Euro-Asian Oil SA v Credit Suisse AG
Letters of credit, letters of indemnity, fraud, carousel arrangements, Romania, Constanza, crude oil, trade finance
In four separate transactions, Abilo sold crude oil to Euro-Asian on CIF Constanza terms. The contract provided for payment by letter of credit. The letter of credit was payable upon presentation of original bills of lading, or a letter of indemnity co-signed by a bank, as well as other shipping documents.
Abilo was a client of Credit Suisse and Credit Suisse agreed to co-sign letters of indemnity to enable Abilo to draw under the letters of credit. It transpired however that Abilo was operating a carousel scheme, where it presented documents to draw under letters of credit for cargoes which were already discharged and transferred to a third party. As a result, but the time of the fourth transaction, the shipping documents (together with a letter of indemnity co-signed by the bank) were presented but no goods have in fact been shipped to Euro-Asian.
Euro-Asian sued both Abilo for failure to deliver and Credit Suisse under its warranty of title contained in the letter of indemnity. Credit Suisse opposed the claim on the basis that Euro-Asian oil was aware of the carousel arrangement, while Credit Suisse was not, and therefore the CIF contract in respect of which the letter of indemnity was signed was not in fact intended to operate as a normal CIF contract, rendering the letter of indemnity ineffective.
The High Court found that there were “historical carousel arrangements” relating to the cargo. Euro-Asian suspected that there might be a carousel arrangement in place, but gave Abilo an opportunity to trade out of any difficulties it may have had. The Court found that Euro-Asian was not a willing participant in any carousel arrangement. On this basis, the Court rejected the bank’s argument that the letter of indemnity was ineffective and that the CIF contract was not in fact intended to operate as such.
The Court of Appeal confirmed the High Court judgment, and granted the bank’s appeal in part, allowing it to seek 100% contribution from Abilo (i.e. allowing the bank to recover from Abilo the full amount of its ability to Euro-Asian Oil).
The judgement is available at the following link: https://www.quadrantchambers.com/sites/default/files/media/document/euro-asian_oil_v_credit_suisse_0.pdf
Vitaliy Kozachenko was part of the solicitor team representing Credit Suisse AG in a dispute under a letter of indemnity. If you are a commodity trader involved in a trade finance dispute, get in touch with Vitaliy to see how we can assist (vk@vtlcapital.com) or reach out to one of our other specialists at info@vtlcapital.com.
