Neutral Citation Number: [2011] EWHC 1785 (Comm)
Case No: 2009 FOLIO 375

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 11/07/2011
Before:
MR JUSTICE HAMBLEN
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Between:
	STANDARD CHARTERED BANK	Claimant	
	- and -		
	CEYLON PETROLEUM CORPORATION	Defendant	
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Mr R Dicker QC and Mr J Goldring (instructed by Linklaters LLP) for the Claimant
Mr A Malek QC, Mr C Freedman and Mr J MacDonald (instructed by Gibson & Co) for the Defendant
Hearing dates: 28, 29, 30, 31 March, 1,4,5,6,7,8,11,12,13,14, April, 27 May 2011
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Judgment

JUDGMENT INDEX 
A. 	OVERVIEW-  paras 1-11
B.	THE TRANSACTIONS - paras 12-52
(1)	The Master Agreement: paras 13-19
(2)	The Term Sheets and Confirmations: paras 20-22
(3)	The nature of the transactions: paras 23-37
(4)	Transactions 1 to 10: paras 20-22
(5)	Transaction 8: paras 44-48
(6)	Transaction 9: paras 49-52
C. 	 FACTUAL NARRATIVE - paras 53-313
(1)	SCB in Sri Lanka: paras 53-57	
(2)	CPC: paras 58-66
(3)	June 2006 to March 2007 - T1 and T2: paras 67-106
(4)	May to August 2007 - T3 and T4: paras 107-118
(5)	September 2007 to February 2008: paras 119-164
(6)	March to July 2008 - T5-T9: paras 165-226
(7)	August 2008 to January 2009: paras 227-313
D.	KEY ISSUES OF FACT - paras 315-389
(1)	24 October 2007 meeting: paras 315-329
(2)	Mr De Mel and Mr Karunaratne’s knowledge of the transaction documentation: paras 330-333
(3) Whether the Transactions were speculations rather than hedges: paras 334-389
E.	THE ISSUES -  paras 390-574
(1) CAPACITY:  paras 391-426
(2) AUTHORITY: paras 427-457
(3)  ILLEGALITY: paras 458-470
(4) THE COUNTERCLAIM: paras 471-574
F.	CONCLUSION - para 575

