Advisory duty
Contractual estoppel

On July 11 2011 Justice Hamblen handed down his judgment in Standard Chartered Bank v Ceylon Petroleum Corporation.(1) The case highlights the robust approach that the English courts are taking at present to the distinction between advisory relationships and investment advice given as part of the sales process.


Ceylon Petroleum Corporation is Sri Lanka's state-owned importer, refiner and retailer of crude oil. By 2007 the cost of the barrels of oil that it was importing into Sri Lanka had risen to about $2 billion. Accordingly, it was exposed to the dramatic increase in the price of oil from 2003 to late July 2008.

In an attempt to hedge against this risk, Ceylon Petroleum Corporation entered into about 30 oil derivative transactions between February 2007 and October 2008, of which 10 were with Standard Chartered Bank. The transactions at issue required Standard Chartered Bank to pay Ceylon Petroleum Corporation when oil prices went above an agreed cap; Ceylon Petroleum Corporation was to pay the bank when the oil price fell below an agreed floor.

Predominantly as a result of the financial crisis in 2008, the price of oil almost completely collapsed and Ceylon Petroleum Corporation found itself out of the money on its derivative transactions. Ceylon Petroleum Corporation failed to make its monthly payments after December 12 2008 and Standard Chartered Bank brought proceedings to recover approximately $160 million, plus interest, that it claimed it was due under the terms of the transactions.

Ceylon Petroleum Corporation submitted that Standard Chartered Bank had held itself out as advising the company to enter into transactions that did not in fact hedge Ceylon Petroleum Corporation's risks, but exposed it to vast and disproportionate downside risk in return for negligible fixed profits. Ceylon Petroleum Corporation contended that Standard Chartered Bank had been well aware of its conservative risk profile, including the fact that it had no appetite to lose money, and maintained that it should never have been sold the products. In addition to other grounds, Ceylon Petroleum Corporation claimed that no amounts were owed because Standard Chartered Bank had:

  • breached a contractual or tortious duty to advise; and
  • made misrepresentations which had induced Ceylon Petroleum Corporation to enter into the transactions.

Advisory duty

In contending that Standard Chartered Bank owed it an advisory duty, Ceylon Petroleum Corporation made allegations that included the following:

  • It had been obvious that Ceylon Petroleum Corporation needed advice. As recorded in Standard Chartered Bank's internal appropriateness profiles, the company had no systems to manage or monitor risk. Its lack of sophistication had also been evident. It had been an important part of the company's strategy that there be a sufficiently large gap between the prevailing price and the floor price to allow it to unwind the trade before the floor was reached without incurring loss. However, this strategy had been deeply flawed, as the unwind price depended on the mark-to-market value of the trade (and the forward curve), rather than the spot price. Standard Chartered Bank had also been fully aware of Ceylon Petroleum Corporation's conservative appetite for risk. An internal Standard Chartered Bank note of a meeting recorded that Ceylon Petroleum Corporation's "chairman was clear [that] he had almost zero tolerance for loss".
  • Standard Chartered Bank had held itself out to Ceylon Petroleum Corporation as an adviser. At a presentation before the transactions were entered into, the bank had told Ceylon Petroleum Corporation that it would advise the company when deciding what products to use and when to enter into trades.
  • Standard Chartered Bank regarded itself internally as providing advice to Ceylon Petroleum Corporation and the bank's internal documents referred to it acting in an advisory capacity.

However, the judge held that no general advisory duty in contract or in tort arose, even if the contractual and other documentation was ignored. Particular reliance was placed on the findings in Springwell,(2) including that:

  • the fact that investment advice is given tells one nothing of the obligations, if any, that are owed in respect of such advice;
  • there is a real distinction between an investment adviser, retained to advise a client, and advice given as part of the selling process;
  • the giving of advice is "part and parcel of every day of a salesman in emerging markets"; and
  • the absence of a written advisory agreement "is a significant pointer against the existence of an advisory obligation".

As an additional factor, the judge noted that Ceylon Petroleum Corporation had not taken steps to ensure that Standard Chartered Bank was provided with all of the information that it would have needed to act as a general adviser in relation to the company's hedging strategy, or to define the scope of any advisory duty.

Contractual estoppel

Standard Chartered Bank contended that Ceylon Petroleum Corporation was in any event estopped by contract - as a result of various non-reliance statements - from submitting that the alleged duty of care existed.

Ceylon Petroleum Corporation contended that the non-reliance statements were not binding because the bank was estopped by convention or acquiescence from relying on them. The company submitted that it was an unsophisticated entity, relying on the bank for advice and guidance, and that a reasonable person would expect the bank, acting honestly and responsibly, to have informed it that this understanding was mistaken.

The judge found this reverse estoppel argument to be fundamentally flawed, stating that:

"The point and effect of the Non-reliance Statements is to require the parties to accept a particular state of affairs as true, even if the actual reality was different. One cannot, merely by referring to what is asserted to be the underlying reality, avoid the effect of these provisions."

Ceylon Petroleum Corporation was also held to be contractually estopped from asserting its claim in misrepresentation by an entire agreement clause. This clause was considered to satisfy the requirement of reasonableness test, particularly given the fact that it was contained in a standard form International Swaps and Derivatives Association document.


The case is the latest in a series in England relating to the misselling of financial products which have favoured investment banks. In uncertain financial times, with a further wave of litigation likely, financial institutions will take comfort from the fact that the English courts continue to take a robust line on the distinction between advisory relationships and investment advice given as part of the sales process. However, given the substantial asymmetry of information and sophistication which exists between arranging banks and the institutions with which they deal, it is to be expected that the reasonableness of exclusion clauses will continue to be tested.

For further information on this topic please contact Andy McGregor at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).


(1) [2011] EWHC 1785 (Comm).

(2) [2008] EWHC 1186 (Comm).