Standard Chartered Bank v Ceylon Petroleum Corporation [2012] EWCA Civ 1049


A commercial entity established under statute, primarily for the purposes of international and domestic trade, has the capacity to enter into a range of transactions which a commercial entity acting in that same sector would undertake as part of their ordinary business. This includes hedging or speculative transactions.


Ceylon Petroleum Corporation ("CPC") appealed against the first instance decision in favour of Standard Chartered Bank ("SCB") for the sum of over $165 million under two derivative contracts made in 2008 between the parties ("T8" and "T9"). The contracts were entered into under the terms of the 2002 version of the ISDA Master Agreement.

CPC is a corporate body established under legislation, primarily for the supply of crude oil and petroleum products to the internal market of Sri Lanka. CPC's business had a price risk based on its need to buy physical oil. In an attempt to protect itself from continued price rises, CPC entered into derivative transactions with SCB (as well as other banks). Between February 2007 and October 2008, ten such transactions were entered into with SCB. T8 and T9 required SCB to make payments to CPC when oil prices were high and for CPC to make payments to SCB when prices fell below an agreed floor.


Due to an unprecedented fall in the price of oil, CPC was "out-of-the-money" on T8 and T9 (as well as on other transactions). From December 2008, CPC failed to make the payments due under T8 and T9 and SCB commenced proceedings to recover the amounts outstanding. At first instance, the court ruled in favour of SCB. CPC appealed on the ground that the contracts on which SCB sued are not binding on CPC because CPC did not have the capacity to enter into them.

CPC claimed they had capacity to enter into derivative contracts which constituted hedging, but did not have capacity where they constituted speculation. SCB argued that whatever the nature of T8 and T9, CPC had capacity.


As a key submission of CPC, the Court of Appeal considered at some length the distinction between hedging and speculation but ultimately found it unhelpful to view the categorisation of the transaction (as either hedging or speculation) as determinative. The Court of Appeal noted that in the absence of a clear line between the two categories, it is likely to give rise to "immense difficulties in practical operation" as it will be impossible to tell which way any particular transaction falls.

Instead, it was better to ask whether the transactions were within CPC's capacity. The Court of Appeal did say if it were necessary to describe the transactions, it viewed them as "either highly speculative hedges or speculations with elements of hedging about them".

CPC relied on the House of Lords' decision in Hazell v Hammersmith and Fulham London Borough Council [1] which held that local authorities had no power to enter into interest rate swap agreements. The Court of Appeal disagreed that a clear parallel could be drawn between English local authorities and CPC - incorporated for a different purpose, a different function and in a different context.

Although CPC was established to act in the public interest, the legislature must have intended "that CPC should have the capacity to enter into the whole range of transactions that a commercial organisation acting in that field of business would ordinarily undertake and that... it [had] capacity to enter into any transaction that could fairly be said to be incidental or conducive to its statutory objects". CPC was not intended to be loss-making, it was responsible for the management of its finances. As the appeal was based on CPC's capacity, the court maintained that the question was to be answered by reference to the nature of the transactions and whether they fell within CPC's scope of business. Were the transactions "ordinarily part of, ancillary or conducive to, the business of a commercial, if public corporation"? The court held that "it seems to us to be impossible to say that they were not. Therefore... these transactions were in our judgment within the capacity of CPC and are binding on it".


It is perhaps not surprising that when the derivatives contracts proved, with the benefit of hindsight, unwise, CPC sought to argue it lacked the capacity to enter into them. What is interesting is the Court of Appeal's response to that argument. Rather than searching for an answer to the impossible question of what is a hedge and what is speculation, the key question was whether the transactions fell within the scope of the business that CPC was incorporated to carry out.