Standard Chartered Bank v Ceylon Petroleum Corporation

A statutory corporation’s contractual capacity is determined by the legislation establishing it. Where that legislation defines principal objects and permits business incidental or conducive to them, capacity extends to transactions fairly connected with the corporation’s authorised commercial field. Capacity depends on the nature and commercial purpose of the transaction, rather than its prudence or the benefit of hindsight. The labels hedging and speculation are not determinative where the distinction lacks clear criteria. A transaction may be within capacity despite speculative features if it is connected with the risks and commercial pressures of the authorised business. The approach in Hazell v Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1 depended on the statutory limits applicable to local authorities and did not necessarily govern a commercial statutory corporation.

Ceylon Petroleum Corporation appealed against Hamblen J’s judgment for Standard Chartered Bank in the sum of US$166,476,281 under two oil derivative contracts, T8 and T9. The High Court decision is reported at [2011] EWHC 1785 (Comm).

CPC argued that it lacked statutory capacity to enter the contracts because they were speculative. The contracts were made under the 2002 ISDA Master Agreement and involved options relating to Singapore Gasoil. The central issue was whether the transactions were outside CPC’s statutory objects, or were incidental or conducive to its authorised commercial business.

The appeal was dismissed unanimously. The contracts were within CPC’s capacity and binding on it.

1. Hedging and speculation. The concepts overlap and may contain elements of each other. In the absence of a formal definition, it is difficult to exclude subjective considerations entirely, although intentions and aims may be objectively ascertained. It was therefore unhelpful to treat the classification of the transactions as hedges or speculations as determinative of capacity.
2. Statutory capacity. Capacity had to be determined by the terms of the Ceylon Petroleum Corporation Act 1961. Section 5 defined CPC’s commercial field in a manner comparable to an objects clause. Applying the principles in Ashbury Railway Carriage Co. Ltd v Riche L.R. 7 H.L. 653 and Attorney-General v Great Eastern Railway Co L.R. 5 App. Cas. 473, CPC had capacity to enter transactions fairly incidental or conducive to its statutory objects.
3. Commercial context. CPC was intended to operate as a commercial entity engaged in international and domestic petroleum trade. Its capacity included ordinary commercial methods of managing the financial, foreign-exchange and market risks inherent in that business. The relevant question was whether the transactions, by their nature, fell within that business, not whether they were prudent.
4. Application. T8 and T9 were linked to CPC’s physical oil-importing obligations. They could provide payments and positive cash flow while prices remained high, helping CPC manage cash and foreign-exchange pressures. Their speculative elements and substantial downside risk did not prevent them from being incidental or conducive to CPC’s objects. The court left open whether CPC could enter purely speculative transactions unrelated to immediate commercial pressures.
5. Hazell distinguished. Hazell concerned local authorities whose borrowing powers were restricted by specific statutory provisions. No necessary parallel existed between that statutory context and CPC’s commercial corporate framework. The separate argument based on sections 6(l) and 6(q) of the Act was unnecessary to determine and was not fully argued.

• Court of Appeal (Civil Division): In [2012] EWCA Civ 1049, the court dismissed CPC’s appeal and held that T8 and T9 were within its statutory capacity.
• High Court of Justice, Queen’s Bench Division, Commercial Court: Hamblen J gave judgment for Standard Chartered Bank in the sum of US$166,476,281 under the two derivative contracts: [2011] EWHC 1785 (Comm).