Mr Justice Hamblen: - 

A. 	OVERVIEW
1.	The Defendant (“CPC”) is Sri Lanka’s state-owned importer, refiner and retailer of oil.  CPC is a large commercial organisation, and a major importer of crude oil and refined petroleum products on the international market, importing some 26 million barrels per annum into Sri Lanka at a cost which had increased, by 2007, to about US$2 billion. Because it was required to buy oil on the international market in US dollars, in such significant amounts, it was inherent in CPC’s business that it had a price risk based on its need to buy physical oil. In particular, in the present case CPC was exposed to the significant and unprecedented rise in the price of oil that occurred in the period from about 2003 up to late-July 2008.  
2.	In an attempt to protect itself from the rise in the oil price, from February 2007  CPC began to enter into oil derivative transactions with the Claimant (“SCB”) and other competing banks operating in Sri Lanka, including Citibank NA (“Citi”), Deutsche Bank (“DB”), and two Sri Lankan banks, Commercial Bank of Ceylon and People’s Bank (which is owned by the Sri Lankan Government). In the period between February 2007 and October 2008, CPC entered into about 30 such transactions, including 10 transactions with SCB.
3.	In the present proceedings SCB claims US$161,733,500 plus interest, being the sum allegedly due under two derivative transactions entered into with CPC  on 28 May 2008 (“T8”) and 9 July 2008 (“T9”) (together the “Transactions”).  These were the 8th and 9th such transactions entered into between CPC and SCB. The bulk of the derivative contracts entered into by CPC, including the Transactions, required the banks to make payments to CPC when oil prices were high.  Conversely, CPC was required to make payments to the banks if the price of oil fell below an agreed floor. 
4.	All CPC’s oil derivative transactions were executed on CPC’s behalf by its Chairman, Managing Director and sole executive director, Mr Ashantha de Mel.  He had been appointed by the Minister of Petroleum with effect from October 2006. The transactions were also often signed by Mr Lalith Karunaratne, a chartered accountant who had been employed as the Deputy General Manager (Finance) of CPC and its chief financial officer since February 2005.
5.	The Transactions were entered into under an ISDA Master Agreement (2002 version) dated as of 31 July 2006 (the “Master Agreement”) on the terms set out in Confirmations dated 3 June 2008 and 15 July 2008. 
6.	In the period between February 2007 and July 2008, oil prices continued to rise in a previously unprecedented fashion, so that CPC was required to make ever-increasing US dollar payments for its physical oil imports. At the same time, CPC’s portfolio of derivative transactions generally required the banks to make payments to CPC when the oil price increased or remained high. 
7.	In late July and August 2008, however, contrary to many industry forecasts, oil prices began to fall rapidly. This fall accelerated later in 2008 as the world financial crisis deepened, resulting in an unprecedented and almost complete collapse of the oil price. The price at which CPC was able to purchase oil in the international market and thus the amount that it needed to pay to do so therefore fell considerably. However, the derivative transactions that CPC had entered into were negatively correlated to the price of oil, which meant that, as physical oil prices fell, CPC also became “out-of-the-money” on its derivative transactions, including T8 and T9, being those which were outstanding with SCB, together with other such transactions with Citi, DB, Commercial Bank of Ceylon and People’s Bank.
8.	In September, October and November 2008, CPC made the payments demanded by SCB under T8 and T9 in respect of the relevant months. Since 12 December 2008, however, CPC has failed to make any further monthly payments in respect of T8 and T9. (It has also failed to make further payments under its outstanding derivative transactions with Citi and DB, which are the subject of arbitration proceedings, and with the local banks.)
9.	SCB’s case is straightforward: it is entitled to the remaining payments which are due under the terms of the Transactions. CPC entered into the Transactions as an arm’s length counter-party with SCB, knowing how they would respond to fluctuations in the oil price, wanting to acquire the benefits of the Transactions, and aware of the risks and rewards that they entailed.  CPC was always aware that a fall in oil prices (which in this case was largely caused by the financial crisis) would cause it to became liable to make payments to SCB and there is no basis upon which it can now avoid its obligations.
10.	CPC’s case is that, when considered in its proper factual context, this is not a straightforward claim, as SCB contends, and that there is nothing standard about this case.  On the contrary, this is a case concerning a publicly owned corporation, of critical importance to its national economy, with no experience in commodity derivative transactions, engaging in novel and sophisticated transactions for the first time in a country that itself had no previous experience of such trading.   CPC contends that SCB held itself out to CPC as advisor and encouraged it to enter into transactions that did not hedge its risks, but instead provided the prospect of insignificant up-front fixed profits in return for taking on vast and disproportionate downside risk.  CPC, which had no appetite to lose money, should never have been sold these products, and it disputes their validity.  
11.	CPC advances four main grounds upon which it is entitled to refuse to pay the amounts allegedly due: 
(1)	Lack of capacity: CPC, which was incorporated under the Ceylon Petroleum Corporation Act 1961 (the “CPC Act”), contends that it did not have capacity under the CPC Act to enter into the particular derivative contracts that it purported to enter into because: (a) they fell outside the scope of CPC’s “general objects” as set out in s 5 of the CPC Act; and (b) they fell outside the terms of a letter dated 29 January 2007 (the “Wijetunge letter”) said to constitute a “direction” given by the Minister of Petroleum to CPC pursuant to s 7(1) of the CPC Act.   
(2)	Lack of authority: CPC contends that (a) Mr de Mel and Mr Karuanaratne lacked actual authority from the CPC Board to enter into the Transactions because they were in breach of the terms of the relevant board resolution of March 2007; and (b) they fell outside the terms of the Wijetunge letter. CPC also denies that Mr de Mel and Mr Karuanaratne had ostensible authority to enter into the Transactions.  
(3)	Supervening illegality: CPC contends that a letter dated 16 December 2008 from the Secretary of the Monetary Board of the Central Bank of Sri Lanka (the “CBSL”) had the effect of rendering any further performance of CPC’s payment obligations under the Transactions unlawful in Sri Lanka and so, it is said, unenforceable in England (relying on Ralli Bros v. Compania Naviera [1920] 1 KB 614, [1920] 2 KB 287).  
(4)	Counterclaim: CPC contends that SCB owed a contractual and/or tortious duty to advise CPC which it breached, and that it made misrepresentations to CPC, thereby causing CPC to enter into the Transactions, and suffer loss constituted by the payments due under them. 
B. 	THE TRANSACTIONS
12.	Each of the Transactions constitutes a transaction the terms of which is governed by the Master Agreement (together with its Schedule) and the relevant Confirmation. 
(1)	The Master Agreement
13.	A draft of the Master Agreement was provided to CPC on 1 August 2006. The Master Agreement, including the terms of its Schedule, was considered by and negotiated between SCB and CPC’s Chief Legal Officer (Ms Geetha de Fonseka) and CPC’s external lawyers (Nithya Partners, a Sri Lankan firm of attorneys-at-law) over a number of months prior to its eventual execution by CPC on 30 May 2007, when it was dated as of 31 July 2006.
14.	CPC admits that it is bound by the terms of the Master Agreement, which was executed by Mr De Mel and another director, Mr David Gooneratne, in accordance with the SCB resolution passed by the Board on 26 March 2007.  CPC does not allege that the execution of that Master Agreement was outside either its capacity or its signatories’ authority. 
15.	The Master Agreement, which was the 2002 version, included, in the usual way, representations as to the capacity and authority of the parties to enter into any transactions (the “Authority Statements”).
16.	Section 3 of the Master Agreement provided that each party represented as follows, which representations (called Basic Representations) were deemed to be repeated by each party on each date on which a Transaction was entered into:
“(ii)	Powers.  It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and/or any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement … and has taken all necessary action to authorise such execution, delivery and performance.
(iii)	No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of Government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets;
(iv)	Consents.  All Governmental and other consents that are required to have been obtained by it with respect to this Agreement … have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and
(v)	Obligations Binding.  Its obligations under this Agreement … constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms …”
17.	The Master Agreement also incorporated in Section 3, in the usual way, an Additional Representation dealing with the “Relationship Between Parties” in the following terms (the “Non-Reliance Statements”), set out in Part 4(m) of the Schedule: 
“Relationship Between Parties. Each party will be deemed to represent to the other party on the date it enters into a Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction):   
(1) 	Non-reliance.  It  is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgement and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction; it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of that Transaction.”
(2) 	Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of that Transaction. It is also capable of assuming, and assumes, the risks of that Transaction. 
(3) 	Status of Parties. The other party is not acting as a fiduciary for or an advisor to it in respect of that Transaction.”
18.	Substantially similar provisions to the Non-Reliance Statements were also expressly set out in each of the ten Confirmations entered into by SCB and CPC between February 2007 and September 2008. They are in a standard form drafted by ISDA. They are part of the pro forma Schedule to the 2002 version of the Master Agreement.  Each Confirmation stated that it formed part of and was subject to the Master Agreement.
19.	Clause 9 of the Master Agreement included the following:
“(a)	Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of any party for fraud.
(b) Amendments.  An amendment, modification or waiver in respect of this Agreement shall only be effective if in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system.”
(2)	The Term Sheets and Confirmations
20.	The various presentations and Term Sheets provided by the banks, including SCB, contained various disclaimers stating that the banks were not acting as advisors to CPC, but as contractual counterparties. 
21.	The Term Sheet for T8 and T9 included (amongst other things): 
(1)	A “Risk Disclosure Statement”, which stated that a counterparty could not expect to terminate the transaction at no cost:
“Upon entering into this transaction, you will be contractually bound to SCB under the terms of the transaction. Unless otherwise expressly stated in the terms of the transaction, this transaction may not be terminated prior to the termination date without the consent of SCB and upon terms agreed between you and SCB. Such terms may include the cost of unwinding a hedging position taken by SCB that are to be payable by you. The cost of early termination of the transaction, inter alia, may be substantial.”  
(2)	A “Risk and Return Analysis”, which included the following: 
“Counterparties should consult their own financial, legal, accounting and tax advisors about the risk associated with this Transaction, the appropriate tools to analyze the Transaction, and the suitability of the Transaction in each counterparty’s particular circumstances.” 
(3)	A “Sensitivity Analysis”, which showed “some (but not all)” of the potential cash-flows that would result if the floating rate declined, in the form of a table. 
(4)	At the bottom of each page of the Term Sheet, the document also stated that:
“SCB has no fiduciary duty towards you, and assumes no responsibility to advise on, and makes no representations as to the appropriateness or possible consequences of, the prospective transaction.”
22.	The Confirmation for T8 and T9 confirmed the economic terms of the trade. It was agreed that “absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for this Transaction”, each party was making representations to the other, which representations were expressly set out in the Confirmation and were substantially similar to the Non-Reliance Statements. 
(3)	The nature of the transactions 
23.	Derivative transactions including transactions such as those entered into by CPC with SCB and the other banks are used to hedge against exposures arising out of an underlying physical position. In the case of CPC, as a purchaser of physical oil, these risks included the price risk of the oil that it was required to purchase.
24.	The price risk in respect of such an underlying physical position is hedged, in whole or in part, by entering into a paper transaction that will result in a payment to the bank’s customer when market prices are high (when the cost to the customer of its underlying physical position is high) in consideration for the payment of a price by the customer.
25.	One method by which CPC could have hedged this risk would have been to purchase a call option from a bank, in exchange for a premium. In other words, in consideration for paying a fixed sum, CPC would acquire the right to buy oil at a particular price on a specified future date (the “strike price” of the call option). One disadvantage of purchasing a call option in exchange for a premium, however, is that the customer has to fund the premium which, depending on the value of the call option it is buying, may be substantial.
26.	An alternative method is for the customer to purchase a call option, not in consideration of a premium, but by selling a corresponding put option to the bank, giving the bank a right to buy oil at a specified price from the customer if the market price of oil is below the strike price of the put option. A transaction involving the purchase of a call option by the customer in consideration of the sale of a put option is sometimes called a Zero Cost Collar or ZCC.
27.	Under a simple ZCC, the customer, a purchaser of physical oil, buys a call option from the bank, that is a right to buy oil if the oil price is higher than the ‘strike price’ of the call option. The strike price of the call option is often referred to as “the ceiling”. The customer does not pay an upfront premium for the call option that it is buying (hence the transaction is, in this sense, “zero-cost”), but pays for it by selling a corresponding put option to the bank. Under the put option, the customer must pay the bank if the oil price falls below the strike price of the put option.  The strike price of the put option is often referred to as “the floor”.
28.	The effect of a simple ZCC is that:
(1)	If the market price of oil is above the ceiling (i.e. above the strike price of the call option bought by the customer), the bank is required to make a payment to the customer.
(2)	If the market price of oil is between the ceiling and the floor, neither party is required to make a payment to the other.
(3)	If the market price of oil is below the floor (i.e. below the strike price of the put option sold by the customer), the customer is required to make a payment to the bank.
29.	The effect of a ZCC is that the customer acquires upside rights exercisable when oil prices are high (and when its costs for physical oil are high) in consideration for selling downside obligations exercisable by the bank when the oil price is low (but when its costs for physical oil are low). In this way, the customer hedges the risks arising from its physical position.
30.	Unlike the position where a party purchases a call option in exchange for a premium, it is inherent in a zero-cost structure that the customer accepts an uncertain downside risk. The consideration that the customer provides to the bank is not the payment of a fixed sum by way of premium, but the sale of rights that will require it to make payments to the bank if, but only if, oil prices are low.
31.	The parties may modify the precise terms of the upside rights which are bought, and as a result the precise terms of the downside obligations which are sold, or vice versa. 
32.	Thus, if, for example, the customer wishes to reduce the risk of its downside obligations, by lowering the floor (i.e. the oil price at which it will start making payments to the bank), one means of doing so is by reducing the value of its upside rights that it seeks to purchase.  There are a number of ways in which it may seek to do so, including the following:  
(1)	It may cap the amount that the bank will have to pay per notional barrel of oil if the oil price is above the strike price of the call option. A ZCC which contains this additional feature is sometimes called a “Seagull” (or “3-way”).  The strike price at which the Seagull operates is sometimes called “the cap”.  The effect of a Seagull is that, if the market price is between the ceiling and the cap, the customer receives the difference between the ceiling and the market price.  If the market price is greater than the cap, it continues to receive payment, but capped at the agreed maximum amount per barrel.  A customer may consider a Seagull sensible where, for example, it considers that oil prices are unlikely to rise beyond a particular amount (the level of the cap) or is not willing or able to pay for full protection above that level.  
(2)	Another way is by capping the total amount that the bank will have to pay in respect of the transaction as a whole when the oil price is above the strike price of the call option.  In this situation, if and when the total amount (or “target”) is paid to the customer, the structure then terminates or “knocks-out”, and there are no continuing obligations either way.  A ZCC that contains this additional feature is sometimes called a “Target Redemption Forward” (or “TRF”).
33.	In each such case, because the customer is buying upside rights by selling downside obligations, a modification to its upside rights will usually require a modification to the amount of its downside obligations (and vice versa) so that the two packages of rights agreed by the parties continue broadly to be matched.
34.	Conversely, if a customer wants to increase the value of the upside rights it is acquiring, it can do so by increasing the risk of its downside obligations.  Thus, for example, if the customer wishes to lower the strike price of the call option it is buying, so as to lower the price at which the bank will be required to make payments to it, it may be able to do so by, for example, raising the level of the floor, so as to raise the price at which it will be required to make payments to the bank, or leveraging, i.e. increasing the notional volume on which it is required to make any downside payments to the bank.
35.	One factor that affects the value of the upside risks concerns the relationship at the trade date between the market price for oil and the strike price for the call option being purchased from the bank.
(1)	It is, for example, possible for a customer to obtain a strike price for the call option that it is buying that is below the market price at the time of the trade.  Such a trade is described as being “in the money” or “ITM”.   
(2)	Given that an ITM trade increases the value of the customer’s upside rights, by lowering the price at which the bank will have to make payment to it, it will need to pay for this, either, for example, by capping the amount of its upside (by including, for example, a Seagull or TRF), and/or by increasing the amount of its downside (by including, for example, leverage).
(3)	By entering into such a trade, the customer may obtain a higher prospect of receiving a (smaller) payment from the bank, in exchange for undertaking a lower risk of having to make a (larger) payment to the bank. 
(4)	It is does not necessarily follow that such a trade will result in a payment being made to the customer.  If, for example, payments are to be determined by the average market price over the following month a trade which starts ITM may not remain ITM. If, during that month, the market price falls, so that the average market price for that month ends up below the strike price of the call option, no payment will be made to the customer in that month. 
36.	In each case, given that such derivative transactions are over-the-counter (or privately negotiated) transactions, the precise terms of any transaction are up to the parties to determine, subject only to the fact that the overall package of rights and obligations purchased and sold needs to be acceptable to both of them. 
37.	In the present case the transactions all contained some of these additional features. 
(4)	Transactions 1 to 10
38.	The transactions that are the subject matter of the present claim represent the eighth and ninth derivative transactions that were entered into between SCB and CPC.  The nature of transactions T1 to T10 are summarised below.
(a)	T1 and T2 were Seagull structures referenced to Singapore Gasoil 0.5%. They each ran for three months starting on 1 March 2007.  Under both of these structures: CPC bought a call option on 150,000 bbl of Singapore Gasoil.  Under this call option, CPC would be paid the amount by which the monthly average price of Singapore Gasoil exceeded the strike price, multiplied by the notional quantity of 150,000 bbl.  So, if the average monthly price of Singapore Gasoil was $1.5/bl higher than the strike price of the call option, CPC would receive $1.5 x $150,000 = $225,000.  The strike price for the call option in T1 was $70 and for T2 was $73.5.  
(b)	Under the Seagull feature, CPC’s maximum monthly payment under each transaction was capped at $2/bl, i.e. $300,000. This cap was achieved by CPC’s sale of a further call option to SCB, the strike price of which was set $2 above the strike price of CPC’s bought call option, which was also referenced to 150,000 bbl of Singapore Gasoil. The effect of that call option was to cancel out any benefit to CPC in the event of price rises in excess of $2/bl. 
(c)	CPC also sold a put option on 150,000 bbl of Singapore Gasoil to SCB, thereby setting the ‘floor’ price for the transaction.  Under this call option, CPC would pay SCB the amount by which the monthly average price of Singapore Gasoil fell below the strike price multiplied by (in each case) the same notional quantity of 150,000 bbl.  The strike price of the put option was $67.5 for T1 and $70 for T2.  
(d)	In summary therefore, if the monthly average price of Singapore Gasoil was above the strike price of CPC’s bought call option, CPC would receive payments limited by the Seagull feature to $2/bl.  However, if the monthly average price was below the strike price of the sold put option (the floor price), CPC would make payments that were unlimited save for the average monthly price of Singapore Gasoil falling to zero. If the monthly average price was in between the strike prices of the put option and the bought call option (i.e., in the collar), no payment would be made by either party.  
39.	T3 and T4 were six-month transactions relating to CPC’s refining (or ‘crack’) margins.  They provided returns to CPC if the margin between the average monthly price of specified refined petroleum products and the average monthly price of Dubai crude oil declined, as follows:
(a)	Under T3, CPC entered into a swap with SCB whereby CPC would receive payments if the margin between the average monthly price of Jet fuel and Dubai crude fell below $18.10/bl.  CPC would make payments to SCB if the margin exceeded this figure.  
(b)	Under T4, CPC entered into a swap with SCB whereby CPC would receive payments if the margin between the average monthly price of Singapore Gasoil and Dubai crude fell below $15.20/bl.  It would make payments to SCB if the margin exceeded this figure.   
40.	T5-9 included TRFs.  As with T1 and T2, in each of these transactions CPC bought a call option, sold a put option and sold a further call option (the Seagull) limiting the maximum monthly return (the amount of the Seagull varied between transactions).  However, there were several differences between these transactions and T1 and T2:
(a)	Each of these transactions featured a TRF.  This specified a targeted profit level for CPC to achieve.  If CPC achieved the targeted amount of profit, the transaction would knock out, i.e. terminate.  If CPC did not achieve this target, the transaction would expire only after a period of between 11 months and 2 weeks and 12 months (depending on the precise terms of the transaction).  The amount of the target accrual varied from transaction to transaction: $2m in T5; $1.5m in T6; $3m in T7; $1.5m in T8; and $2.5m in T9.  The target accrual therefore imposed a total limit on CPC’s maximum return, in addition to the monthly limit imposed by the Seagull.  
(b)	T6-T8 were leveraged.  This meant that the notional quantity of the sold put option was twice as large as the notional quantity of CPC’s bought call option.  Thus, the amount per barrel which CPC would have to pay if it was required to make a payment was twice the amount per barrel which SCB would have to pay if SCB had to make a payment.  
(c)	For T9 there was no gap between the strike price of the bought call option and the strike price of the sold put option.  In this transaction, the strike prices of both options were set at the same level ($139.35). 
(d)	In T6, the referenced commodity was Dubai crude oil, rather than Singapore Gasoil.  As with T1 and T2, T5 and T7-9 were referenced to Singapore Gasoil.  
41.	T10 was also a TRF, but operated in reverse: CPC received payments up to a total target accrual of $7m if the price of Singapore Gasoil fell below $124/bl.  As was not in dispute, this transaction was entered into by CPC in order to offset losses it was experiencing under T8 in September 2008.  
42.	All of transactions T1 to T7 and T10 were performed in accordance with their terms.  In relation to T1, 2, 5-7 and 10, those transactions resulted in payments being due from SCB to CPC.  SCB duly made those payments. T3 and T4, the crack hedges, resulted in payments being due from CPC to SCB. CPC duly made those payments.
43.	In relation to all its transactions with CPC, SCB hedged its own obligations by entering into a back-to-back contract with another major bank. SCB has made the payments due under those contracts, in the same amounts, subject to receipt of a premium, to those in respect of which it now seeks payment from CPC. 
(5)	Transaction 8
44.	The terms of T8 were agreed in a Term Sheet dated 28 May 2008, signed by Mr de Mel and Mr Karunaratne, and confirmed by a Confirmation dated 3 June 2008, again executed by Mr de Mel and Mr Karunaratne. 
45.	The underlying commodity was Singapore Gas Oil. The payments to be made by each party would depend upon the fluctuations of the reference price for Singapore Gas Oil (published by Platts Asia-Pacific), sometimes referred to as the floating price. The Effective Date was 2 June 2008. The First Monthly Fixing Date was at the end of the month, 30 June 2008. On that date, and at the end of each subsequent month, the average market price of Singapore Gas Oil for the preceding month would be calculated.
46.	The floor price was agreed at $124 per barrel, the ceiling price at $134 per barrel and the cap price for the Seagull at $139 per barrel. 
47.	On each Monthly Fixing Date, starting on 30 June 2008, there would be a three-stage process to determine the payment (if any) to be made, which would be set out in a fixing invoice: 
(1)	The direction of any cash-flows would be determined by comparing the market prices for Singapore Gas Oil with those agreed prices. There were three possibilities: 
(a)	If, at the fixing date, the average per barrel market price for the previous month was above the ceiling price ($134), SCB would be required to make a payment to CPC per barrel equal to the difference between the average of the market price and the ceiling, subject to a maximum, constituted by the cap price (or Seagull), of $5 per barrel.
(b)	If, at the fixing date, the average market price for the previous month was between the ceiling price ($134) and the floor price ($124) then no payments would be made either way. 
(c)	If, at the fixing date, the average market price for the previous month was below the floor price ($124), then CPC would have to make a payment per barrel equal to the difference between the average market price and the floor. 
(2)	The total amount of any payments would then be calculated by reference to the agreed notional number of barrels of oil. In an un-leveraged trade, the notional amounts would be the same in calculating both the customer’s rights in relation to its call option and its obligations under the bank’s put option. Transaction 8 was a leveraged trade, so that: 
(a)	If SCB was required to make a payment in relation to the customer’s call option, its quantum would be calculated on a notional amount of 100,000 barrels. 
(b)	If CPC were required to make a payment in relation to SCB’s put option, its quantum would be calculated on a notional amount of 200,000 barrels. 
(3)	T8 included a TRF. The maximum term of the transaction was 12 months. But there would be an early termination of the Transaction if CPC received a total sum of $15 per barrel from SCB, or $1,500,000 in total. 
(4)	T8 was also ITM by in the region of $26-27.  
48.	The amount alleged to be due by CPC, but unpaid, in respect of Transaction 8 is US$91,905,000  plus interest.
(6)	Transaction 9 
49.	The terms of T9 were agreed in a Term Sheet dated 9 July 2008, signed by Mr de Mel and Mr Karunaratne, and confirmed by a Confirmation dated 15 July 2008, executed by Mr de Mel and Mr Kuranuratne. The original Confirmation was superseded by an amended Confirmation on 13 November 2008. 
50.	Again, the underlying commodity on the transaction, which this time had an effective date of 1 August 2008, was Singapore Gas Oil. It was broadly similar to T8, with the following differences: 
(1)	Both the ceiling price and the floor price were $139.35 per barrel, while the cap was $149.35. Thus each month, if the average market price for the previous month was above $139.35, that is if oil prices remained high, SCB would be required to make a payment to CPC per barrel equal to the difference between the average price and the ceiling. This was subject to a maximum, constituted by the cap price (or Seagull), of $10 per barrel. Conversely, if the average price fell below $139.35, then CPC would have to make a payment per barrel equal to the amount by which that average price was below the floor.
(2)	T9 had a 12-month tenor, subject to a target redemption which was set at $25 per barrel. 
(3)	There was no leverage; the notional amount was 100,000 barrels on both sides of the transaction. 
(4)	It was ITM by in the region of $28.
51.	CPC contended that T8 and T9 were not ZCCs principally because they were ITM; they had limits on their upside protection; they had increased (leveraged) downside exposure and T9 did not have a collar.  
52.	More fundamentally CPC contended that T8 and T9 were not hedges at all but rather were speculative trades.  It submitted that they did not provide the basic requirements of a hedge, namely a reduction in CPC’s physical price risk and a reduction in uncertainty associated with CPC’s physical position.   It was submitted that this was the result of the combination of two features of T8 and T9: the limitations on CPC’s upside benefits imposed by the Seagull and TRF, and their ITM nature.  This structure of T8 and T9 had the consequence that the returns to CPC did not vary if prices of Singapore Gasoil rose higher from the trade date, but only if prices fell, and they provided no additional protection to CPC if the market price of Singapore Gasoil went up from the level it was at on the date of the transactions. If the price went up by $50, CPC would receive the same amount as if it fell by $18.  CPC submitted that these were not therefore hedges against rising prices, or indeed hedges at all.  This was disputed by SCB and the issue will be addressed in detail below.
C. 	FACTUAL NARRATIVE
(1) 	SCB in Sri Lanka
53.	SCB is one of several international banks which has branches in Sri Lanka. Others include Citi, DB and HSBC. SCB’s Chief Executive Officer in Sri Lanka at the relevant time was Mr Clive Haswell (“Mr Haswell”). SCB’s business in Sri Lanka was divided into two parts, Wholesale Banking and Consumer Banking. Until February 2008, Wholesale Banking was divided into two parts, namely Global Markets, headed by Mr Rukshan Dias (“Mr Dias”) and Corporate Client Relationships, headed by Ms Kimarli Fernando (“Ms Fernando”), who led a team of relationship managers. From February 2008, following Ms Fernando’s departure from SCB, Mr Dias became head of Wholesale Banking. Mr Chanaka Peiris (“Mr Peiris”) was Head of Sales for Global Markets. Mr Dushan Casie Chetty (“Mr Casie-Chetty”) was a relationship manager in Corporate Client Relationships, who came to deal with CPC from July 2007 onwards.  
54.	SCB’s branches in Sri Lanka were subject to supervision and control by SCB’s global functions. There were checks and balances within the system by which transactions originating in Sri Lanka, including those with CPC, were approved and managed by SCB. The business teams in Sri Lanka reported to their superiors across the region. For example, Mr Dias reported to Mr Sundeep Bhandari (“Mr Bhandari”), the Head of Global Markets for India and South Asia. Mr Peiris reported to Mr Hemant Mishr (“Mr Mishr”), Regional Head of Sales. At the same time, Mr Haswell, as the local CEO, had a supervisory role in relation to the local branches, though he had no line management responsibility for particular business areas. 
55.	In addition, there were two SCB departments whose approval was required for the transactions with CPC. First, there was a credit function, consisting of a Senior Credit Officer in Sri Lanka, Mr Nigel Beebe (“Mr Beebe”), who reported to a Regional Credit Officer, Mr Robert Green (“Mr Green”), based (until May 2008) in Mumbai. He in turn reported to Mr Jake Williams. There were also two credit committees. Secondly, SCB had an internal risk management division (which later became Market & Institutional Risk Management or “MIRM”) which, for South Asia, was based in Dubai. The transactions with CPC required suitability and appropriateness sign-off from MIRM, and so were also subject to internal scrutiny by the MIRM team, usually Mr Avinash Naik (“Mr Naik”) or Mr Ganesh Raman (“Mr Raman”), who were based in Mumbai. 
56.	At the trial SCB called the following factual witnesses: Mr Haswell; Mr Peiris; Mr Dias; Mr Casie Chetty; Mr Green; Mr Naik; Mr Bhandari and Mr Raman.   There was also a statement from Mr Frederik Cogny, Global Head of the Structured Products Training Team at SCB, but he was not required to be cross examined.
57.	CPC called two former SCB employees as witnesses: Ms Fernando and Mr Ozman, who had been Chief Financial Officer of SCB Colombo. 
(2) 	CPC
58.	CPC, which is a public corporation incorporated under the CPC Act in 1961, is a very substantial company in Sri Lanka with some 2,600 permanent employees. Under s 5B of the CPC Act, CPC has a monopoly over the import of crude oil, and is the sole refiner of oil in Sri Lanka. While it no longer had a monopoly in the import of refined oil, it is the largest such importer, generally purchasing from Saudi Arabia or Iran. Its physical imports amounted to some 26 million barrels per year. 
59.	CPC is also the largest retailer of refined petroleum products in Sri Lanka, having numerous outlets for their sale with a market share of about 75%. CPC’s revenue was therefore generally earned in Sri Lankan rupees (LKR). But, in order to purchase oil, it would have to acquire dollars. Indeed CPC was the biggest purchaser of dollars in the Sri Lankan economy. 
60.	Sri Lanka meets its entire petroleum requirement through imports.  Oil imports therefore constitute a considerable proportion of its import expenditure, placing a significant burden on its foreign exchange requirements and balance of payments position.  CBSL estimates were that petroleum imports constituted 20.2% of Sri Lanka’s entire import costs in 2006 rising to 22.1% in 2007.  CPC’s crude oil and refined petroleum imports cost about $1.8bn in 2006, and its cost of sales in 2007 was around $2bn.
61.	As a long-time importer of oil, CPC had experience of procuring oil in the international oil markets. As a significant commercial organisation, CPC had also long been a regular user of banking facilities, such as loan facilities and letters of credit, which had been provided by Government-owed banks, together with privately owned banks such as Citi and SCB.    
62.	CPC’s commercial position in the oil market was not identical to that of a privately-owned oil importer.  In particular:
(1)	In Sri Lanka, retail prices for petrol and other products (i.e. pump prices) are not set by the market, but centrally, ultimately by the Government: see s 66 of the CPC Act.  There was an issue between the parties as to the extent to which CPC could influence these prices, but it is clear that for political reasons the retail price did not generally increase in line with international oil prices, with the consequence that CPC would make an insufficient sum from its sales to finance its purchases of oil. Before June 2006, the Government subsidised that loss, but at the end of that month, the subsidy was removed. Thus, from July 2006 onwards, CPC was potentially exposed to increases in world oil prices. The consequence was that high oil prices caused financial problems for CPC, including cash flow problems, that were of concern both to CPC and to the CBSL.  Conversely, when international oil prices decreased, pump prices did not necessarily have to be lowered at the same time or to the same extent. Subject to political considerations, there was the potential for pump prices to be kept high for a period.
(2)	As a Government-owned entity, with a significant monopoly, CPC had broader concerns than those of a purely commercial operator, including (for example) maintaining price stability and guaranteeing supply within Sri Lanka. As Mr de Mel put it in CPC’s 2007 Annual Report: 
“Arising from our vision, CPC is committed to contribute towards the prosperity of our country. In this connection, I am proud to announce that [CPC] maintained steady prices for the last five months of the year despite an international oil price increase of 28% over the same period. In addition to thus protecting the nation from the greatest oil price surge in history, [CPC] also granted a massive discount of Rs 5.8 billion to the Ceylon Electricity Board, thus helping maintain steady energy prices for Sri Lankan consumers despite the Board’s poor payment patterns.”   
63.	Under the CPC Act, CPC has a board of directors consisting of seven members appointed by the Minister of Petroleum, one of whom is appointed in consultation with the Minister of Finance: s 8. The general supervision, control and administration of the affairs and business of CPC is vested in the Board: s 15. From the directors, the Minister appoints a Chairman and Managing Director, who can be the same person: s 17(1) and (2). 
64.	The Managing Director is the sole executive director.  The three other senior executives of CPC are the Deputy General Managers of Finance and Administration, and the Refinery Manager. Thus, on the financial side, the Chairman and Deputy General Manager of Finance were the two senior executives of CPC.  
65.	The Board, which generally met once per month, also included as members, or as observers, representatives of various Government departments: 
(1)	The directors of CPC included Ms Kanthi Wijetunge (“Ms Wijetunge”), who was Additional Secretary at the Ministry of Petroleum and Mr Saliya Rajakaruna (“Mr Rajakaruna”), the Chief Financial Officer of the Commercial Bank of Ceylon and a former employee of Citi, who was also the Chairman of CPC’s audit committee.
(2)	From October 2006, Mr Weerasekera and Dr Thenuwara, two Assistant Governors of the CBSL, Mr Kanagasabapathy, Financial Advisor to the Treasury, Dr Samaratunge, Director General of Investment & Trade, Mr Lalith R de Silva, Director General of the Treasury Operations and a staff member of the Strategic Enterprise Management Agency (or SEMA), were also appointed by the Minister of Finance as observers to the CPC to strengthen the operations of CPC. Other Government officials also involved and who attended certain board meetings of CPC, included Mr K.D. Ranasinghe, Deputy Director (Economic Research Department) of the CBSL and Mr Dharmakeerthi, Chief Operating Officer and Executive Director of the SEMA.
66.	At the trial CPC called the following factual witnesses: Mr Karunaratne; Mr de Mel; Ms Fernando; Ms Wijetunge; Mr Wijegoonewardena, a non-executive director of CPC; Mr Rajakaruna; Mr Abdul Hameed Mohamed Fowzie, the Minister of Petroleum at the material time (“the Minister”); Mr Ozman; Mr Ranasinghe, and Mr Nanayakkara, Director, Bank Supervision Department of CBSL.
 (3) 	June 2006 to March 2007: T1 and T2
67.	Starting in about late 2003, oil prices became increasingly volatile and began to escalate.  Since Sri Lanka imported its entire crude oil requirement, rising oil prices posed a threat to its limited foreign exchange reserves. In addition, the end of government subsidies for CPC in mid-2006 meant that domestic retail petroleum prices were increasingly exposed to rising oil prices.  
68.	Further, on 21 December 2005 the CBSL issued Directions on Financial Derivative Products (the “Directions”), effective as from 1 January 2006.  The Directions expanded the class of derivatives permitted by the CBSL for commercial banks appointed to act as Authorized Foreign Exchange Dealers to include, amongst other things, Commodity Options (as defined at Note 3(f) of the Explanatory Notes).  
69.	The Directions prohibited (by Reg. 3) the use of derivatives for speculation and required (by Reg. 11.2) Authorized Dealers to provide adequate information on the transactions to customers, including information on the risks involved.  As Mr Peiris agreed in evidence, the issuance of the Directions provided an opportunity for SCB to do business with CPC as regards derivatives. 
70.	It was against this general background that a number of presentations were made by SCB and other banks in relation to the potential benefits of hedging during the course of 2006.  
71.	SCB made its first presentation to CPC on 22 June 2006. The Chairman at the time, Mr Medagama, was one of the CPC attendees.  SCB gave a general presentation, the objective of which was said by Mr Peiris to be to “educate” CPC and inform CPC of SCB’s capabilities and certain available instruments for hedging.  The presentation identified SCB’s “extensive” experience in commodities and its “cutting edge” team spread over London, Singapore and New York.  The emphasis on SCB’s capabilities overseas no doubt partly reflected the fact that, as Mr Pieris confirmed in evidence, there was no significant expertise in SCB Colombo at the time. Mr Peiris had never previously sold any commodity derivatives, and he described in his evidence how it was therefore necessary for him to have “a lot of interaction with our officers overseas in understanding what a commodity derivative hedge is all about…”.
72.	The presentation focused on CPC’s exposure to oil price risk as a result of increasing and volatile oil prices.  A graph was included highlighting the rise and volatility in oil prices between 7 November 2002 and 19 July 2006.  The presentation touched on four basic hedging strategies: crude oil swaps, refining margin swaps, crude oil caps and ZCCs.
73.	SCB made a similar presentation to the CBSL, and had further discussions, which also involved the Ministry, in July 2006. It was recognised within SCB that the prospect of transacting with CPC presented a major opportunity for SCB and a potentially major revenue stream.
74.	Mr Amit Juneja gave another presentation to CPC on 22 August 2006, accompanied by Mr Dias, Mr Peiris and Mr Kamoor Sourjah.  Mr Juneja was a Director in SCB Global Commodity Derivatives and was based in Singapore.  He was another product specialist. Mr Peiris recalled that the presentation was attended by Mr Medagama and Metta Hettiarachchie of CPC’s Finance Division.  The presentation stated that the “chosen” hedging strategies by that stage were caps or ZCCs and went on to identify various action steps in order to implement hedging: formalising the hedging instrument, completing the documentation and mandating SCB to implement a strategy.
75.	On 1 September 2006, a paper was prepared by Mr Peiris seeking permission to increase the SCB Sri Lanka country limits to accommodate the CPC transaction.  The paper noted that the possible structures under discussion were caps or ZCCs, and added that “SCB Sri Lanka is currently engaged in advisory capacity to the government”.  It concluded:-
“Given the nature of this groundbreaking transaction, SCB Colombo will be able to make a considerable impact on our capabilities in the local market, which would be significant from a franchise point of view.  From a revenue perspective, we expect to make USD 300,000 on the transaction…We reliably understand that Citi and [DB] are our competitors on this trade”
76.	Mr Medagama resigned from CPC around this time and Mr de Mel was appointed Chairman and Managing Director CPC with effect from 2 October 2006.  He met Mr Dias, Mr Peiris and Prasanna Fernando shortly thereafter on 4 October 2006.  
77.	SCB followed up this meeting with a presentation to the Board at a Board Meeting on 2 November 2006, at which Mr Kanagasabapathy and Dr Thenuwara were also present.  The presentation was again given by Mr Juneja, with Mr Dias, Mr Peiris and Mr Sourjah in attendance.  The presentation described SCB as CPC’s “trusted partner” and described SCB’s product expertise, highlighting SCB’s specialist commodities team based in Singapore, London and New York.  SCB included in the presentation a graph identifying the volatility in gasoil prices between 15 February 2004 and 2 November 2006. It stated the “Objective” to be “Balance risks/protect cost escalation”.  It also identified three “Available Alternatives”: Caps, ZCCs and Open (i.e., unhedged).  The presentation stated that Caps and ZCCs allowed CPC to be “fully hedged against upward price movements”.  The final slide of the presentation stated:-
“An effective hedging program does not attempt to eliminate all risk.  Rather it attempts to transform unacceptable risks into an acceptable form.  The key challenge is to determine the risks the company is willing to bear and the ones it wishes to transform by hedging.  The goal of any hedging program should be to help the company achieve the optimal risk profile that balances the benefits of protection against the costs of hedging”.
78.	It was Mr Karunaratne’s recollection that SCB said at this meeting that it had a strong research team that watched the commodity markets full time and that they would advise CPC when deciding what products to use and when to enter into trades.  SCB disputed that it was ever said that it would advise CPC as to when to enter trades.  I find that no statement to that effect was made, as borne out by the fact that there was no documentary evidence of such advice being given at any stage, and that the only specific evidence of any such advice was in respect of rejected advice to unwind T7 in May 2008.  
79.	SCB knew that a number of other banks were also involved in discussions with CPC, competing with SCB on structures and prices, and providing additional information to CPC as to what structures were available, including Seagulls, and their risks and consequences. For example: 
(1)	In 2005, Mr Karunaratne had discussions with Citi, and, by 2006, he was familiar with the concept of a Seagull.
(2)	DB made a presentation on 1 August 2006, attended by Mr Karunaratne. Citi made presentations on 7 August 2006 and 25 October 2006. Both mentioned, in addition to the caps and simple ZCCs referred to in SCB’s presentations, the Seagull (or ‘3-way’). 
(3)	CPC also obtained quotations, on various occasions and in relation to various products, from SCB, Citi, DB, HSBC and Bank of Ceylon. 
80.	CPC was also receiving information from Mr Upul Arunajith. Mr Arunajith was a consultant, based in Toronto, who had been in extensive correspondence with various parts of the Sri Lankan Government, including the Minister, and CPC about oil hedging from 2004. It appears he met with the Minister in June 2006. On 12 January 2007 he was appointed by CPC (as SCB was told at the time) as a consultant, on the recommendation of Mr de Mel, and shortly thereafter met with Mr de Mel, although his involvement thereafter appears to have been limited.
81.	As CPC and the CBSL investigated possible transactions with the banks, there was also an on-going evaluation process to consider the use of derivative instruments by CPC, which involved the CBSL, the Ministries of Petroleum and Finance, the Cabinet and CPC’s Board.
82.	The evaluation process included:-
(1)	The publication of a research paper entitled “Hedging to protect CPC Imports against Oil Price Volatility” dated 17 August 2006.
(2)	A presentation on hedging given to the Cabinet by the Governor of CBSL on 6 September 2006, following which the Cabinet decided to appoint a committee to study hedging further.
(3)	The establishment of a committee to study hedging (the “Study Group”) by the Secretary to the Treasury in October 2006.  The Study Group comprised representatives from the CBSL, the Ministries of Petroleum and Finance, CPC and Sri Lankan domestic banks.  
(4)	A press release issued by the CBSL on 28 September 2006 to increase public awareness about hedging.  
(5)	After completing its deliberations, the Study Group produced a Report, which it supplied to the Secretary to the Treasury under cover of a letter dated 16 November 2006.
83.	The Study Group Report set out the case for CPC’s entry into hedging transactions.  In particular it stated that:
(1)	Oil prices had declined from historical highs of $78/bl for Brent Crude in August 2006 to $58/bl by the end of October 2006.  
(2)	If oil prices were to rise higher, and particularly over $80/bl, this could result in “unbearable” pressures on Sri Lanka’s foreign exchange.  Further, the “sharp rise and volatility” in oil prices had generated macroeconomic imbalances and created domestic uncertainty, for example in the form of frequently changing utility prices.  
(3)	Hedging could be deployed by CPC to “reduce the risk of adverse price movements and bring in stability”.  It would be an “insurance cover” that could protect against the risk that prices were to rise to very high levels.  The “main objective” of hedging was described as to “protect from high volatility in prices thereby maintaining stability in domestic prices”.
(4)	Whilst hedging did have costs, these costs could be justified on the basis that “the benefits of protection from high oil prices are greater than the cost of hedging”. 
(5)	Two basic derivative structures were reviewed by the Study Group and identified as “suitable” for Sri Lanka: a crude oil cap and a ZCC. 
84.	The Study Group Report analysed the distinction between caps (which required payment of a premium) and ZCCs (which did not). This lack of premium was a factor causing the Study Group to recommend the ZCC “as the better alternative”. Its report recognised, however, that this gave rise to risks for CPC, in that it would be required to make payments if there were a drop in oil prices. 
85.	 The Study Group Report concluded with a single page of five “recommendations” (“the Recommendations”):
“1.	CPC to hedge purchase of petroleum products, both crude oil and refined product, in the international market.
2.	Use Zero-Cost Collar as the hedging instrument with the upper bound based on market developments. 
3.	Commence hedging with smaller quantities for a shorter period and gradually increase the quantity and the duration.
4.	Grant authority to the CPC to call for quotations for oil hedging, decide on future prices and purchase hedging instruments from reputed banks. 
5.	Grant authority to CPC to change instruments based on the developments in the market.” 
86.	It was CPC’s case that the Study Group Report made it clear what both the objective and the justification of the recommended hedging programme was to be.  The objective was to put in place hedges that could provide protection against significant further oil price rises and oil price volatility (which CPC referred to as the “Stated Objective”). The justification was that the benefits of protection were greater than the costs of hedging (which CPC referred to as the “Stated Justification”). 
87.	In early December 2006, CPC began the process of approaching the banks for indicative prices for ZCCs on gasoil and fuel oil.  Mr Karunaratne said in evidence that the purpose of this was essentially to give CPC a period in which to see how the process would work in practice to get familiar with it before entering into its first hedging transaction. 
88.	On 1 December 2006 Mr Rupasinghe of the CBSL (on behalf of Mr Ranasinghe) provided Mr Karunaratne with draft letters that CPC could use to call for quotations for three month ZCCs referenced to gasoil and fuel oil, and also to request proposals from the banks for establishing a treasury unit.  The potential need for a treasury unit had been identified at the Study Group meeting on 6 November 2006.  
89.	Accordingly, on 1 December 2006, CPC wrote to Citibank, SCB, DB, HSBC and Bank of Ceylon calling for quotations on ZCC structures for 3m bbl of Gasoil for a six month period and 75,000 MT of fuel oil for a 6 month period.  These letters identified specific cap prices for these structures and invited the banks to indicate the proposed floor prices by 7 December 2006.  By letters of the same date, CPC also wrote to the same banks requesting proposals by 20 December 2006 to set up and manage a treasury unit at CPC.  
90.	Mr Haswell and Mr Dias responded to CPC’s request for quotations for ZCCs on gasoil and fuel oil by letter dated 7 December 2006, which attached a draft term sheet.  
91.	As for CPC’s request for help setting up a treasury unit,  Mr Dias emailed Mr Mishr on 7 December 2006 stating that he was not sure if SCB could do what was being asked by CPC.  Mr Mishr replied that SCB should “limit ourselves to an advisory role”.  As Mr Karunaratne explained, SCB, Citibank and DB ultimately declined the invitation to assist in setting up a treasury unit; CPC’s discussions with Bank of Ceylon progressed further, but the project never got off the ground. 
92.	SCB’s offer of a ZCC was rejected.  A factor in this decision was that the floor prices were very close to the market price of oil, requiring payment by CPC even if there was a small fall. By January 2007, CPC’s attention appears to have shifted to call options, which required payment of a premium, and offers were solicited from the banks, but these proved to be too expensive. CPC’s attention therefore returned to zero cost structures, including Seagulls, which had been discussed both by Citi and DB in presentations. Meanwhile, Mr Arunajith (who thought that the use of ZCCs was a “wrong strategy”) had procured an indicative hedge model from Total in Geneva.  
