Court of Appeal considers unjust enrichment claim in trade finance fraud

Rasmala Trade Finance Fund -v- Trafigura PTE Ltd

This was a case of two innocent parties who were each the victim of a fraud committed by a third person.

As a result of the fraud, the claimant made payments to the defendant in respect of sale contracts that turned out to be forged by the third party. The defendant was unaware of the forged contracts and applied the payments to clear the third party’s outstanding debts with it.

The claimant’s claim for restitution due to unjust enrichment was unsuccessful. The recipient of the payments had changed its position to its detriment in good faith in the belief that it was entitled to the payments and to apply them as it had done. As a result, it would be inequitable to require it to pay back the money.

The background facts

In 2016, international commodities trader Trafigura PTE Ltd (Trafigura), granted its customer, Farlin Energy & Commodities FZE (Farlin), an open credit of approximately US$ 2 million. Farlin had been a customer of Trafigura since September 2015. The credit limit was subsequently increased and by early 2018 was between $10m and $11m.

Farlin struggled to remain within the limit and was late in making payments. Therefore, on 16 July 2017, Farlin entered into a one-year Sharia-compliant Murabaha Facility Agreement (Facility) with Rasmala Trade Finance Fund (Rasmala) in the amount of US$ 20 million.

Under the Facility, Farlin would request a drawdown of 85% of the purchase price for a specific contract and, if Rasmala approved the transaction, it was to be structured as a purchase of the relevant coal by Rasmala and its subsequent sale to Farlin for the purchase price and an agreed profit rate for Rasmala. An Agency Agreement between the two meant that Farlin entered into each approved purchase contract on behalf of Rasmala as undisclosed agent.

Between August 2017 and March 2018, Rasmala made five payments to Trafigura totalling over US$ 22.6million pursuant to purported sale contracts provided by Farlin to Rasmala.

However, the contracts were in fact forgeries and Trafigura, upon receiving the payments, had allocated the funds to clearing Farlin’s outstanding debts with Trafigura. As a result, Farlin was brought within its credit limit with Trafigura who then continued trading with Farlin. Between September 2017 and May 2018, Trafigura entered into a series of new contracts with Farlin with an invoice value of just under US$ 60 million.

Trafigura had accepted the payments from Rasmala pursuant to a Third-Party Agreement (TPA) that purportedly confirmed that Rasmala agreed to Trafigura’s proposed use of the payment against Farlin’s debts. However, Farlin forged Rasmala’s signature of the TPA and Rasmala had no knowledge of the TPA. There was a TPA in place for each of the first four payments but not the fifth.

When Rasmala discovered the fraud committed by Farlin, it sought restitution of the payments it had made to Trafigura on the ground of unjust enrichment.

The Commercial Court decision

The Court found that Trafigura had been unaware of the fraud and were not party to it. It also accepted that Rasmala had only made the payments in the mistaken belief that the sale contracts were genuine.

However, in order to make a successful claim of unjust enrichment, Rasmala had to show:

1. That Trafigura had been enriched.

2. That the enrichment was at Rasmala’s expense.

3. That the enrichment at Rasmala’s expenses was unjust.

If Rasmala could show all three requirements were satisfied, Trafigura could still raise a defence such as good consideration or change of position.

In this case, the Court found that Rasmala had demonstrated there was unjust enrichment at its expense.

However, Trafigura had a successful defence of change of position. The defence was established in respect of a mistaken payment if the defendant had in good faith changed his position in some way which, but for the payment, he would not have done, and he would now suffer substantial detriment if required to repay all, or alternatively part, of the sum received.

In this case, had Trafigura not received the payments, it would not have continued to trade with Farlin because further deliveries would have exceeded Farlin’s credit limit. There was therefore, a sufficient causal connection between the unjust enrichment and the change of position.

Taking into account the new contracts it entered into before it stopped trading with Farlin, Trafigura was owed slightly more than it had been before receiving the first payment from Rasmala. The Court, therefore, decided it would be inequitable to require Trafigura to make any repayment.

Rasmala appealed.

The Court of Appeal decision

Good faith

The Court of Appeal dismissed the argument that the judge had applied the wrong test as to whether Trafigura had acted in good faith. On the authorities, the Court held as follows.

