Hedging case takes another turn

A fresh fundamental rights petition was filed on the oil hedging crisis this Thursday seeking an interim order from the Supreme Court to restrain the Ceylon Petroleum Corporation (CPC) and the Treasury Secretary from participating in any arbitration proceedings or litigation with any of the banks involved in the hedging contracts until a final determination is made on the application.

The petitioner, public interest activist Nihal Sri Ameresekere filed a petition in May 2009 on the hedging issue in the Supreme Court but in this week’s petition says that he was only aware of the intentions of the banks, namely Citibank, Deutsche Bank and Standard Chartered Bank, to enter into arbitration or litigation after the May application was filed. He is also asking that the interim order be converted into a permanent order upon the final determination of the application.

The petition states that arbitration cannot be proceeded with because the claims for payments by the banks stem from unlawful and illegal contracts. Mr. Ameresekere states that he now believes that the payments due from the CPC on the hedging agreements it entered into with five different banks is over US$800 million as some agreements go up to July, August and October of 2009. He also stated that contracts which he says are unlawful and illegal jeopardizes the government of Sri Lanka’s foreign borrowing ability and the standing in the international community for attracting foreign investments into the country.

The petition says the claims by the five banks --Standard Chartered Bank, Citibank, Deutsche Bank, Commercial Bank and People’s Bank --, are alarmingly high when compared with the foreign exchange reserves.

The petition further states that the hedging contracts are in effect ‘deals’ in the nature of speculating, gambling, betting or wagering on the movement of petroleum oil prices on notional quantities, through a devious scheme of hedging through derivative instruments. Such ‘deals’ are unlawful and illegal activity in Sri Lanka and internationally and cannot be enforced in law. Mr. Ameresekere states that he believed the transactions were carried out purportedly under the Master Agreement, referred to as the ISDA Master Agreement of the International Swaps and Derivatives Association, Inc., and in terms of the directions of the CB.

The petition states regardless of specific directions given in or about December 2008 by the CB’s Monetary Board, Standard Chartered Bank has remitted in valuable foreign exchange a sum exceeding US$100 million between December 2008 and April 2009, and was endeavouring to remit a further sum exceeding US$20 million on ‘Back to Back Agreements’ entered into with one or more foreign parties. The US$20 million had not been remitted after Mr. Ameresekere filed the earlier petition on May 25th 2009 in FR Application 404/2009.

Mr. Ameresekere added that he understand Standard Chartered Bank has instituted legal action in the UK High Court, making a claim against CPC, while Deutsche Bank has filed for arbitration in the International Center for Settlement of Investment Disputes (ICSID) in the US, and Citibank has instituted arbitration proceedings in the U.K, in the London Court of International Arbitration. He said that to date, he understands the arbitration (defence) alone has amounted to around Rs.25 million which is public money.