93.	On 3 January 2007, the Minister sent a Memo to the Cabinet, saying he agreed with, and was seeking the approval of, the Study Group’s recommendations. On 26 January 2007, the Cabinet approved the Minister’s Memo, “to be implemented without delay as suggested by the [CBSL]”. On 29 January 2007, Ms Wijetunge sent a copy of the draft Cabinet Decision to CPC saying: 
“The draft Cabinet Decisions dated on 26th January 2007 regarding the above is forwarded for your information & necessary action please”. 
94.	It was CPC’s case that this letter, enclosing a copy of the draft decision, was a formal “direction” within the meaning of s 7(1) of the CPC Act, which had the effect of limiting CPC’s capacity and the authority of its Board. 
95.	SCB kept in close contact with CPC in January 2007, meeting with Mr Karunaratne on 18 January 2007 and Mr de Mel and Mr Karunaratne on 23 January 2007 and again on 26 January 2007. Mr Muthu Kumar (Director, Financial Markets Sales, India) attended this last meeting where he is recorded as having “explained about the oil hedging and educated the customer on the advantage and disadvantage”, and having “advised” CPC that it would be better to hedge a small part of their imports to get a feel for the product.
96.	In early February 2007, CPC obtained several rounds of indicative prices for structures referenced in most (but not all) cases to Singapore Gasoil. SCB provided CPC with indicative levels on two structures with Seagulls (3 months and 6 months) on 2 February 2007.  CPC obtained further indicative prices from SCB, Citibank and DB on 2 February 2007 and from Citibank and DB on 5 February 2007.  On 5 February 2007 Mr Dias was told by Mr Karunaratne that CPC expected to deal the following day, but at that stage wanted to give all three banks a share.   Further indicative prices on Singapore Gasoil with Seagulls were provided by SCB on 6 February 2007.  On the evening of 6 February 2007, SCB and Citibank appeared at a press conference with Mr de Mel, Mr Karunaratne, Governor Cabraal, two Deputy Governors, two Assistant Governors and the Minister for Power and Energy.  Mr Dias reported that it was possible that a deal would be concluded the following day.
97.	It was the evidence of Mr de Mel and Mr Karunaratne that their number one priority was to avoid the risk of making a payment to a bank.  They considered that it would be seen as politically unacceptable for CPC to have to make any payment under a derivative transaction.   For this reason, they set about trying to reduce the floor level of the transaction – i.e., the strike price of the sold put option below which CPC might have to make a payment to the bank – as far as possible: they wanted some “breathing space”.   For this reason, CPC incorporated a Seagull into its first transaction with SCB, T1, which was closed with SCB on 7 February 2007.
98.	On 8 February 2007, Mr Karunaratne (together with the other Deputy General Managers) sent a memo on the “Hedging of Gasoil” to the Chairman, seeking approval of transactions offered by DB, SCB and Citi. The memo indicated that the maximum upside on the SCB transaction was $2 per barrel. Mr de Mel and Mr Karunaratne also submitted a paper for the Board meeting due to take place the following day, seeking approval of a “hedge position of 0.05% Sin Gas Oil on Zero Cost Collar method for a quantity of 450,000 barrels for a period of 3 to 6 months”. 
99.	On 9 February 2007, the Board (attended, amongst others, by Ms Wijetunge on behalf of a director of CPC and Mr Ranasinghe, a deputy Director of the CBSL) passed the following resolution (which was sent on to SCB by 28 February 2007): 
“The Board discussing this subject again approved to take the hedge position of 0.05% Sin Gas Oil on ZERO Cost Collar or any other suitable instrument for a quantity of 450,00 bbls for a period of 3 to 6 months.”		
100.	Also on 9 February 2007, the Chairman sent Mr Karunaratne’s memo to the Minister for ‘observation and comments’. The Ministry responded on 14 March 2007, requesting preparation of a draft Cabinet Memorandum. CPC provided a report on 19 March 2007. That report explained the limited upside of a Seagull, which it described as a “Zero Collar which is structured in three ways”. 
101.	Meanwhile, on 20 February 2007, there was a press conference at the Cinnamon Grand Hotel in Colombo to announce the entering into of T1, attended by SCB (Mr Dias and Mr Haswell), Dr Thenuwara and Mr de Mel. A press release explained how T1 was to operate, including both the limited upside for CPC (of $2 per barrel) and the theoretically unlimited downside. There was also a CPC press release explaining the transactions in which the Minister thanked the President for the support extended.  
102.	T2 was concluded shortly thereafter, on 27 February 2007, following a meeting at CPC and the provision of indicative prices. As with T1, this was a three month deal referenced to 150,000 bbl of Singapore Gasoil, with a $2/bl Seagull. 
103.	SCB’s internal emails at the time reflected considerable satisfaction that T2 had been completed.  Mr Haswell emailed Mr Mike Rees and Mr Jaspal Bindra (CEO, SCB Asia) on 27 February 2007 to inform them that T2 had been closed.  He added that T1 had been won partly as a result of “long term (12 months) educating of [CBSL and CPC], a process which has led to considerable trust being built”.  He indicated that SCB was now able to “leverage” this trust.  SCB also nominated T1 for the Energy Risk 2007 “Innovation of the Year Award” in early March 2007, which it later won.  A draft write-up for the award attributed the following comment to Sean Mulhearn: “CPC chose us because we kept advising all the way along…We did a lot of educational seminars with them introducing them to risk management, the tools, and their pros and cons”.
104.	By the March meeting of the Board, on 26 March 2007, CPC had entered T1 and T2, in accordance with the authority granted by the Board in February 2007. At the March meeting (Meeting 1061), following a board paper dated 8 March 2007, the Board passed three resolutions, authorising derivative transactions with each of SCB, Citi and DB. The CPC board minute recorded as follows: 
“Having considered the contents of the Board Paper the Board resolved the attached resolutions complying with the requirements of [Citi], [DB] and [SCB] empowering Chairman & Managing Director [Mr de Mel] and Deputy General Manager (Finance) to execute hedging transactions by using appropriate hedging instruments. This supersedes the Board Decision No 24/1060 of 19 March 2007”. 
105.	The SCB resolution, the specimen for which had been provided by SCB was in the following terms: 
“The Board of Directors of [CPC] at their meeting on 26th March passed the following resolutions: 
A.	That approval be and is hereby given for the Corporation to enter into the following agreement(s), which had been presented to and the contents thereof considered by the meeting, together with any other agreement(s) incidental thereto: ISDA Master Agreement between Standard Chartered bank and the Corporation. 
B.	Accordingly, that authority be and is hereby given to any one or more of the persons named below to sign for and on behalf of the Corporation the above mentioned agreement(s). [Mr de Mel and Mr Karunaratne are then named.]
C.	Board of directors affirmed that they had carefully considered and understood the nature and risks of the transactions contemplated by the agreements and believed that such transactions were appropriate for and in the interests of the corporation.”
106.	The documents relevant to Mr de Mel and Mr Karunaratne’s authority to enter into appropriate hedging instruments which were provided to SCB in 2007 were as follows:-
(1)	SCB received the relevant extract from the minutes of Meeting 1060 on 9 February 2007 on or around 25 February 2007. 
(2)	Mr Peiris was sent the relevant extract from the minutes of Meeting 1061 on about 30 March 2007. 
(3)	SCB was sent a certified copy of the SCB Board Resolution.  Mr Peiris recalled that he had received this by at least 1 June 2007. 
(4)	Mr Peiris received a copy of the Cabinet Decision including the five Study Group Recommendations in January 2007.  A copy of the Cabinet Decision also appears to have been subsequently faxed to SCB by Mr Karunaratne on 23 July 2007. 
(5)	Mr Peiris also received a copy of the Study Group Report.  There was an issue however as to when this was received by SCB and I am not satisfied that it was received by SCB in early 2007, as CPC contended.  
 (4)	May to August 2007: T3 and T4
107.	T1 and T2 matured on 31 May 2007. Under T1, the Singapore Gas Oil market rate remained above the ceiling for each of March, April and May, with the result that SCB was required to pay a sum of $300,000 for each of the three months, being $2 per barrel on the 150,000 notional barrels. In relation to T2, it was above the ceiling for April and May, requiring SCB to pay a further $600,000.   The payment of these sums was announced at a second press conference, this time attended by the Minister, on 20 April 2007. The basis for the calculations were set out in monthly fixing invoices. 
108.	In the latter part of May, a structure that would provide CPC with profits if Singapore Gasoil prices fell was discussed with CPC. The rationale for the transaction appears to have been that, having bought Gasoil at high prices, and holding an inventory of it, CPC wanted protection if prices fell and it was forced to lower Gasoil prices at the pumps and sell its inventory at a loss.  
109.	In this respect, Mr Dias emailed Mr Parthirage on 23 May 2007 having met Mr de Mel.  He stated that Mr de Mel was of the opinion that the chances of Gasoil heading lower were greater than the chances of crude oil heading lower, and that he wanted to “benefit from the downward movement in prices”.  Mr Juneja emailed Mr Heilpern the same day informing him that CPC was “looking to make money on the downside”.  On 29 May 2007 Mr Peiris supplied Mr Karunaratne with an indicative term sheet under which CPC would receive payments if the average monthly Singapore Gasoil price fell below $76/bl.
110.	Mr Peiris sought appropriateness approval for this transaction. However, Mr Mishr said he would not support the transaction, highlighting the “serious risks” to CPC if prices were to rise and Mr Agnani also indicated in an email to Mr Juneja on 30 May 2007 that he had some concerns as to whether CPC had any underlying exposure to falling Gasoil prices.  Mr Mishr emailed Mr Dias and Mr Peiris on 30 May 2007 setting out his concern that the transaction would leave CPC “both long and short”.  Mr Peiris drafted a response for Mr Dias which Mr Dias was sent to Mr Mishr.  The reply asserted that CPC had an inventory of Gasoil, Mr de Mel and Mr Karunaratne were of the “strong opinion” that Gasoil prices would move lower, and were therefore seeking to hedge against falling prices.  
111.	At the same time Mr Peiris remained keen also to discuss crude oil hedges to protect against rising prices with CPC.  On 11 June 2007, Mr Peiris sent Mr Karunaratne indicative prices for a Brent crude oil ZCC and a Brent crude oil cap intended to give protection against rising prices.
112.	CPC was also investigating entering into hedges with other banks. On 11 July and 24 August 2007 CPC entered into four transactions, with additional features, with Citi. 
113.	CPC’s transactions with Citi were different from T1 and T2. Amongst other things, they were structured as swaps and included two additional features, namely a form of ‘knock-out’ and leverage on CPC’s downside, both of which were referred to in a training session that Citi provided to CPC on 11 July 2007. The swaps terminated only at the expiry of their tenor, but operated so that if, in any given month, the reference price was above a particular level, CPC did not receive any payment at all.  An internal SCB e-mail of 11 July 2007 recorded comments made by Mr de Mel that:
“... the structures shown by Citi were far more innovative than ours. He mentioned that the first structure that we dealt was excellent, but thereafter there were no new structures.”   
114.	While CPC was entering new transactions with Citi in respect of its exposure as a purchaser of oil, CPC also became interested in entering another type of derivative transaction, namely “crack hedges”. These were products dealing with the risks associated with CPC’s refining operations rather than its import business. As a refiner, CPC was exposed to the difference between the price at which it would sell refined products (such as jet fuel and gas oil) and that at which it could purchase the crude oil from which those products were created, a difference known as the “crack spread”. If the crack spread narrows, the refiner’s profit margin shrinks and, if the “crack” is less than its costs, the refiner may lose money. 
115.	A refiner may hedge this risk by a entering a crack hedge which results in payments to the refiner if the crack narrows (when the refiner is losing on the physical side) and to the bank if it widens (when the refiner is gaining on the physical side). On 6 July 2007, SCB made a presentation to Mr de Mel and the Board explaining these structures (this again made reference to SCB as CPC’s “trusted partner”). Thereafter, CPC entered into two such crack hedges with SCB dated 24 July 2007, one on the Jet Fuel crack (T3) and the other on Gas Oil crack (T4).
116.	T3 and T4 were 6-month swaps. In summary, if, in any month the floating reference crack spread was less than, in the case of T3, $18.10 per barrel, then SCB would be required to make a payment to CPC. If it was greater than $18.10, then CPC was required to make a payment to SCB. (The equivalent amount under T4 was $15.20.) 
117.	In the event, generally (though not every month) refinery margins widened over the 6 month tenor of T3 and T4. This benefited CPC on the physical side, because it made greater profits from the sale of refined products, as the difference between the cost of the physical oil it was acquiring and the price it was obtaining for its refined oil was greater. But under the crack hedges, CPC was required to, and did, make total payments to SCB of $3,319,300.  
118.	On 20 August 2007 Mr de Mel and Mr Karunaratne submitted a Board Paper, providing details of, and seeking approval of, the hedging contracts CPC had entered into with each of Citi and SCB, including a reference to the fact that the Citi contracts were leveraged, so that “if the prices go below the floor level CPC has to pay twice”. There was a Board meeting on the same day, attended by (amongst others) Dr Thenuwara of the CBSL and a representative of the Ministry (Ms Wijetunge). The Board minute records that at “the onset of the Board Meeting Chairman had a discussion with the members of the board and Central Bank representative Dr Thenuwara … on oil hedging”. Later it records that “the Board having discussed the Board Paper gave its approval to the four hedge positions mentioned … in the Board Paper.”
(5)	September 2007 to February 2008
119.	Between September and October 2007, SCB increased the frequency of its meetings with Mr de Mel and Mr Karunaratne.  During these meetings, it presented some novel and innovative structures.  This was a response to the pressure of competition from Citi’s more advanced derivatives business.
120.	At a meeting in early September Mr de Mel told Mr Dias and Mr Peiris that he preferred to do structures that gave him an “upfront benefit, i.e. ITM strike”. This was to become a common feature of CPC’s transactions with SCB (and the other banks) in 2008. 
121.	SCB showed a new structure to CPC later in September.  This was a WTI TRF pivot structure.  This was, as Mr Peiris confirmed in evidence, “quite an exotic structure”.   At a meeting on 18 September 2007 Mr Karunaratne informed Mr Peiris that he was interested in the structure, but wanted the range moved lower.  He also emphasised the importance of being able to unwind the transaction.
122.	As shown in the term sheet, the pivot structure under discussion essentially allowed CPC to earn money if the average weekly price of WTI crude went above or below the pivot of $80/bl, so long as it remained in a range between $67.5-92.5/bl.  If the price rose above this range, or fell below it, CPC would have to make leveraged payments.  The structure had a 52 week tenor, but would knock out if CPC accumulated profits of $187,500.  The notional quantities were relatively small: 2,500 x 5,000 bbl.  CPC submitted that this was a speculative transaction since it bore no relation to CPC’s underlying physical exposure.  Mr Raman accepted in evidence that CPC were “trying to achieve a profit for themselves, based on a prediction that the oil price will remain within the range of X and Y”.
123.	There followed internal discussion within SCB about other possible structures to offer CPC.  These included “a bullish brent TRF”, sell-side structures on gasoil/kerosene, and a “power range forward” and a TRF with a cap on the downside. 
124.	A meeting took place with Mr de Mel on 3 October 2007 attended by Mr Peiris, Mr Dias and Mr Casie-Chetty.  At the meeting they discussed with Mr de Mel a “participating forward, leveraged ZCC, TRF and cracks”.  Mr de Mel replied that he was not interested in a leveraged structure since he thought the price of crude oil and gasoil would move lower.  As regards the TRF, he said that the downside risk (of $200,000 for 12 months) was too great compared to a knock out at $250,000.  Mr de Mel indicated that he ultimately wished to hedge as much as 70% of his Dubai and gasoil exposures for one year or longer, using a ZCC structure.  
125.	The next structure SCB considered (and then proposed) to CPC was a pre-funded crack spread.  Essentially, the structure was a loan: CPC would receive the present value of a crack spread, and make payments depending on the movements in crack margins.
126.	As with some of the other structures, pre-funded crack spreads were novel products. The structure was shown to Mr de Mel and Mr Karunaratne at a meeting on 10 October 2007, who indicated that they would be interested in taking the structure forward, and wished to discuss it further during their forthcoming visit to Singapore on 15-16 October 2007. 
127.	Mr de Mel and Mr Karunaratne visited SCB’s dealing rooms in Singapore on 15-16 October 2007.  
128.	The transaction needed to be approved by credit within SCB and when it was shown to Mr Green on 5 October 2007 he had responded that he doubted that CPC had the sophistication to enter into a transaction like this.  He had in mind a previous transaction entered into by CPC which was referred to as “Titis Sempurna”.  Mr Craig MacDougall also raised a series of questions in relation to the transaction in an email dated 9 October 2007, including whether CPC understood the implications of the deal, whether it was appropriate, whether CPC’s risk policies allowed it and whether the risk was acceptable to CPC and SCB.  
129.	Mr Green’s approval was required for the transaction and on 11 October 2007 he wrote to Mr Juneja stating:  “You do NOT have my clearance to proceed until my questions on CPC have been addressed”.  Matters were then left on the basis that Mr Green would meet Mr de Mel and Mr Karunaratne in Singapore on 15 October 2007.
130.	Mr Green identified various matters upon which he required to get “comfortable” which he set out in an internal email. These included his doubts whether CPC had the cash flow to repay the $9m involved.  As far as understanding of risk and risk appetite, he wrote: “CPC’s senior management must fully understand the risks and must have explained their risk appetite.  I want to know how much they are prepared to lose”.  
131.	The meeting with Mr Green took place over dinner on 15 October 2007. It was attended by Mr Juneja, Mr Casie-Chetty, Mr Dias, Mr Green, Mr de Mel and Mr Karunaratne.  A summary of the meeting is contained in Mr Green’s email  of the same day.  This included the following:
(1)	As to CPC’s risk appetite, Mr Green considered that CPC’s “...risk appetite appears to be limited to almost no downside”.  Mr Green stated in his statement that:  “This recorded that the Chairman indicated that he had no appetite to lose money on the hedging transactions - basically, I had asked him how much are you prepared to lose and he replied “Nothing”.  Mr Green confirmed in his evidence that he could not remember how he responded to that remark but that he believed that he would have made a comment to the effect that this was not possible.  
(2)	As to CPC’s total derivative exposures, he raised the question in the email: “How can we get visibility on CPC total derivative exposure and how they are monitored and managed?”
(3)	The question was raised as to whether CPC needed advice on their hedging strategy.  The email refers to Mr de Mel and Mr Karunaratne’s limited experience and the fact that CPC had no consultants.  Mr Green raised the question of whether CPC had anyone who could advise CPC  (“Do we have anyone in house to can [sic] advise how companies like CPC should frame and conduct procurement and hedging strategies”).   The point was made again in an email from Mr Green of 24 October 2007 in which he wrote “….they really need expert and disinterested advice on this subject”.  
(4)	The Government’s involvement in CPC’s derivative strategy was noted. The note at paragraph 5 records:  “The Government has given [Mr de Mel]  power to deal in derivatives without further specific authorization;  the board is however informed of these.  It recently had a presentation from Citi”.   
(5)	He did not get a satisfactory response to his concerns about Titis Sempurna.  As his email records at 8): “[Mr de Mel] could offer no plausible explanation of why these suppliers would not cut out the middlemen to deal with CPC direct”.
132.	In response to Mr Green’s email relating to the meeting Mr Juneja emailed Mr Green informing him that SCB had “in-house expertise on hedging strategies and have been advising CPC since July 2006”.  He further stated in an e-mail to Mr Dias that “We believe the customer is sophisticated, credit clearly believes otherwise”.
133.	In the light of the concerns raised by Mr Green, matters were left on the basis that there would need to be a meeting with Mr de Mel to “explain and understand the risk appetite of the proposed structures”. This was in the context of a proposed presentation on 24 October 2007 which related to the pre-funded crack deal and TRFs.   On 24 October 2007 Mr Green commented on the proposed presentation and described it as “a good framework for discussion with CPC”.  He recorded: “One result we must have is a clear expression of their Risk Appetite, which can be translated into the maximum cash outgoings”.  He also wanted confirmation that there was “a framework for limiting CPC’s overall position on derivatives”.  
134.	Meanwhile, on 18 October 2007, Mr Peiris and Mr Casie-Chetty met with Mr de Mel and later spoke to Mr Karunaratne.  It was Mr Peiris’ evidence that at this meeting SCB explained the downside risk if the price were to move below the strike price.  He said that Mr de Mel mentioned that he could maintain the pump price despite a fall in market prices in order to gain revenue to finance the payment to SCB under the trade, and that he mentioned that the risk of the transaction was also mitigated by the fact that the hedge ratio of CPC was such that CPC had a larger amount of oil on which it could gain from a fall in prices.  This evidence was challenged by CPC but I find that Mr de Mel did mention the possibility of maintaining pump prices as a means of mitigating the effect of payments that might be required to be made under the trade, although he did not say that this was something under his control. 
135.	This then was the background to the meeting of 24 October 2007 upon which CPC placed great reliance.
136.	The meeting was attended by Mr de Mel, Mr Karunaratne, Ms Fernando, Mr Dias, Mr Peiris, Mr Casie-Chetty and Mr Beebe.  CPC submitted that the meeting was critical on the issues of risk appetite; CPC’s hedging strategy; and the advisory role of SCB. 
137.	I shall address the detail of the meeting separately, but there are two principal records of the meeting: Ms Fernando’s email of 26 October 2007 to Mr Green and Mr Haswell (copied to Mr Beebe) and Mr Casie-Chetty’s email of 26 October 2007 to Ms Fernando and Mr Sourjah.  I accept that these two records are substantially accurate. 
138.	It was Mr Dias’ evidence that after the meeting he visited Mr de Mel to seek clarification of whether in considering risk he looked at his position as a whole, taking into account his physical position and his transactions with other banks.  This was denied by Mr de Mel; it is not reflected in any document and I am not satisfied that any such meeting took place.
139.	Following on from the meeting, the SCB team in Sri Lanka, including Ms Fernando, worked together in an effort to deal with Credit’s concerns (and particular those of Mr Green) by introducing two conditions to the credit application they were due to make (the BCA).
140.	On 26 October 2007 Ms Fernando sent an email to Mr Green containing her notes of the 24 October meeting.  She stated:
“Refer to the request made by you at MANCOM yesterday, from Nigel and myself to explain re progress of these transactions.
To enable us to move forward, seek your comments/support on the following:
 Your confirmation of support for these transactions with CPC. 
Could we request you to assist the business by seeking clarity with the Regulator and Government to their position re these transactions i.e. understand the benefits and costs associated with these transactions.”
141.	Ms Fernando received two responses to her e-mail of 26 October 2007. The first response was from Mr Haswell who wrote that he would support the transactions, on the basis that: 
“As discussed with you, we should position SCB as a close advisor with CPC’s best interests at heart. If this can be a differentiator with our competitors so much the better. We also need to be crystal clear that CPC understands the potential downside in very straightforward terms and, we should be geared up to support the client adequately throughout the life of the transaction. On that basis I’d support it.  	
Presumably testing regulator opinion should be done in a low key way to avoid the impression that we are going over the Chairman’s head. Do you agree?”
142.	Ms Fernando replied to Mr Haswell’s e-mail, copying in Mr Dias, replying to the two paragraphs: 
“Rukshan, Appreciate if you could provide necessary feedback to Clive on his concerns. 
Clive, Re regulator, this was a valid concern raised by Robert.
Best regards, Kimarli”   
143.	The second response to Ms Fernando’s e-mail was from Mr Green who stated: 
“We are obviously developing the right type of dialogue but I’m struck by your statement that the Chairman does ‘not have the appetite to lose money, hence no max amount set.’
As a statement of Risk Appetite this is as clear as it gets. However the structures I have seen ALL leave CPC with downside risk. i.e. there are circumstances in which they will have to pay us.”  
144.	Ms Fernando responded to Mr Green indicating that she fully agreed with his comments. In her e-mail to Mr Green she picked up the two comments, including the specific language, that had earlier been made by Mr Haswell and suggested that each could be incorporated in an amended BCA so that Global Markets would be responsible for the first aspect (i.e. CPC’s understanding) and Mr Haswell the second (i.e. the regulator/government’s understanding). 
145.	Thereafter, the two conditions were incorporated into the BCA by 29 October 2007, signed by the entirety of the SCB Sri Lankan team. Mr Beebe of Credit added a manuscript comment: 
“Supported subject to the above additional conditions (b) & (c) & on the understanding that CPC is fully aware of the downside attached to any deal booked & the quantum of possible loss. RM & Global Markets to be satisfied all obligations to be met from cash-flow and bank resources.”
146.	There was a factual dispute between the parties as to whether Ms Fernando had concerns about the CPC transactions and the extent to which she shared those concerns with others within SCB.  I do not consider that dispute to be of great relevance to the issues in the case.  In so far as it matters, I find that Ms Fernando did share some of Mr Green’s concerns, but I am not satisfied that she expressed these concerns to any greater extent than is shown by the documentation.
147.	On 20 November 2007, there was a meeting, arranged by SCB, between Mr Haswell and the Minister. Mr Haswell had previously met the Minister at press conferences. An e-mail of 21 November 2007 by Mr Haswell to Mr Green and Mr Williams (who had chaired the Credit Committee meeting) records:  
"One of the requests made in the recent CPC BCA was for me to provide some assurance that the Sri Lankan government was cogniscent [sic] of the hedging activity between ourselves and the CPC, and understood the potential downside risks of these structures. 
Yesterday, I met Minister Fowzie. I found he was knowledgeable about the history of our relationship, and was pleased to be presented with the plaque marking the Energy Risk magazine award. He stated that he understood the simpler structures they had been using and wanted to do more of the same - zero cost oil hedges, but to extend this up to 75% of the total country requirement. For this there would need to be a cabinet paper prepared. I felt he realized that a drop in oil prices would mean a penalty price being paid by the CPC and that he would deal with that eventuality through a preparedness to hold pump prices for a period.
He understood the relationship between the crack hedge structure and the relative inefficiency of the refinery. This is why he and the CPC Chairman delayed adopting this structure. He is in the process of arranging a substantial loan from a Middle East source in order to upgrade this refinery; and he gave us details of the oil and gas exploration activity, tendering for which is also imminent.   
Overall he is very pleased with the results of hedging, which has resulted in a return of approximately US$6m, so far."
148.	The Minister denied the accuracy of Mr Haswell’s note and suggested that it was only a very short meeting and that there was not much time to discuss anything.  I find that Mr Haswell’s note is a substantially accurate record of the meeting but that this was not a lengthy or in-depth meeting, although some matters of detail were mentioned, as reflected in the email note.
149.	On 30 November 2007, Mr de Mel and Mr Karunaratne prepared a Board Paper on CPC’s “Hedge Position” (to which were attached two graphs), setting out the payments made by or to CPC in the six months to October 2007. It gave a detailed description of the crack hedges and sought approval of payments due under the hedges.
150.	At its meeting on 6 December 2007, the Board approved the resolution in the  following terms: 
“Hedge position, Submitted by: Chairman & DGM (F)
The Board on considering the contents of the Board Paper gave its approval for the payment of US$ 1,779,000 in line with Cabinet Decision dated 24th January 2007 out of Refinery profits.” 
151.	Mr Dias, Mr Peiris and Mr Casie-Chetty held a meeting with Mr de Mel on 3 January 2008.  At the meeting Mr de Mel explained that CPC was facing the problem that domestic oil prices had not moved upwards in line with international oil prices and therefore its bottom line had been adversely affected.  He also said that although he was keen to look at structures at current prices he was not comfortable entering into any hedges.  Mr Peiris also suggested that CPC should hedge 5% of its requirement by paying a premium, but Mr de Mel replied that he was not very keen on structures that involved an upfront premium. He requested SCB to work on the TRF and the pre-funded crack structure.  He mentioned that at the right price, CPC would consider hedging 70% of its entire requirement. 
152.	On 17 January 2008 Mr Peiris sought appropriateness approval for a fresh pivot structure.   However, on 28 January 2008 Mr Peiris reported to Mr Agnani that he was reluctant to show this to CPC as he had in mind that in September/October 2007 CPC had “mentioned that they were not too keen on leveraged structures and more importantly stressed the ability to unwind the trade at short notice”.  
153.	Meanwhile Mr Diasz of Citi sent Mr Karunaratne presentations on TARNs on 25 January 2008 and shortly afterwards CPC entered into its first TRF with Citibank (TARN is another acronym used to describe a TRF and is short for Target Accrual Redemption Note).
154.	By letter dated 1 February 2008 Mr de Mel wrote to the Ministry Secretary providing an update on CPC’s hedging of petroleum products.  This followed a series of chasing letters from the Ministry asking Mr de Mel to appoint a committee to implement hedging.  The letter was drafted by Mr Karunaratne and informed the Ministry that CPC had used “Zero Cost Collar and certain hedging structured derivatives of Zero Cost Collars during the year 2007”.  It also contained a reference to CPC “continuously discussing long term strategy on oil hedging with Central Bank of Sri Lanka and Treasury”. The letter concluded with Mr de Mel’s view that a committee to implement hedging was not suitable.  
155.	Mr Dias, Mr Peiris and Mr Casie-Chetty met Mr de Mel again on 6 February 2008.  They showed him TRFs and ZCCs.  Mr de Mel expressed the view that Dubai crude prices would move lower to $75/bl.  He said he was not interested in leveraged structures.  He asked them to work on three types of structure on between 100,000 to 200,000 bbls for about six months at certain price levels: a Dubai crude ZCC; a Singapore Gasoil ZCC; and an unleveraged Dubai crude TRF with a strike of $75/bl and a $20/bl target.
156.	The same day, CPC concluded the first TRF transaction with Citi.  It had a strike price of $75/bl and a $20/bl target accrual.  The transaction was unleveraged, had no Seagull and had a notional quantity of 200,000 bbl of Dubai crude.  It was over $10 ITM.
157.	It was Mr Karunaratne’s evidence that following the success of this first TRF transaction with Citibank Mr de Mel became increasingly keen on TRFs, which he thought could be used to earn profits for CPC. Over the next six months CPC was to entered into 19 further transactions, of which 18 were TRFs.  Of these 19 transactions, nine were unwound prior to expiry with CPC receiving a lump sum payment in all but one case.  
158.	On 18 February 2008 Mr Karunaratne wrote to the Economic Research Department of CBSL providing an overview of CPC’s performance in 2007.  His letter noted that CPC’s “hedge positions have gained Rs 209 million during the year”.
159.	Mr Peiris and Mr Casie-Chetty met Mr Karunaratne on 22 February 2008 who was recorded as saying that: “…the TRF at 75 [i.e. Citibank T5] was a good deal, and that if they were to unwind this now, they would be receiving USD 2.1mio, even before the trade starts! He seems keen to cash in.”  This was a reference to the fact that although the trade date of Citibank T5 was 6 February 2008, its effective date was 1 March 2008 so there was an opportunity to unwind the transaction for profit in advance of the effective date.  Mr Karunaratne was also recorded as saying that “he would be happy with this type of trades [i.e. a TRF], and told us to work on a GO [Gas Oil] TRF at 90.00…”.
160.	Mr de Mel visited Dubai between 22 and 25 February 2008.  During this trip, Mr de Mel met a number of SCB personnel including Mr Haroon Imtiaz, a Director of SCB Risk Management Advisory.  Mr Imtiaz followed up the meeting by emailing Mr de Mel on 26 February 2008 with a proposal for a structure described as offering a “deep discount” to Gasoil prices. Mr Eric Pascal (Mr Imtiaz’s boss, the Regional Head of Risk Management Advisory) summarised the impression Mr de Mel  had given on his visit in an internal  email in the following terms:
“…Haroon [Imtiaz] and FI sales met with the chairman on Sunday…it became apparent that the chairman was not interested in discussing more than trading strategies around oil, which we are glad to do.  Basically, the way the client works is that he likes to be shown ideas.  He then acts on the ones he feels are most profitable”.
161.	On 26 February 2008 CPC requested SCB provided fresh pricing on a TRF pivot for Gasoil and a draft term sheet was prepared. Mr Dias and Mr Peiris met with Mr de Mel to discuss the proposed pivot trade the same day.  Mr de Mel expressed the view that the pivot trade was too risky compared with Citibank’s structures, as Mr Dias reported in an email to Mr Mishr.   
162.	On the following day, 27 February 2008, CPC entered into Citi T6.  This was a TRF on Singapore Gasoil, with a $5 seagull and a $15/bl target accrual.  It was unleveraged.  The notional quantity was 160,000 bbl per month.  The strike price was $100.  It was about $17 ITM.
163.	It appears that SCB came close to closing a TRF transaction with CPC on 28 February 2008.  The problem appears to have been that, due to the fact that SCB had to back-to-back the transaction, its traders were unable to obtain the transaction at the price level that CPC wanted and still make a profit for SCB.  An email from Mr Peiris recorded feedback from the trader that the notional quantity proposed – 100,000 bbl on Singapore Gasoil was a “very large size”. 
164.	Meanwhile, the Ministry had followed up on Mr de Mel’s letter dated 1 February 2008.  Mrs Wijetunge wrote to Mr de Mel by letter dated 25 February 2008 asking him to supply certain information (dates, quantities, effective periods and profit/loss accrued) for the purposes of completing a draft Note for the Cabinet.  Mr Karunaratne drafted a fresh Cabinet Memorandum for Mrs Wijetunge, which he finalised at her office in April 2008.  The draft Cabinet Memorandum picked up, amongst other things, the fact that CPC had “entered into a hedge…which will definitely generate US$ 4.0m in March and April of 2008 and a couple of small quantity hedges which may also generate certain cashflows to CPC”. The $4m was a reference to the expected profits from the first TRF transaction with Citibank (Citibank T5).  It also pointed out that CPC had made “hedge gains” of 209m Rs in 2007.  The Minister was not sure that this was presented to Cabinet. 
(6)	March to July 2008: T5-T9
165.	In early March 2008 concerns were expressed internally within SCB that it was “losing out to Citi on TRF”.  This was mainly due to the fact that SCB had to back to back trades with external counterparties, whereas Citi could run trades in house.  An internal email of Mr Peiris’ dated 4 March 2008 recorded that he considered CPC to be “hooked” on TRFs .  He wrote that “…we need to quickly come up with a structure that will counter the TRF ‘threat’ we face”.  
166.	Concerns that SCB might be losing out to Citi were escalated to Mr Bass and Mr Feder by Mr Mishr and Mr Haswell.  Mr Bass responded on 7 March 2008 noting that SCB was “clearly losing ground”.  He also posed the question: “Are we absolutely convinced that this is the right structure for the client in this case?”.  Mr Pieris drafted a response for Mr Dias to send explaining why, in his view, the TRF structure was suitable for CPC.  It records that Mr de Mel was “very keen” on TRFs due to “the ability to make something quickly and the structure knocks out”.  It also suggests that CPC’s interest in this structure was due to the fact that CPC was losing “heavily” on diesel at the pumps.  
167.	Mr Dias’ email to Mr Bass and Mr Mishr copied in a number of other senior individuals, such as Mr Carr, Mr Mulhearn, Mr Harinder Singh (SCB Head of Structured Solutions Group), Mr Bhandari and Mr Haswell.  The involvement of so many senior individuals indicates that SCB considered the prospect of business being lost to Citi a serious matter.  Indeed, Mr Haswell also emailed Mr Bass, Mr Mishr, Mr Bhandari and Mr Dias saying: “The word is that Citi have closed deals for a total of 400,000 barrels this year so far.  We have won none.  We estimate they have made around US$2m revenue”.  
168.	Meanwhile, CPC concluded two further TRFs with Citi in short succession.  Citi T7 was concluded on 5 March 2008.  It was an unleveraged TRF referenced to a notional quantity of 100,000 bbl of Singapore Gasoil.  The strike price was $101/bl.  There was a $5/bl seagull and a $15/bl target accrual.  Citi T8 was concluded on 12 March 2008.  This was CPC’s first leveraged TRF.  It was referenced to 25,000 x 50,000 bbl of Singapore Gasoil.  The strike price was also $101/bl.  There was a $5/bl seagull and a $15/bl target accrual.  Citi T7 and T8 were around $14 ITM.
169.	SCB concluded its first TRF transaction with CPC the day after Citi T8.  This was SCB T5, and the first concluded transaction with SCB since T3 and T4 in July 2007.  It appears that Mr de Mel was keen to conclude a further TRF transaction with SCB because Citi’s credit limits for CPC were full.  Mr Peiris’ email to Mr Manoj Mishra on 13 March 2008 shows that at the meeting, SCB showed levels of $130-122-102.85, but Mr de Mel asked for levels of $128-120-102.85.  
170.	Mr Beebe supported the transaction on 13 March 2008 subject to Mr Peiris’ “…assurances that the client has a full understanding of this structure and the risks attached”.  Mr Mishra gave TCRM approval the same day. 
171.	SCB T5 was an unleveraged TRF referenced to 200,000 bbl of Singapore Gasoil.  It had a $8/bl Seagull and a $10/bl target accrual.  The strike and cap levels reflected the levels Mr de Mel had requested: $120 and $128 respectively. The transaction was slightly ITM, by in the region of $1.  This was a consequence of Mr de Mel’s request to reduce the strike from $122 to $120.  
172.	When T5 had been closed, Mr Dias circulated an email congratulating Mr Peiris on his “effort and all the hard work (finally it paid off)”.  Mr Agnani added his congratulations when Mr Peiris emailed him to inform him that the deal had been done and that the revenue for SCB was $1.2m.  Mr Agnani wrote: “… I am sure this is just the beginning of many more such big ticket deals”.  
173.	After T5 had been closed, Mr Peiris then sought to get appropriateness approval for a TRF with split strikes on 18 March 2008.  This structure involved strike prices which would change after a period of time, to take account of Mr de Mel's view that the price of Dubai crude would remain high in the initial months and then move lower thereafter. The proposed transaction generated disquiet within SCB’s TCRM and credit teams.
174.	Mr Raman emailed Mr Peiris on 19 March 2008 asking a number of questions about the transaction.  The email was copied to, amongst others, Mr Kamoor Sourjah and Mr Beebe.  In the email, Mr Raman said: “The client is targeting fairly large gains out of these trades (USD 2mio in the gas oil TRF and USD 4mio in the current structure).  How do these figures look in the context of the client’s annual turnover/operating profits?”  In a subsequent email he said:   “…the potential revenue that the client is targeting from these trades (USD 2 mio in the last trade [T5] and USD 4mio in the current [proposed] trade) is fairly large in the context of its total profits…I only have the operating profit figure of USD 60mio [for CPC]…the potential trading gains look large relative to the operating profit itself…Does the client really run its Treasury as a revenue/profit centre? Are we comfortable with this?”  Mr Raman accepted in cross examination that he was concerned that CPC were focusing more on trading with a view to making gains than on reducing their exposure to risk. 
175.	Mr Naik, who was also copied in to the exchange, forwarded the email chain to Mr Green, querying whether, given Mr Green’s previous discomfort on CPC’s transactions, he had any views on the derivatives under discussion.  Mr Green’s response was to require a risk officer “with knowledge of these structures” to “speak directly” to CPC to gauge its risk appetite and validate the transactions from an appropriateness viewpoint.  He noted that “…the chairman was clear he had almost zero tolerance for loss!”.  Mr Green also identified CPC’s poor financial position: “…their financials probably look even worse than last year”.  He also wrote: “…any loss on a trade will effectively have to be backstopped by the government of Sri Lanka.  We therefore need to be comfortable that the right people in central bank/govt are conversant with what we’re doing”.  Mr Green also supplied Mr Raman with a copy of his note of the dinner meeting on 15 October 2007.
176.	On 1 April 2008 Citi T9 was entered into.  It was a leveraged TRF referenced to 100,000 x 200,000 bbl Dubai crude.  It had a $5/bl seagull and a $15/bl target accrual. Citi T10 was entered into two days later, on 3 April 2008.  This was a leveraged structured swap, on 20,000 x 40,000 bbl of Dubai crude.  It had a $5/bl seagull and a knock-out level set at $105.  Citi T9 and T10 were both ITM by about $14.
177.	On 4 April 2008 Mr Haswell and Mr Neeraj Swaroop (SCB CEO India) met with Mr de Mel.  When this meeting was finished, Mr Peiris and Mr Casie-Chetty met Mr de Mel and showed him levels on a Dubai crude TRF and a Seagull with a target.  In the email describing this meeting Mr Peris noted that SCB currently had an outstanding Singapore Gasoil transaction (T5) for which CPC would receive the maximum payment of $8/bl for March.  He noted that “When he [AdM] receives another $2, the structure knocks out”.  He further noted that “…we understand his Dubai exposure is unhedged.  He is of the view that Dubai crude could be between 93 to about 100 in the next few months, and as such is keen to look at a structure with a low target.  Given this view he is keen to leverage…” .  
178.	Mr Peiris’ email also sought appropriateness sign off from Mr Raman.  Mr Raman gave appropriateness sign off the same day, subject only to the condition that “the term sheet discloses the down side risks clearly through detailed sensitivity analysis”. 
179.	 SCB closed T6 with CPC on 9 April 2008. T6 was a leveraged TRF referenced to 100,000 x 200,000 bbl of Dubai crude.  It had a seagull of $5/bl and a target accrual of $15/bl.  It was the first leveraged transaction with SCB.  SCB T6 was ITM by in the region of $8.
180.	SCB’s revenue on this transaction was $1.05m, as Mr Dias informed his seniors (including Mr Haswell, Mr Bhandari, Mr Mishr and Mr Singh) in an email dated 9 April 2008.  Upon being informed by Mr Dias that the deal had been closed, Mr Agnani emailed Mr Dias with the congratulations: “Super!!! Rukshan/Chanaka, credit goes to you for the way you have managed this client relation and your effort…”.  The substantial revenues from T5 and T6 (totalling $2.25m) were noted in the minutes of the MANCO meeting on 10 April 2008.  The country financial update section of the minutes recorded: “Revenue high due to CPC”.
181.	On 8 April 2008, Mr Bhandari met with Mr de Mel in Dubai at Mr Bhandari’s hotel, where they had dinner. This was a fairly general conversation about topics ranging from oil prices, hedging strategies and CPC’s understanding of the risk.  As recorded in his contemporaneous email, as part of this general discussion Mr Bhandari highlighted the need for Mr de Mel to understand the risks of any transaction he entered into and to ensure that the Term Sheets were in accordance with his understanding of the transaction.  I am not, however, satisfied that Mr Bhandari’s more detailed account in his witness statement is an accurate recollection of this particular meeting.
182.	On 16 April 2008, CPC did its first TRF unwind.  Citi T6 (a Singapore Gasoil transaction) was unwound on this date with a payment to CPC of $1.5m. On the same date, Citi T11 was entered into.  This was a leveraged TRF referenced to 135,000 x 270,000 bbl of Dubai crude.  It had a $5/seagull and a $15/bl target.   Citi T11 was ITM by over $15.
183.	CPC only had to earn a further $2/bl in April for SCB T5 to reach the target accrual and knock out and so towards the end of April 2008, Mr Peiris began to investigate internally what transactions could be offered to CPC to replace T5 when it knocked out.  He considered that CPC might want to do something even more “innovative” than T5, as reflected in his email on 22 April 2008 to Rahul Goela, a trader, in which he observed that “[w]e need to show something similar or preferably something totally innovative to the client [at the end of the month]”.  Mr Goela disagreed, replying that “the structures we have done so far have been good fit.  No reason why we should not reconsider those”. 
184.	Mr Peiris and Mr Dias met Mr de Mel on 23 April 2008 where they discussed a replacement for T5.  Mr de Mel indicated that, given the high possibility of the existing transaction knocking out, he was keen to do another similar deal by the end of the month.  There was also a discussion about downside risk as reflected in Mr Peiris’ email note: “… during the meeting [we] emphasized the downward risk, due to the nature of the leverage.  We also mentioned that should crude prices correct, the downward move could also be quite swift.  He mentioned that a floor in the range of 115 to 120 is acceptable as CPC is intending to raise prices after the 10th May 2008” (emphasis original).  Mr de Mel said in evidence that at this time, CPC was losing something like Rs. 1bn per month because it was selling oil at a loss and that he was concerned to press the Government for an increase in pump prices.  During April oil prices had risen to unprecedented levels with Singapore Gasoil peaking at $145 on 21 April 2008 and Dubai crude oil peaking at $110 on 28 April 2008.
185.	T7 was entered into on 30 April 2008.  CPC unwound Citi T7 and T8 on the same day, receiving payments of $900,000 and $200,000 respectively.  These were both Singapore Gasoil transactions.  Mr Peiris, Mr Dias and Mr Casie-Chetty met with Mr de Mel that day.   As recorded in an email sent to Mr Agnani prior to the meeting by Mr Peiris, SCB planned to show CPC five different structures, two on Singapore Gasoil and two on Dubai crude.  Four were unleveraged transactions with 100,000 bbl notional quantities.  The fifth was a leveraged TRF on 100,000 x 200,000 bbl Singapore Gasoil.  At the meeting Mr de Mel said that he did not have any Singapore Gasoil structures in place and wanted SCB to do a leveraged deal of 200,000 x 400,000 bbl of Singapore Gasoil.  This caused some concern amongst SCB’s salesmen.  The call report recorded that: “At this point we did impress on him the risk CPC runs should prices fall below $113.50 [the proposed floor price].  Further, by leveraging the structure he would basically expose his hedge percentage to 45% on gas oil”.  SCB suggested that CPC should do one 100,000 x 200,000 bbl transaction then do another, but Mr de Mel rejected this suggestion.  Mr de Mel also wanted SCB to improve the cap spread on the transaction from $129-139 to $128-138.  
186.	T7 was a leveraged TRF referenced to 200,000 x 400,000 bbl Singapore Gasoil.  It had a $10/bl seagull and a $15/bl target accrual. This trade involved the largest notional quantity of any of CPC’s derivative transactions with the banks.  T7 was in the region of $9-10 ITM.
187.	Mr Peiris reported the closing of this transaction to Mr Mishr, Mr Kumar, Mr Saber and Mr Dias by email dated 30 April 2008.  As he reported in the email, SCB’s revenue on the transaction was $3m.  Mr Kumar replied: “Congrats!! you are rocking!!” 
188.	CPC executed Citi T12 on 2 May 2008.  This was a leveraged TRF referenced to 60,000 x 120,000 bbl of Dubai crude.  It had a $5/bl seagull and a $15/bl target accrual.  Citi T13 was executed shortly after this, on 9 May 2008.  This was also a leveraged TRF referenced to 65,000 bbl x 130,000 bbl Dubai crude, also with a $5/bl seagull and a $15/bl target accrual. Citi T12 and T13 were both ITM by over $15.
189.	On the same day, Citi T9, a leveraged TRF referenced to 100,000 x 200,000 bbl Dubai crude, was unwound.  CPC received a payment of $935,000 upon unwinding.  
190.	In the meantime, the revenue earned from T7 caught the attention of Mr Bhandari.  He emailed Mr Dias on 30 April 2008 asking for a brief on the risk/reward dynamics of the transaction.  Mr Bhandari confirmed in evidence that he had seen a large potential revenue so he wanted to investigate the nature of the deal that had given rise to this revenue.  Later that day Mr Bhandari wrote to Mr Dias to indicate that he was not happy with the revenue, stating “Please ensure there is no leakage of these details in country”.  He proposed returning $500,000 to CPC, although ultimately this did not happen. 
191.	Mr Peiris emailed Mr Raman seeking formal sign off on T7 on 2 May 2008.  Mr Raman replied noting that Mr Peiris had “agreed that we shall not undertake any further structures till the existing structures [T6 and T7] get knocked out”.
192.	On 6 May 2008 Mr Bhandari also reviewed a term sheet and commented to Mr Dias and Mr Peiris that the risk disclosure needed clearer numbers, that downside risks when the floor is breached needed to be set out, and that they needed to ensure that the terms sheets were very clear. Mr Peiris responded by supplying Mr Bhandari with the term sheet for T7 observing that “we had infact given the downside risks in a table – last page”.  Mr Bhandari replied: “Do not agree – this is not plain English”.
193.	T6 and T7 were profitable transactions for SCB Colombo. Nishani Ariyawansa emailed Mr Haswell and others on 7 May 2008 stating: “An Excellent start for the 2nd quarter with YTD TP recording USD 11.57Mn, 72% above budget mainly o\a of Fee income earned on Oil Deal (USD 4mn) during April [sic]” (emphasis original).  
194.	The revenue also appears to have impressed James Sullivan, a Director Energy Structuring & Origination, SCB Singapore.  He emailed Mr Peiris on 30 May 2008: “…I want to say Thank You for your astounding success with your client. You have individually lifted the Energy product’s success beyond my own aggressive expectations…Could you please drop me a quick few lines about how you have achieved this?”.  Mr Peiris replied on 2 May 2008 describing in some detail the dealings between SCB and CPC:-
“I am indeed honoured to share with you some ‘take-aways’ from our success story.  I will attempt to share with you my personal thoughts on success factors and also some pitfalls to avoid.
Success factors:
1. Team effort
Our success story is the result of a great team effort. This team comprising Rukshan, Dushan (RM), Girish and Amit, and last but not the least the traders of the likes of Rahul and Mike. This team always had discussions around the need of the client and did not hesitate to make constructive criticism of ideas and suggestions. Encourage this behaviour.
2. Feedback -
There was a time when we could not meet the challenge of Citi Bank. These feed back was always passed on to the traders who took it constructively and attempted harder to meet this challenge.
3. Perseverance -
This should really be the first on the list. When we first engaged CPC, it took almost a year to do the first deal. During that period we did engage all key stake holders - Central Bank being one - to highlight the importance of structured solutions and its benefits and always highlighting the risks.
4. Relationship-
Another key aspect. At the end of the day we deal with human beings and as such relationship is a key success factor. Engage the decision maker not only at a formal level but informally as well. You might know that the crack hedge we did with the client went bad and CPC paid USD 3mio as a result of the adverse price movement. Yet they did not close SCB for future deals. There will be many ways to gauge the strength of the relationship? One of them lies in answering the question as to how easy it is to have access to the decision maker of the Company. When we walk into the CPC premises, the security guards don't even ask whom we want to meet but they immediately give the pass to the Chairman's office.
