A court in Singapore has ordered an energy trader to pay Crédit Agricole US$10.3mn in a dispute over fraud perpetrated by the collapsed commodities group ZenRock.

In a judgement handed down on October 24, the Singapore Court of Appeal overturned a ruling made last year dismissing Crédit Agricole’s claim against PPT Energy over a US$23.6mn letter of credit applied for by ZenRock in PPT’s favour.

In the new judgment, the court found that PPT breached promises it made to Crédit Agricole in a letter of indemnity (LOI) and that it must return the funds paid to it by the French lender under the letter of credit.

ZenRock collapsed in May 2020 after HSBC moved to have the trader placed under judicial management following the discovery of what the bank described as “extremely suspicious” financing practices. In June last year, Singapore police charged ZenRock’s ex-president with cheating, forgery and criminal breach of trust, partly for allegedly cheating Crédit Agricole out of US$17mn.

The dispute is among many that have played out in the Singapore courts since the collapse in 2020 of large commodity traders such as ZenRock, Hin Leong and Agritrade, which have since faced allegations of systematically raising fraudulent financing from a raft of major trade finance banks.

Like many of the transactions now being dissected in litigation, the deal at the heart of the dispute between Crédit Agricole and PPT included a lengthy chain of parties buying and selling a cargo of oil.

In early 2020 ZenRock applied to the bank for a letter of credit in favour of PPT Energy, from which it was buying a cargo of Congolese oil. It then intended to sell the oil to Totsa, the trading arm of French energy giant Total.

But according to the judgement, ZenRock concealed from Crédit Agricole that the deal was part of a circular trade and that the cargo was already pledged to another lender, ING, as part of a transaction further up the chain.

ZenRock also furnished Crédit Agricole with a doctored sale contract which made it appear the company would be selling the oil at a US$3.60 per barrel premium, when in reality it was a US$3.60 per barrel discount.

The judge in the original case found that while PPT Energy was not an “innocent bystander”, it did not have direct knowledge of ZenRock’s fraud and therefore the fraud exception to Crédit Agricole’s obligation to pay out through the letter of credit was not engaged.

Instead of contesting this aspect of the ruling, Crédit Agricole won its appeal because the court accepted its arguments that the previous judge erred in finding that PPT had not made or broken a warranty in the LOI that the trader had provided to the bank in place of the original bills of lading.

The initial judge found that the LOI never came into effect because the bank did not make the payment by the due date.

But the appeals court found that the LOI was valid from the moment it was issued.

In the LOI, PPT confirmed it had “marketable title” over the oil. But the judges described evidence from PPT traders in the original trial as “unbecoming and redolent of PPT’s lack of good faith”. They found “there are well-founded concerns about the marketability of the title held by PPT from these circumstances alone” and that the trader was not a “bona fide purchaser”.

PPT knew that its promise in the LOI that the goods were “free and clear of any lien or encumbrance” was not correct because it was aware that another lender, ING, also had a floating charge over the goods, the judges found. This is because ZenRock had separately attempted to raise financing from that bank using the same cargo.

“In sum, we conclude under this issue that there was a breach of the warranty in that PPT lacked a marketable title,” the judges wrote.

However, the court roundly dismissed the second plank of Crédit Agricole’s appeal, in which the bank pointed to previous cases where lenders had successfully argued that fraud by letter of credit applicants had impugned on an obligation to pay, even if the beneficiary was not party to the wrongdoing.

The judges found those cases did not support the bank’s arguments, which they said inappropriately fused the separate contractual obligations a bank has with the applicant and the beneficiary in a letter of credit transaction.

“The fundamental problem with [Crédit Agricole]’s case on the letter of credit is that it would, if accepted, significantly undermine the whole system of documentary credits,” they wrote.

“The effect would be that no seller-beneficiary could be assured of payment under a letter of credit, without investigating the integrity of the issuing bank’s customer in its relationship with the issuing bank, which is a practical impossibility, or without seeking some further contractual protection or insurance against the risk that the issuing bank’s customer may have misled the issuing bank. Therefore, we unhesitatingly reject [Crédit Agricole]’s appeal in relation to the letter of credit.”

Although Crédit Agricole paid the proceeds of the letter of credit to an escrow account in 2020, it has since trimmed its claim and made a US$6.2mn recovery in related proceedings, meaning it has been awarded only US$10.3mn.

Crédit Agricole declined to comment on the judgment. A lawyer representing PPT did not respond to a request for comment.

Following another recent ruling in favour of OCBC in similar circumstances, the judgment further highlights the risks to participants in circular trades, says Baldev Bhinder, managing director of law firm Blackstone & Gold.

“The message for traders arising from both Winson Oil vs OCBC and the recent PPT case is the same: those that insert themselves into string chains, choosing not to seek clarifications as to the title they allege to be passing when circumstances dictate otherwise and instead relying on the comfort of the LC for payment, run the risk of being out of pocket, either by a reckless indifference fraud exception under the letter of credit or a breach of warranty as to marketable title under the LOI.”

Bhinder says it is disappointing Crédit Agricole chose not to appeal the lower court judge’s verdict that PPT did not have “reckless” disregard to the truth when it sought payment under the letter of credit.

“It may be somewhat of a missed opportunity to clarify the fraud test in the highest court of the land,” he says, particularly considering the decision in Winson Oil vs OCBC. In that case, the court found Winson had acted with recklessness and explicitly disagreed with the consideration of “recklessness” in the original decision in the Crédit Agricole case.