Mere negligence was not enough to deprive a defendant of the defence of change of position; something more was needed. In English law, the question whether a person has acted in good faith usually depended on what they actually knew or suspected, not what they should reasonably have known or suspected. A person might act carelessly or incompetently, but nevertheless in good faith.

The Judge had concluded that:

• Trafigura did not know about the Murabaha financing

• understood that it was dealing with Farlin as principal and that Rasmala was simply providing finance to Farlin

• received the money with the understanding that it was to be used to meet Farlin's obligations and that it would become Trafigura's money

• did not have knowledge of facts which gave anyone at Trafigura – or should have given a reasonable person – reason to believe that the TPAs were invalid or the payments repayable

• did not know or suspect this.

Trafigura’s conduct was to be measured by what it knew or understood or suspected. The Court of Appeal did not think that good faith (or the lack of it) was capable of embracing a failure to act in a commercially acceptable way. In any event, what the duty of good faith, or the dictates of commercial acceptability, required depended on the circumstances of the individual case.

In this case, the Judge had heard the relevant evidence and decided that Trafigura had gone further than was normal in the market to ascertain what the payments were for. On the evidence, Trafigura’s inquiries were not inadequate, and it had not acted in a commercially unacceptable way.

Causation

The question was whether a defendant's change of position was sufficiently causally connected with, or referable to, the payment so as to make it inequitable to require him to make restitution.

What was required was that Trafigura should have acted in the bona fide belief that the payments were valid and that they could deal with the money as their own.

Here, Trafigura received the money on the understanding that it was to be used to meet Farlin's obligations to Trafigura and that it would become Trafigura's money.

The Court of Appeal concluded that Trafigura’s conduct in this case amounted to a sufficient causal connection for the purposes of a change of position defence.

Risk allocation

The issue raised was which party should bear the risk of the invalidity of the TPAs.

However, the TPAs were not essential to the validity of the payments. The payments were invalid because Rasmala had been defrauded by Farlin into making them, not because Rasmala did not sign the TPAs.

Farlin’s defrauding of Rasmala had nothing to do with Trafigura and that was not a risk that Trafigura ran. Trafigura had no reason to think that Farlin was defrauding its own financier.

In those circumstances even if Trafigura could be said to have run the risk of the TPAs being invalid, it would not have made any difference. Trafigura would still have acted in the bona fide and justified belief that the payments were valid, and that was sufficient for the change of position defence.

The Court of Appeal also dismissed the argument that Payment no. 5, made without any TPA being in place, should be treated differently to the other four payments. As the TPAs did not affect the validity of the payments, the change of position defence applied equally to Payment no. 5.

Detriment

On the facts and figures, the Court of Appeal found that Trafigura had suffered detriment sufficient for the purposes of change of position. It highlighted that the relevant detriment did not need to be financial or even capable of being measured in pecuniary terms.

For example, a lost opportunity can constitute a detriment even if it is not quantifiable as long as it is substantial and irreversible.

In essence, after Farlin stopped trading in 2018, Trafigura had an overall loss of around US$ 7 to 7.5 million. While it was impossible to say whether it would have had lesser or greater loss if it had stopped trading with Farlin before Rasmala’s first payment, the Judge had decided that this was a lost opportunity to have stopped trading with Farlin earlier and to have taken steps to recover its then debts.

It was possible Trafigura would have been able to make greater recoveries than it was able to make when Farlin eventually failed. This was not a remote chance, and it was possible that if Trafigura had demanded repayment at that time, Farlin would have found funds from elsewhere to repay Trafigura.

The appeal was, therefore, dismissed.

Comment

It remains to be seen whether leave to appeal to the Supreme Court will be sought.

In the meantime, the judgment is useful for its analysis of what is required for a successful change of position defence in claims of unjust enrichment.

The dispute also highlights the increasing incidence of fraud affecting commercial contracts and transactions and the potential difficulties of deciding which of two innocent parties should bear the resulting loss.

Mark Aspinall of Hill Dickinson LLP acted for Rasmala Trade Finance Fund.

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