5. Appropriateness -
I don't have to elaborate on this. We need to understand what the client wants, and make a call as to if that is what the client needs. The TRF specifically meets exactly what the client needs - the potential of an early KO in uncertain times with a payoff, while understanding the downside risks if the KO does not happens. The stringent controls we have around this are great. Either we do or we don't. Once that decision is made - live with it.
6. Encouragement -
Provide encouragement and guidance to the people on the ground. If they are to be corrected, clearly articulate the reasons, lest a misunderstanding happens.” 
195.	Mr Karunaratne produced a quarterly financial statement for the Board for the first quarter 2008 dated 13 May 2008. This contained a slide relating to hedging, entitled “Hedge Gains”.  This showed gains under transactions with Citi and SCB in the months of January, February, April and May 2008, but provided no details about the contracts.  It showed a total hedge gain as at 12 May 2008 of Rs. 1,215m (about $12m). 
196.	Mr Pieris, Mr Casie-Chetty, Mr Dias and Mr Agnani met Mr de Mel on 14 May 2008.  The discussion at the meeting was recorded in an email from Mr Peiris to Mr Raman as follows:-
"We - Dushan, Rukshan. Girish and I - met with the CPC Chairman last evening and discussed the prospects of unwinding the Sing Gas oil structure where, as at yesterday, he would have received USD 2.5mio. The Chairman is of a STRONG view that prices will head further north, and in fact suggested that by the end of the month, he would be able to unwind at a much higher level! Given that, he was not keen to unwind.
We did indicate to him that subsequent to the news from the US yesterday, that prices could dip. He was of the view that it would be temporary and also that he would be keen to enter into a similar type of a hedge (TRF with a target) for Dubai Crude. He was looking at a size of 100k by 200k
Further to your approval for the last structure dated 02.05.2008, you did indicate that we will be looking at a new structure only when either one of the existing structures close. Given the comments made by the Chairman (para two above) we would like to seek your views as to if we could go ahead with another deal…”
197.	Between 15 and 18 May 2008 Mr de Mel visited SCB's offices in Singapore, including a visit to SCB's dealing room.  Mr Haswell and Mr Dias joined him on this visit.  Mr de Mel also met with, amongst others, Mr Feder, Mr Mulhearn and Mr Juneja.  
198.	On 19 May 2008 Mr Bass of SCB emailed Mr Goela stating that he needed to have a discussion about CPC’s hedging strategy.  Mr Goela's referred to Mr de Mel wanting a strategy which monetised his short term bullish view on Gasoil, and allow him to re-evaluate market conditions, say every 3-4 months.  Similar terminology was used in a presentation given to Mr de Mel by SCB in Singapore, which referred to one of the benefits of TRFs being: “Small target allows client to monetise short term bullish view on the underlying effectively”.
199.	T7 was unwound on 21 May 2008 for $2.8m.  SCB kept $100,000 for itself and paid $2.8m to CPC.  Including the initial commission of $3m, SCB made a profit of $3.1m on the transaction.  Mr Mishr recorded in his email of 21 May 2008: “Between the initiation and the cancellation the bank made US 3.1[m] on this deal.  Wonderful effort by the Lanka FI team…”.  Mr de Mel also indicated on this date that he wanted to enter into another trade of 200,000 x 400,000 bbl, the same size as T7.
200.	On 22 May 2008, T6 (a 100,000 x  200,000 Dubai crude TRF) was unwound for a payment of $900,000 to CPC.  SCB's commission on the unwind was $60,000. At that point SCB had no outstanding transactions with CPC.  That day, Mr de Mel indicated that he wanted to replace this with another Dubai crude TRF, but on twice the notional quantity, i.e. 200,000 x 400,000 bbl.
201.	Replacements for T6 and T7 were discussed internally.  A replacement for T6 was declined by Mr Raman at TCRM on 22 May 2008.  Mr Raman’s evidence was that before deciding to decline the transaction, he spoke to Mr Mishr, Mr Bhandari and Mr Naik to inform them he was going to decline the transaction. A number of email exchanges took place over 21 and 23 May relating to this.  In summary they show:
(1) Mr Raman and Mr Naik and Mr Bhandari expressing concern that the downside risks were disproportionate to the rewards.
(2) A view that the proposed transactions were risky in particular because prices had already substantially appreciated and there was a risk of a market correction.
(3) Mr Bhandari expressing concern that Mr de Mel may be getting over confident: “Equally, as [Mr de Mel] gets more and more confident and so long as he makes money things are ok. Just want to make sure that such confidence does not lead him to take unnecessary risk”.; and in a later email: “…as the Chairman keeps making money and gets this in his blood, he needs to understand that at some point there will be losses”.
(4) Mr Bhandari asking “if the client has conveyed to us anything by way of an action plan/strategy to cut losses if prices drop significantly” and also “in a downside scenario what is the cumulative loss the client could suffer and can he take the cash flow”..
202.	SCB’s salesmen were frustrated that the requested transactions had been refused.  So, for example, Mr Haswell emailed Mr Bhandari stating: “[Mr Dias] was genuinely frustrated at the lack of consensus about selling another structure to CPC. Especially, after unwinding two hedges and after a very positive visit to Singapore. He will feel that we've promised to continue to support CPC hedging but now can't deliver. Having failed to get agreement to proceed even after halving the size of the proposed hedge; the field will now be open for Citi to unwind its Dubai Crude hedge and sell another”. 
203.	A press conference took place on 23 May 2008 at which Mr Haswell handed over a mock cheque for $2.8m to Mr de Mel, reflecting the profits made on T7. The press conference was attended by the Minister, representatives of the media, and some customers of SCB.
204.	Mr Pieris’ email of 24 May 2008 recorded that the Minister “mentioned how well the hedges had worked and highlighted that due to this reason they have been able to hold on to any price increase”.  Mr Peiris also recorded that the Minister had said that SCB was “running away from hedging” in the light of the recently refused transaction.  According to Mr Dias, the Minister also said that “Hedging is like gambling” and said to him after the meeting “If things go right I’m a hero, if they go wrong I’m a zero”.  
205.	A press report of the conference in the Daily Mirror dated 24 May 2008 reported the Minister’s comment that hedging was like gambling.  It reported that the Minister had said that CPC had incurred a loss of Rs 7,231m from January to April, and that the previous month a loss of Rs 1,656m was incurred, but hedging had “helped us soften the loss by earning the CPC [Rs] 585m”.  
206.	The Minister’s comments that CPC was running away from hedging caused some disquiet within SCB, and they had a concern that CPC might do trades with other banks and SCB would lose out. 
207.	On 26 May 2008, Mr Dias, Mr Peiris and Mr Casie-Chetty met Mr de Mel and Mr Karunaratne.  The call report records Mr de Mel stating that retail prices would be increased and that “inspite [of] the increase in prices in the pump, given the current rising global oil prices he would require to further reduce losses by entering into consumer hedges with the banks”.  The call report then states:-
“Given the current view of the market, his view was to continue dealing with TRF type of transactions, where his objective would be getting the structure knocked out prior to the maturity of the hedge. He mentioned that the current hedge to unhedge ratio is comfortable and requested SCB to show additional prices on TRF type deals to hedge its gas oil exposure.”
208.	On 28 May 2008, CPC entered into T8 with SCB.  This was a leveraged TRF referenced to 100,000 x 200,000 bbl Singapore Gasoil.  It had a $5/bl Seagull and a $15/bl target accrual.  T8 was ITM by in the region of $26-27.
209.	The internal reaction was again positive.  Mr Dias’ email dated 28 May 2008 records that SCB made $1.35m revenue on the transaction.  Mr Mishr responded: “Well done pal.  You guys are rocking”.  
210.	Appropriateness sign off for T8 was given by Mr Beebe, Mr Casie-Chetty and Mr Naik (verbally) on 28 May 2008.  In evidence Mr Naik identified various factors that he said had given the bank greater comfort than for the declined transaction.  In particular, he referred to the discussions with the Minister and the fact that earlier transactions had knocked out.
211.	Other differences were that it was referenced to a different underlying commodity to the declined transaction (the declined transaction related to Dubai crude, but T8 related to Singapore Gasoil) and CPC had informed SCB that it had no hedge on Singapore Gasoil at the time; and T8 had a notional quantity half the size of the declined transaction (the declined transaction related to a notional quantity of 200,000 x 400,000 bbl, but T8 related to a notional quantity of 100,000 x 200,000 bbl).
212.	It was decided at the end of the month that Mr Bhandari would visit Mr de Mel in Sri Lanka in early June 2008.  Mr Bhandari wished to discuss the downside risk of transactions with CPC; to get a clearer explanation of CPC’s risk appetite, in particular as to its strategy for cutting losses if prices fell significantly; and to support the relationship with CPC following SCB’s decision to decline the transactions. 
213.	Mr Bhandari met Mr de Mel and also the Governor of the CBSL, a Deputy Governor, Reserve Management Team and Chief Advisor to the CBSL on 2 June 2008. Mr Dias and Mr Haswell also attended. 
214.	The meeting with the CBSL was high level. There was a general discussion about the risks involved in derivative transactions and Mr Bhandari discussed some examples of challenges he had seen with customers in India and situations where SCB had declined to enter into transactions, including the recent deal with CPC.  
215.	The meeting between Mr Bhandari and Mr de Mel was again over dinner.  The essential matters discussed are recorded in Mr Bhandari’s contemporaneous email as follows.
“I also met the Chairman of CPC along with Clive and Rukshan for dinner and we had a long chat about the deals, risk and the banks perspective on the downside.  He has made 18m to date and these are placed in an effective reserve.  In terms of losses, he would effectively consider cutting negative positions at around the $7m to $8m level.  We chatted extensively about his appetite for losses, that of the finance ministry and central bank.  Overall he is very aware of the downside risk and I did indicate that where we felt that downside risk could be a probability in our view and such risk was high, we would want his specific comment and acknowledgment of such a risk and we may even be reluctant to enter into such a deal.  However we would make sure he clearly understood the banks perspective and that we had the company interest at heart.”
216.	The following day, Mr Green emailed Mr Bhandari in relation to an email exchange between Mr Warbanoff and Mr Naik that he had been copied into.  He wrote “Avinash [Naik] says [CPC] is a USD 10mio account.  How can this be?”.  Mr Bhandari replied that Mr de Mel had a “very clear thought process around strategy”.  
217.	CPC entered into Citi T14 on 10 June 2008.  This was a leveraged TRF referenced to 45,000 x 90,000 bbl Dubai crude.  It had a Seagull at $5/bl and a target accrual of $15/bl.  Citi T14 was ITM by over $24.  On the same day, CPC unwound Citi T10, with no payment between CPC and Citi.  
218.	CPC entered into Citi T15 on 13 June 2008.  This was a leveraged TRF referenced to 175,000 x 350,000 bbl Dubai crude oil.  It had a $5/bl seagull and a $15/bl target accrual.  Citi T15 was ITM by over $30. On the same day, CPC unwound Citi T11 and Citi T12, receiving payments of $1.215m and $500,000 respectively.  
219.	Singapore gasoil and crude oil prices peaked on 4 July 2008 and started to decline thereafter, such that the spot price of Singapore Gasoil had by the end of the month fallen by nearly $30 from its peak on 4 July 2008.  
220.	CPC entered into transactions with DB and Commercial Bank, on 8 July and 9 July 2008 respectively.  The DB transaction was an unleveraged TRF referenced to 100,000 bbl Dubai crude. It had a $10/bl Seagull and a $25/bl target accrual.  The Commercial Bank transaction was considerably smaller.  It was a leveraged TRF referenced to 10,000 x 20,000 bbl WTI Light, with a $5/bl Seagull and a $15/bl target accrual.  Both transactions were ITM, by over $25 and $22 respectively.
221.	Prior to entry into T9, Mr Peiris met with Mr de Mel.  They discussed a structure that placed a monthly limit on the loss CPC would have to bear should prices move below the given floor and which did not have a Seagull.  At around the same time CPC was recategorised as Category 2 in SCB’s appropriateness profile.  
222.	SCB T9 was entered into on 9 July 2008.  This was an unleveraged TRF referenced to 100,000 bbl Singapore Gasoil.  It had a $10/bl Seagull and a $25/bl target accrual.  Unlike SCB’s previous transactions with CPC, there was no collar: the floor and strike prices were set at the same level, namely $139.35.  T9 was ITM by over $28.
223.	Mr Raman gave TCRM approval. The revenue on this transaction for SCB was $1.6m.  
224.	Citibank T16 was entered into on 16 July 2008.  It was a leveraged TRF referenced to 30,000 x 60,000 bbl of Dubai crude.  It had a $5/bl seagull and a $15/bl target accrual.  This transaction was also ITM by over $30.
225.	As at end-July 2008, CPC’s total profits from derivative trading in 2008 were substantial.  The net amount paid to CPC under all its transactions in 2008 (including payments made to CPC upon unwinding) was at this stage $21,100,000.  
226.	As at the end of July, it was already clear that CPC’s MTM position on T8 and T9 was negative.  Mr Peiris sent Mr Casie-Chetty an email dated 30 July 2008 identifying that the transactions had a -$9m MTM.  Mr Peiris position, as shown in his subsequent email to Prolay Kundu, was that the transactions were nonetheless “very much in the money” because the spot price of Singapore Gasoil was currently trading at $154.40, which was well above the strike prices of both transactions.  This reflected the fact, as borne out by his witness statement and evidence, that Mr Peiris did not fully understand the relationship between MTMs and spot prices and that the fact that the spot price was significantly ITM did not mean that the MTM would have a positive value.  Mr Dias similarly did not have a clear understanding of this. 
(7)	August 2008 to January 2009 
227.	According to an internal Citi email dated 6 August 2008 on that day Mr Dias and Mr Basnayake of Citi met Mr de Mel and Mr Karunaratne.  Mr de Mel was reported as having said, amongst other things, that he felt that WTI prices would hold above $115 and that CPC was comfortable with the prices of all hedges and did not plan to restructure any.  This note also reports that Mr de Mel said that any losses on the hedges would be a benefit on the unhedged portion and would ultimately be beneficial for the corporation and the country.  
228.	On 15 August 2008, CPC entered into its first transaction with People’s Bank.  This was a leveraged TRF referenced to 25,000 x 50,000 bbl of WTI Light.  It had a $5/bl Seagull and a $15/bl target accrual.  The transaction was ITM, by almost $24.
229.	SCB’s internal emails show that a pivot structure referenced to WTI was under consideration for CPC from 16 August 2008.  Mr Peiris noted in an email to Mr Raman dated 18 August 2008 that given the downward move in prices, CPC was keen to dilute the risk by entering into a structure.  The transaction required a reallocation of $22m from SCB’s Category 1 limits for CPC to SCB’s Category 2 limits.  Since new credit allocations were required, Mr Dias emailed Mr Warbanoff to seek his approval.  Mr Warbanoff raised a number of queries. He asked: “Where is the local support for this?  Why isn’t protocol being followed?; he also wrote: “I am sorry to be hard on you guys but the request is scant to say the least – you have assumed because it is CPC it is automatically approved”.
230.	Mr Dias, Mr Peiris and Mr Casie-Chetty met Mr de Mel on 19 August 2008.  The email note of the meeting records that Mr de Mel was of the view that prices may not fall further, but was aware that there could be a possible payment from CPC to SCB on one of the structures.  
231.	On 19 August 2008, Goldman Sachs published a report that forecast a price of $149/bl for WTI at the year end.  Mr Raman gave TCRM approval for the pivot transaction on 20 August 2008.  He noted that there was now a negative MTM of around -$26m on the existing trades.  He also noted that there was “no question of unwinding” the transactions and that CPC had “agreed to run these trades until maturity”.
232.	At some point in August, SCB told Mr de Mel that both T8 and T9 could be unwound for a substantial sum.  Mr Dias’ evidence was that he and Mr de Mel met for dinner in Dubai on 20 August 2008, when SCB made an offer to unwind T8 and T9 for $20m.  He says that Mr de Mel did not agree to this because he thought that prices would come back up again in the future.  Mr de Mel did not recall this meeting, but he did recall being told in early August by Mr Peiris that it would cost SCB $12m to unwind these transactions. 
233.	It does not greatly matter whether one or both accounts are correct. On both accounts at some point in August, SCB told Mr de Mel that both transactions could be unwound for a substantial sum, but Mr de Mel declined to unwind. 
234.	Mr de Mel’s evidence, which I accept, was that he was shocked when he was told of the level of cost to unwind, and that he felt he could not have justified paying this sort of sum to the Government or the Minister.  
235.	Mr de Mel explained in evidence why CPC decided not to unwind the transactions at this time.  The gist of his evidence was that T8 was still ITM, there were only ten days to go to the end of the month, and there was a good chance that the average Singapore Gasoil price at the end of the month would be high enough for T8 to knock out at the end of August.  He mentioned that there were expectations that a hurricane would hit the US that would result in prices rising.  He pointed out that CPC had no alternative: it either paid SCB a substantial sum to unwind T8, or it waited until the end of the month for the transaction to knock out.  
236.	On 21 August 2008 Mr Peiris sent an email informing that he had had a chat with Mr de Mel and spoken about a restructuring idea on T8.  Mr de Mel’s view was recorded as being that “Given the risk involved (increasing the put from 124 to 130 levels) and the fact that oil is once again looking to go North, he wants to stay and watch the situation”.  
237.	Mr Karunaratne gave a presentation to the Board dated 22 August 2008 on CPC’s financial statements for the second quarter 2008.  This recorded that pump prices had been increased with effect from 24 May 2008 “In order to avoid huge losses due to the abnormal price surge in April”.  It contained a slide on hedging, setting out CPC’s profits under derivative transactions with SCB and Citi from February to June 2008, but without giving any details of the transactions.  The slide noted that CPC’s total “hedge gain” as at 30 June 2008 was Rs. 1,936m.  A slide on CPC’s working capital also noted that, whilst the mounting debts of CEB and other Government institutions had placed “severe pressure” on CPC’s liquidity position, Rs. 2,000m of Government debts had been settled in August 2008. A slide entitled “Profitability” stated that “Hedge gain of USD 1.9 billion is the main contributor for the profitability in first six months of 2008 [sic]” .  (This statement contained a typo: the hedge gain was Rs. 1.9bn, not $1.9bn.) 
238.	At some point in August 2008, Mr de Mel was also told that he would have to pay about $15 million to unwind the two outstanding Citi transactions, Citi T15 and T16, but he declined to do so.  
239.	By the end of the month, prices had fallen substantially.  Prices continued to drop in September 2008.  
240.	Mr Peiris reported to Mr Dias in an email dated 2 September 2008 that Mr Agnani had had a chat with Mr de Mel, who was at this point still in New York.  The email stated that Mr de Mel had said that “there is nothing to be done, except to wait and see” and that Mr de Mel “had not been very happy on the price move obviously, but had sounded ‘ok’”.
241.	By 8 September 2008 a ‘producer’ TRF for CPC was under discussion at SCB.  Mr Dias explained that Mr de Mel called him that morning and requested that SCB suggest how CPC could neutralize the payments to be made to SCB on its existing leveraged structures.  Such a structure would allow CPC to profit from the falling prices and offset some of its losses under T8.
242.	Mr Peiris emailed Mr Raman on 8 September 2008.  He noted that the pivot structure had not materialised. However he recorded that, given the current price movements on Singapore Gasoil, CPC was “very keen” on a 200,000 x 100,000 bbl producer TRF with a target of $35/bl, a bought put at $124/bl and a sold call at $153/bl.  He wrote: “If this trade is done, the client’s exposure on the existing leveraged deal is minimized to a great extent.  If Gas Oil prices keep sliding, he will pay on the existing structure, but will receive on this new one.  If prices go up, he will receive on both the existing structures, and pay on this.  However CPC’s risk is if it goes over 153.00.  Custy is well aware of this risk, and does not expect Gas Oil to go there”. 
243.	Mr Raman raised various questions about the transaction in email exchanges with Mr Peiris but gave appropriateness approval on 9 September 2008.  
244.	It was also necessary to obtain credit approval for a reallocation of $24m from SCB’s Category 1 lines to its Category 2 lines.  Mr Casie-Chetty sought approval for this at Mr Peiris’ request which led to further questions from Mr Mr Warbanoff.  He asked:  “What is the overall strategy for this name just piling on cat 2 limits - what is our risk appetite for this name?”; he later noted “the account plan is now 10 months old and who from credit signed off on it? Can I pls have a copy. I still don't have a clear idea of what our risk appetite on this name is - the fact we earn so much from this name is as much a concern as it is a positive as I can see the over reliance on this name for driving revenues against tough budgets…”
245.	SCB T10 was concluded on 9 September 2008.  It was a ‘producer’ TRF: CPC got paid on 200,000 bbl Singapore Gasoil if the average monthly price fell below $124 up to a target of $35/bl.  The upside was half the notional quantity: CPC would have had to make payments on 100,000 bbl Singapore Gasoil if the average monthly price rose above $140.  
246.	SCB’s revenue for T10 was $350,000.  Mr Dias reported internally that the transaction had been closed.  He reported that, due to issues with back to back counterparties, “the revenue on the deal was not at all what was expected”.  He added: “…we need to address our pricing”.
247.	Mr Agnani spoke with Mr de Mel on 10 September 2008, as he recorded in his email of the same date.  Mr Agnani reported that Mr de Mel had mentioned that he had around 400,000 bbl of derivative transactions on Dubai crude where he would have to start paying if the price fell below $100.  He also reported that Mr de Mel had met Goldman Sachs, who had briefed him on the market and informed him that they still hold the view of a higher crude price by year end (around $130-140).
248.	CPC’s Board met on 30 September 2008.  Amongst other things, they approved Board Paper 45/1076.  This Board paper referred (second bullet) to CPC having the opportunity to select “…appropriate product at low risk…”.    This approved Mr de Mel and Mr Karunaratne to enter into an ISDA Master Agreement with Commercial Bank and gave covering approval to the Commercial Bank transaction entered into on 9 July 2008.  This was the first recorded discussion of hedging/derivatives at the CPC Board since the meeting on 6 December 2007.  
249.	CPC’s losses under T8 and T9 started to mount in September 2008.  It made payments in respect of the month of September of $1,014,600 under T8 on about 14 October 2008 and $2,042,300 under T9 on about 7 October 2008.  It also received a payment of $1,372,400 in respect of SCB T10 on about 7 October 2008.  CPC also made substantial payments to Citi in relation to the month of September, totaling $2,435,360.
250.	Prices started to fall sharply from the latter half of October 2008.  By the end of the month, the Singapore Gasoil spot price had fallen by $72.27 from the spot price at the beginning of August ($145.75).  
251.	On 9 October 2008, CPC entered into T2 with People’s Bank.  This was a leveraged TRF referenced to 25,000 x 50,000 bbl of WTI Light.  It had a $5/bl seagull and a $15/bl target accrual.  It was ITM, by about $18.50.  
252.	Mr de Mel’s evidence about this transaction (and the earlier August 2008 People’s Bank transaction) was that CPC entered into them to try to mitigate some of its losses under its other transactions.  
253.	Mr Hussey of Citi reported in an internal email dated 15 October 2008 that he had met the Minister along with CPC senior management on 10 October 2008.  Mr Hussey reported (amongst other things) that during the meeting, the Minister had said that price changes were imminent, but CPC’s costs (including hedging) would have to be met as part of the price change.  He reported that the Minister was not willing to disclose whether these changes would be in November as had been reported in the press, or earlier.  The email also reported that the Minister “…reiterated that hedging costs will be borne within retail price moves.  There will be a buffer.  CPC management also reaffirmed this”.  The Minister did not recall the meeting, but said that even if there was a meeting, he would not have said this.  Mr de Mel did not recall providing confirmation of this point either.  I find that something was said along the lines of  the contemporaneous email, but not in the unequivocal terms that such costs “will be” borne within retail price moves.
254.	This email also contained a rough cash flow analysis suggesting that, given current pump prices and a WTI average price of $80, CPC was generating $55m profits per month against hedging portfolio losses from all banks of around $25m.  It also included a calculation suggesting that CPC needed at that time to maintain a buffer of roughly Rs. 10/litre in order to cover hedging costs (i.e., CPC needed to maintain pump prices at least Rs. 10/litre above international prices to cover hedging costs). 
255.	Mr Dias, Mr Juneja, Mr Casie-Chetty and Mr Peiris met with Mr de Mel on 16 October 2008.  I accept that Mr Dias’ email recording the meeting and the call report are substantially accurate records of the meeting.  They record that Mr de Mel pointed out that even if T10 knocked out at the end of the month, CPC’s hedge exposure on Singapore Gasoil was 300,000 bbl, so it would be able to source the balance of 600,000 bbl at the more favourable market prices.  This meant that the average price paid by CPC overall for Singapore Gasoil would be $96.37 if the market price was $80.  Mr de Mel said that this was a manageable situation as CPC was not compelled to reduce pump prices.  He also said that he was keen to look at offsetting structures and wanted SCB to come up with suitable options and that for 2009, he would seek approval to go for plain vanilla options after paying an upfront premium and said that all hedge gains amounting to approximately $30m were placed in a reserve account to accommodate payments.  Mr de Mel also said that there had been discussions with “Central bank, Ministry of Finance and Sec. to Treasury, all of them our supporting CPC decision of not reducing the pump price. Further the Central bank has reiterated that by not reducing prices it would have positive impact on trade defecate [sic]”.
256.	Increasing concerns were expressed internally within SCB about CPC’s mounting losses.  On 20 October 2008 Mr Peiris emailed Mr Mishr seeking his support and comments on the proposed producer TRF.  Mr Kumar, who was copied in, noted that the target of $35/bl on T10 was likely to be achieved very soon and hence CPC would be left without any protection if it was unable to initiate a similar new trade.
257.	Mr Juneja met Mr de Mel for dinner on 20 October 2008.  He reported that: “…We discussed market views and general response was we expect a bounce (maybe test 80 soon) before the market retraces back down. He would like to wait to enter into the restructure as soon as the bounce happens. He is also keenly watching OPEC meeting on Oct 24th…”.  
258.	A Citi internal email reports a meeting between Mr de Mel and Citi’s Ananth Doraswamy and Ravi Bala.  The email reported that Mr de Mel “…seemed reasonably relaxed from a cashflow as well as a hedging philosophy perspective about the trades he had done.  He feels that was the right thing to do considering the rising oil price environment and the threat it posed to the SL economy.  To the extent that he has hedged only 35% or so, the country overall is better off with lower prices.  In his words, ‘if prices go up, the hedges may win but the country loses’.  All this is correct and positive attitude”.  
259.	An SCB internal email dated 22 October 2008 from Mr Ashish Mittal (SCB Managing Director, Regional Head of South and South East Asia Sales, Financial Markets) reported a similar discussion with Mr de Mel: “The Chairman has yesterday confirmed to Amit [Juneja] and I that the current hedges represent about 30% of their requirement and that the country as a whole benefits by falling prices even though the hedge lose money”.  
260.	After several chasing letters from the Ministry of Petroleum, Mr de Mel wrote a letter to the Ministry Secretary entitled “Hedging arrangement for fuel imported to the country” on 22 October 2008.  It also contained an annexure entitled, “A brief note on CPC’s hedging”. The letter and annexure were both drafted by Mr Karunaratne.  They reflected both his and Mr de Mel’s views, although both were keen to disown the letter in evidence.
261.	The letter included the following:
(1)	It was stated that, since hedge prices were still lower than average purchase prices of petroleum products during the last nine months, CPC was confident that hedge losses could be handled by CPC without recovering them from consumers. It was also suggested in the annexure that CPC’s 65% unhedged position would generate adequate cash flows for CPC.
(2) CPC noted that it planned to use ‘hedge gains’ to offset ‘hedge losses’ and that the present ‘hedge structure’ that it had used (i.e. TRFs) “will only help ease off the cash flow of CPC but not to stabilize the domestic prices”.  
(3) The annexure explaned CPC’s object, in entering into the TRF transactions.  It said:
i.	 “CPC prefers this method as this structure pays benefits immediately and once the full benefit accrues hedge get knock off…”;
ii.	the perceived advantages of TARNs were :-
“(a) This structure reduces the risk of hedge by receiving hedge gain immediately.  (Hedge is ‘in the money’ from the first month itself)
(b) 	Once it pays the target hedge gain, hedge get knock off while reducing the risk of holding into hedge for longer period
(c) 	Possibility to secure low floor prices allowing hedge to accrue maximum profit in the shortest possible time
(d)	…this structure could be un hedged premature while accruing a target profit based on the figures in forward curve and hedge providers forecasts
(e) 	These hedges could be re-structured to capture the advantage in fluctuation of oil market whiles mitigating losses if any…”
262.	Mr Peiris and Mr Casie-Chetty met with Mr Karunaratne on 29 October 2008.  At the meeting, Mr Karunaratne showed them the 22 October 2008 letter.  They informed Mr Karunaratne that the current MTM was approximately $130m and they would forward a monthly report on this starting in November 2008.
263.	T10 knocked out at the end of October 2008, with SCB paying CPC the remaining sum of $5,627,000 on or about 7 November 2008.  
264.	CPC’s payments on its other transactions in respect of liabilities accrued during the month of October 2008 (which were due to be paid in early November) were substantial.  CPC paid SCB $8,003,200 on or about 14 November 2008 under T8 and $5,536,600 on or about 14 November 2008 under T9.  CPC also paid Citibank a total of $14,288,390 under Citi T15 and Citi T16 on 10 November 2008.  
265.	International oil prices continued to fall substantially in November 2008.
266.	Further internal SCB discussions took place in early November 2008 with a view to securing credit lines to enable another producer TRF to be offered to CPC.  
267.	SCB supplied Mr de Mel and Mr Karunaratne with an MTM in respect of T8 and T9 on 4 November 2008 showing an MTM of -$115,314,551 for COB 31 October 2008. Mr Dias reported internally on 6 November 2008 that he had spoken to Mr de Mel who was concerned that SCB had not come up with a suitable structure to mitigate the existing structures.  He reported that Mr de Mel “…went on to mention that had he known that we would be unable to offer such down side mitigating structures he may not have dealt with us in the first place.  He further said that he would expect banks to support him when structures have gone against him”.  
268.	A substantial domestic price revision took effect from midnight on 6 November 2008.  The price of auto diesel was revised downwards from Rs. 110 to Rs. 80/litre.  There were also reductions, albeit not as substantial, in the prices of other classes of fuel (95 octane petrol was reduced from Rs. 170 to Rs. 155/litre; 90 octane petrol was reduced from Rs. 157 to 142/litre; super diesel was reduced from Rs. 125.30 to 95.30/litre).  
269.	Mr Dias, Mr Juneja, Mr Casie-Chetty and Mr Peiris met Mr de Mel and Mr Karunaratne on 7 November 2008.  Mr de Mel said that his current requirement was for all banks to provide him with a structured solution to reduce his cash outflows and that one of the ‘action points’ for SCB was to offer an acceptable offsetting structure so as to manage his cash flows.
270.	On 7 November 2008, Mr Perera (Chairman/Director General of the Board of Investment of Sri Lanka) wrote to Mr de Mel pointing out that he had been informed that “…some of the instruments that the CPC may have entered into, are schemes for investors and are not proper hedges”.  Mr de Mel replied by letter of the same date denying this.  He wrote: “…our hedges are always in the money when we enter into hedge contracts.  In order to be in the money and to unhedge as quickly as possible, we have agreed into targeted hedge gains in those contracts”.  
271.	A meeting on the current financial situation of CPC took place at the CBSL at 6.30pm on 7 November 2008.  Amongst others, Governor Cabraal, Mr Ranasinghe, Mr de Mel and Mr Karunaratne were in attendance.  At the meeting Mr de Mel explained that due to the unexpectedly huge decline in oil prices, CPC would make losses from already contracted hedging arrangements that would impact on the profitability of CPC in 2008 and 2009.  He said that CPC’s total financial commitment would be around $180m at current prices. He also said that, since only 30% of CPC’s oil requirement had been hedged and the balance of 70% was imported at current spot market prices, there would not be a significant financial erosion of the CPC and total oil import bill would be well below the projected level.  He was “requested to explain in detail the structures of all hedging arrangements currently in force” and then gave a summary explanation of CPC’s structures.  .  The minutes record that Mr de Mel said: “…under this hedging arrangement CPC had the advantage of getting money when prices move both ways…”.
272.	On 9 November 2008, the Sunday Times of Sri Lanka carried an article entitled “Crisis over oil hedging deals”.  This asserted, amongst other things, that payments of about $30m due to SCB and Citibank had not been paid by a deadline said to be Friday 7 November 2008.  It reported that both banks were due to meet their ambassadors (Britain and United States) to put pressure on CPC to pay.  
273.	The report was not entirely accurate: CPC’s payments to SCB were not due until 14 November 2008 although a payment to Citibank was due on Friday 7 November 2008, but was not made on that day because Governor Cabraal called Mr Karunaratne to hold payments to the banks for a while.  He said that, as a result of the press report on the Sunday 9 November 2008, Governor Cabraal told CPC to release the payment and to call a press conference on Monday 10 November 2008 to say there had been no default by CPC.  
274.	Mr de Mel’s evidence was that he was given a draft press release responding to the article by Governor Cabraal on Monday 10 November 2008 which he gave to Mr Dias to type up prior to the press conference but that the draft subsequently produced by SCB, which was given to him moments before the press conference and which he did not have time to read through, was very different.  The issued press release included the following:
“The risks have been fully explained by all the banks… As a result, there is no question of mis-selling of these products by the Banks. Since starting our hedging program, the different Banks have explained to CPC the various downside risks associated with each product, and we entered into these deals with full knowledge of these risks..”
275.	Mr B.D.W.A. Silva, the Director Bank Supervision of the CBSL, was informed by Governor Cabraal on 10 November 2008 that an investigation should be commenced under s. 29(1) of the Monetary law Act into derivative transactions entered into by CPC with the five banks.  SCB was informed that the investigation had commenced on 13 November 2008. 
276.	On 14 November 2008, Dr Jayamaha (Deputy Governor of the CBSL) wrote to Mr de Mel further to a letter dated 11 November 2008.  She wrote in relation to CPC’s oil hedging and pointed to an imbalance in risk: “…there is no significant protection available to CPC from the hedging contracts…However there was an unlimited potential loss to CPC on the downward movement of oil prices…”.  She concluded that:“…The huge downside risk on these contracts has already threatened the stability in the domestic foreign exchange market in the immediate term. Hence it is essential for CPC to take remedial measures immediately…” 
277.	On the same date, Mr de Mel wrote to Governor Cabraal attaching a proposal from Citibank for restructuring.  By 14 November 2008, SCB had formulated two possible restructuring proposals for CPC, as noted in SCB internal emails.  On that day, Mr de Mel, Mr Karunaratne and Mr Rajakaruna met with Mr Dias, Mr Kumar, Mr Pitale, Mr Casie-Chetty and Mr Peiris.  At the meeting SCB proposed various restructure proposals.  Mr de Mel said that the key consideration was a reduction in the monthly payment over the next three to four months with an increase thereafter and that the reason for this was that, due to CPC’s credit terms, CPC was currently paying for oil imported when the price was high.  
278.	Mr Dias, Mr Kumar and Mr Pitale also met a senior delegation from the CBSL (Dr Wijewardena, the Senior Deputy Governor, and Dr Thenuwara, an Assistant Governor) on about 15 November 2008.  Dr Wijewardena acknowledged that the decline in prices had benefited the country overall from a cost perspective.
279.	On 15 November 2008, Mr de Mel also attended a meeting at the CBSL where it was agreed to set up a committee to assess and analyse the risks posed by the outstanding transactions and how CPC should proceed in its future hedging contracts.  
280.	On 17 November 2008, the Minister submitted a Cabinet Memorandum proposing the establishment of a Hedging Risk Management Committee comprising seven members, including Mr de Mel, Mr Karunaratne and representatives of the Treasury, the Ministry and the CBSL. The terms of reference included negotiating with present hedge providers to restructure hedge positions in order to minimise possible hedge losses.  Cabinet approval for this proposal was granted at a meeting on 19 November 2008.  
281.	The same day, Mr de Mel responded to Dr Jayamaha’s letter.  He set out his reasons for not capping the downside.  He also denied Dr Jayamaha’s allegation that CPC’s losses had created pressure in the domestic foreign exchange market.  He pointed to the fact that CPC was paying expensive fuel bills relating to imports in June/July.  He said it was not fair for the CBSL to put the entire blame on CPC when the markets had gone down.  
282.	On 19 November 2008 Mr de Mel wrote to the Attorney-General’s department at the CBSL’s request, asking them for an opinion on the ISDA Master Agreements with SCB, Citibank and Commercial Bank. 
283.	Mr Haswell met with Governor Cabraal on 19 November 2008.  Governor Cabraal informed Mr Haswell that the CBSL had conducted an independent audit into the transactions, the key findings of which were that the Board was unaware of the structures dealt by Mr de Mel and that Mr de Mel was not given authority to enter into such hedges.  The Governor added that the movement in pump prices was determined by the Government, not CPC.
284.	An emergency Board Meeting was held on 20 November 2008 at 8.30am to discuss oil hedging.  The Directors present were Mr de Mel, Mr Wijegoonewardena, Mr Rajakaruna and Mr Weragama.   Mr de Mel explained the derivative transactions to the Board, saying that “when the prices were coming down [CPC] and the country as a whole was gaining because CPC has hedged only 35% and that the gain was on 65%. Therefore, instead of paying 400 million dollars which we paid in May, June and July, we are now paying only US$125m”.  Mr de Mel also said that CPC had paid roughly $33m to the banks, i.e. $9m in excess of CPC’s earnings on hedging.  Mr Rajakaruna said that he was shocked when he heard this.
285.	After the Board meeting, Mr Dias, Mr Peiris and Mr Casie-Chetty held a meeting with Mr de Mel, Mr Karunaratne and Mr Rajakaruna to discuss SCB’s restructuring proposal further.  Mr de Mel was reported as having stated: “…that the Central Bank was of a strong opinion that the structures could be made null and void. However, the Chairman had indicated to the Board that this was not the avenue that he wants to take as they knew all the risks of the trade. He further mentioned that he will stand by this comment at any forum.  He further mentioned that CPC have had very cordial relations with the Banks and would be looking to continue same…”.
286.	There is a dispute as to whether this was in fact said by Mr de Mel but I find that the note is substantially accurate.  He also told SCB that the banks had a moral responsibility to take part of the loss due to their delay in offering restructuring proposals.  
287.	After the emergency Board meeting, Mr de Mel was asked to attend the Parliamentary Committee on Public Enterprise.  He recalled that a number of parliamentarians asked about the derivative contracts and that “…whilst the opposition MPs were quite supportive, the Government MPs absolutely hammered me over CPC’s payments”.  
288.	On 23 November 2008 SCB met Mr de Mel at his residence to discuss a restructuring proposal.  Mr Dias reported that Mr de  Mel said he wanted Mr Peiris and Mr Dias to present the proposal to the CPC Board at a Board meeting the following day, 24 November 2008 at 4pm, and that Citi might be present.  Mr Dias also reported that the President was fully aware of the proceedings.  
289.	The Hedging Risk Management Committee met for the first time at 9.30am on 24 November 2008 at the Ministry.  The Minutes record that it was decided that Mr de Mel should table a restructure of hedging for consideration and deliberations at the next meeting of the Committee, which was to be held on 26 November 2008 at the General Treasury.  
290.	The CPC Board met later that day at 4pm.  Mrs Wijetunge was absent.  Mr Rajakaruna and Mr Wijeygoonewardena, amongst others, were present.  Amongst other things, Mr de Mel and Mr Karunaratne submitted Board Paper 35/1078 which the latter had drafted.  The paper sought approval for payment of liabilities accrued on derivative transactions between the months of January 2008 and October 2008, totalling $34,795,663.50.  
291.	The Board Paper also noted the banks had now proposed “acceptable restructures” which were to be forwarded to the Hedging Risk Management Committee. 
292.	At the meeting, approval for the payment was given.  The Board Minutes record that, “having deliberated the paper at length the Board gave its approval for the payment of hedge losses in line with the Cabinet decision of 24th January 2007 amounting to US$34.796Mn…in order to avoid default by CPC”.  Mr de Mel recalled that the Board was not very comfortable about having to pay such a big amount, but agreed to make the payment since CPC did not want to “…have a big crisis regarding the situation”.  
293.	During the meeting, Mr Karunaratne also provided a presentation to the Board on CPC’s financial statements for the third quarter 2008.  He identified the crash in international oil prices from July.  He also included a slide on ‘Hedge Gains’.  The slide noted: “During month of Oct’ 08 the total hedge gain was wiped off and ended incurring a loss of USD 10.5Mn”.  A later slide on ‘Profitability’ noted that “Hedge gain of USD 1.7Mn is one of the main positive contributor for the profitability in the first nine months of 2008”.
294.	SCB also gave its presentation on restructuring during the Board meeting.  It gave a short summary of the existing structures (T8 and T9) and SCB’s restructuring proposals.  SCB gave its presentation after the Board had conducted its usual business.  
295.	By letter dated 24 November 2008, Dr Jayamaha responded to Mr de Mel.  She informed him that the CBSL did not wish to enter into any more correspondence on the subject of hedging. 
296.	Mr Mishr, Mr Warbanoff, Mr Haswell, Mr Peiris and Mr Dias met with the Minister on 25 November 2008.  The note of the meeting recorded the Minister mentioning that he had had a discussion with the President in the morning and they agreed that CPC had committed no wrong and only implemented the Cabinet’s instructions.  The Minister clarified in evidence that the President had told him that if CPC had not done any wrong, he wanted an amicable settlement.  
297.	The Hedging Risk Management Committee met again on 26 November 2008. The Minutes record that after studying the proposed restructuring programme, the same was not advantageous to CPC in the long run, since the total loss to be borne by CPC under present hedging arrangements would not be compensated through the proposed restructuring programme.  
298.	The Hedging Risk Management Committee also produced an interim report signed on 26 November 2008.  This noted that the Committee had reviewed proposals for restructuring by SCB and Citi but was of the view that the proposals did not reduce CPC’s losses or mitigate the risks it faced if the prices remained at the current levels.  It concluded that the Committee was of the view that the proposals were not acceptable.  
299.	A Ministerial Committee was also appointed on 26 November 2008 to review the derivative transactions entered into by CPC. 
300.	On the same day, two petitioners petitioned the Supreme Court of Sri Lanka in relation to CPC’s derivative transactions under a jurisdiction conferred on the Supreme Court by Article 126 of Sri Lanka’s Constitution (the “2008 proceedings”).  Their petitions (nos.SCFR 535/2008 and SCFR 536/2008) first came before the Supreme Court on 28 November 2008.  In its Order of that date, the Supreme Court held that the petitioners had:-
“…established a strong prima facie case that these transactions have not been entered into lawfully; that they are not “arms length transactions”; that they are heavily weighted in favour of the Banks; that they are to the detriment of the Ceylon Petroleum Corporation and through that to the people of Sri Lanka…”
301.	Accordingly, the Supreme Court made interim orders pending final determination of the application, including orders that:-
(1)	Mr de Mel was to be suspended as Chairman of CPC with immediate effect;
(2)	the Monetary Board of the CBSL (CBSL’s regulatory arm) was to carry out an investigation into the impugned transactions;
(3)	all payments by CPC to the financial institutions concerned were to be suspended; and
(4)	the Secretary to the Treasury was to review taxes imposed on petroleum products and submit a report to the Supreme Court with a view to revising the price at which petroleum was sold domestically. 
302.	In the meantime, Mr Silva had written to Mr Haswell enclosing the CBSL’s Assessment of Compliance dated 26 November 2008.  The Assessment of Compliance criticized SCB and stated that:
“Our examination also does not reveal that a careful assessment has been undertaken by you to ascertain the nature and quality of the risk mitigation and identification processes and internal controls established within the CPC to deal with risk.  Had such a review been carried out by you, it would have been clearly known by you as to whether the CPC had put in place, transparent and adequate controls which were necessary to identify, understand and assess the substantial risks that were undertaken by the CPC…”
303.	CPC did not make payments due in December 2008 in respect of the month of November.  Illustrating the scale of losses CPC was facing at this time, SCB served fixing invoices dated 4 December 2008 on CPC seeking payments of $11,047,000 on 12 December 2008 under T8 and $7,058,500 on 12 December 2008 under T9. 
304.	On 29 November 2008 Mr de Mel wrote to the Minister seeking to resign from CPC.  The Minister accepted his resignation by letter dated 2 December 2008.
305.	On 3 December 2008 Mr Haswell wrote to the Director of Bank Supervision responding to the Assessment of Compliance.
306.	The Minister gave a statement to Parliament in relation to hedging on 3 December 2008.  At the outset of his speech, he stated that: “…the oil hedging concept was not my concept at all.  It was initiated by no less a person than the Governor of the Central Bank…”.   He said that CPC had been acting in good faith to mitigate the impact of escalating oil prices and curtail the huge outflow of foreign exchange from the country.  His speech included the following explanation:
“In the year 2008, the quantum of oil hedging was increased since oil prices were escalating sharply. All of you are aware that crude oil prices went up to US$147 per barrel and the prediction at the time was that it would go up to US$200. The market was volatile and the whole world was panic stricken. As a benefit of this hedging, the CPC made a hedge gain of US$24 million between March and August 2008, for six months. 
Then came the sliding down of the prices beginning in September, which none of the experts in the world were able to foresee. Even reputed international researchers such as Goldman Sachs and EIA failed to forecast the unprecedented downward trend in oil prices. It was so unpredictable that it would have been insane and fanciful or wishful thinking to believe that within a period of three months from September to November, prices would drop sharply from US$147 to US$47 per barrel.”      
307.	On 5 December 2008, SCB met with a Presidential advisor.  The opposition parties also tabled a no confidence motion in the Government highlighting oil hedging deals.  
308.	On 16 December 2008, the Monetary Board submitted a confidential report to the Supreme Court. It also wrote to SCB and the other banks in the following terms (the “Monetary Board Letter”): 
“Having considered the above matters, and the interim Order made by the Supreme Court of Sri Lanka on 28 November, 2008 suspending all payments by the CPC to the respective banks on the aforesaid transactions, we find that the above transactions are materially affected and substantially tainted. 
In the circumstances, please do not proceed with, or give effect to, these transactions.” 
309.	Under cover of a letter dated 24 December 2008, the Director of Bank Supervision wrote to SCB enclosing its investigation report on oil derivative transactions entered into by SCB with CPC.  
310.	CPC held its 1080th Board meeting on 30 December 2008.  The Board minutes record that the Board decided to defer Board paper 35/1078 approving the payments to the banks.
311.	On 11 January 2009, the Minister filed an affidavit in the Supreme Court proceedings.  The Minister’s evidence in relation to this affidavit is that was partly based on his own knowledge and partly based on information provided to him by Mr Karunaratne and Mr de Mel. In the affidavit the Minister rejected criticism of the trades, and explained, in some detail, how and why they had been entered into, including: (a) the wide scope of the Study Group Recommendations; (b) that he believed that the Board had sufficient expertise; (c) that Mr de Mel had told him of the detailed discussions with the Board over hedging. There was no suggestion of any wrongdoing by the banks.  
312.	On 27 January 2009, the Supreme Court vacated its interim orders in the 2008 proceedings.  
313.	On 27 January 2009, the CBSL issued a press release making clear that the instructions and directions issued by the CBSL to the respective banks on 16 December 2008 continued to be in force.
D.	KEY ISSUES OF FACT
314.	There were a number of disputed issues of fact which were relevant to various of the issues in the case.  The most important of these were:
(1)	The 24 October 2007 meeting
(2)	Mr De Mel and Mr Karunaratne’s knowledge of the transaction documentation
(3)	Whether the Transactions were speculations rather than hedges.
(1)	24 October 2007 meeting
315.	The most reliable evidence as to what was actually said at the meeting are the meeting notes of Ms Fernando and Mr Casie Chetty which I find to be substantially accurate.  
316.	Ms Fernando’s notes stated:
“Clients Knowledge”
•	He does seem to understand the risks and flows the movements/trends in the market.
Hedging Strategy
•	His current strategy is to hedge 10-20%, and he looks at the average total cost for his oil.
•	Depending on the structure and value, he prefers to get in to transactions that are short in tenor.
•	Flexibility is critical, flexible so that he could get out anytime and change in top and bottom price.
•	He does not have appetite to loose money, hence no max amount set.
•	He is currently not interested in 1 year structure we have suggested, requested 3 month tenor.
•	Central Bank/Gov. has apparently requested that he hedges as much as 100% i.e. straight forward hedges.  Just to lock the price in.
•	He will consider max of 50-60% next year, which he will look at when prices are at USD 60-65 a barrel.
•	He still believes hedging 20% is sufficient
Clients Expectation
•	He expects the bank to guide him daily, to ensure that he gets out when  he is in the money/when the transaction has value.
•	Citi talks to him daily, and provided market update and guides, to  ensure that the transaction has value.  He has not lost money with Citi.
•	 He lost money with SCB on one transaction, he paid, but felt we should guided him.
•	 Flexibility is critical.  The ability to unwind the hedge.
•	 He was not comfortable with the assumptions we had made with the crack prices.  He enquired as to whether the fact that his refinery is less efficient than the global players were taken into account (CPC margin USD 3-4 and globally USD 10-12 per barrel margin)
317.	Mr Casie-Chetty’s notes stated:

