Standard Chartered Bank v Ceylon Petroleum Corporation
| Jurisdiction | England & Wales |
| Judge | Mr Justice Hamblen |
| Judgment Date | 11 July 2011 |
| Neutral Citation | [2011] EWHC 1785 (Comm) |
| Docket Number | Case No: 2009 FOLIO 375 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 11 July 2011 |
[2011] EWHC 1785 (Comm)
Mr Justice Hamblen
Case No: 2009 FOLIO 375
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr R Dicker QC and Mr J Goldring (instructed by Linklaters LLP) for the Claimant
Mr A Malek QC, Mr C Freedman and Mr J MacDonald (instructed by Gibson & Co) for the Defendant
Hearing dates: 28, 29, 30, 31 March, 1,4,5,6,7,8,11,12,13,14, April, 27 May 2011
STANDARD CHARTERED BANK v CEYLON PETROLEUM COMPANY JUDGMENT INDEX
A. OVERVIEW—paras 1–11
(6) Transaction 9: paras 49–52
C. FACTUAL NARRATIVE—paras 53–313
(1) SCB in Sri Lanka: paras 53–57
E. THE ISSUES—paras 390–574
(1) CAPACITY: paras 391–426
(4) THE COUNTERCLAIM: paras 471–574
F. CONCLUSION—para 575
—
A. OVERVIEW
The Defendant ("CPC") is Sri Lanka's state-owned importer, refiner and retailer of oil. CPC is a large commercial organisation, and a major importer of crude oil and refined petroleum products on the international market, importing some 26 million barrels per annum into Sri Lanka at a cost which had increased, by 2007, to about US$2 billion. Because it was required to buy oil on the international market in US dollars, in such significant amounts, it was inherent in CPC's business that it had a price risk based on its need to buy physical oil. In particular, in the present case CPC was exposed to the significant and unprecedented rise in the price of oil that occurred in the period from about 2003 up to late-July 2008.
In an attempt to protect itself from the rise in the oil price, from February 2007 CPC began to enter into oil derivative transactions with the Claimant ("SCB") and other competing banks operating in Sri Lanka, including Citibank NA ("Citi"), Deutsche Bank ("DB"), and two Sri Lankan banks, Commercial Bank of Ceylon and People's Bank (which is owned by the Sri Lankan Government). In the period between February 2007 and October 2008, CPC entered into about 30 such transactions, including 10 transactions with SCB.
In the present proceedings SCB claims US$161,733,500 plus interest, being the sum allegedly due under two derivative transactions entered into with CPC on 28 May 2008 ("T8") and 9 July 2008 ("T9") (together the "Transactions"). These were the 8th and 9th such transactions entered into between CPC and SCB. The bulk of the derivative contracts entered into by CPC, including the Transactions, required the banks to make payments to CPC when oil prices were high. Conversely, CPC was required to make payments to the banks if the price of oil fell below an agreed floor.
All CPC's oil derivative transactions were executed on CPC's behalf by its Chairman, Managing Director and sole executive director, Mr Ashantha de Mel. He had been appointed by the Minister of Petroleum with effect from October 2006. The transactions were also often signed by Mr Lalith Karunaratne, a chartered accountant who had been employed as the Deputy General Manager (Finance) of CPC and its chief financial officer since February 2005.
The Transactions were entered into under an ISDA Master Agreement (2002 version) dated as of 31 July 2006 (the "Master Agreement") on the terms set out in Confirmations dated 3 June 2008 and 15 July 2008.
In the period between February 2007 and July 2008, oil prices continued to rise in a previously unprecedented fashion, so that CPC was required to make ever-increasing US dollar payments for its physical oil imports. At the same time, CPC's portfolio of derivative transactions generally required the banks to make payments to CPC when the oil price increased or remained high.
In late July and August 2008, however, contrary to many industry forecasts, oil prices began to fall rapidly. This fall accelerated later in 2008 as the world financial crisis deepened, resulting in an unprecedented and almost complete collapse of the oil price. The price at which CPC was able to purchase oil in the international market and thus the amount that it needed to pay to do so therefore fell considerably. However, the derivative transactions that CPC had entered into were negatively correlated to the price of oil, which meant that, as physical oil prices fell, CPC also became "out-of-the-money" on its derivative transactions, including T8 and T9, being those which were outstanding with SCB, together with other such transactions with Citi, DB, Commercial Bank of Ceylon and People's Bank.
