Standard Chartered Bank v Ceylon Petroleum Corporation

A derivative transaction may constitute a hedge even where it is in the money, leveraged, capped, subject to a target redemption feature or otherwise provides limited protection. The question is objective and depends on the transaction’s relationship to an underlying physical exposure; subjective intention is not determinative. A public corporation’s capacity is assessed by its statutory objects and powers. A ministerial direction concerning the exercise of powers does not necessarily limit corporate capacity. Clear contractual non-reliance provisions may negate a general advisory duty and create a contractual estoppel. Commercial counterparties who receive accurate contractual explanations cannot readily recast those explanations as representations that a transaction is suitable or forms part of a proper strategy.

Standard Chartered Bank claimed unpaid sums under two oil derivative transactions, T8 and T9, entered into with Ceylon Petroleum Corporation under an ISDA Master Agreement. CPC, a Sri Lankan statutory corporation, alleged that the transactions were beyond its capacity and the actual authority of its officers, that payment had become illegal in Sri Lanka, and that the Bank had breached advisory and tortious duties and made misrepresentations.

The principal issues were whether the transactions were hedges or speculative trades; whether they fell within CPC’s statutory objects, the Cabinet recommendations and the relevant board authorisations; whether a Sri Lankan regulatory direction prevented enforcement in England; and whether the contractual documentation excluded the alleged advisory and misrepresentation claims.

1. Nature of the transactions. The court rejected CPC’s contention that T8 and T9 were speculative. The relevant question was objective. The transactions were entered into against CPC’s underlying physical oil exposure and provided protection against prices being above specified levels. Their being in the money, leveraged, capped or subject to a target redemption feature limited the protection or altered the risk allocation, but did not transform them into speculation.
2. Capacity. The transactions were conducive or incidental to CPC’s petroleum-importing business under section 5 of the Ceylon Petroleum Corporation Act 1961. They also fell within the broad statutory powers in section 6. Applying Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246, a transaction capable of falling within the corporate objects was not rendered ultra vires merely because of the purpose or state of mind of those authorising it.
3. The Wijetunge letter was not a direction under section 7(1). It was not expressed as a statutory direction, was not addressed to the Board, did not refer to the Act or the exercise of corporate powers, and was not preceded by the required consultation. Section 7(1) regulated the exercise of powers, rather than CPC’s capacity. The transactions were in any event within the Study Group Recommendations.
4. Authority. The March 2007 board resolution gave Mr de Mel and Mr Karunaratne broad actual authority to enter into derivative transactions under the Master Agreement. The alleged limitations were neither expressed nor necessary to give the resolution commercial effect. CPC had also represented their authority to SCB, so that ostensible authority would have existed in any event.
5. Illegality. CPC’s payment obligations were payable into an account in New York and were not contractually required to be performed in Sri Lanka. The regulatory direction was addressed to SCB, not CPC, and section 46 of the Banking Act No. 30 of 1988 did not clearly confer a power to extinguish accrued contractual payment rights. The illegality defence therefore failed.
6. Counterclaim. No general advisory duty arose in contract or tort. The parties’ relationship was that of commercial counterparties, and the ISDA documentation, Term Sheets and Confirmations contained clear non-reliance and non-advisory provisions. Those provisions created a contractual estoppel. The alleged representations that the transactions were true hedges or part of a proper strategy were not made; CPC also failed to establish inducement. SCB’s claim succeeded and CPC’s counterclaim was dismissed.

First-instance judgment. No earlier appellate decision is stated in the judgment.