1.	“ADM firstly mentioned that oil prices are at an all time high and that currently it’s not the best time to hedge against large percentage of the exposure.  He mentioned currently they have taken a view to hedge only 15% to 20% of its requirement.  However, these structures that they enter into should have the flexibility of re structuring the hedge, unwinding the hedge etc.  In addition currently due to  the prevailing prices he is of the view of hedging short term and taking maximum profit of the volatility in the market.
2.	ADM mentioned that prior to him or his team entering to hedges they rely greatly on information provided to them from its bankers.  He mentioned that unlike Standard Chartered, Citibank is on the ball and advices (advises) on movements on a daily basis.  In addition the structures he has entered with Citi had the flexibility of unwinding the hedge when the market moved against him.
3.	ADM further stated that he and his finance team actively follows the movements in the market.  In addition to relying from information he gains from Bankers in the calibre of Citi, Deutsche, BNP, SCB etc.  Internally they track current world trends in crude, gas oil, kero and crack margins etc.  ADM went on to show us a five year historical evaluation the corporation has done on the prices.  He further explained the reasoning behind the expectation of prices to move down in November/December.
4.	ADM stated that he has only entered into hedges that he and his team completely understands.
5.	CPC is in the process of putting together a hedging strategy.  Currently they are only looking at hedging short term 20% of its requirement.  However once the prices thin off they will be looking at hedging 50% to 60% of its entire imports.  ADM mentioned that Central Bank of Ceylon is of the view that they should look at hedging 100% of its entire requirement.
6.	ADM stated that the current pricing formula does not include any levay (leeway) for hedging.  The latest pricing formula includes Cost + 1.5% margin.  However, as the corporation refines 50% of its capacity they are able to attain an additional USD 4 to USD 5 profit per barrel it refines.
7.	ADM mentioned that he does not have a high risk appetite.  He requires the flexibility in structures that would enable them to unwind or restructure.  CPC currently has made USD4 mio approx from AMD as ‘leveraged hedges’.  These seem to be from closing out in the money positions early.  Others were knocked out and a remaining contract is out of the money.  AMD maintains this will not cause any cash outflow.”
318.	CPC contended that the meeting was critical in relation to the issues of (1) risk appetite; (2) CPC’s strategy; and (3) the advisory role of SCB. I shall address each issue in turn.
(1)	Risk appetite
319.	I find that Mr de Mel was asked by Ms Fernando how much money he was willing to lose and he said that he did not want to lose any money; a similar answer to that he had given to Mr Green at the 15 October 2007 dinner meeting.  However, that did not mean that he was not prepared to lose any money.  Mr de Mel recognised that the hedging transactions involved a risk of doing so, but he was concerned to minimise that risk so far as possible.  He wanted to have the flexibility to be able to unwind transactions when the market moved against him so as to avoid losses.
320.	In that connection he expressed annoyance that CPC had lost money on the crack hedges with SCB and contrasted that with the position with Citi.
 (2)	CPC’s strategy
321.	I find that Mr de Mel explained how his current strategy was to hedge 10-20% of his exposure as with oil prices at an oil time high it was not the best time to hedge against a large percentage.  He explained that once prices eased off they would be looking to hedge 50-60% of their import requirements, although the CBSL’s view was that they should look to hedge 100%.  In the meantime he was looking for short term hedges which gave him the flexibility to unwind or restructure in the light of market developments, and ideally make a profit as well. 
322.	He also stressed the importance of flexibility and the importance of being able to unwind transactions whilst they still had value.  
(3)	The advisory role of SCB
323.	I find that Mr de Mel explained that Citi talked with him every day, providing him with market updates and guides so that he could know that the transaction still had value.  He made it clear that he expected SCB to do likewise.  Mr Dias indicated that they could do so.
324.	There was, however, no discussion or agreement as to SCB undertaking a general advisory role. SCB did indicate a willingness to provide CPC with regular market updates and guides which would enable him to know the value of the transaction and movements in that value.  That would help to put Mr de Mel in a position to be able to decide whether to unwind or restructure and hopefully to be able to do so before a loss was suffered.  However, the decision as to whether or not to do so was for CPC.  SCB might express views on market movements and whether they considered that it was a good time to unwind or restructure but it was CPC’s decision.
325.	Although some of the oral evidence of the CPC witnesses suggested that general assurances were given that SCB would advise and guide CPC that is not borne out by the contemporaneous notes of the meeting.  Ms Fernando’s note refers to guidance in the context of the unwinding of the transactions and the provision of market information.  Mr Casie Chetty’s note refers to the provision of information and advice on market movements.  In his witness statement Mr Karunaratne put the matter in a more specific and limited way: “SCB’s representatives assured us that they and SCB’s regional experts in Singapore would advise us and guide us, and that SCB would keep in close touch about the markets and products … They confirmed that SCB would provide the flexibility to restructure trades”.  In so far as any assurance was given it was in the context of the need for flexibility to unwind or restructure and the regular provision of market information so as to give CPC the opportunity to do so, if possible, while the transaction had value.
326.	SCB’s position was reasonably summarised as follows by Mr Haswell:
“I responded to Kimarli’s observations in an internal email, saying that SCB should position itself as “a close advisor with the CPC’s best interests at heart”. This was an internal comment and this internal SCB perception of our relationship with CPC was not discussed with CPC. In light of the Chairman’s expectation that he should be guided daily, my comment referred to the provision of daily information to CPC about the status of its trades after a sale and counselling CPC about what options it had and what we could offer…My comment was also an indication that we should stick to our high standards of appropriateness and sell what we believed was in the customer’s best interests (as opposed to what may simply make revenue for the Bank). It did not mean that we should offer advice as to what CPC should do. The relationship between SCB and CPC was one of selling products, in competition with other banks, not of advising on strategy or risk management…. Clearly, the long term franchise and relationship considerations meant that it was not in our interests to do something which was not in CPC’s interests, but we were never an adviser in terms of constructing an overall hedging strategy.“   
327.	Mr Green’s evidence was to similar effect when asked about the reference in Ms Fernando’s note to advising on movements on a daily basis so that CPC had the flexibility of unwinding the hedge when the market moved against it:
.	“Q. Did you ever suggest that SCB could not provide this
service to CPC?
          	 A.  Well, the request here certainly didn't seem to me
             something that we would have a problem with, which is
             pretty much what any trading desk with knowledge of
             a commodity or a currency would do, which is to tell
             a client, well, our view is that over the next few days
             X will happen or Y will happen.
             That's a different concept to the one of being
             a paid adviser to say "enter into this transaction with
             Deutsche, but turn that one down from Citi".

