Deutsche Bank targets Sri Lanka with a BIT claim connected to a hedging contract

By Damon Vis-Dunbar
3 April 2009

A dispute related to oil derivatives entered into by Sri Lanka’s state-run petroleum utility has led at least one foreign bank to file arbitration proceedings against the Government of Sri Lanka.

The state-run Ceylon Petroleum Corporation (CPC) entered into hedging contracts with a number of foreign and local banks in 2007 to protect against a surge in oil prices. While the contracts were originally profitable for CPC, they led to heavy losses when oil prices fell steeply in the fall of 2008. The heads of CPC and the banks involved have come under criticism by politicians, citizens and the news media in Sri Lanka.

According to reports in the Sri Lankan press, several citizens have submitted petitions to the Supreme Court alleging corruption played a part in the contracts, leading the court to order CPC to temporarily suspend payments under the contracts. While that order was lifted in January 2009, The Sri Lankan Central Bank has also stepped in, ordering CPC to suspend the hedging transactions, on the grounds that they were “materially affected and substantially tainted.”

Media reports also quote government officials as saying that the Government of Sri Lanka and the banks have been engaged in talks on re-negotiating the hedging contracts.

Deutsche Bank has filed an arbitration claim against the government of Sri Lanka in relation to the hedging contracts, registered with the International Centre for Settlement of Investment Disputes (ICSID) on 24 March 2009.  In its claim, Deutsche Bank argues that the government of Sri Lanka has violated the German-Sri Lanka bilateral investment treaty. Deutsche Bank has declined to comment on the case.

Citibank is also rumored to have turned to arbitration in order to enforce the hedging contracts.  An official with the bank said he could not comment, because a case related to the contracts is pending in the Sri Lankan Supreme Court.