BLs down the chain. The Court also noted the commercial reality in chain contracts more broadly where BLs move down the chain and get endorsed step by step as parties come into possession of them. 

The evidence showed that the BLs did exist and were valid, and that CAO had good title to the cargo and the right to receive the BLs from its seller in the chain. BCP’s decision to abandon its challenge to the genuineness of the CAO-Zenrock contract on appeal was significant – by conceding that the contract was genuine, BCP effectively accepted that the cargo and BLs existed as represented.

In the circumstances, the only way BCP could have succeeded in showing the falsity of CAO’s Representation was to prove that CAO never intended to endorse the BLs to BCP once it received them. The Court however found no evidence to support such an inference. This was sufficient to defeat BCP’s claim of misrepresentation against CAO. 

The Court nevertheless went further to address other points raised. 

On the question of whether CAO’s Representation was fraudulent, the Court clarified that this query into CAO’s honest belief mustbe assessed with reference to its subjective understanding of the Representation (as opposed to an objective assessment of whether the representation was true or false). The Court found nothing in the evidence, including internal documents and the course of negotiations, that suggested CAO acted dishonestly. On the contrary, CAO’s operational steps showed it expected to receive and endorse the BLs in the ordinary course.

Had it been necessary to decide the point on reliance (if hypothetically the Representation was false), the Court found that BCP would have been able to make out its reliance on the Representation at law. The Court clarified that the correct test in this regard is whether the Representation played a real and substantial part in inducing BCP’s payment decision. Here, since BCP paid out against the presentation of the LOI (which contained the Representation intended for BCP’s reliance), the Representation was found to have played a real and substantial part in inducing BCP to release the money under the LC.

Key Takeaways: Fraudulent misrepresentations not taken lightly

This appeal decision reinforces the high threshold that banks face when seeking to recover LC payments by alleging fraud based on representations in LOIs. Following the success of banks in refusing payments under LCs in Winson Oil, there might been overzealous approach by banks to recover payments from the beneficiary on the basis of fraudulent representations in the LOI, when the applicant (its customer), has collapsed. The Court of Appeal has made clear that representations in LOIs must be read as a whole and in context, and that banks cannot rely on overly literal interpretations that ignore commercial practice underpinning why LOIs are used in the oil trade. 

The Court also considered whether the Representation was made to BCP, given that the LOI was formally addressed to Zenrock. The Court clarified that the test is whether the representation was intended to be acted on by the relevant entity. Although addressed to Zenrock, the LOI was presented to BCP to trigger payment under the LC. Further, BCP itself had inserted the wording requiring the BLs to be endorsed to it in the LOI template. On these facts, the Court found that the Representation was indeed made to BCP. This is a unique development from previous cases on the same issue.