            Q.  It's slightly different.  It's not simply just providing
             him information about prices.  It's to guide him daily
             and to ensure that he gets out when he is in the money
             when the transaction has value.  It's not just simply
             providing figures.  It's beyond that, isn't it?
            A.  Well, the way I interpreted it then and would do now is
             this is -- it's a very common client expectation, and
             it's about talking to a trader about what the price is
             now, what they expect to happen in the near range.  And
             typically, as would have been the case here, you may
             well be talking to traders of more than one bank”.

328.	Whilst the evidence relating to the 24 October 2007 might support an argument that SCB agreed to provide an after sales service to supply market information and guidance in relation to the value of the transactions, no such case was advanced and in any event it does not follow that any such assurance was to be a matter of legal obligation.  Indeed if it was to be so one would expect it to be more clearly defined.
329.	The evidence might also be said to support an argument of an advisory duty in relation to the unwinding of transactions which had been entered into.  I do not consider that the evidence went that far but in any event that was not the case advanced.  The case was of a general advisory duty when “presenting and discussing” the transactions.  CPC did not allege any duty in relation to what was to happen after the relevant transactions had been entered into nor that SCB was in breach of duty as a result of anything that it did or failed to do after CPC had entered into the transactions.
(2) Mr De Mel and Mr Karunaratne’s knowledge of the transaction documentation
330.	SCB stressed that the importance of the documentation to the parties’ relationship was well known to CPC and to Mr de Mel and Mr Karunaratne in particular, as demonstrated by the following: 
(1)	The use of ISDA documentation was required by the CBSL Directions on Financial Derivatives and was standard in Sri Lanka.
(2)	SCB provided CPC with a draft of the Master Agreement (including a draft Schedule) on 1 August 2006, apparently following a request by the Governor of the CBSL on 26 July 2006. This was only shortly after the discussions about possible oil derivative transactions started, and six months before T1 and T2. CPC therefore had a lengthy period in which to review the documentation. 
(3)	The other banks also insisted on ISDA documentation. For example, a Citi presentation dated 25 October 2006 referred to the requirement.
(4)	Mr Karunaratne accepted in cross examination that CPC always knew that any transactions would have to be entered on the basis of ISDA documentation.
(5)	Mr de Mel also knew that the transactions would be entered into on ISDA terms and proceeded on the basis that this was “agreeable”. In cross-examination, he was shown his witness statement in the Sri Lankan proceedings and confirmed that he signed the ISDA Master Agreement, and other agreements, once they were confirmed to be acceptable by Nithya Partners.
(6)	The Board of CPC was aware that ISDA documentation would be used, and agreed to that, as shown, for example, in the 26 March 2007 resolution, expressly referring to ISDA documentation. 
(7)	Both the Terms Sheets and Confirmations for each of T1 and T2 expressly agreed that an ISDA Master Agreement would later be executed by CPC. 
(8)	The Master Agreement, including the terms of its Schedule, was considered by and negotiated between SCB and CPC’s Chief Legal Officer (Geetha de Fonseka) and Nithya Partners, over a number of months.
(9)	The Master Agreement was finally executed  by CPC on 30 May 2007, when it was dated as of 31 July 2006.
331.	Notwithstanding the importance of the documentation, both Mr de Mel and Mr Karunaratne, while conceding that they read a portion of the transaction documentation, denied that they ever read any more than a limited amount of it and said that they were ignorant of those portions that they did not read.  It was the evidence of both of them that whilst they would review the prices and other details relating to the particular transaction described in the Term Sheets and Confirmations, they did not read and were not aware of the other provisions contained therein, such as the disclaimers and non-reliance statements.
332.	SCB submitted that this evidence should be rejected as being untruthful.  They relied in particular on the following:
(1)	The documents were, as both Mr de Mel and Mr Karunaratne knew, important agreements entered into in respect of a policy of hedging that had been initiated and recommended by a combination of the Cabinet, the CBSL, the Treasury and the Ministry of Petroleum, and for which they were responsible. 
(2)	It is inherently unlikely that they would have signed (and stamped) agreements on behalf of CPC while not having sought to understand at least the substance of the agreements into which they were entering, whether by themselves reading the documents, or, to the extent necessary, ensuring that they understood their contents from advice provided by CPC’s legal department and its external lawyers. 
(3)	They both accepted that they reviewed certain parts of the Term-Sheets and Confirmations (i.e. those containing the prices), but it is difficult to see how that review could have excluded looking at other parts of such documents. Neither the Term-Sheets nor the Confirmations are long documents, but each obviously includes provisions that do not relate to pricing. 
(4)	The provisions in question were often included very closely above the signatures of Mr de Mel and Mr Karunaratne or adjacent to the parts of the documents that both accepted that they did read. There were also headings in bold (e.g. “Representations”, “Status of Parties” or “Risk Disclosure Statements”).
(5)	It is implausible that Mr de Mel and Mr Karunaratne can now remember precisely which parts of the documents that each read, and those that they did not read. 
(6)	This is not a case where the provisions are included in only a single document. On the contrary, by 2008, the provisions had been included in numerous documents with numerous banks, which Mr de Mel and Mr Karunaratne executed repeatedly over a period of some 18 months. 
(7)	As regards Mr Karunaratne, it was part of his function to consider the hedging transactions. He was a trained accountant, whose accountancy training included basic contract law. 
(8)	As regards Mr de Mel, given his central role in CPC’s hedging, the likelihood must be that he would have read the documents himself, or would have been informed of important provisions by Mr Karunaratne.   
(9)	The legal department and/or CPC’s external lawyers would be expected to have summarised the legal position, especially in relation to important provisions, for Mr de Mel and Mr Karunaratne. 
333.	Despite the forcefulness of these points I do not accept the submission that Mr de Mel and Mr Karunaratne should be regarded as untruthful witnesses.  Although I do not accept all of their evidence I find that they both sought to assist the court.  However, I do not accept that, whatever they may think now, Mr de Mel and Mr Karunaratne were entirely ignorant of the general provisions contained in the Term Sheets and Confirmations.  Whilst they regarded these as being essentially a matter for the legal department and they did not consider the provisions in detail, I am satisfied that they were aware of the broad thrust of the provisions, which are commonly found in bank documentation.  In particular, they were aware that the general import of the provisions was that it was up to CPC to judge for itself the appropriateness of the transaction and to make its own independent decision as to whether to enter into it.
(3) Whether the Transactions were speculations rather than hedges
334.	A fundamental issue between the parties was whether or not T8 and T9 were speculations rather than hedges.
335.	SCB contended that they were hedges and relied in particular on the following:
 (1)	The Transactions were undertaken in the context of an underlying physical position.
(2)	The Transactions all involved CPC entering into a transaction that would require SCB to make a payment to it if the market price of oil was high, in consideration for CPC making a payment to SCB if the market price was low.   
(3)	The specific protection that CPC was purchasing was against the market price of oil being above the strike price of the call option (i.e. the ceiling) during the relevant period.
(4)	The mere fact that the Transactions included a cap on the total amount of any payment per barrel (i.e. a Seagull) does not mean that they were no longer hedges. CPC would continue to receive full protection between the ceiling and the cap and would continue to receive the maximum amount per barrel if the market price of oil increased above the cap.  The existence of a Seagull merely limited the amount of protection being obtained. Someone who obtains such limited protection is still hedging.
(5)	The same is true in relation to the inclusion of a knock-out feature in a transaction.  Again, this merely limits the amount of protection that is being obtained.
(6)	The mere fact that the Transactions were, to a greater or lesser extent, ITM at the time that they were entered into, does not mean that they were no longer hedges.  CPC was purchasing protection against oil prices being above the ceiling during the tenor of the relevant Transaction. The fact that, as at the trade date, the market price of oil was at that stage within that range, does not mean that what is being purchased is not protection or that the Transaction is not a hedge. 
336.	SCB stressed that CPC’s physical exposure objectively provides the necessary context for all the transactions. However hard Mr de Mel focussed on the “profits” that he was making, the derivatives were tied to a physical benchmark to which CPC was exposed (the obligation to pay market prices for oil), and the notional amount hedged was always less than CPC’s physical exposure.
337.	SCB also relied upon its witnesses’ evidence as to the importance of the existence of a counterparty’s physical position in the context of assessing a transaction, both generally and specifically in relation to CPC’s transactions.
338.	CPC, on the other hand, contended that the Transactions were not hedges but were in fact speculations.  
339.	One difficulty with this contention is how one distinguishes what is a hedge from what is speculation.
340.	As SCB’s derivatives expert, Ms Bossley pointed out in the Joint Expert’s Report:
“…at the extreme ends of the spectrum it is clear what is hedging and what is speculating.  In the middle of the spectrum there is a grey area where the same action can be hedging or speculation depending on the context, including the party’s intention.  The existence of a physical position makes it more likely that any particular action involves hedging”.
341.	As further pointed out in a paper of Professor Hieronymous of the University of Illinois in a paper exhibited to the expert report of Mr Begnini, CPC’s derivatives expert:
“This (a suggested definition of hedging) assumes that “hedging” and “speculation” are at least different, if not opposite.  They are not.  All hedges are more or less speculative, and all speculative positions are more or less hedged”.
342.	A further difficulty is that, as Ms Bossley states, a significant factor may be the parties’ intention.  However, CPC rightly accepted that for present purposes “the question of whether the Transactions were speculative should be determined objectively and not by reference to the subjective states of mind of those involved”.  This must be correct.  Further, as SCB stressed, the question of whether CPC had capacity or Mr de Mel and Mr Karunaratne had authority to enter into the Transactions cannot sensibly depend on their subjective states of mind.  Nor is SCB likely to have been in breach of a duty of care or guilty of negligent misrepresentation for failing to warn Mr de Mel and Mr Karunaratne of something that depended on their own subjective reasons for acting.  
343.	CPC submitted that this did not prevent one from seeking to ascertain the objective intention with which the transaction was entered into.  But the relevant intention in this context is the actual intention with which the transaction was entered into, which is or at least is mainly a subjective matter.  
344.	Another difficulty is that if one focuses on the terms of the transactions rather than extraneous matters such as intention it becomes very hard to determine exactly what it is that transforms what would otherwise be hedging into speculation.  So, for example, CPC accepted that simple ZCCs would be hedging but it is difficult to see that merely because of the formal addition of a cap or a knock-out to the structure of a simple ZCC, it would cease to be a hedge.  Depending on the level at which the cap was introduced or the amount at which the knock-out would operate, in practice such a transaction could operate in exactly the same manner as a simple ZCC, as, for example, if the cap was added at a strike price materially above where the market price was ever likely to reach during the tenor of the transaction. It is also implausible that the question of whether a transaction is a hedge or speculation should depend on the happenstance of, for example, the fine detail as to the specific levels and amounts at which the cap and knock-out were set in any particular transaction, whether it was ITM at the trade date and, if so, by how much, or whether it was leveraged.
345.	Mr Begnini accepted that there is no single definition of hedging.  However, he identified various matters which he considered to be indicative of hedging, and various matters which he considered to be indicative of speculation.  Such an approach effectively admits that there is no straight-forward dividing line, but that at best a judgmental approach is required where various factors are to be weighed in the balance.
346.	The main indicators of hedging which he stressed were:
(1)	Hedging is concerned with a risk that the hedger actually faces.
(2)	That risk may have a negative impact on the hedger.
(3)	A hedge reduces the risk faced.
(4)	More specifically, “hedging is an activity undertaken by companies attempting to take control of their own cash flow by ironing out price spikes and troughs in their oil acquisition or sales contracts.  Its objective is to reduce future oil price uncertainty and may be seen as having a risk reducing motivation.” 
(5)	All this is achieved by an offsetting transaction.  Hedging involves an entity establishing a ‘paper’ position by purchasing derivative instruments which offset price movements in a market to which it is exposed (the entity’s ‘physical’ position).  Thus, for example, an oil importer will hedge the cost of its oil imports (its physical position) by purchasing derivative instruments (its paper position) which offset movements in the price of its oil imports.  As the price of its oil import costs increase, the importer will receive payments under the derivative instruments that offset these increases.  
347.	Mr Begnini stressed that the objective of a hedger is to remove risk and increase certainty, rather than to make profits.  Conversely, a speculator will trade with the objective of achieving profits through the successful anticipation of price movements and will take on risk in order to generate profits from anticipating market movements.
348.	Against that background CPC contended that T8 and T9 were speculative transactions rather than hedges.  In particular:
(1)	They were trades with the objective of achieving profits through the successful anticipation of price movements.
(2)	T8 and T9 did not protect an existing market exposure.
(3)	Rather than remove risk and increase certainty, T8 and T9 increased risk and uncertainty.
349.	It was submitted that point (1) followed from the fact that T8 and T9 were ITM and had a target accrual feature, thereby providing CPC with a fixed profitable return unless the market price fell below the strike price of the sold call (Seagull).  These transactions were therefore structured around a view that prices would not fall or fall as far as the strike price of the Seagull (therefore by $22/bl (T8) or $18/bl (T9)).  It was submitted that such directional views on price movements are not a proper determinant for a hedging strategy.
350.	In relation to point (2), CPC pointed out that its existing market exposure was to rising prices.  Ms Bossley accepted in cross-examination that T8 and T9 did not provide protection from rising prices.  It is a simple arithmetical point: if the limit on protection (the strike price of the Seagull) is below the market price at the date of the transaction, then if prices rise there is no additional protection.
351.	CPC submitted that point (3) follows from the ITM nature of zero cost transactions.  To obtain an ITM bought call option in a zero cost structure, the user has to do one or both of two things: limit the upside protection (Seagull and target accrual) or increase the downside risk (leverage).  But both increase risk and reduce certainty.  That is the cost of the ITM bought call option in a zero cost structure.  As a result of T8 and T9 CPC took on the risk of a potential liability to pay very large amounts to SCB if the price of gasoil fell.  Further, it is clear that the Seagull and target accrual features meant that CPC had no certainty on the trade dates of T8 and T9 as to the outcome of the combined paper and physical position if prices stayed above the level of the Seagull.  It was this upside certainty that is a key feature of hedging, but which CPC did not achieve.
352.	As to (1), this strays into the area of subjective intent and ignores the fact that all hedging (or indeed a decision not to hedge) involves anticipation of price movements.  During cross-examination Mr Benigni accepted that the company’s price view was important and indeed, he himself took account of price movements when devising his hypothetical strategy for 2008, commenting that, given movements in the price of oil, he would not have recommended a simple ZCC at this stage.
353.	The fact that a trade is ITM does not mean it is speculative or aimed at profit making.  Such a trade might be made, for example, in order to increase the cushion before the floor is reached.  Where payments have to be made if the spot price falls below the floor, an ITM trade means that a larger market fall is required for that to occur.
354.	Further, an ITM trade does not necessarily result in any profit.  The market price of oil could have dropped between the trade date and the effective date of the Transactions.  Furthermore, the fact that these were Asian options, with the result that payment would depend on the average of the market price during the relevant fixing period, means that there was no guarantee that they would remain ITM for all or any part of the tenor of the transaction. 
355.	In cross examination Mr Benigni accepted that the mere fact that a trade was ITM did not indicate speculation, that whether a trade is ITM may depend on how this is measured and that whether it results in payment will depend on what happens subsequently.  He also accepted that someone who enters into a transaction to secure himself a strike price that he has just missed, is still hedging.  As SCB submitted, there is no obvious reason why a speculator would wish to purchase an ITM transaction, as this would merely increase the cost of his speculative investment. Also, the fact that a transaction can be ITM one day and OTM the next demonstrates that it must be wrong to regard the fact that it is ITM as a critical factor – if that were the case, transactions could fluctuate from being “legitimate” hedges to speculation from one day to the next.
356.	CPC was purchasing protection against oil prices being above the ceiling during the tenor of the Transactions. The fact that, as at the trade date, the market price of oil was at that stage within that range, does not mean that what is being purchased is not protection or that the Transactions are not hedges.  
357.	The fact that a trade has a TRF also does not mean it is speculative.  Such a transaction still provides protection, albeit the TRF feature limits the amount of protection being provided.  Mr Begnini accepted that the fact that a trade knocked out or was unwound does not necessarily indicate speculation.   
358.	As to (2), it is not correct that T8 and T9 provided no protection against rising prices.  If prices rose CPC would receive the capped amount of protection.  It is correct that the same protection would be received even if prices did not rise from the date of the ITM trade, but the comparison to be made is with what the position would have been if no trade had been made.  It is also correct that the amount of protection provided was limited by the cap and small by comparison to CPC’s overall oil purchasing requirements.   However, it was still potentially a substantial sum of money.  Further, if prices fell below the ceiling price and thereafter rose the Transactions would then be providing protection against rising prices.
359.	The mere fact that the Transactions included a cap on the total amount of any payment per barrel does not mean that they were no longer hedges. CPC would continue to receive full protection between the ceiling and the cap and would continue to receive the maximum amount per barrel if the market price of oil increased above the cap.  The existence of a Seagull merely limited the amount of protection being obtained. 
360.	As to (3), whether or not the Transactions involved increased risk is a matter of judgment rather than objective fact.  CPC were undoubtedly potentially exposed to increased risks but the extent of that risk was linked to the probability of it occurring.  As SCB pointed out, assuming that the various strike levels for any particular transaction were the best prices that CPC had been able to obtain from the banks, one would expect that, if you multiplied the total possible payments by the expected probability of each occurring, you would end up with two boxes representing potential payments to CPC and potential payments by CPC that were of broadly similar size, subject only to any additional prospect of payment to the bank to compensate it for the credit risk it was accepting and any profit element that it sought.
361.	It is correct that the Transactions probably did not provide increased certainty, but real certainty is only provided by a perfect hedge.  As soon as one introduces features which remove complete correlation between the paper and physical position that certainty would not be achieved.  However, the mere introduction of such features does not mean, as Mr Begnini accepted, that the transaction is not a hedge.
362.	Further or alternatively, CPC relied on various propositions which were substantially accepted by Ms Bossley in evidence:
(1)	A hedging transaction reduces risk and speculation increases risk.  
That may be generally true but, as pointed out above, it depends on one’s assessment of risk.  For example, as Mr Begnini accepted in evidence, entering into a ZCC (which is undoubtedly a hedge) at a time that oil prices were very high would be likely to involve increased risk for CPC, and would not have been advised by him.
(2)	Hedging considers the combined outcome of the physical and paper position together; speculation will tend to focus on paper gains or losses.  
That may be generally true but it does not mean that placing weight on the paper position means that the transaction is not a hedge.  The particular point made in the present case was that CPC’s strategy involved ignoring its physical position, in the sense of being concerned about the risk of making payments to the banks in a way that, according to Mr Benigni, a person hedging would never be.  As he put it, the hedger is effectively indifferent to making payments to the bank, sleeping easy regardless.  However, the suggestion that this attitude on the part of CPC indicated that it was speculating is surprising.  The real reason for such an attitude was because CPC was concerned about the political and other consequences in Sri Lanka if such payments had to be made, not because it was speculating.  As described by Mr Benigni, CPC was a speculator whose main target was to reduce the risk of making a payment.  But, as SCB submitted, it is paradoxical to talk about a speculator whose "main target" is to reduce the risk of making a payment. A better description of this would be that it indicated a person who was concerned to follow a conservative hedging strategy, this being the equivalent of only wanting to pay a small premium.  Moreover, this factor involves consideration of the person’s “focus” or intention.
(3)	The hedger’s primary objective is that he or she achieves a degree of certainty, a certain outcome or a more certain outcome for his combined physical and paper position.  The primary objective of the speculator is to predict prices correctly and thereby make profits.  
This is an oversimplification and it ignores the blurred line between hedging and speculation.  It also involves consideration of the person’s “objective” or intention.
(4)	Hedging is not a money making concept, but a concept that aims to create certainty and minimise risks.   
This may be generally so but it does not mean that the benefit of receiving payments under a hedge may not be part of a hedging strategy.  It also involves consideration of the person’s “aim” or intention.
(5)	In an ideal world, the hedger ought to be indifferent as to whether the hedges involved payments.  The hedger has almost by definition to make a loss on either a paper derivative contract or its physical position.  The speculator is interested in paper profits.  
That may be correct in relation to a perfect hedge in an ideal world.  However, many hedges are not perfect hedges.  Nor, as explained in (2) above, is interest in the paper position necessarily inconsistent with a hedge.  Further, in the real rather than the ideal world it is unrealistic to think that, even if a transaction provides a full hedge against rising prices, the hedger will be indifferent where it has to make a payment to the bank when prices fall below the floor. The consequence of the decision to enter a hedge is that the customer will be making a payment to the bank which it would not otherwise be obliged to make. The fact that it will be receiving benefits from a lower physical price at the same time, does not alter the reality that, as a result of the paper transaction, it will have an obligation that would not otherwise exist.  In addition this again involves consideration of the person’s state of mind or intention.
(6)	A hedger seeks to reduce the effect of volatility.  A speculator might aim to make profit from the volatility of the market.  
This may generally be the case but it is not necessarily so.  A hedge does not have to be against volatility.  Further, the Transactions do not indicate an intent to make profit from volatility.  Indeed, the ITM nature of the Transactions would indicate the contrary.  In addition this involves consideration of the person’s “aim” or intention.
(7)	You can be a speculator or a hedger even if you have exposure to the underlying.  
This may be so, but it is far more difficult to identify the line between speculating and hedging where there is such an exposure.
(8)	Hedgers should sleep well because they should be indifferent to paper gains or losses and there is a certain outcome for their combined position.  By contrast speculators bite their nails, because the outcome is uncertain and depends on uncertain future price movements.   
This is a similar point to (5).  In any event a hedger may be biting his nails about whether the hedge transaction that he entered into was a good deal or not. For example, if CPC had entered into a ZCC, with a floor price just below the market price, in February 2008 there could be no suggestion that it was not a hedge. But CPC might equally be concerned about the consequences of even a small fall in oil prices on the transaction, which would require payments to be made to the bank where otherwise none would have been required, and CPC would be able to take the full benefit of the decline in oil prices.  Further, this again involves consideration of the person’s state of mind or intention.
(9)	ITM structures are not common to hedgers.  
This was accepted by Ms Bossley, but, as explained above, they would be expected to be even less common to speculators.  Further, as Mr Begnini accepted, the fact that a trade is ITM does not indicate speculation.
(10)	A company that enters into a hedging transaction usually does it with the intention of running it to expiry.  
That may be generally so, but as Mr Begnini accepted, the fact that a trade is unwound does not necessarily indicate speculation.  In addition this again involves consideration of the person’s state of mind or intention.
(11)	Buying options is generally a price risk reducing activity and selling options is generally a price risk increasing activity.  Selling a naked put option, Ms Bossley agreed, “wouldn’t [look] much like hedging”.  
363.	In relation to the last point, CPC submitted that T8 and T9 were both riskier for CPC than selling a naked put option, because if CPC had sold a naked put option it would have had the certainty of receiving the premium, as opposed to the expectation (but not the certainty) of receiving a targeted gain.  Unlike the premium in a put option, the targeted gain would not be achieved if a large fall in the oil price took place.  Accordingly, just as the sale of a naked put option by CPC would have been speculation, so too were T8 and T9 speculative trades.  However, this ignores the structure of the Transactions and the call option.  That was a bargain for the provision of price protection, and specifically protection against oil prices being above the ceiling during the tenor of the relevant Transaction.
364.	CPC also placed reliance upon the decision of the House of Lords in Hazell v Hammersmith LBC [1992] 2 AC 1 which it submitted showed that an approach of trying to make profits by successfully forecasting future price movements, in order to reduce the impact of losses already being incurred, is speculation.  In that case it was held that the local authority’s activity of entering into swap transactions in the hope of raising money by successfully forecasting future interest rate trends, in order to alleviate the burden of interest payable on money already borrowed, was speculation.  
365.	It was submitted that there is a direct analogy between Hazell and this case; that Ms Bossley agreed that her evidence was that the Transactions would lessen the cash flow burden on CPC from already high prices; that it is clear from Hazell that the activity of reducing the burden of interest payable on money already borrowed through entry into derivative instruments is speculation; and that the analogous activity of seeking to reduce the burden of already high prices through entry into derivative instruments is accordingly also speculation.     
366.	That case, however, concerned a different context, different transactions and a different inquiry.  
367.	The question for the House of Lords, was ‘whether the council possessed power to enter into any swap contract’ (23B-C). This primarily depended, in turn, on whether, under s 111(1) of the Local Government Act 1972, the contracts were “calculated to facilitate” or “conducive to” or “incidental to” the function of borrowing, notwithstanding the express restrictions on the function of borrowing imposed by Schedule 13 (28G-29B; 31G-34A).  The House of Lords, construing the 1972 Act, held that the council had no power to enter into any swap transactions, or the swap market, at all (e.g. 34G, 37C, 37F, 46F). It was a matter for parliament to decide whether, for example, any “power to hedge” should be given to local authorities (36B; 46E-F). The essence of the House of Lords’ reasoning was that the existence of any power to enter any swap transactions incidental to a local authority’s power to borrow was inconsistent with the existence of the detailed statutory code limiting such borrowing power in Schedule 13 of the 1972 Act.
368.	The House of Lords was not therefore purporting to lay down general rules applicable to the characterisation of derivative transactions. Rather it was applying a specific statutory code. Further, CPC, unlike the council in Hazell, concedes that it was capable of entering into certain forms of derivative transactions, seeking to draw a line based solely on whether the transaction was a hedge. But the House of Lords did not distinguish between swap transactions which were hedging (on CPC’s case, intra vires) and those which were speculation (on CPC’s case, ultra vires). The suggestion that local authorities had a “power to hedge” was rejected (36B, 46E).
369.	For all the reasons outlined above I am not satisfied that it has been shown that the Transactions were speculations rather than hedges given in particular:
(1)	The considerations set out in paragraphs 335 and 336.
(2)	The difficulty of distinguishing between hedging and speculation.
(3)	The fact that, as was accepted, subjective intention cannot be taken into account.
(4)	The difficulty of identifying by reference to the terms of the Transactions exactly what it is that transforms what would otherwise be hedging into speculation.  
(5)	The reservations expressed above in relation to the various features relied upon by CPC and the fact that, whether considered individually or collectively, they do not establish that the Transactions were speculations.
(6)	The opinion and evidence of Ms Bossley that they were not speculations.
(7)	The fact that no-one involved at the time at CPC or SCB considered the Transactions to be speculations.
370.	Finally, in so far as it is relevant or appropriate to consider matters of subjective intention or purpose, I make the following findings in respect of CPC’s hedging strategy.
371.	Following the Cabinet decision to approve the Study Group recommendations Mr de Mel understood that he had been was directed to carry out hedging by the Cabinet.  Hedging was “to be implemented without delay”.  He had no choice in the matter.  His preferred hedging strategy was a call option.  However, this would have involved a significant premium and it was made clear to him that this would be unacceptable.  He therefore had to fall back on the alternative of a ZCC.
372.	The problem for Mr de Mel was that a ZCC involved the risk of payments being made to the banks should prices fall.  He recognised that that this would be politically unacceptable and indeed the Minister told him that both his job and that of the Minister would potentially be on the line.
373.	Mr de Mel was therefore in a very difficult position.  He was required to hedge but could not use his preferred hedging instrument.  Further, the instrument he was required to use was likely to involve severe consequences should the innate risk of payments to the banks materialise.
374.	It was against that background that he and Mr Karunaratne determined that they should do whatever they could to ensure that the floor price of any ZCC was as low as possible, thereby minimising the risk of payment to the banks.  The price of so doing was necessarily giving up upside benefits (through the use of Seagulls and then TRFs) and/or increasing downside risks (through leverage).  I accept the evidence of Mr de Mel that minimising the risk of payments to the banks remained a primary concern throughout.
375.	An important part of this strategy was that CPC should be able to unwind the trades before any or at least any significant losses were suffered.  Mr de Mel’s thinking was that if there was a sufficiently large gap between the prevailing price and the floor price then it should be possible to unwind the trade before the floor was reached unless there was a very sudden and steep drop in price.
376.	This strategy could have worked but it was not as straightforward as Mr de Mel believed because the unwinding price would depend on the MTM value of the trade (and the forward curve) rather than the spot price.  It was therefore possible for the spot price to be well above the floor but for the trade to have a negative MTM value.  Implementation of the strategy therefore required up to date knowledge of the trades’ MTM as well as a preparedness to bear and cut losses should the market turn against the trade.
377.	Until the dramatic fall in oil prices in the second half of 2008 Mr del Mel’s strategy had been generally successful.  Aside from the crack hedges with SCB he managed to avoid payments to the banks and in fact realised gains on most of the hedges.
378.	These perceived successes and Mr de Mel’s growing knowledge and familiarity with hedging transactions led to him becoming more confident and assertive in his dealings with the banks.  He increasingly indicated the terms that he wanted rather than awaiting the banks’ suggestions, and he increasingly took decisions based on his own view on prices.
379.	It was CPC’s case that these successes led Mr de Mel’s strategy to become one increasingly focused on profits.  This was also the evidence of Mr Karunaratne who said that he regarded it as “fishing” rather than hedging and that he told Mr de Mel this.
380.	It is correct that the ITM TRF transactions which CPC entered into in 2008 became part of an intended short term strategy whereby gains would be realised and the transactions knocked out or unwound within a relatively short period and the position then re-assessed. It is also correct that this reflected a view that Mr de Mel was taking on the likely trend in oil prices.  However, it is an oversimplification to say that the object of the transactions was profit making.
381.	In the first place Mr de Mel’s overall hedging strategy was to await a time when the oil price was at a sufficiently low level to make it possible to hedge a significant proportion of his underlyings, ideally through a call option.  In the meantime he wanted hedges that offered the possibility of a short term exit.
382.	Secondly, the main reason that Mr de Mel was keen if possible to receive payments under the hedges was not profitmaking but rather to obtain cash which would ease CPC’s pressing cashflow and foreign exchange requirements.  As the oil prices increased these became increasingly serious concerns for CPC.  The price went well above the level that the Study Group had said would be “unbearable”.
383.	As Mr de Mel explained in evidence:
“we had to do hedging because we were asked by the cabinet and the governor was very specific, that I had to enter into hedging contracts. Otherwise I would have been held responsible….as the oil prices were going higher, we had to be hedged.  We couldn't be waiting without hedging because the main concern was the foreign exchange outflow.  So we were earning some amount of dollars in these hedging contracts.”
384.	Thirdly, although, as he explained, Mr de Mel was required to go on hedging, the high price levels limited CPC’s hedging options.  A classic importer’s hedging strategy of locking in protection above a ceiling in excess of current market prices would not have been advisable. If oil prices at $125 per barrel were unsustainable, there was little point in purchasing protection payable only when they went above $150. Because oil prices had already risen so far, CPC had missed the level at which, in an ideal world it would have hedged  Hence it was Mr Begnini’s evidence that he would not have recommended a ZCC in these circumstances, but rather a call option (the premium for which CPC could not pay).
385.	As Ms Bossley explained in evidence, in these unprecedented market circumstances it made reasonable sense to enter ITM trades.  The TRF feature, capping CPC’s upside, allowed CPC to lower the spot price at which it would receive payments, and, in cash-flow terms, increased the prospect that a payment would be made by SCB in circumstances when CPC would most require the money, that is when the spot price remained high.
386.	Although the downside risk of the transactions CPC entered into were considerable, especially where leverage was involved, for the reasons outlined above Mr de Mel and Mr Karunaratne believed that those risks would not materialise and that the transactions could be unwound beforehand.  They were further reassured by the fact that only a proportion of their underlyings were hedged so that if prices fell they would reap the benefit of the lower prices on the unhedged portion.
387.	As Mr Karunaratne explained in his witness statement:
“We both knew that overall CPC would be better off if oil prices crashed, since, at the time, retail pump prices were much lower than international fuel prices and if oil prices crashed and the retail price was not adjusted to reflect the crash, then we would be saving money on the unhedged element of our oil purchases.” 
388.	At the trial CPC pointed out that this would only be a real benefit if CPC was able to avoid passing on the reduced price to their customers.  However, I am satisfied on the evidence that there was a reasonable expectation that the passing on of reductions could be both delayed and not implemented in full.  I am also satisfied that this was explained to SCB as a way the downside risk could be mitigated, as borne out by a number of documents.  Further, on any view the reduced prices would benefit CPC’s cashflow and foreign exchange position.
389.	In summary, CPC’s hedging strategy involved a combination of concerns and considerations and the emphasis between them differed over time and in response to the unprecedented and very difficult market conditions.  However, the hedges were all related to underlying physicals and provided protection against both high and rising prices.  Although the extent of that protection became limited, and although CPC became increasingly keen to use hedging more for cashflow and foreign exchange generation than price protection purposes, price protection remained an element of its strategy and that strategy never became one that was solely or predominantly driven by speculative profit making.
E.	THE ISSUES 
390.	In the light of the factual background and findings made above I turn to the four core issues, namely:
(1)	Capacity;
(2)	Authority;
(3)	Illegality;
(4)	The Counterclaim.
(1)	CAPACITY – Did CPC have capacity to enter T8 and T9?
The law
391.	CPC is a public corporation created by Act of Parliament (the CPC Act).  As was common ground, CPC’s capacity to contract is therefore determined by Sri Lankan law see Dicey, Morris & Collins on the Conflict of Laws, 14th ed. (“Dicey”), Rule 162.  It was also agreed between the Sri Lankan law experts that an ultra vires contract entered into by a public corporation is void ab initio.  
392.	The Sri Lankan law experts (Professor Muthucumaraswamy Sornarajah for SCB and Mr Shibly Aziz PC for CPC) agreed that:
(1)	the doctrine of ultra vires applies to Sri Lankan public corporations (such as CPC);
(2)	relevant English law precedent is of persuasive authority when determining the capacity of CPC to contract; and
(3)	primacy is to be given to relevant Sri Lankan case law.  
393.	There was a difference in emphasis between the experts as to the extent to which the Sri Lankan court’s approach to CPC would be informed by that which has been taken to private companies incorporated under the Companies Acts. Given that the doctrine of capacity is common to both, having a shared historical origin in Ashbury Railway Carriage v. Riche (1875) LR 7 HL 653, and that the Act is in similar terms to the memorandum and articles of a private company, I accept the evidence of SCB’s expert that one would expect that the principles significantly to overlap. This is supported by the fact that the leading Sri Lankan text book, Amerasinghe, Public Corporations in Ceylon (1971) (“Amerasinghe”), which was referred to by both experts, refers extensively to the English case law. 
The facts
394.	CPC’s capacity argument had two limbs:
(1)	T8 and T9 fell outside the objects of CPC as set out in the CPC Act.
(2)	T8 and T9 fell outside the scope of a binding Ministerial direction given to the Board of CPC as to the exercise of its powers under s. 7(1) CPC Act in the Wijetunge letter.
(1)	Whether T8 and T9 fell outside the objects of CPC as set out in the CPC Act
395.	CPC is a public corporation and, while it is ultimately subject to Governmental control, it is not a Government department or body exercising administrative powers. Rather, it is a commercial trading operation whose object (as the title of the statute makes clear) is to “carry on business”. As appears to be the general statutory approach in relation to such corporations, the CPC Act includes both an “objects” clause (s 5) and a “General Powers” section (s 6).
396.	The “general objects of the Corporation” are set out in s 5 of the CPC Act:
“5. The general objects of the Corporation shall be – 
(a)	To carry on the business as an importer, exporter, seller, supplier or distributor of petroleum;
(b)	To carry on the business of exploring for, and exploiting, producing, and refining of petroleum; and
(c)	To carry on such other business as may be incidental or conducive to the attainment of the objects referred to in paragraphs (a) and (b)”
397.	S 6 provides that CPC “may exercise all or any of the following powers”. There follows 17 sub-paragraphs identifying a series of express powers, which include the following:
“(l) to give any guarantee, security or indemnity to, and to enter into any agreements with, any bank, Government department, local authority, or any other person in order to obtain any rights, concessions, or privileges that may seem to the Board to be conducive for the purposes of the Corporation;
(m) to delegate to any officer of the Corporation any such function of the Corporation as the Corporation may consider necessary so to delegate for the efficient transaction of business;
(n) to enter into and perform or carry out, whether directly or through any officer or agent authorized in that behalf by the Corporation, all such contracts or agreements as may be necessary for the exercise of the powers of the Corporation; …
(q) to do all other things which, in the opinion of the Corporation, are necessary to facilitate the proper carrying on of its business” (emphasis added).
398.	SCB contended that CPC had capacity to enter into the Transactions on the basis (1) that they were incidental to or conducive to the attainment of the objects referred to in s 5(a) and (b) of the CPC Act and/or (2) that such transactions fell within the express powers contained in s 6 of the CPC Act and, even if those powers had been exercised for a purpose outside s 5 of the CPC Act. This would not mean that such transactions were beyond its capacity. 
(a)	S 5 of the CPC Act
399.	It was SCB’s case that the Transactions fell within CPC’s objects in s 5, on the basis that such transactions were either: 
(1)	conducive to the attainment of the business of importing, selling, supplying or distributing oil; or  
(2)	incidental to such business.  
400.	It was CPC’s case that the Transactions fell outside these objects because they were speculative transactions rather than hedges.  However, for reasons already given this has not been established on the evidence. 
401.	I find that the Transactions were conducive or incidental to CPC’s business of importing, selling, supplying or distributing oil because they were hedges of its petroleum purchases and in particular:
(1)	CPC is a commercial enterprise, operating in relation to a commodity in respect of which it had a price risk and an exchange risk.  It is common practice for oil companies to enter into derivative transactions relating to the purchase of oil.
(2)	They provided some protection for CPC from high and rising oil prices, in the sense that they all involved SCB making a payment to CPC if and when the oil price was above a particular level, in exchange for making a payment if and when the oil price was low.
(3)	They potentially provided CPC with foreign exchange to mitigate its exchange risk.
(4)	They potentially provided CPC with cashflow which its business urgently needed. 
(b)	S 6 of the CPC Act
402.	Alternatively, SCB contended that the Transactions were within the capacity of CPC on the basis that they fell within CPC’s express ancillary powers as set out in s 6, even if such powers were not in fact exercised for the objects of the corporation in s 5.
403.	SCB relied in particular on s 6(l) which gives CPC express power “to … enter into any agreements with, any bank … in order to obtain any rights … that may seem to the Board to be conducive for the purposes of the Corporation”.  It submitted that the Transactions involved the exercise of a power that fell within the letter of, for example, s 6(l), in that the Transactions all involved agreements with a bank to obtain rights.
404.	The issue which then arises is whether CPC had capacity to enter into transactions which were within the letter of its general ancillary powers in s 6 but which (for present purposes one assumes) had not been exercised for the purposes of its objects as set out in s 5.
405.	Slade LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246 (“Rolled Steel”) identified the same question in the following terms at 287:
“…two important points of principle which arise in the present context may be expressed thus: Is a transaction which falls within the letter of the powers conferred on a company incorporated under the Companies Acts but is effected for a purpose not authorised by its memorandum of association properly to be regarded as being beyond the corporate capacity of the company?”
406.	The Court of Appeal in Rolled Steel decided that a company did have capacity in such circumstances so long as the transaction is “capable of falling within the objects of the company” (per Browne-Wilkinson LJ at 306).
407.	The effect of Rolled Steel is conveniently summarised in Buckley on the Companies Act at paragraph 35.50:
“[Rolled Steel], so far as it related to the doctrine of ultra vires, established the following principles: (1) a company had power to do only those things which are within, or reasonably incidental to, its stated objects; (2) if an act was capable of being in pursuance of, or incidental to, the stated objects, it could not be ultra vires and void because of the purpose or state of mind of the directors who authorised it.” 
408.	If the Transactions were speculative by reason of the purpose or state of mind with which they were entered into then Rolled Steel would be directly relevant.  It was CPC’s case, however, that the Transactions were ultra vires not because of the purpose or state of mind with which they were entered, but rather because, viewed objectively, they were speculative transactions and, as such, are not capable of being conducive or incidental to the carrying on of CPC’s petroleum business as set out in s 5.  I have rejected that case on the facts, but if it had been made out I would accept that neither s 6 nor Rolled Steel would assist SCB.  
(2)	Whether T8 and T9 fell outside the scope of a binding Ministerial direction given to the Board of CPC as to the exercise of its powers under s. 7(1) CPC Act
409.	S 7(1) of the CPC Act provides that:
“The Minister may, after consultation with the Board of Directors give such Board general or special directions in writing as to the exercise of the powers of the Corporation, and such Board shall give effect to such directions”.
410.	In her 29 January 2007 letter, Ms Wijetunge (in her capacity as Additional Secretary to the Ministry of Petroleum) wrote to Mr de Mel in his capacity as Chairman of CPC.  She attached the Cabinet Memorandum, which set out and endorsed the five Study Group Recommendations and the Cabinet Decision, which indicated that those Recommendations were to be “implemented without delay”.  Ms Wijetunge’s covering letter stated:
“The draft Cabinet Decisions dated on 26th January 2007 regarding the above is forwarded for your information & necessary action please”. 
411.	CPC’s case was that this letter constituted a direction in writing under s. 7(1) of the CPC Act, that a failure to comply with s. 7(1) is ultra vires CPC and that there was such a failure since the Transactions did not comply with the Study Group Recommendations.  Each of these contentions was disputed by SCB.
412.	Three issues therefore arise:
(1)	Whether the Wijetunge letter constituted a direction under s 7(1) of the CPC Act.
(2)	If it did, whether a direction under s 7(1) goes to the capacity of CPC.
(3)	If it does, whether the Transactions were within the scope of the Study Group Recommendations and the Cabinet Decision.
(1)	Whether the Wijetunge letter constituted a direction under s 7(1) of the CPC Act.
413.	CPC contended that the letter was a s 7(1) direction in that:
(1)	The letter was clearly intended to be a direction to CPC, since it stated on its face that it was for CPC’s information and “necessary action”.  That can have left no room for doubt that CPC was expected to comply with it.  
(2)	The direction was given on behalf of the Minister.  It was not necessary for the Minister to sign the letter himself.  The Carltona principle applies – see Carltona Ltd v Commissioner of Works [1943] 2 All ER 560.  The Carltona principle is recognised in Sri Lankan law and is engaged whenever the action in question falls within the general authority that the officials of a department enjoy to carry on the business of the department on behalf of the minister.  That is this case.
(3)	The direction was in writing and was given to the Board.
(4)	The direction followed a consultation with the Board which included the following:
(a)	The Study Group Report was sent in draft to Mr de Mel by the Ministry of Petroleum on or about 13 November 2006.  Mr de Mel wrote to the Secretary of the Ministry of Petroleum by letter dated 15 November 2006 confirming that CPC was in agreement with the contents of the Study Group Report.  The consultation process was therefore carried out through the Chairman of the Board, as would be expected.  
(b)	Hedging was discussed at Board level during late 2006 and early 2007, and SCB gave a presentation on hedging to the Board in November 2006.
(c)	Ms Wijetunge (who was one of CPC’s Directors) and Mr Karunaratne (who though not a Director attended all Board meetings relating to hedging) were both members of the Study Group and attended one or more of its meetings.
(5)	Even if there was no consultation this was not a mandatory requirement.
414.	I find that the Wijetunge letter was not a s 7(1) direction.  In particular:
(1)	It does not purport to be such a direction.
(2)	It does not appear to be such a direction.  It is not from the Minister.  It is not addressed to the Board.  It makes no reference to the CPC Act.  It makes no reference to any consultation or to the exercise of the Corporation’s powers.  It does not give any “direction”. 
(3)	S 7(1) provides a statutory mechanism for the Minister that may have important consequences for the internal management of CPC. It is important that, at the time, both the Minister and the Board are clear as to whether it has been invoked, and one would expect any direction thereunder to be clearly made.
415.	I further find that:
(1)	The letter was not provided to the Board.
(2)	The failure to refer to the power being allegedly exercised contrasts with other examples where the fact that the Minister was exercising a statutory power under the CPC Act was made clear, as with the appointment of Ms Wijetunge as a director of CPC.
(3)	There was no consultation by the Minister with the Board before the issue of the letter.  Both Ms Wijetunge and the Minister accepted this in evidence.
(4)	Neither Ms Wijetunge nor the Minister considered that s 7(1) was being implemented at the time.
(5)	The language in the letter, in particular the phrase “for your information and necessary action” would appear to have been a stock phrase used in the Ministry when passing on a document, and was used on other occasions far removed from s7(1).
(2)	Whether a direction under s 7(1) goes to the capacity of CPC.
416.	I agree with SCB that s 7(1) is concerned with how the powers of the Corporation are to be exercised rather than capacity.  That is what it says – the direction is “as to the exercise of the powers of the Corporation”.  Further, if it had been intended that a direction from the Minister to the Board would restrict the capacity of CPC, one would expect there to be a requirement that any such direction be published or be otherwise made known to third parties.   There is no such requirement.
(3)	Whether the Transactions were within the scope of the Study Group Recommendations and the Cabinet Decision.
417.	The Recommendations were:
“1.	CPC to hedge purchase of petroleum products, both crude oil and refined producst, in the international market.
2.	Use Zero-Cost Collar as the hedging instrument with the upper bound based on market developments. 
3.	Commence hedging with smaller quantities for a shorter period and gradually increase the quantity and the duration.
4.	Grant authority to the CPC to call for quotations for oil hedging, decide on future prices and purchase hedging instruments from reputed banks. 
5.	Grant authority to CPC to change instruments based on the developments in the market.” 
418.	CPC contended that the Transactions did not fall within these Recommendations because:
(1)	Recommendation 1 required CPC to hedge its purchases of crude oil and refined products in the international market. Contrary to Recommendation 1, the Transactions were not hedges of CPC’s purchases of crude oil and refined products but were speculative.  
(2)	Recommendation 2 required CPC to use ZCCs.  In breach of this Recommendation, the transactions were not zero-cost collars, but much more sophisticated and complex structures.  
(3)	Whilst Recommendation 5 granted authority to CPC to “change the instrument based on market developments”, this was only authority to change the instrument used, not authority to change the objective of CPC’s hedging programme as set out in Recommendation 1.  Any instrument adopted by CPC under Recommendation 5 would need to meet the Stated Objective and Stated Justification.  The Transactions did not do so since they provided no protection against rising prices and involved disproportionate risk.  
(4)	The Transactions were also in breach of Recommendations 3 and 4 since they involved excessive notional exposures and tenors, and had been entered into without going through a process of obtaining competitive quotes for the same transaction from several banks.  
419.	As to (1), for reasons already stated I find that the Transactions were hedges of CPC’s purchases of petroleum products and were not speculative.  
420.	As to (2), the phrase “zero cost collar” is not a term of art.  I agree with SCB that the mere addition of one or more of a Seagull, a knock-out or leverage to a structure does not mean that a transaction can no longer be regarded as a ZCC.  The Transactions were zero cost and they involved the purchase of a call option, in exchange for the sale of a put option.  T8 also involved a band or “collar” between the strike prices of the two options within which no payment would be made by either party.  Although T8 involved variations on a standard ZCC I do not consider that either individually or collectively they can be regarded as being so fundamental as to mean that it could not be described as or was not a ZCC.  Indeed no clear, alternative description was suggested by CPC or its expert.  T9 is a more doubtful case because it involved no collar and could be described as a synthetic long position or swap.  However, even if it is not a ZCC I find that it was within Recommendation 5 which permitted a change in instrument based on market developments.
421.	As to (3), the only basis upon which CPC contended that the Transactions would not fall within Recommendation 5 was that they did not meet the objectives set out in Recommendation 1 or the Stated Objective and Justification.
422.	Whilst there is some force in CPC’s contention that the authority conferred was only in order “to hedge purchase of petroleum products” as set out in Recommendation 1, I have found that the Transactions were such hedges.
423.	I do not consider that it is necessary or appropriate to superimpose upon the Recommendations the Stated Objective and the Stated Justification derived from the Study Group Report and deliberations.  The Recommendations speak for themselves.  As Recommendations, one would expect them to be self-contained and not dependent on reference to other material, still less interpolations of that material.  Further, on CPC’s case the objective is set out in Recommendation 1, namely to hedge purchases of petroleum products.
424.	As to (4), this was not developed in the evidence.  In any event, the Transactions took place when CPC’s hedging programme was well developed rather than at its commencement.  Further, it was not a requirement that competitive quotes be obtained before any transaction be entered.  I find that there was no breach of Recommendations 3 and 4.
425.	I accordingly conclude that the Transactions were within the scope of the Study Group Recommendations and the Cabinet Decision.
Conclusion on Capacity
426.	For the reasons set out above I find that CPC’s capacity defence fails.
(2)  AUTHORITY - Were Mr de Mel and/or Karunaratne authorised to enter into Transactions 8 and 9 on behalf of CPC?
(1) Actual authority
427.	It was agreed between the parties that authority to enter into derivative transactions with SCB was conferred by the Board of CPC on Mr de Mel and Mr Karunaratne over the course of the Board meetings on 9 February 2007 and 26 March 2007.  It was also agreed that the law applicable to Mr de Mel and Mr Karunaratne’s actual authority is Sri Lankan law.
428.	CPC submitted that the terms of Mr de Mel and Mr Karunaratne’s actual authority to contract on behalf of CPC with SCB were derived from two sources:-
(1)	The 29 January 2007 letter, which constituted a s 7(1) CPC Act direction fettering the powers of the Board and therefore limiting the authority of any agents to whom the Board delegated its powers.  However, for reasons already given I find that it was not such a direction and that there was in any event no breach of the Recommendations. 
(2)	The terms of the authority conferred by the Board on Mr de Mel and Mr Karunaratne at the 9 February 2007 and 26 March 2007 Board meetings.  
429.	The Sri Lankan law experts agreed that the terms of Mr de Mel and Mr Karunaratne’s authority are to be determined by ordinary principles of interpretation applicable to contracts.  
430.	As to those principles, CPC stressed the following:
(1)	Interpretation is the ascertainment of meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract - Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, per Lord Hoffmann at 912-3.
(2)	Subject to the requirement that it must have been reasonably available to the parties, and the exclusion of evidence of pre-contractual negotiations, the factual background includes “absolutely anything which would have affected the way the document would have been understood by a reasonable man” (ibid).  
(3)	Implication of terms is simply an exercise in the construction of the instrument - Attorney General of Belize & Ors v Belize Telecom Ltd & Anor (Belize) [2009] UKPC 10, [2009] 1 WLR 1988 per Lord Hoffman at [16] – [19].  A provision should therefore be implied into an instrument where that provision would “spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean” - ibid. at [21] – [25]. 
(4)	An implied term can fill gaps in the express terms, as long as it does not conflict with the express terms.  Such a term may be implied where it is necessary, because it is essential to give effect to the reasonable expectations of the parties - Equitable Life Assurance Society v Hyman [2002] 1 AC 408, per Lord Steyn at 459.
431.	I would add that the Belize Telecom case was considered in the Court of Appeal decision Mediterranean Salvage & Towage Limited v Seamar Trading & Commerce Inc [2009] 2 Lloyd’s Rep. 639.  In that case it was emphasized that the touchstone for implication remains necessity rather than reasonableness.
432.	The primary document to be interpreted is the SCB Board Resolution passed on 26 March 2007 authorising Mr de Mel and Mr Karunaratne to enter into the Master Agreement which provided as follows:
“The Board of Directors of [CPC] at their meeting on 26th March passed the following resolutions: 
A.	That approval be and is hereby given for the Corporation to enter into the following agreement(s), which had been presented to and the contents thereof considered by the meeting, together with any other agreement(s) incidental thereto: ISDA Master Agreement between Standard Chartered bank and the Corporation. 
B.	Accordingly, that authority be and is hereby given to any one of the persons named below to sign for and on behalf of the Corporation the above mentioned agreement(s). [Mr de Mel and Mr Karunaratne are then named.]
C.	Board of directors affirmed that they had carefully considered and understood the nature and risks of the transactions contemplated by the agreements and believed that such transactions were appropriate for, and in the interest of the corporation.”
433.	CPC submitted that the SCB Board Resolution must be read in the light of the relevant factual background and the commercial context and that Mr de Mel and Mr Karunaratne’s authority must have contained (at least) the following implied limitations:- 
(1)	Any derivative instruments entered into by Mr de Mel and Mr Karunaratne on behalf of CPC would have to be instruments falling within the terms of the Study Group Recommendations as approved by the Cabinet Decision. 
(2)	Any derivative instruments entered into by Mr de Mel and Mr Karunaratne on behalf of CPC would need to be consistent with the Stated Objective and Stated Justification.  
(3)	If Mr de Mel and Mr Karunaratne wished to change the derivative instrument from the ZCCs specifically recommended, or wished to increase from the smaller quantities and shorter durations recommended, they would need to go back to the Board to get approval before doing so.   
434.	CPC submitted that the relevant factual background in this case included at least the following matters:-
(1)	The evaluation process and, in particular, the Study Group Report and the five Study Group Recommendations, and the materials available to the Study Group.
(2)	The relevant Board Papers and Board Minutes relating to the Board’s delegation of authority to Mr de Mel and Mr Karunaratne as regards hedging.  In particular:-
(a)	Board Paper 24/1060 (seeking approval for CPC’s entry into the first transactions with SCB) and the relevant Board Minutes of the meeting on 9 February 2007 approving it.  
(b)	Board Paper 39/1061 (seeking approval for the SCB Board Resolution and other resolutions allowing CPC to enter into transactions with Citibank and DB) and the relevant Board Minutes of the meeting on 26 March 2007 approving it.  
(3)	The evidence that the SCB Board Resolution was based on a specimen resolution supplied to CPC by the bank, rather than drafted on behalf of CPC’s Board.  
(4)	The Sri Lankan cultural context.  The evidence of the Minister was that Mr de Mel would have been expected to seek explicit approval from Cabinet if he wanted to change the instrument CPC used from the ZCCs expressly recommended by the Study Group.  Mr de Mel confirmed in evidence that he would also have considered it necessary to obtain Cabinet and Board approval for any transactions that were not ZCCs.
(5)	The fact that CPC was not permitted to speculate as was clear from the 2005 CBSL Directions
435.	Taking the relevant factual background into account, CPC submitted that the Board must have intended Mr de Mel and Mr Karunaratne’s authority to be limited in scope.  The following points were made:
(1)	The evaluation process had considered the objectives and justification for CPC’s hedging programme at the highest levels of Sri Lanka’s central administration.  In particular, the Study Group Recommendations had been considered and approved by the Minister of Petroleum in the Cabinet Memorandum; and then by the Cabinet in the Cabinet Decision.  CPC was a public corporation of national importance engaging in a task of national significance.  It is inconceivable that its Board could have intended that Mr de Mel and Mr Karunaratne could have acted outside the scope of the Study Group Recommendations or the Stated Objective.  
(2)	The relevant Board papers and Board Minutes contain several references to the Study Group Report, Cabinet Memorandum and the Cabinet Decision. Indeed Board paper 24/1060 specifically attached both the Cabinet Decision and Cabinet Memorandum.  That demonstrated that the Board intended Mr de Mel and Mr Karunaratne to comply with these documents in implementing CPC’s hedging programme.  
(3)	Further, these Board papers expressly refer at several points to the Cabinet Decision, Cabinet Memorandum and Study Group report:-
(a)	Board paper 24/1060: para 1 states: “Based on the report submitted by study group…the Cabinet has approved CPC to take suitable hedging positions, (please find the attached Cabinet approval)”; para 2: “After the study….it is decided to take hedge position in Gas Oil” and “…As recommended by the Cabinet Decision…we use Zero Cost Collar derivatives for a shorter period”.
(b)	Board paper 39/1061: para 1: “…CPC decided to hedge one third of its oil requirement with Citi bank, Deutsche Bank and Standard Chartered Bank vide the Cabinet approval dated 13th January, 2007”. 
(4)	Board paper 39/1061, and the Board Minutes of the 26/3/07 meeting that approved this Board paper, expressly described the draft resolutions for SCB, Citibank and DB as permitting Mr de Mel and Mr Karunaratne to enter into “appropriate hedging instruments”, which can only have meant, in this context, instruments falling within the terms of the Study Group Recommendations.  
(5)	The SCB Board Resolution is itself in vague and broad language, purporting to approve Mr de Mel and Mr Karunaratne’s entry into the ISDA Master Agreement and “any other agreement(s) incidental thereto”.  On its face this could permit Mr de Mel and Mr Karunaratne to enter into any transaction capable of being governed by the ISDA Master Agreement, but that can never have been the intended result.  It is obvious, for example, that the Board could not intended by this resolution to give Mr de Mel and Mr Karunaratne authority to enter into FX derivatives.  That shows that the authority conferred on Mr de Mel and Mr Karunaratne by the SCB Board Resolution must necessarily be restricted in its scope.  
(6)	The Minister and Mr de Mel’s evidence on the Sri Lankan cultural context also shows that Mr de Mel would be expected to obtain further approval to enter into transactions that were not the ZCCs specifically approved in Recommendation 2.  
(7)	Although the Study Group Report was not attached to Board paper 24/1066 and the Board did not have the Study Group Report in front of it at the meetings on 9 February 2007, that does not matter because:-
(a)	The Board did see the five Recommendations and CPC was required to act within them.  The Stated Objective was clear from the Recommendations alone.  
(b)	The Stated Justification was also clear: a deliberately cautious approach was evident from (i) the selection of a ZCC (a basic instrument with balanced upside and downside risk) (Recommendation 2); (ii) the recommendation that CPC should commence hedging with smaller quantities for shorter periods and gradually increase the quantity and the duration (Recommendation 3); and (iii) the requirement for CPC to purchase hedging instruments from reputed banks (Recommendation 4).  An expectation that CPC would take a cautious approach was also reflected in the Board’s understanding that Mr de Mel and Mr Karunaratne would seek approval if they sought to change the instrument under Recommendation 5.  
436.	CPC submitted that the implication of the above terms is necessary to give effect to the reasonable expectations of the Board and Mr de Mel and Mr Karunaratne.  Further, it was the evidence of CPC’s Board witnesses and Mr de Mel that he was bound to act in accordance with the Cabinet Decision, which approved the Cabinet Memorandum setting out the five Study Group Recommendations.  
437.	It is to be noted that the Board Resolution of 26 March 2007 was expressed in broad and unqualified terms.  It approved CPC entering into “any other agreement(s) incidental” to the ISDA Master Agreement, including any Confirmations, and authorised Mr de Mel and Mr Karunaratne to sign on behalf of CPC any such agreements.  No limitation, qualification or restriction was expressed. 
438.	On the face of it CPC thereby gave Mr de Mel and Mr Karunaratne authority to enter into any individual derivative transactions, to be governed by the Master Agreement.  
439.	Even if the expectation was that these transactions should be entered into in accordance with the Study Group Recommendations and the Cabinet decision or should be “appropriate hedging instruments” there was no necessary reason why the authority of Mr de Mel and Mr Karunaratne should be so limited.  It was perfectly possible to trust Mr de Mel and Mr Karunaratne to decide upon this within the broad authority they had been given, subject to the monitoring and supervision of the Board.  Indeed given the vague and broad language of the Recommendations, and the flexibility they conferred, it made good sense to do so, rather than to seek to impose a limited mandate. 
440.	Further, the Resolution acknowledged that the contents of the Master Agreement had been considered and that the Board “had carefully considered and understood the nature and risks of the transactions contemplated by the agreements and believed that such transactions were appropriate for and in the interests of the corporation”.  The Master Agreement involved a representation by CPC under Section 3(ii) that:
“It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and/or any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement … and has taken all necessary action to authorise such execution, delivery and performance.”
441.	For the purposes of Section 3, “this Agreement” is defined as meaning the single agreement constituted by the Master Agreement, the Schedule and the various Confirmations relating to the various individual transactions (see Section 1(c) to the Master Agreement).
442.	The structure and terms of the Master Agreement, the entry into which the Board was approving, are therefore consistent and indeed only consistent with a broad authority being conferred in respect of the entry into individual transactions made thereunder.
443.	Having granted that broad authority it was for CPC to take such steps, if any, as it considered necessary to ensure that Mr de Mel and Mr Karunaratne only entered into such derivative transactions as it was content to enter into, and to monitor and supervise their activities.  In effect, the responsibility for controlling and the risks arising out of how Mr de Mel and Mr Karunaratne exercised the broad authority that they had been given, lay with CPC.  The context and background provides no good reason why this should not be done, still less a necessary reason.
444.	The main relevance of the Recommendations and the Cabinet decision was that they formed part of the political background which led to CPC deciding to enter into derivative transactions and to the Board giving authority to Mr de Mel and Mr Karunaratne to enter into individual transactions.  No doubt the Cabinet Decision and the Cabinet Memorandum were matters to which they could be expected to have regard, when deciding how to exercise the general authority that they were granted.  But this does not mean that they needed to or did limit, restrict or qualify such authority.  In particular:
(1)	The vague and general language of the Cabinet Decision and Cabinet Memorandum, including the effect of Recommendation 5, is ill-suited to being treated as a limitation, restriction or qualification on their actual authority, such that whether or not they had authority would depend on whether they were at all times within the letter of such documents. 
(2)	The Board could reasonably consider that, in practice, there was no need to limit Mr de Mel and Mr Karunaratne by reference to the terms of such documents, as they could be relied upon to have regard to them in any event.  In other words, they would choose to try to act consistently with them, even if their authority was not limited, qualified or restricted by their terms.
(3)	The same applies to the reference in the Board minutes to “appropriate hedging instruments”, although this was not part of or reflected in the Board Resolution itself.
445.	As to the specific terms which it is alleged fall to be implied:
(1)	The first implied term is that any instruments had to be within the terms of the Study Group Recommendations. However, the wording of the Recommendations is both vague and flexible and, as such, ill-suited to constitute a limitation on the scope of authority, still less an implied limitation.  In any event, I have found that the Transactions did not breach the Recommendations.
(2)	The second implied term is that any instruments were consistent with the Stated Objective and the Stated Justification.  However:  
(a)	The Stated Objective and Stated Justification are alleged to have been contained in the body of the Study Group Report, but since the Board was not even provided with a copy of that Report, it is difficult to see how it can be said to have been intended to be implied into the Board Resolution.
(b)	The Stated Objective was stated in CPC’s pleading to be “to provide substantial protection from significant further rises in oil prices”.  It is inherently unlikely that it can have been intended that, whether Mr de Mel and Mr Karunaratne had actual authority to cause CPC to enter into a transaction, would depend on a necessarily imprecise assessment as to whether the protection it provided was “substantial” and was in respect of “significant” further rises in oil prices.  The Stated Justification was stated in the pleading to be that “the benefits of protection from high oil prices were greater than the costs (or risks) of hedging”.  It is similarly inherently unlikely that it can have been intended that, whether Mr de Mel and Mr Karunaratne had authority to cause CPC to enter into any particular transaction, would depend on some inevitably uncertain assessment of whether the benefits of that transaction outweighed the costs. 
(c)	As already found, I do not consider that it is necessary or appropriate to superimpose upon the Recommendations the Stated Objective and the Stated Justification derived from the Study Group Report and deliberations.  
(3)	The third implied term is that Mr de Mel and Mr Karunaratne would return to the Board to seek their specific approval and authority before entering into the Transactions, if and to the extent that they were not initially for “smaller quantities” or for a “shorter period” or if they wished to change derivative instruments from ZCCs based on developments in the market.   This implied term is contrary to the terms of the Board Resolution, that expressly authorised Mr de Mel and Mr Karunaratne to enter into “any other agreement incidental to” the Master Agreement (emphasis added). In addition, the wording of “smaller quantities” and “shorter period” is in any event a very uncertain basis for a limitation on authority and therefore unlikely to have been intended as such.  So far as changes from ZCCs are concerned, this was expressly allowed under Recommendation 5 and therefore even if the authority conferred was limited by the Recommendations, it included other instruments.  In any event T8 was a ZCC. 
446.	I accordingly reject CPC’s case that Mr de Mel and Mr Karunaratne’s authority was subject to the implied limitations alleged.  I further find that in relation to the Transactions both Mr de Mel and Mr Karunaratne bona fide and reasonably believed that they were acting within the authority conferred on them. I therefore conclude that Mr de Mel and Mr Karunaratne did have actual authority to enter into the Transactions.  In the above circumstances, it is not necessary to rule on SCB’s further arguments under this head based on contractual estoppel and implied actual authority.  
(2) Ostensible authority 
447.	Even if Mr de Mel and Mr Karunaratne did not have actual authority to enter into the Transactions, SCB submitted that they had ostensible authority to do so because of the representations as to their authority made by CPC to SCB.  Given my conclusion on actual authority I shall address this issue relatively briefly.
448.	There was an issue between the parties as to the applicable law. As to that, I accept SCB’s case that whether or not Mr de Mel and Mr Karunaratne had ostensible authority to enter into the Transactions is to be determined by English law: Dicey, Rule 228 and 33-432. In any event, I also find there is no relevant difference between the English and Sri Lankan law relating to ostensible authority, including Turquand’s case. I agree with SCB and its expert that the contention by CPC, based on the decision of the Privy Council on an appeal from Sri Lanka in AG of Ceylon v De Silva [1953] AC 461, that under Sri Lankan law, a corporation established by Act cannot be bound by an agent’s ostensible authority is not supported by the cases, nor by the leading Sri Lankan text book, Amerasinghe.  
449.	Whether one is considering English or Sri Lankan law, the first question is whether, objectively, CPC represented to SCB that Mr de Mel had authority to enter on behalf of the principal a contract of the kind sought to be enforced by SCB. 
450.	I find that the acts of CPC, taken as a whole, constituted a representation that Mr de Mel and Mr Karunaratne had authority to enter into the Transactions.  In particular:
(1)	S 6(l) of the CPC Act provided that CPC had power to enter into any agreements with any banks in order to obtain any rights “that may seem to the Board to be conducive for the purposes of the Corporation”.  In this respect, the CPC resolution of March 2007, a certified copy of which was provided to SCB, represented to SCB that approval had been given for Mr de Mel and Mr Karunaratne to enter “any other agreement(s) incidental” to the Master Agreement and that the “Board of directors … had carefully considered and understood the nature and risks of the transactions contemplated by the agreements and believed that such transactions were appropriate for, and in the interest of the corporation”.  
(2)	CPC made the express representations contained in Section 3(a) of the Master Agreement, including an express representation by CPC repeated on entry into each Transaction, that it had power to execute both the Master Agreement and any Confirmation, and such it had “taken all necessary action to authorise that execution, delivery and performance”. 
(3)	The Board allowed Mr de Mel and Mr Karunaratne to enter into a number of transactions over many months up to May and July 2008 with SCB (and other banks), without objection or reservation.  The Board also acquiesced in CPC accepting payments from SCB in relation to T1, T2 and T5 to T7, and in making payments to SCB in relation to T3 and T4.  
451.	CPC submitted that even if such representations were made SCB knew that Mr de Mel and Mr Karunaratne’s authority was limited and that it is well established that ostensible authority can never arise where the contractor knows that the agent’s authority is limited so as to exclude entering into transactions of the type in question.  See: Armagas v Mundogas SA [1986] 1 AC 717 at 777B, per Lord Keith of Kinkel.
452.	Further or alternatively, CPC submitted that it cannot be liable on the basis of ostensible authority because SCB’s belief in Mr de Mel and Mr Karunaratne’s authority was irrational and that irrational in this context includes turning a blind eye, or recklessness - see Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Limited (in liquidation) [2011] 1 HKLC 357 at [49-62].
453.	It is correct that in evidence Mr Peiris accepted that he understood that CPC had to operate within the Recommendations.  However, it was his belief and understanding that the Transactions fell within the Recommendations.  The belief and understanding that the Transactions were authorised was shared by all relevant persons within SCB. Neither he, nor anyone else at SCB, therefore knew that Mr de Mel and Mr Karunaratne’s authority was limited so as to exclude entering into the Transactions.  Nor was a belief that the Transactions fell within the Recommendations irrational.  On the contrary I have found it to be correct.
454.	I further find that SCB was induced by CPC’s representation of authority to enter into the Transactions.  SCB believed that Mr de Mel and Mr Karunaratne had authority to enter into the Transactions. I agree with SCB that it is inconceivable that SCB would have entered into the Transactions (and the corresponding back-to-back obligations) if SCB had not held such a belief. SCB neither knew nor suspected Mr de Mel and Mr Karunaratne to lack authority, nor turned a blind eye to that possibility. SCB understood CPC to have conferred any necessary authority on Mr de Mel and Mr Karunaratne. 
455.	I accordingly conclude that even if Mr de Mel and Mr Karunaratne did not have actual authority to enter into the Transactions they had ostensible authority to do so.
(3) Ratification
456.	SCB further contended that the Transactions were ratified by the Board on 20 August 2007 and T8 and T9 were ratified by the Board at its meeting on 24 November 2008.  In the light of the fact that I have concluded that there was both actual and ostensible authority to enter into the Transactions it is not necessary to rule upon this alternative case.
Conclusion on Authority
457.	 For the reasons set out above I find that CPC’s authority defence fails.
(3)	ILLEGALITY
458.	The agreed terms of this issue were:
“If CPC would otherwise be obliged to pay in respect of Transactions 8 and 9, are such obligations unenforceable?  In particular:-
3.1	Is payment by CPC in respect of Transactions 8 and 9 illegal under the law of Sri Lanka? 
3.2 	Is Colombo, Sri Lanka the place of performance of CPC’s obligations?”
The law
459.	Under English law, performance of a contract is excused if it necessarily involves doing an act which is unlawful by the law of the place where the act has to be done – see Ralli Bros; Libyan Arab Foreign Bank v Bankers Trust Co [1989] Q.B. 728, per Staughton J at 743; see also Ispahani v Bank Melli Iran [1998] Lloyd's Rep Bank 133.
460.	As SCB submitted, the principle only applies where the obligor is required, under the terms of the contract in question, to perform in the country where such performance is alleged to be illegal: Kleinwort, Sons v. Ungarische Baumwelle [1939] 2 KB 678, at 687, 693-5; Toprak v. Finigrain [1979] 2 Lloyds Reps 98, at 105-6, (Robert Goff J); 114 (Lord Denning MR). It is not enough that it was contemplated that performance would be in a particular foreign state. 
The facts
461.	In November 2008, the CBSL’s Bank Supervision Department commenced an investigation into CPC’s derivative transactions with SCB.  Mr Nanayakkara led this investigation.  As Mr Nanayakkara explained in his statement, after conducting this investigation, the CBSL’s Monetary Board issued a direction to SCB under s. 46 Banking Act No. 30 of 1988 dated 16 December 2008 (the “16 December direction”).
462.	The 16 December direction informed SCB that the Monetary Board’s investigations had found that SCB’s derivative transactions were “materially affected and substantially tainted” and required SCB not to proceed with, or give effect to, the transactions.  The CBSL has subsequently confirmed that this direction remains in force, and it has never been challenged by SCB in the courts of Sri Lanka.  
463.	It was Mr Aziz’s evidence that, as part of a suite of extensive powers conferred on the Monetary Board, the Monetary Board has a power under s. 46(1) of the Banking Act No. 30 of 1988  (as amended) to issue directions to licensed commercial banks as to the conduct of “any aspect” of their business.  Such directions entail a mandatory obligation of compliance, and failure to comply can lead to criminal sanction.  
464.	Under s 2(a)(ii) of the Master Agreement, payment due under a Confirmation is to be made in the place of the account specified in the relevant Confirmation or otherwise pursuant to the agreement. 
465.	The Confirmations for each of T8 and T9 did not provide for payment by CPC to SCB (as Party A) in any particular location. On the contrary, the place of payment was “to be advised”. i.e. SCB was given the right to specify the account into which payment was to be made. In the event, the relevant fixing invoices specified an SCB account located in New York.  SCB submitted that it follows that in relation to T8 and T9, CPC was not required, in either case, to make payment in Sri Lanka. 
466.	This was disputed by CPC who contended that:
(1)	Pursuant to cl. 10(c) of the Master Agreement and the Confirmations for T8 and T9, the Office through which CPC entered into the transactions was Colombo.  Under cl. 10(c), unless otherwise agreed in writing, a party’s Office is the Office through which it makes payments under transactions.  
(2)	Any payment to SCB made under the Transactions will necessarily involve CPC making a payment from its Office in Colombo.  Accordingly, enforcing SCB’s right to receive a payment from CPC will necessarily require the performance by CPC of an act that is unlawful, by virtue of the 16 December direction, in the place it is to be performed.  
467.	However, I do not accept that these provisions required payment to be made from Sri Lanka.  Payment was required to be made in New York.  How that payment was to be made was a matter for CPC but it was not contractually obliged to do so from Sri Lanka.
468.	In any event, the statutory power is directed at SCB not CPC.  It could not be directed at CPC, which was not a bank, and therefore could not render CPC’s payment obligation illegal in Sri Lanka.
469.	Further, the import of CPC’s case is that the CBSL had a power, after a contract had been entered into, effectively to deprive a bank, by letter, of its accrued right to payment, for no compensation. Even assuming that such an extraordinary power could be granted consistently with the Sri Lankan constitution, I agree with SCB that for it to exist, it would need to be clearly spelt out in the relevant statute, and clearly exercised. Neither condition is satisfied here. The statutory provision relied upon (s 46 of the Banking Act, a regulatory statute) does not disclose such a power. Nor does the letter of 16 December letter purport to exercise any such power. Rather, it appears to be ancillary to the Supreme Court’s interim order dated 26 November 2008, which fell away on 27 January 2009.  
Conclusion on illegality
470.	For the reasons set out above CPC’s illegality defence fails.
 (4)  THE COUNTERCLAIM 
(1) The alleged duty of care
471.	CPC counterclaims that SCB owed it a duty of care in contract or tort to advise on hedging and derivative instruments, that SCB was in breach of that duty and that, but for such breaches, CPC would have followed a proper hedging strategy, including if necessary not entering into the Transactions, as a result of which CPC would have earned additional returns and/or would have avoided liabilities.
472.	Each element of this counterclaim was disputed by SCB.  It contended that it did not owe CPC any duty of care, was not in breach of any such duty, and did not cause CPC any loss or damage.  In relation to the alleged duty of care SCB contended that CPC is contractually estopped from alleging the existence of such a duty, and that in any event no such duty would have existed.
473.	The nature of the duty of care which is alleged is that, in the context of SCB presenting and discussing proposed transactions with CPC, SCB owed duties: 
(1)	To present the financial implications of the Transactions in a balanced fashion by a properly constructed letter and graph explaining their downside and upside.
(2)	To “warn” CPC if the Transactions were not consistent with the Stated Objective or the Stated Justification, in other words to warn CPC if the Transactions would not “provide substantial protection from significant further rises in oil prices” or if “the benefits of protection from high oil prices were not greater than the costs (or risks) of hedging”.
(3)	To “warn” CPC if the Transactions were of a level of complexity and sophistication which was not commensurate with CPC’s level of Relevant Expertise and the extent of its Relevant Capabilities.
(4)	To “warn” CPC that seeking to generate short-term trading profits was not consistent with a proper hedging strategy.  It is alleged that SCB should have provided this warning in mid-to-late January 2007, in the context of the Seagull feature for T1, and thereafter.
The law
Implied contract
474.	A contract will only be implied from the parties’ conduct where it is necessary to do so.  It will not be necessary to do so where the parties would or might have acted as they did without any such contract – see The Aramis [1989] 1 Lloyd’s Rep 213; The Gudermes [1993] 1 Lloyd’s Rep 311; Baird Textile Holdings Ltd v Marks and Spencer plc [2001] CLC 999.
475.	In The Aramis Bingham LJ considered the authorities on the implication of contracts in some detail and cited with approval the statement of May LJ in his judgment in The Elli 2 [1985] 1 Lloyd’s Rep 107, 115 that: 
“… no such contract should be implied on the facts of any given case unless it is necessary to do so: necessary, that is to say, in order to give business reality to a transaction and to create enforceable obligations between parties who are dealing with one another in circumstances in which one would expect that business reality and those enforceable obligations to exist.”
476.	Bingham LJ held that the authorities showed that “a contract will only be implied if it is necessary to do so” and further stated that (at 224): 
“… it would, in my view, be contrary to principle to countenance the implication of a contract from conduct if the conduct relied upon is no more consistent with an intention to contract than with an intention not to contract. It must, surely, be necessary to identify conduct referable to the contract contended for or, at the very least, conduct inconsistent with there being no contract made between the parties. Put another way, I think it must be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract.” 
477.	In Baird Textile Holdings Ltd v Marks and Spencer plc Mance LJ summarised the position as follows:
“61. An intention to create legal relations is normally presumed in the case of an express or apparent agreement satisfying the first requirement: see Chitty on Contracts (28th Ed.) Vol. 1 para 2–146. It is otherwise, when the case is that an implied contract falls to be inferred from parties' conduct: Chitty, para.2–147. It is then for the party asserting such a contract to show the necessity for implying it. As Morison J said in his paragraph 12(1), if the parties would or might have acted as they did without any such contract, there is no necessity to imply any contract. It is merely putting the same point another way to say that no intention to make any such contract will then be inferred.
62. That the test of any such implication is necessity is, in my view, clear, both on the authority of The Aramis [1989] 1 Ll.R. 213, Blackpool and Fylde Aero Club Ltd. v. Blackpool B.C. [1990] 1 WLR 1195, The Hannah Blumenthal [1983] AC 854 and The Gudermes [1993] 1 Ll.R. 311 cited by the Vice-Chancellor, and also a matter of consistency. It could not be right to adopt a test of necessity when implying terms into a contract and a more relaxed test when implying a contract — which must itself have terms.”

