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UniCredit is considering exiting commodity trade finance if it loses an appeal over a US$24.7mn loss on a financed oil trade that went awry, a lawyer representing the Italian lender has told a London court.

Last year UniCredit lost a claim in the Commercial Court against shipping company Euronav, which the bank argued had mis-delivered a financed oil cargo at the behest of Gulf Petrochem, an oil trader that collapsed shortly afterward, owing millions to creditors under outstanding oil trades. The Court of Appeal began hearing UniCredit’s appeal against the ruling on March 28.

“The first instance decision has sent something of a shockwave through trade finance banks,” John Russel KC, representing UniCredit, told the court at the outset of the appeal.

“I know that my clients have, at high levels, considered whether they might leave the entire sector if the security they thought they had by holding bills of lading is potentially so illusory or at risk as the first instance judgement suggests.”

“We are aware that other banks, too, are anxiously awaiting the result of this appeal to determine whether the existing trade finance lending model will continue to be supported by English law in the same way it has been understood to be supported hitherto,” he added during the two-day hearing that was ongoing as of press time.

GTR approached UniCredit seeking elaboration on the lawyer’s statement but a spokesperson for the bank declined to comment.

In its written submission to the court, the bank said: “The judgment is a startling one to anyone involved in international trade governed by English law. It seriously erodes the fundamental rights of a bill of lading holder and undermines the bill of lading’s importance as a key document in international trade, both for trading parties and financing banks.”

Other major trade finance lenders, such as ABN Amro and Rabobank, have exited or trimmed their exposures to commodity trade finance following the exposure of several large-scale frauds by commodity traders, chiefly in Asia and the Middle East.

In addition to the London court’s decision, UniCredit also last year lost an attempt in Singapore to claim US$37mn in damages from commodities giant Glencore in what it alleged was a “sham” transaction involving another collapsed trader, Hin Leong.

In the case currently before the Court of Appeal, UniCredit’s German subsidiary financed the sale of fuel oil from BP to Gulf Petrochem, a subsidiary of GP Global, in April 2020 through a letter of credit. The oil was to be on-sold to approved buyers that would then pay UniCredit directly.

Euronav, the owner of the vessel carrying the cargo, allowed it to be discharged by ship-to-ship transfers onto two vessels. Documents filed in the appeal suggest that after the ship-to-ship transfers, the cargo was further on-sold to non-approved sub-buyers. None of the buyers or Gulf Petrochem ever repaid any of the money owed to UniCredit.

In a written submission to the court, UniCredit alleges that by August 2020 “it was becoming apparent that Gulf had been guilty of widespread fraud in relation to many cargoes”. Gulf Petrochem, now in the hands of restructuring advisors, is not a party to the claim and declined to comment.

UniCredit argued that by allowing the discharge of cargo, Euronav breached the contract contained in the bill of lading (BL), which BP was in the process of endorsing to the bank and which had not yet been produced.

But Justice Moulder found that the BL stopped containing the contract of carriage when BP novated the charterparty to Gulf Petrochem shortly before delivery.

At that time a new contract had “sprung up” and the BL constituted a “mere receipt” at the time of discharge, she found, meaning UniCredit had lost its security for the financing.

Even if the BL had constituted a contract of carriage, Justice Moulder said she would have still found against the bank on the grounds that it would , if asked by Euronav, have permitted the cargo to be unloaded without production of the original BL if asked to do so by Euronav.

In the appeal, UniCredit said Justice Moulder, who has since retired, was wrong on both counts. It argued that finding that the BL did not constitute a contract of carriage runs against well-established principles in trade finance.

In a written submission, the bank said: “If the judgment stands, any bank financing trade credit where the cargo will be delivered without production of the bill of lading (ie the vast majority of international trades in oil) will be taken to have caused its own loss if a shipowner breaches his obligations and misdelivers without production of the bill.

“The bill of lading – up until now the main form of security in the hands of a bank financing the purchase of oil cargoes – will be worthless and banks will be routinely left unsecured. The obvious consequence will be an unwillingness of banks to finance such trades, with the knock-on effect on the market, and a major reduction in the utility of a bill of lading governed by English law to support the international oil trade.”

UniCredit’s lawyer Russell argued that the only possible cause of the bank’s loss was Euronav’s agreement to discharge the cargo without the BL. “In any hypothetical circumstances… would the bank have acted as to lose both the physical cargo and the right to sue the carrier for misdelivery? It’s utterly improbable that a bank would ever act in that way.”

Acquiescing to discharge without the BL would have been the only practical option open to the bank because that is the only way oil trades are conducted, he said.

 

Bank’s case ‘untenable’

Robert Thomas KC, representing Euronav, urged the judges to concur with the original finding that the charterparty novated to Gulf Petrochem constituted the contract of carriage, rather than the bill of lading.

The “primary case now advanced by the bank is untenable and unsupportable by the textbooks and the authorities”, he told the court.

Thomas also rejected UniCredit’s suggestion that if the appeals court confirms the original ruling it would undermine the entire concept of BLs providing security in trade finance, saying instead that the case should turn on its “unusual” facts.

“The applicant has taken quite a lot of time in seeking to persuade the court of the untold damage this judgement will do to international trade. I’m sure the court will have heard this often deployed in argument before it – we submit it is no substitute for a coherent legal analysis, which is what is absent in this case in both grounds of appeal,” Thomas said.

Claims against shipowners for alleged misdelivery have been a common tactic by financiers following a spate of commodity trader collapses in 2020, because such claims have typically been hard for shipowners to defend.

Many, including several involving Gulf Petrochem, have ended in success for banks, although Singapore’s High Court last year found that Standard Chartered and Overseas Chinese Banking Corporation  would have to prove misdelivery cases against Maersk and Scorpio tankers at a trial rather than through a simpler summary judgement.