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Wednesday, May 22, 2024

CPC loses hedging case in London – hundreds of million of dollars to pay

High Court in a 140-page judgment awards case to Standard Chartered Bank on all counts; State oil utility liable to pay minimum of $ 162 m previously withheld plus interest Government likely to appeal against the ruling in a higher court; Ruling on $ 200 m-claiming Citi’s arbitration scheduled for late July; $ 60 m claiming Deutsche Bank’s arbitration in Washington to start in Sept.
In a major setback to the Government’s stand on the controversial oil hedging fiasco the Ceylon Petroleum Corporation (CPC) has lost the case in London High Court instituted by the Standard Chartered Bank.

Reports reaching from UK said that as per judgment delivered by the London High Court yesterday CPC has lost the Case No: 2009 FOLIO 375 on all counts.
Standard Chartered Bank, part of the consortium of banks with which CPC hedged oil, filed a case early this year claiming for an estimated $ 162 million (Around Rs. 18 billion + interest) held back by the Government after the latter suspended the scheme.
In his judgment, High Court judge Justice Hamblen concluded Standard Chartered Bank’s claim succeeded of $161,733,500 plus interest following derivative transactions entered into with Ceylon Petroleum Corp., Reuters said in a report filed out of London.
Local analysts told the Daily FT that  Standard Chartered Bank winning the case on all counts is a major setback to the Government and the London High Court ruling will have a big influence on pending actions.
CPC advanced four main grounds upon which it is entitled to refuse to pay the amounts allegedly due: (1) Lack of capacity; (2) Lack of authority; (3) Supervening illegality and (4) Counterclaim.
“I conclude that SCB’s claim in respect of T8 and T9 succeeds and that CPC’s counterclaim be dismissed,” Justice Hamblen said in his judgment. The two derivative transactions entered into with CPC on 28 May 2008 (“T8”) and 9 July 2008 (“T9”) (together the “Transactions”).
CPC is likely to appeal against the ruling in London.
The other two foreign banks payments to which have been withheld are also contesting. A ruling on the arbitration action in Singapore sought by Citi, whose due is estimated to be $ 200 million, is slated for late July whilst Deutsche Bank which has $ 60 million claim, is likely to see its arbitration action in Washington to start in September.
The two local banks involved in the scheme Commercial Bank and People’s Bank haven’t filed any action as yet.
The Standard Chartered Bank case was heard in late March to mid-April with a host of public and private sector officials being flown to London at CPC expense. Before the case came up analysts said stakes were high for both parties but neither wanted to give in based on their firm beliefs.
             The case was filed by Standard Chartered Bank UK after the head office took over the liability out of Colombo Branch.
The contentious hedging deal dates back to early 2007 when CPC entered into a transaction to hedge against rising oil prices with SCB, Citi, Deutsche as well as People’s Bank and the biggest private sector player Commercial Bank.
The contact entered into was what is described as “zero dollar option” which capped the exposure amount at a price. Originally hedging deal benefitted CPC but from mid-2008 as price of oil decreased dramatically in tandem with global recession CPC had to make substantial monthly payments to the banks under the agreements. Efforts to restructure the deal failed leading up to default by CPC in late 2008.
Given the serious impact of the deal and its fallout, hedging contract ended up in the Supreme Court with assertion that it was invalid and improperly structured for the benefit of banks. Thereafter Supreme Court ordered the suspension of further payments by CPC and directed that fuel prices must be reduced, the then Petroleum Minister removed and CPC Board reconstituted.
However the Court order was later lifted in early 2009 as the Government failed to adhere to the directions of reducing fuel prices or removing the Minister. The matter failed to be resolved amicably as the Government and banks stuck to their original positions and the matter going for international arbitration and legal proceedings.
According to London High Court’s Monday judgment
•    It is contained in a standard form document produced by the industry body International Swaps and Derivatives Association (ISDA) , in the interests of all market participants and end-users, and has been used for almost 20 years. 
•    The use of the ISDA documentation was required by the CBSL, the relevant bank regulator in Sri Lanka.
•    From the outset of the relationship, it was the common understanding of CPC and SCB that ISDA documentation would be used. 
•    CPC, a substantial concern, took legal advice both internally and externally, and conducted negotiations over the ISDA documentation with SCB. It was capable of taking such further legal advice as it considered appropriate.
•    CPC had ample opportunity to decide whether or not to enter into the Transactions, or other transactions offered by other banks in a competitive market for its business.
•    CPC could have appointed an independent expert to advise it on its hedging programme; indeed it specifically considered whether to do so, and after initially choosing to do so for a short period, chose not to.
•    These were large, arm’s length Transactions, entered into between significant commercial counterparties.
•    In a commercial context, particularly where the parties take independent legal advice, there is every good reason for the Court to allow the parties to allocate their respective risks and responsibilities, and not to re-write their agreement so as to undermine reasonable commercial expectations.

Reuters’ report from London said:The state oil company, which imported some 26 million barrels per year at a cost of $2 billion in 2007, needed to hedge its purchases of crude oil and refined products on the international market.
It was exposed to the record oil rally of 2008 when oil hit an all-time high above $147 a barrel for U.S. crude in July before crashing to less than $40 a barrel in December of that year.
Standard Chartered Bank’s case was that Ceypetco had always been aware that a fall in oil prices would have made it liable to make payments to Standard Chartered.
But in a counterclaim, Ceylon Petroleum Corp said it was entitled to refuse to make the payments.
“CPC, which had no appetite to lose money, should never have been sold these products and it disputes their validity,” noted the court judgment, but it dismissed Ceypetco’s counterclaim.
 The state-owned company entered into derivative transactions with other banks and one official at Citi Bank, speaking on condition of anonymity, said the ruling could mean other banks would also be entitled to payments.
Daily FT


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