Duty of care in tort
478.	In considering whether a duty of care arises and, if so, its scope, recent case law has emphasised the importance of a pragmatic approach which concentrates on the exchanges and dealings between the parties considered in their context rather than the application of high level statements of principle.  Attention should be concentrated on “the detailed circumstances of the particular case and the particular relationship between the parties in the context of their legal and factual situation as a whole” – per Lord Bingham in Commissioners of Customs & Excise v Barclays Bank [2007] 1AC 181 at [8].
479.	A convenient summary of the case law and the correct legal approach can be found in the first instance decision of JP Morgan Chase Bank v Springwell Navigation Corp - [2008] EWHC 1186 (Comm), per Gloster J at [48] – [52] and [55].  
“48. ….The cases were most recently reviewed by the House of Lords in Commissioners of Customs & Excise v Barclays Bank [2006] UKHL 28; [2007] 1 AC 181(HL) a case which arose in a non-contractual setting (notice of a freezing order). The speeches in that case referred to the three tests which had been used in deciding whether a defendant sued as causing pure economic loss to a claimant owed him a duty of care in tort: 
i) the assumption of responsibility test, coupled with reliance; 
ii) the “three-fold-test” (whether the loss was reasonably foreseeable, whether the relationship between the parties was of sufficient proximity and whether in all the circumstances it is fair just and reasonable to impose such a duty); and 
iii) the incremental test.
49 Ultimately, the conclusion of their Lordships was that there was no single common denominator, with all of the tests operating at a high level of abstraction. However, what each test emphasised was the need to take into account all the relevant facts in the overall determination. As Lord Bingham said: 

“8. … it seems to me that the outcomes (or majority outcomes) of the leading cases cited above are in every or almost every instance sensible and just, irrespective of the test applied to achieve that outcome. This is not to disparage the value of and need for a test of liability in tortious negligence, which any law of tort must propound if it is not to become a morass of single instances. But it does in my opinion concentrate attention on the detailed circumstances of the particular case and the particular relationship between the parties in the context of their legal and factual situation as a whole”. 

50 Likewise, Lord Hoffmann also emphasised the need for a practical approach to the question whether a duty of care exists, and the evolution of “lower level principles” as a more useful guide than “high abstractions”: 

“35. There is a tendency, which has been remarked upon by many judges, for phrases like ‘proximate’, ‘fair, just and reasonable’ and ‘assumption of responsibility’ to be used as slogans rather than practical guides to whether a duty should exist or not. These phrases are often illuminating but discrimination is needed to identify the factual situations in which they provide useful guidance.” 

51 However, as was pointed out in Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 (HL), whatever the formulation of the test, it requires an objective ascertainment of the relevant facts, the primary focus being on exchanges between the parties: 

“The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff. Obviously, the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff”.

52 As Mance J (as he then was) pointed out in Bankers Trust v PT Dharmala Sakti Sejahtera [1996] CLC 518 at 575-6, the ultimate decision whether to recognise a duty of care, and if so of what scope, is pragmatic.”
….

55 In Bankers Trust International plc v PT Dharmala Sakti Sejahtera, a case having some similar features to the present, where allegations of misrepresentation, breach of contract and breach of duty of care were made against a bank in relation to derivative transactions, Mance J (as he then was) made the following comment : 