In September, October and November 2008, CPC made the payments demanded by SCB under T8 and T9 in respect of the relevant months. Since 12 December 2008, however, CPC has failed to make any further monthly payments in respect of T8 and T9. (It has also failed to make further payments under its outstanding derivative transactions with Citi and DB, which are the subject of arbitration proceedings, and with the local banks.)
SCB's case is straightforward: it is entitled to the remaining payments which are due under the terms of the Transactions. CPC entered into the Transactions as an arm's length counter-party with SCB, knowing how they would respond to fluctuations in the oil price, wanting to acquire the benefits of the Transactions, and aware of the risks and rewards that they entailed. CPC was always aware that a fall in oil prices (which in this case was largely caused by the financial crisis) would cause it to became liable to make payments to SCB and there is no basis upon which it can now avoid its obligations.
CPC's case is that, when considered in its proper factual context, this is not a straightforward claim, as SCB contends, and that there is nothing standard about this case. On the contrary, this is a case concerning a publicly owned corporation, of critical importance to its national economy, with no experience in commodity derivative transactions, engaging in novel and sophisticated transactions for the first time in a country that itself had no previous experience of such trading. CPC contends that SCB held itself out to CPC as advisor and encouraged it to enter into transactions that did not hedge its risks, but instead provided the prospect of insignificant up-front fixed profits in return for taking on vast and disproportionate downside risk. CPC, which had no appetite to lose money, should never have been sold these products, and it disputes their validity.
CPC advances four main grounds upon which it is entitled to refuse to pay the amounts allegedly due:
(1) Lack of capacity: CPC, which was incorporated under the Ceylon Petroleum Corporation Act 1961 (the "CPC Act"), contends that it did not have capacity under the CPC Act to enter into the particular derivative contracts that it purported to enter into because: (a) they fell outside the scope of CPC's "general objects" as set out in s 5 of the CPC Act; and (b) they fell outside the terms of a letter dated 29 January 2007 (the "Wijetunge letter") said to constitute a "direction" given by the Minister of Petroleum to CPC pursuant to s 7of the CPC Act.
(2) Lack of authority: CPC contends that (a) Mr de Mel and Mr Karuanaratne lacked actual authority from the CPC Board to enter into the Transactions because they were in breach of the terms of the relevant board resolution of March 2007; and (b) they fell outside the terms of the Wijetunge letter. CPC also denies that Mr de Mel and Mr Karuanaratne had ostensible authority to enter into the Transactions.
(3) Supervening illegality: CPC contends that a letter dated 16 December 2008 from the Secretary of the Monetary Board of the Central Bank of Sri Lanka (the "CBSL") had the effect of rendering any further performance of CPC's payment obligations under the Transactions unlawful in Sri Lanka and so, it is said, unenforceable in England (relying on Ralli Bros v. Compania Naviera [1920] 1 KB 614, [1920] 2 KB 287).
(4) Counterclaim: CPC contends that SCB owed a contractual and/or tortious duty to advise CPC which it breached, and that it made misrepresentations to CPC, thereby causing CPC to enter into the Transactions, and suffer loss constituted by the payments due under them.
B. THE TRANSACTIONS
Each of the Transactions constitutes a transaction the terms of which is governed by the Master Agreement (together with its Schedule) and the relevant Confirmation.
(1) The Master Agreement
A draft of the Master Agreement was provided to CPC on 1 August 2006. The Master Agreement, including the terms of its Schedule, was considered by and negotiated between SCB and CPC's Chief Legal Officer (Ms Geetha de Fonseka) and CPC's external lawyers (Nithya Partners, a Sri Lankan firm of attorneys-at-law) over a number of months prior to its eventual execution by CPC on 30 May 2007, when it was dated as of 31 July 2006.
CPC admits that it is bound by the terms of the Master Agreement, which was executed by Mr De Mel and another director, Mr David Gooneratne, in accordance with the SCB resolution passed by the Board on 26 March 2007. CPC does not allege that the execution of that Master Agreement was outside either its capacity or its signatories' authority.
The Master Agreement, which was the 2002 version, included, in the usual way, representations as to the capacity and authority of the parties to enter into any transactions (the "Authority Statements").
Section 3 of the Master Agreement provided that each party represented as follows, which representations (called Basic Representations) were deemed to be repeated by each party on each date on which a Transaction was entered into:
"(ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and/or any other documentation relating to this Agreement that it is required...
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