“The relationship under examination is not the conventional banker-customer relationship, although that too may on occasions be affected by representations, undertakings or the assumption of an advisory role. The bank here was marketing to existing or prospective purchasers derivative products of its own devising which were both novel and complex. The analysis of the relationship is in the circumstances one of some delicacy.”
480.	Gloster J said that Mance J’s comment in the Bankers Trust case was “singularly apposite” to the case before her, another bank derivative misselling case.  It is equally apposite to the present case.
The facts 
481.	Leaving aside the effect of the contractual provisions, as to which CPC contended that a reverse estoppel arises, CPC submitted that it is clear that the nature of the relationship between CPC and SCB was advisory.  In particular, SCB was advising CPC as to:-
(1)	the risks of transactions;
(2)	the appropriateness of transactions;
(3)	the nature of CPC’s strategy;
(4)	the performance of transactions already entered into (including advice as to when to unwind).  
482.	CPC pointed out that SCB itself accepts that it fulfilled an advisory role to CPC in two of these respects, and also with respect to providing market views as to oil movements.  In its Reply SCB acknowledges (subject to the terms of the Master Agreement, its Schedules and the Confirmations) that it fulfilled an advisory role in the sense of:-
(1)	informing CPC of structure and downside risks of transactions;
(2)	of market views as to oil movements; and 
(3)	as to the performance of transactions already entered into with SCB.  
483.	CPC relied in particular on the following factors as establishing that SCB’s relationship with CPC was advisory in the respects admitted by SCB, and also in the respects alleged by CPC:
(1)	It was obvious that CPC needed advice.  
(2)	SCB cultivated a close and personal relationship with Mr de Mel.
(3)	SCB held itself out to CPC as providing advice. 
(4)	SCB regarded itself internally as providing advice to CPC.
(5)	The nature of the products being sold. 
(6)	The cultural context: there was a cultural expectation in Sri Lanka that advice would be provided.  
(7)	The regulatory context.
(1)	It was obvious that CPC needed advice
484.	CPC submitted that it was obvious that CPC needed advice and that it was not sophisticated. In particular:
(1)	As at mid-2006, there was very little experience of commodity derivative transactions in Sri Lanka.  
(2)	As at mid-2006, CPC did not have any knowledge, understanding and expertise in relation to derivative instruments. 
(3)	SCB knew that CPC had asked for help in setting up a treasury unit, but no such unit was ever set up.  
(4)	CPC was legally unsophisticated as regards the ISDA contractual documentation used for derivative transactions.
(5)	As recorded in SCB’s internal appropriateness profiles for CPC dated 6 December 2006, 26 February 2007 and 21 March 2007:-
(i)	CPC had no systems to manage and monitor risk (question 2).  This meant that CPC had to be classified as Category 3.
(ii)	CPC did not have a written policy on financial risk management, but was believed to be preparing a written policy on financial risk management (question 5).
(6)	Further:-
(i)	CPC did not have a risk management committee to oversee the implementation and effectiveness of its hedging strategy.
(ii)	CPC did not have the technical resources, staff or expertise to carry out its own regular monitoring and analysis of CPC's exposures in relation to derivatives transactions or its combined physical and paper positions, in order to take such steps as might become necessary to modify its hedging strategy from time to time. 
(7)	CPC did not have a consultant to advise it.  Mr Arunajith’s involvement as CPC’s ‘consultant’ did not extend further than early February 2007.  
(8)	Mr Green recognised that CPC needed expert and disinterested advice.  
485.	It is correct that CPC had little knowledge of derivative transactions in mid-2006 and that it never had proper systems in place to manage and monitor risk.  However, both Mr de Mel and Mr Karunaratne became increasingly knowledgeable about derivatives through the various presentations made by the banks, through their own due diligence and as a result of the various trades which CPC carried out. Both well understood the operational features of the trades which they did, including the downside risks. They understood the technical details of the Term Sheets.  One matter which they did not fully understand, however, was the importance of the MTM to the price at which a trade could be unwound, the fact that this might differ significantly from the spot price and the consequent importance of continually monitoring the MTM.  
486.	Despite the appointment of Mr Arunajith, SCB knew that CPC had no independent consultant who was actively advising them on hedging and hedging strategy and that they made their own decisions.  Whilst Mr Green recognised the advantages of having such an advisor, neither he nor SCB considered that essential or that CPC was unable to make proper decisions for itself.  Although at various times concerns were raised internally within SCB about the level of CPC’s sophistication, those concerns were never regarded as being so serious that trades with CPC should not be carried out.  Further, these concerns were essentially raised for internal reasons related to the requirements of SCB’s own appropriateness and credit criteria.  As SCB submitted, the issue in this case is not whether SCB complied with the requirements of its own internal appropriateness criteria, nor is the effectiveness of its credit function in issue.  
 (2)	SCB cultivated a close and personal relationship with Mr de Mel
487.	CPC submitted that SCB cultivated a close and personal relationship with Mr de Mel and, to a lesser extent, with Mr Karunaratne.  This was borne out, for example, by references in SCB internal documents, by the fact that over time Mr Dias and Mr Peiris were able to walk straight past the security guards and into Mr de Mel’s office, and that Mr Dias spoke to Mr de Mel virtually every day.
488.	There is no doubt that Mr Dias in particular did develop a close relationship with Mr de Mel.  However, that was part of his job as relationship manager.  Further, at all times he was only one of the people Mr de Mel was dealing with.  Throughout the relationship Mr de Mel worked with other banks and people from those banks.
(3)	SCB held itself out to CPC as an advisor 
489.	CPC stressed the following points in particular: 
(1)	SCB engaged in a protracted and persistent process of engagement with the CBSL, the Government and CPC, from mid-2006 with the objective of convincing these entities of the merits of hedging, and of its skill and expertise in this field.  
(2)	SCB held itself out to CPC as expert in commodity derivatives and in hedging, as shown, for example, by the presentations given by SCB to the CBSL or CPC, in which SCB emphasised its expertise in commodity derivatives and hedging, highlighting its teams of product experts in London, New York and Singapore, and describing itself in presentations as CPC’s “trusted partner”. 
(3)	SCB’s officers told Mr de Mel and Mr Karunaratne that they would provide CPC with advice and guidance. 
(i)	At the Board presentation on 2 November 2006 SCB’s officers told CPC that they would advise CPC when deciding what products to use and when to enter into trades.  
(ii)	From late 2006 CPC started to have regular meetings with Mr Dias and Mr Peiris, at which they assured Mr de Mel and Mr Karunaratne that they would guide and advise CPC.  
(iii)	The advisory duty was reaffirmed at the 24 October 2007 meeting.  The evidence shows clearly that that CPC required advice from SCB, in particular as regards how to get out of the structures to make profits and avoid losses by unwinding transactions while they still had value to CPC.  Mr Dias gave assurances to Mr de Mel in this respect at the meeting; alternatively he did not disabuse Mr de Mel of his belief that SCB would be providing this advice.
(iv)	The fact SCB said that it would provide advice was confirmed by Mr Karunaratne in evidence.  He made clear that he understood that SCB would guide and advise CPC in three respects: (i) the product being offered; (ii) as to when to restructure transactions and (iii) on market movements and forecasts.
(4)	Mr Dias and Mr Peiris provided advice on the appropriateness of Seagulls and TRFS, telling CPC that they were good for CPC because of the low floor price.  SCB described in internal materials that it had convinced CPC to enter into the Seagull.
490.	It is correct that SCB used the experience of its international offices in derivatives as a selling point.  It is also correct that its representatives agreed to and did provide information relating to market prices and views on market movements and forecasts.  It is also correct that it would describe the various products it put forward.  However, I am not satisfied that SCB ever held itself out as a general advisor to CPC.  
491.	There are no documents crossing the line which support such an inference and it is inherently unlikely that SCB would have done so given the clear demarcation, at least as far as SCB was concerned, between a selling and an advisory role.
492.	The general nature of the relationship was one in which SCB and CPC would discuss CPC requirements and SCB would then seek to come up with products to suit those requirements.  As time went on Mr de Mel became increasingly opinionated as to the products, and product features, that he was interested in, but at all times it was his and CPC’s decision whether or not to carry out a particular trade.  SCB, and in particular Mr Dias and Mr Peiris, would not advise him whether or not to do so, albeit they hoped that he would trade with SCB and no doubt they would generally put a positive spin on the products being put forward.  
493.	The closest that the evidence comes to indicating an advisory role of any kind being undertaken is the 24 October 2007 meeting, as to which I have already made findings and which will be considered further below.  As already found, that does not lead to or evidence the assumption of any general advisory role.
(4)	SCB regarded itself internally as providing advice to CPC
494.	CPC submitted that it is clear that SCB regarded itself as an advisor to CPC and that from October 2007, SCB regarded this as a factor that could differentiate it from Citibank.  In this connection CPC relied in particular on:
(1)	SCB’s internal documents refer to it acting in an ‘advisory’ capacity to the CBSL.  
(2)	SCB’s internal documents, prior to the 24 October 2007 meeting, referring to it acting as an advisor to CPC, as having advised CPC, and as having convinced CPC to enter into the Seagull structure.  
(3)	SCB’s internal documents after the 24 October 2007 meeting showing that SCB sought to position itself as a close advisor to CPC with its best interests at heart.
(4)	The fact that CPC needed advice, that SCB was providing guidance and advice all along and that SCB gave every indication that it would provide this advice was accepted by Mr Dias in his evidence.  
(5)	In proceedings initiated before the Sri Lankan courts in May/June 2009, Mr Haswell and Mr Dias acknowledged SCB’s advisory role.  Both confirmed in their witness statements served in those proceedings that SCB “…extended full guidance” to CPC and was “best placed to advise [CPC] on the hedging rationale and instruments”.  Indeed, in those proceedings Mr Dias went as far as to say that the banks (including SCB) had a “fiduciary responsibility” to educate CPC.
495.	It is correct that there are a number of internal SCB documents which refer to SCB advising CPC.  However, these are internal and informal documents.  They do not demonstrate the assumption of any legal responsibility to advise.  In its dealings with CPC SCB was providing information and advice in the respects already indicated and indeed accepted.  There is therefore nothing surprising about there being references to advice in such internal documents.  The statements made in the Sri Lankan proceedings should be viewed in the same context, as was explained in evidence.
(5)	The nature of the products being sold
496.	CPC stressed that the transactions in which CPC was engaging were far from the straightforward ZCCs recommended by the Study Group.  On the contrary, they were novel and complex.  CPC was amongst the very first of SCB’s clients to enter into TRF-type transactions for commodity derivatives. Mr Benigni has never seen any other oil company use TRFs.   Further, it appears that SCB’s trades with CPC were in fact at the forefront of SCB’s global commodity TRF sales.  
497.	Not only were TRFs in commodities a new product.  Other products that it offered to CPC, or considered offering (TRF pivots, power range forwards and pre-funded crack spreads) were also new to the commodities market.  Had these transactions gone ahead, CPC would have been the first, or amongst the first, of SCB’s commodity clients to engage in such transactions. 
498.	 In such circumstances, CPC submitted that there was plainly a duty on SCB to ensure that CPC understood the transactions, that the strategy CPC was following by entering into these transactions made sense, and that the transactions it proposed were appropriate for CPC in terms of complexity and risk profile – and to ensure that its own salesmen understood the transactions too.  
499.	It is correct that the products offered by SCB were more complex than vanilla ZCCs.  However, the nature of the product was discussed and accurately described in the Term Sheets.  There was no suggestion of there being any material misdescription of the features of any of the products and Mr de Mel and Mr Karunaratne understood the operational features of all the transactions.
500.	It is also correct that certain people within SCB had concerns about CPC’s strategy and in particular its risk appetite.  This was an issue raised at the 24 October 2007 meeting and in discussions in 2008 between Mr Bhandari and Mr de Mel.  However, those concerns were never regarded as being so serious that further trades with CPC should not be carried out.
(6)	The cultural context: an expectation that advice would be provided
501.	CPC submitted that the cultural context was a further reason why it would have been obvious that CPC expected SCB to provide it with advice and guidance, and that SCB understood that it was expected to provide this.  Ms Fernando’s evidence was that the cultural context in Sri Lanka does not draw a clear distinction between advisory and commercial banking.  There is, on the contrary, an expectation that banks will provide advice.  Mr Rajakaruna also referred in cross-examination to the cultural expectation in Sri Lanka that banks would play a dual advisory and transactional role.
502.	It is correct that this evidence suggested that the line between a bank’s counterparty and advisory role is not clearly drawn in Sri Lanka and that there is an expectation that advice and assistance will be provided.  However, that is not the same thing as undertaking legal responsibility for so doing and the generalised evidence given did not specifically address that issue.
(7)	The regulatory context
503.	CPC also submitted that SCB’s duty to CPC should also be placed in the appropriate regulatory context.  The CBSL issued Directions on Financial Derivative Products dated 21/12/05 which prohibited (by Reg. 3) the use of derivatives for speculation and required (by Reg. 11.2) Authorized Dealers to provide adequate information on the transactions to customers, including information on the risks involved.
504.	SCB knew that speculation was prohibited but they did not understand the transactions to be speculative.  They also knew that it was important to provide adequate and accurate information in relation to proposed transactions and the risks involved.  They sought to do so and considered that they had done so.  
 (8)	CPC’s reliance on SCB’s advice
505.	Mr de Mel and Mr Karunaratne’s evidence was that SCB knew that CPC was looking to it for advice, and that they did in fact rely on SCB’s advice. They both said that if anyone at SCB had told them that they were not being advised, they would not have been prepared to deal with SCB.  
506.	As to Mr de Mel and Mr Karunaratne’s evidence, the “advice” they referred to was expressed in very generalised terms.  There were few, if any, clear examples of specific advice being given of the nature, detail and extent that would be expected if an advisory relationship had been assumed, and no documented examples of such advice.
507.	Having carefully considered all the evidence, and the particular factors relied upon by CPC as giving rise to a duty of care, I am not satisfied that such a case has been made out, even if one ignores the contractual and other documentation signed and received by CPC.  I have expressed reservations above about various of the individual matters sought to be relied upon by CPC but there are a number of relevant counter-factors.
508.	First, there is a clear distinction between giving advice and assuming legal responsibility for that advice.   This point is made very clearly by Gloster J in the Springwell case.  In that case she stated as follows:
(1)	The term “advisory relationship” is ambiguous: “one has to be clear whether the term simply refers to a situation where A gives advice to B in the context of a commercial relationship; or whether the term necessarily connotes the existence of an obligation on the part of the provider of the advice to take reasonable care and / or to give advice about certain matters” (at [374]).
(2)	Accordingly, the fact that a person, in the capacity of a salesperson, gives investment advice, “tells us nothing about what, if any, obligations were in fact owed...still less does it inform us to the extent of any such duties of care as were owed. In order to decide whether the advice given gave rise to obligations that went beyond the normal recommendations or “advice”, given in the daily interactions between an institution’s sales force and a purchaser of its products, so as to import obligations of the type owed by a fully-fledged investment advisor, one needs to look at all aspects of the objective evidence of the relationship between the parties” (at [374]). 
(3)	The real question, therefore, is not whether there was an “advisory relationship” between the parties but whether the giving of investment advice by a salesperson in that capacity attracts the obligations and duties of care of an investment advisor (para 451). In this respect, it is important to bear in mind that there is “a real distinction... between the investment advisor, properly so-called, who is retained to advise a client, usually backed by considerable research...and the advice or recommendations given by a bonds salesperson...as part of the selling process” (at [452]). 
(4)	It should be appreciated that the expressing of opinions and giving of advice is “part and parcel of everyday life of a salesman in emerging markets” (at [361]).
(5)	It follows that mere giving of advice, even specific investment advice, is not sufficient to establish a duty of care. This is the case even where the investment advice is relied upon by a customer: “The fact that...a salesman...was, in that capacity, giving such advice and making recommendations, and that the customer was taking the salesman’s advice and recommendations into account... does not in my judgment predicate that a duty of care arises on the party of the salesman. Reliance on its own, even if established, does not necessarily give rise to an advisory relationship, with consequential duties of care” (at [449]).  
(6)	Accordingly, the fact that a witness accepts that they were giving investment advice to a customer  (as was the case in Springwell) does not constitute an admission as to the existence of an “advisory relationship” in the relevant sense of that phrase (at[379]).
(7)	Where phrases such as “trusted financial advisor” are used in internal documents, or even in correspondence between the parties, the court has to construe their meaning in the relevant context. Such words and phrases may be a mere “slogan” or “buzzword...intended to encourage relationship managers to maintain close relationships with their customers and to understand their business as a whole” (at [380]).
(8)	The absence of any written advisory agreement “is a significant pointer against the existence of an advisory obligation” (at [440]). 
509.	Secondly, it is very unclear on CPC’s case exactly how and when the alleged duty arose.  In relation to the contractual claim, it was originally alleged to have come into existence on or about 2 November 2006, alternatively between December 2006 and February 2007.  In the Amended Defence and Counterclaim it was alleged that the contract came into existence “from about December 2006”.  In CPC’s Further Information, it was alleged that the contract “had come into being by 7 February 2007 …. alternatively by 13 March 2008”.  The position in relation to the alleged duty of care in tort is similar, being said to have existed “from about December 2006” and to have arisen from essentially the same facts.
510.	The alleged duty of care was said by CPC to have existed, effectively unchanged, from these various start dates through to the conclusion of the relevant transactions in late 2008.  It was not said, however, that it originally came into existence as a result of any specific discussion or event, as opposed merely to having come into existence when SCB began the process of making presentations to or discussing possible transactions with CPC. 
511.	The most compelling evidence that CPC has to support any case on advisory duty is the 24 October 2007 meeting but their own witnesses accepted that that did not change anything.   One must therefore identify some earlier stage at which the alleged duties arose, but CPC was unable to do so with any precision or particularity or by reference to any specific discussion or dealing.
512.	Thirdly, on the basis of Mr de Mel and Mr Karunaratne’s evidence a similar advisory duty was owed by the other banks they were dealing with, and in particular Citi and DB.  CPC therefore apparently had various different advisers, all with competing interests, and, as contracting counterparties, potentially conflicting interests to those of SCB.
513.	Further, it apparently did not have an advisory relationship with any other bank that was providing market information to it but with whom it did not in the end enter into any transactions.   This emphasises the extent to which the alleged advisory duty is necessarily said to arise otherwise than as a result of any specific conduct on the part of the particular bank.
514.	Fourthly, there was no advisory agreement, or consultancy agreement, nor anything equivalent even to the letter that was provided by CPC to Mr Arunajith on 12 January 2007.  The engagement of Mr Arunajith shows that CPC understood the distinction between a hedging advisor, which provides advisory or consultancy services for a fee, and a bank which is involved in selling products to a counterparty.   As Mr de Mel said in his witness statement: “since hedging needed expertise and hands on experience, it was appropriate to hire an expert in hedging to help CPC achieve the best results.  I therefore wrote to Minister Fowzie by letter dated 9 January 2007 recommending the appointment of Upul [Arunajith] as a consultant for hedging”.  This was at a time when CPC on its case already had an advisory relationship with SCB, and indeed other banks.
515.	Fifthly, the nature and scope of any duty of care is ill-defined and not grounded on specific and appropriate evidence.  The alleged terms of the duty, as expressed by Mr de Mel and Mr Karunaratne, were ill-suited to the existence of any legal obligation.  Thus, for example, they described the duty as having been to “safeguard CPC’s interests” or to have “CPC’s best interests at heart” and referred to SCB as being CPC’s “trusted partner”.  These are not the appropriate subject matter of legal obligation.  Further, the scope of what Mr de Mel and Mr Karunaratne expected the banks to do was vague and not suitable to being the subject of a duty of care in the sense alleged.  Mr Karunaratne suggested, for example, that SCB and the other banks “recommended” ZCCs and Seagulls, but all this meant was that the banks indicated that such structures would not require the payment of a premium.  Again, both Mr de Mel and Mr Karunaratne repeatedly asserted that SCB was advising CPC on likely movements in the market price of oil.  However these were, and would reasonably have been understood by CPC to be, at best, predictions or views, rather than formal advice.  In addition, no steps were taken by CPC to ensure that SCB was provided with the information that it needed if it were to act as a general advisor in relation to its hedging strategy, for example being provided with details of CPC’s transactions with the other banks, nor were any steps taken to seek to define what the duties as advisor would involve.  
516.	Sixthly, there are no contemporaneous documents, particularly from T5 onwards, in which CPC is recorded as ever having asked SCB: “What transaction should we enter into?” or “Should we enter into this transaction?”  It is difficult to see how a general advisory relationship to be inferred from conduct in which CPC never actually seeks advice.  Further, from T5 onwards CPC increasingly decided for itself what structures to enter into, for what quantities and at what strike prices.
517.	For all these reasons I find that no general advisory duty in contract or in tort arose, even if one ignores the contractual and other documentation.  The position becomes all the clearer if that documentation is taken into account.  
518.	The framework for the relationship between the parties was set out in the Master Agreement and the numerous Confirmations signed by CPC in relation to the individual Transactions, together with the Term Sheets.  In summary:
 (1)	CPC executed the Master Agreement on 30 May 2007.  It did so, having taken advice from its own internal legal department and from Nithya Partners, a Sri Lankan firm of attorneys-at-law, and knowing that the execution of such an agreement was a pre-requisite to SCB entering into any derivative transactions.
(2)	CPC signed, at the time of entering into the various Transactions, a total of 10 Term Sheets, each of which stated that SCB had no fiduciary duties to CPC, assumed no responsibility to advise on and made no representations as to the appropriateness or possible consequences of the prospective transactions.  They also expressly stated that CPC was “advised to make your own independent judgment with respect to any matter contained herein”.
(3)	CPC subsequently executed a total of 11 Confirmations with SCB in respect of the Transactions, each of which contained the Non-Reliance Statements, confirming that the terms of such document “correctly sets forth the terms of our agreement. 
519.	The nature of this framework was emphasised and buttressed by the terms of the presentations made by SCB and other documentation provided by SCB to CPC.  In particular:
(1)	The various presentations made by SCB to CPC, each of which contained a disclaimer, which stated, amongst other things, that “SCB has no fiduciary duty towards you, and assumes no responsibility to advise on and makes no representation as to the appropriateness or possible consequences of the prospective transaction” and also stated that CPC was “advised to make your own independent judgment with respect to any matter contained herein”.
(2)	The various market reports produced by SCB, all of which stated that the information contained in it did not constitute any offer, recommendation or solicitation to adopt any hedging, trading or investment strategy, nor a prediction of likely future movements in rates or prices, and also stated that “Users of this document should seek advice …”.
520.	Also relevant are the various ISDA Master Agreements and Confirmations signed by CPC with other banks, including Citi, DB, Commercial Bank of Ceylon and People’s Bank and the various presentations that it received from them, all of which would have included similar provisions.
521.	As made clear in the Springwell case, in determining whether the circumstances are such as to impose a duty of care, an important factor is the way in which the parties have sought to regulate their relationships, and to allocate risk, by contract. Where the parties have entered into agreements containing representations or acknowledgments as to sophistication and non-reliance the court is not required to undertake a detailed textual analysis of the precise ambit, extent and legal effect of each relevant clause. This is because “the contractual documentation, taken has a whole, has the broader evidential significance of negating the assumption of any general advisory duty” (Gloster J at [478]).  
522.	CPC disputed the relevance of the documentation in the present case.  Quite apart from its reverse estoppel argument, it contended that the relevant statements did not, as a matter of fact, alter the true factual position between the parties.  It submitted that SCB’s representatives undertook to advise CPC in 2006, prior to the first transactions and that that position remained the same, notwithstanding CPC’s entry into transactions containing the ‘Non-Reliance Statements’ and presentations from SCB containing similar statements.  By the time of the 24 October 2007 meeting, CPC had entered into four transactions with SCB containing the ‘Non-Reliance Statements’, yet at the meeting, Mr Dias reaffirmed that SCB would advise and guide CPC (alternatively did not disabuse CPC of the belief that SCB would advise and guide CPC) and CPC continued to look to SCB for this guidance and advice.  
523.	In the circumstances, it was submitted that it was perfectly reasonable for CPC to have considered that SCB was advising it, notwithstanding the contractual small print, particularly bearing in mind the cultural context that CPC expected that such advice would be provided.  As Mr de Mel pointed out in evidence, he did not expect the banks to put something in the contract that purported to contradict the basis on which the parties were dealing.  Moreover, the evidence shows that Mr de Mel and Mr Karunaratne continued to understand that SCB was advising CPC, notwithstanding what was in the term sheets and Confirmations.  
524.	Given the clear and repeated disclaimers set out in the contractual and other documentation I do not accept that it was reasonable for CPC to ignore them.  Objectively these were highly material to the question of whether any advisory duty was being assumed.  Mr de Mel and Mr Karunaratne should have been aware of these provisions themselves and, moreover, have had their attention drawn to them by CPC’s legal department, upon whom they were apparently relying.  In any event, for reasons already stated, I do not accept Mr de Mel and Mr Karunaratne’s evidence of complete ignorance.  As I have found, they were aware of the general import of the risk disclaimers, even if they never considered them in detail.
525.	Leaving aside the reverse estoppel argument, which will be addressed below, I find that taken as a whole the disclaimers in the documentation do negate the assumption of the alleged advisory duty.
Contractual estoppel
526.	SCB submitted that CPC is in any event estopped by contract from contending that the alleged duty of care existed, as a result of the Non-Reliance Statements contained in the Schedule to the Master Agreement and in the numerous Confirmations that it signed.
The law
527.	I recently reviewed the recent authorities on contractual estoppel in Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Plc [2011] EWHC 484 at [492-508].
528.	Those authorities show that:
“…parties to a contract may agree that a particular state of affairs is to be the basis upon which they are contracting, regardless of whether or not that state of affairs is true, and that such an agreement may give rise to a “contractual estoppel”, precluding the assertion of facts inconsistent with those which have been agreed to form the basis of the contract.”[488]  
529.	Further:
“(1)	If a term is to be construed as having this effect (and thereby prevent from arising the ordinary consequences which would otherwise follow as a matter of law) clear words are necessary – see Peekay para. 57; Board of Trade v Steel Brothers & Co. Ltd. [1952] 1 Lloyd’s Rep. 87 at p95.  
(2)	Whether or not a clause or collection of clauses has this effect is a matter of construction of the contract.
(3)	The principle may not apply where there has been a misrepresentation as to the effect of the contractual documents which give rise to the estoppel – see Peekay para. 60; Springwell para. 166.” [505]
The facts
530.	The Non-Reliance Statements are set out in Part 4(m) of the Schedule to the Master Agreement, incorporated by Section 3 as an Additional Representation, and the relevant Confirmations.  They provide that:
“Relationship Between Parties. Each party will be deemed to represent to the other party on the date it enters into a Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction):   
(1) 	Non-reliance.  It  is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgement and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction; it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of that Transaction.”
(2) 	Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of that Transaction. It is also capable of assuming, and assumes, the risks of that Transaction. 
(3) 	Status of Parties. The other party is not acting as a fiduciary for or an advisor to it in respect of that Transaction.”
531.	In Opening CPC accepted that, subject to one point, this Court is bound by the decision of the Court of Appeal in Springwell to hold that those provisions create a contractual estoppel preventing CPC from alleging the existence of a duty of care, whilst reserving the right to argue in a higher court that Srpingwell was wrongly decided.  That point was CPC’s reverse estoppel argument.
532.	In Closing, however, CPC submitted that the ‘Non-Reliance Statements’ do not cover advice as to CPC’s strategy but relate only to advice in relation to a specific transaction.  For example, Additional Representation (2) refers to CPC understanding and accepting the risks of “that Transaction”; Additional Representation (3) indicates that SCB was not acting as fiduciary or adviser “in respect of that Transaction”.  CPC’s case was that one of the ways in which SCB breached its duty to CPC was by failing to advise CPC that the strategy it was following was unsound, risky and was not a hedging strategy and this was not advice in relation to a specific transaction, but advice as to CPC’s strategy generally.  
533.	I reject this argument and consider that the original concession was correctly made.  In particular I do not accept that advice as to strategy can be divorced from advice in relation to the Transactions in the manner suggested.  Indeed on CPC’s case the only significance of the advice as to strategy is in relation to the entering into of the Transactions.  Further:
(1)	CPC’s case is that if the alleged advice had been given it would not have entered into the Transactions.  The advice as to strategy therefore goes to whether the Transactions were “appropriate or proper” for CPC, a matter upon which it agreed that it had made its own independent decision.
(2)	The strategy CPC was following was a risk of the transaction it was entering into.  So, for example, in relation to its unwinding strategy the risks involved in subsequently seeking to unwind the transaction was one of the risks intrinsic to the entering of the transaction.  CPC accepted that it understood, accepted and assumed those risks.  
(3)	The particular duties and breaches alleged all arise in the context of the presentation and discussion of the Transactions.
(4)	The claims for loss and damage made are the alleged consequence of entering into the Transactions.
534.	As to the reverse estoppel argument, CPC contended that the ‘Non-Reliance Statements’ are not binding on CPC because SCB is estopped by convention (i.e. by conduct) or acquiescence from relying on them.  
Estoppel by convention and estoppel by acquiesence 
The law 
535.	The elements of estoppel by convention are set out in the speech of Lord Steyn in Republic of India v India Steamship Co [1998] AC 878 at 913-914 (the “Indian Endurance”).  He said:-
"It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption: The August Leonhardt [1985] 2 Lloyd's Rep. 28; The Vistafjord [1988] 2 Lloyd's Rep. 343; Treitel, Law of Contracts, 9th ed., at 112-113. It is not enough that each of the two parties acts on an assumption not communicated to the other. But it was rightly accepted by counsel for both parties that a concluded agreement is not a requirement for an estoppel by convention”.
536.	As regards estoppel by acquiescence, Lord Steyn said later in the same passage:-
“That brings me to estoppel by acquiescence. The parties were agreed that the test for the existence of this kind of estoppel is to be found in the dissenting speech of Lord Wilberforce in Moorgate Mercantile Co. Ltd. v. Twitchings [1977] A.C. 890. Lord Wilberforce said at p. 903 that the question is ". . . whether, having regard to the situation in which the relevant transaction occurred, as known to both parties, a reasonable man, in the position of the 'acquirer' of the property, would expect the 'owner’ acting honestly and responsibly, if he claimed any title to the property, to take steps to make that claim known . . . ." . Making due allowance for the proprietary context in which Lord Wilberforce spoke, the observation is helpful as indicating the general principle underlying estoppel by acquiescence”
537.	Lord Steyn rejected the suggestion that the two concepts should be treated as aspects of “one overarching principle”, in order not to blur “the necessarily separate requirements and distinct terrain of application” of the two kinds of estoppel (p 914C).
The facts
538.	In the present case CPC submitted that:-
(1)	SCB and CPC acted on the shared assumption that, notwithstanding the Non-Reliance Statements, SCB was advising CPC.  CPC submitted that the evidence shows that CPC thought that it was being advised; SCB held itself out as advisor and SCB understood that it was advising all along.  There was also a crossing of the line, because SCB held itself out to CPC as advising it, both prior to the first transactions and at the 24 October 2007 meeting.  
(2)	Alternatively CPC was acting on the assumption that it was being advised by SCB, notwithstanding the Non-Reliance Statements. The circumstances of the case were such that SCB should have brought CPC’s mistaken belief to its attention.  CPC was an unsophisticated entity relying on SCB for advice and guidance, as SCB knew.  At the 24 October 2007 meeting, CPC (through Mr de Mel) made this understanding express.  A reasonable man would expect SCB acting honestly and responsibly to have brought it to CPC’s attention that this understanding was mistaken.  Instead, SCB expressly confirmed (through Mr Dias) that it would advise and guide CPC; alternatively it did not disabuse CPC of its understanding.  
(3)	It is unjust for SCB now to go back on the shared or acquiesced in assumption.  That is because:-
(a)	SCB held itself out to CPC as adviser in circumstances where it knew that CPC was looking to it for advice and guidance.  It did so, specifically to win business from CPC and, in part, to differentiate its service from that provided by its main competitor, Citibank.  
(b)	The assumption that SCB would advise and guide CPC was the basis on which CPC entered into transactions with SCB.  CPC would not have entered into transactions if it thought that advice was not being provided.  As Mr Karunaratne said in evidence, had anyone told him that SCB was not advising CPC, he would not have been prepared to deal with SCB; and had the relevant contractual provisions been drawn to his attention, he would have asked for them to be removed.
(4)	The above shared/ acquiesced in assumption was not merely an assumption about the factual situation.  The parties assumed that SCB was, in fact, advising CPC.  However, the assumption goes further than this.  Both parties assumed that SCB would be giving advice and could be liable for this advice.  That is the correct inference to draw from SCB’s continued reassurances to CPC that it was advising it, even after CPC had entered into transactions containing the ‘Non-Reliance Statements’ and from the fact that CPC would not have entered into transactions had it been told that SCB was not advising it.  The convention was not only a convention of fact, but of law.  It related to the legal basis on which SCB was transacting with CPC.  That means that the effect of the estoppel is to deprive SCB of a defence to CPC’s counterclaim based on the ‘Non-Reliance Statements’ 
539.	I reject CPC’s case on the evidence.
540.	As to (1), SCB did not consider that it was advising CPC, or at least advising it in the sense alleged by CPC.  SCB was well aware of the Non-Reliance Statements and of the distinction between providing information and assistance in relation to proposed transactions and undertaking a duty to advise in relation thereto.  SCB did not hold itself as undertaking any general duty to advise either prior to the first transactions or at the 24 October 2007 meeting.  
541.	As to (2), SCB did not know that CPC understood that SCB was undertaking a general duty to advise it.  It had not held itself out to do so and such a duty  would be plainly inconsistent with the Non-Reliance Statements.  SCB had no reason to believe that CPC had not read or understood the Non-Reliance Statements, even if it had not.
542.	As to (3), SCB did not hold itself out as undertaking a general duty to advise.  Even if CPC understood otherwise, that was not known by SCB, nor was it an assumption shared by it.
543.	As to (4), SCB never assumed that it could be liable for giving advice.  It assumed that the legal basis upon which it was transacting was as set out in the contractual documentation.
544.	I further find that there are a number of fundamental difficulties with CPC’s case.  In particular:
(1)	The facts and matters on which CPC relies are consistent with SCB providing “advice” in a general sense to CPC, on the basis of the terms set out in the Master Agreement and Confirmations.  The giving of “advice” may or may not be of such a nature as to give rise to legal obligations.  Whether it does so, depends on the terms of the legal relationship between the parties.  It does not assist, in answering that legal question, simply to repeat that one party was “advising” the other.
(2)	CPC’s argument is that, merely by “advising” CPC, it follows that it was mutually assumed or understood that SCB was undertaking an obligation in respect of such advice, regardless of the terms of any written agreement to the contrary.  In other words, regardless of what the documentation says, in practice SCB could not give “advice” without thereby accepting an obligation in respect of it. The effect of that argument if correct would be to reverse the effect of the authorities such as Springwell.  Rather than provisions such as the Non-Reliance Statements operating to protect a party, in practice they would not do so, because, whenever a party gave “advice”, it would be estopped from relying on such provisions.
(3)	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 those provisions.  
(4)	The alleged assumption is and needs to be that notwithstanding the Non-Reliance Statements, SCB was advising CPC.  However, there is no evidence that the Non-Reliance Statements were ever discussed between the parties and CPC’s own evidence is that Mr de Mel and Mr Karunaratne were unaware of them.  If so, they cannot have made any assumption as their non-applicability and there is no specific or sufficient evidence that they did so.  
(5)	Neither Mr de Mel nor Mr Karunaratne in fact said that they believed that the legal position was not as set out in the contractual documentation. Mr de Mel knew at all times that the transactions would be on ISDA terms, and he was content to leave the legal position to CPC’s lawyers and to sign the documents on the basis that they had been approved by CPC’s legal department.  Mr Karunaratne also knew that the transactions were on ISDA terms and was content to proceed on that basis.
(6)	In circumstances where responsibility for consideration of the terms of the Master Agreement and other contractual documentation was left to CPC’s legal department it is their state of mind that is most relevant, but there was no evidence as to that. 
545.	SCB further submitted that CPC is in any event contractually estopped by Clause 9(a) (“Entire Agreement”) of the Master Agreement from asserting the existence of an estoppel by convention or acquiescence.  In this connection it relied upon the case of Sere Holdings Ltd v. Volkswagen Group [2004] EWHC 1551.  In the light of my decision on the facts it is not necessary to rule upon this further issue. 
546.	For all these reasons I reject CPC’s reverse estoppel argument.  It follows that CPC is contractually estopped from alleging the existence of the duty of care which it alleges.
547.	Given that I have rejected CPC’s case on duty both as a matter of law and on the facts I do not propose to address in detail the issues of breach and loss.  However, I would observe that the findings I have made do not support CPC’s case on breach.  In particular, the Term Sheets and Confirmations clearly and correctly set out the effect of the Transactions and Mr de Mel and Mr Karunaratne understood how they operated.  It was apparent from those documents the extent to which the Transactions departed from plain vanilla ZCCs and what the downside risks were.
548.	The closest that the evidence comes to supporting any case of breach is in respect of CPC’s flawed understanding in relation to the valuation and unwinding of the transactions. SCB contended that this was not a misunderstanding clearly identified in the pleadings or in the witness statements.  Nevertheless, had I found that SCB was under a general advisory duty there would have been force in the factual case that it should have made clear to CPC what would be involved in seeking to unwind the transactions at value in the light of the discussion at the 24 October 2007 meeting.
549.	Whilst I do not find it to have legal consequences, I consider that CPC was to an extent let down by SCB in this respect.  It made clear its reliance on its unwinding strategy but what that would need to involve was not explained to it.  One reason for this is that Mr Peiris and Mr Dias did not have a clear or complete understanding of the relationship between MTMs and spot prices and that the fact that the spot price was ITM did not mean that the MTM would have a positive value.  They too believed that the transaction would have value if it was significantly ITM and therefore that spot prices could generally be relied upon to monitor the transactions’ value.  
Conclusion on duty of care
550.	I accordingly find that the alleged duty of care was not owed on the facts, in contract or in tort.  Even if that be incorrect, I find that CPC is contractually estopped from alleging the existence of the duty of care which it alleges.  Its counterclaim founded on such a duty accordingly fails.
(2) Misrepresentation
551.	CPC alleges SCB made misrepresentations or negligent misstatements to CPC as a result of which CPC has suffered loss.  
The law
552.	I recently summarised a number of the main elements of the law relating to misrepresentation in Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Plc [2011] EWHC 484, drawing on Christopher Clarke J’s helpful judgment in Raiffeisen Zentralbank v RBS plc [2011] 1 Lloyd’s Rep 123.  So far as relevant to the present case I stated as follows:
“Misrepresentation Act, section 2(1)
211.	Section 2(1) of the Act …provides as follows:
“2. — Damages for misrepresentation.
(1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true.”
212.	In order to establish a right to damages under s.2(1), it is therefore necessary for [CPC] to prove (a) a representation made by [SCB] to [CPC], which (b) was false, and (c) induced [CPC] to enter into the relevant contract, (d) as a result of which [CPC] has suffered loss. If these elements are proved, then [SCB] would have a defence under s.2 (1) if it proves that it had reasonable ground to believe, and did believe, up to the time the contract was made that the facts represented were true.  
213.	The requirements for a claim under s.2(1) are therefore the same as for a claim in deceit, subject to the important difference that under s.2(1) it is not necessary for the claimant to prove that the misrepresentation was made fraudulently.  Rather, the Act expressly provides that, where the other requirements of the tort of deceit are met, the person making the misrepresentation is liable under s.2 (1) “notwithstanding that the misrepresentation was not made fraudulently”, unless he proves that he reasonably believed the facts represented to be true.
….
Making a representation 
215.	A representation is a statement of fact made by the representor to the representee on which the representee is intended and entitled to rely as a positive assertion that the fact is true. In order to determine whether any and if so what representation was made by a statement requires (1) construing the statement in the context in which it was made, and (2) interpreting the statement objectively according to the impact it might be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee: see Raiffeisen, supra, at [81]; Kyle Bay Ltd v Underwriters Subscribing under Policy No. 01957/08/01 [2007] Lloyd’s Rep IR 460, 466, at [30]–[33], per Neuberger LJ.  
216.	In order to be actionable a representation must be as to a matter of fact. A statement of opinion is therefore not in itself actionable. However, as stated in Clerk & Lindsell para 18-13:
“A statement of opinion is invariably regarded as incorporating an assertion that the maker does actually hold that opinion; hence the expression of an opinion not honestly entertained and intended to be acted upon amounts to fraud.”
217.	In addition, at least where the facts are not equally well known to both sides, a statement of opinion by one who knows the facts best may carry with it a further implication of fact, namely that the representor by expressing that opinion impliedly states that he believes that facts exist which reasonably justify it – see Clerk and Lindsell para 18-14, citing among other cases Smith v Land and House Property Corp (1884) 28 Ch D 7, 15, per Bowen LJ, and Brown v Raphael [1958] Ch 636.
218.	A statement as to the future may well imply a statement as to present intention: “that which is in form a promise may be in another aspect a representation” - Clerk & Lindsell, para 18-12, quoting Lord Herschell in Clydesdale Bank Ltd v Paton [1896] AC 381, 394.
219.	Silence by itself cannot found a claim in misrepresentation. But an express statement may impliedly represent something.  For example, a statement which is literally true may nevertheless involve a misrepresentation because of matters which the representor omits to mention.  The old cases about statements made in a company prospectus contain illustrations of this principle – for example, Oakes v Turquand (1867) LR 2 HL 325, where Lord Chelmsford said (at 342-3):
“... it is said that everything that is stated in the prospectus is literally true, and so it is; but the objection to it is, not that it does not state the truth as far as it goes, but that it conceals most material facts with which the public ought to have been made acquainted, the very concealment of which gives to the truth which is told the character of falsehood.”
220.	In relation to implied representations the “court has to consider what a reasonable person would have inferred was being implicitly represented by the representor’s words and conduct in their context”: per Toulson J in IFE v Goldman Sachs [2007] 1 Lloyd’s Rep 264 at para. 50.  That involves considering whether a reasonable representee in the position and with the known characteristics of the actual representee would reasonably have understood that an implied representation was being made and being made substantially in the terms or to the effect alleged.  
….
222.	It is necessary for the statement relied on to have the character of a statement upon which the representee was intended, and entitled, to rely. In some cases, for example, the statement in question may have been accompanied by other statements by way of qualification or explanation which would indicate to a reasonable person that the putative representor was not assuming a responsibility for the accuracy or completeness of the statement or was saying that no reliance can be placed upon it. Thus the representor may qualify what might otherwise have been an outright statement of fact by saying that it is only a statement of belief, that it may not be accurate, that he has not verified its accuracy or completeness, or that it is not to be relied on: Raiffeisen, supra, at [86]. 
….
224.	As further observed in Raiffeisen, at [87], the claimant must show that he in fact understood the statement in the sense (so far as material) which the court ascribes to it; and that, having that understanding, he relied on it. Analytically, this is probably not a separate requirement of a misrepresentation claim but rather is part of what the claimant needs to show in order to prove inducement.
		…. 
Inducement
232.	As analysed by Christopher Clarke J in Raiffeisen, supra, at [153]-[199], to establish inducement for the purpose of a claim under s.2(1) of the Misrepresentation Act, it is necessary to show that, but for the representation, the claimant would not have entered into the contract that he did.”
553.	In the present case SCB stressed the importance of the principle that in order to be actionable the statement must have the character of a statement upon which the representee was intended, and entitled, to rely.
554.	In this connection it referred to Kyle Bay v. Underwriters in which Neuberger LJ said (at [32]): 
“The question whether a statement can amount to a representation capable of founding a claim in misrepresentation must depend on the words involved in the context in which they were so used. Until one has decided that, in the circumstances of the particular case, the statement should be treated as a representation rather than, say, a contention or argument, any question of liability for misrepresentation cannot arise”.
555.	It also relied upon IFE Fund SA v. Goldman Sachs International as an illustration of the principle that one of the elements of the factual matrix relevant to whether a statement is made or actionable is other statements made by the parties.  In that case, the question of whether certain implied representations had been made was answered by reference to statements made by the defendants in an Information Memorandum in which the defendants stated that they had neither verified the accuracy nor the completeness of the information provided and that they did not accept any responsibility for reviewing the information.  
(1)	Toulson J held (at [70]) that such statements “went to the scope of the representations being made” - they impacted upon the representations that a reasonable person would have inferred were being made.  
(2)	The approach adopted by Toulson J was approved by the Court of Appeal, Gage LJ accepting (at [67]) that: “the question of what representation, if any, was made by Goldman Sachs must be considered by reference to the terms of the Important Notice in the SIM. The Notice expressly states that Goldman Sachs have not independently verified the information set out in it. It also states that it accepts no responsibility for the accuracy or completeness of the information contained in it. It must inevitably follow that no representation is made as to the accuracy of the Arthur Anderson reports….”
556.	As SCB further submitted, in so far as it relies upon the Non-Reliance Statements as part of the context in which the court is required to determine whether actionable representations are made at all, s 3 of the Misrepresentation Act 1967 has no application: Raiffeisen [273], approved by the Court of Appeal in Springwell, [180].
The facts
557.	CPC’s case was that, by the Term Sheets it sent to CPC, SCB impliedly represented that:-
(1)	The transactions, alternatively T8 and T9, were a true hedge for CPC’s physical exposure;
(2)	The transactions, alternatively T8 and T9, were part of a proper hedging strategy;
(3)	The transactions, alternatively T9 and T9, were consistent with the justification for hedging stated in the Study Group Report.  
558.	Alternatively, CPC contended that SCB impliedly represented that there were reasonable grounds to believe the same.  
559.	It was CPC’s case that these implied representations are to be drawn from the fact that the Term Sheets repeatedly reiterated that the transactions in question were a “hedge” for CPC’s physical exposures, and could provide CPC with protection, or compensation, against further rises in the price of Singapore Gasoil or Dubai crude.  In particular:
(1)	The Term Sheet for T1 dated 7 February 2007 stated on the first page: 
“Description
The following over-the counter Singapore Gasoil swap offers the Customer protection against rising prices.
The structure gives the Customer protection from future US dollar Sing gas Oil price rises…”
Over the page, under the heading “Risk and Return Analysis”, it was said that “This strategy offers a full hedge for the Monthly Notional Amount…”.  
(2)	The Term Sheet for T2 was in almost identical terms.
(3)	The Term Sheets for T6-T9 all referred to the transactions in question as providing a “limited hedge” for CPC’s Dubai Crude, or Singapore Gasoil exposure.  Although these sheets suggested the hedge was limited, they still indicated that the transactions were hedges.  
(4)	The impression that these transactions were hedges was also reinforced by other wording.  For example, the T6 Term Sheet contained the statement that the purpose of the transaction was “To hedge CPC’s Dubai crude Exposure”.  
(5)	Equally, the Terms Sheets for T7-T9 alluded to the objective of protecting against rising prices, suggesting that they allowed CPC to “be compensated” should Singapore Gasoil move higher.  
560.	CPC submitted that the impact that SCB's statements in the successive Term Sheets provided by SCB to CPC could have been expected to have on a reasonable representee in CPC’s position, with CPC’s known characteristics, was to emphasise that CPC was entering into prudent hedges as part of a proper hedging strategy, without excessive risk. 
561.	 In relation to the express statements relied upon I find as follows:
(1)	In relation to T8 and T9 the main express representation which was relied upon was the statement in the Term Sheets that they provided a “limited hedge”. However, the Term Sheets continued by explaining in the same paragraph what that meant, namely that “The client is protected at the Strike Rate if the Fixing Rate is between Strike and Cap, and can participate in any weakening of the commodity till Floor.  However, if the Fixing Rate is below the Floor, the client has to buy the leveraged notional at the Floor Rate.  Also if the Fixing Rate is greater than the Cap, the client’s benefit is limited to the extent of the difference between the Cap and Strike”.  There was therefore no free standing statement that the transaction was a “limited hedge”.  There was simply a statement that it was a “limited hedge” in the sense then described.  
(2)	Reliance was also placed on the statement in the Term Sheets for T8 and T9 that their purpose was “for CPC to be ‘compensated should [Singapore Gas Oil 0.5%] continue to move higher’”.   However, the effect of the Transaction was set out in detail in the rest of the Term Sheet and the extent of such compensation was correctly set out, the precise position depending on the actual market price over the tenor of the transaction.
(3)	The statements relied upon should not be taken out of context or divorced from the rest of the Term Sheets.  When read in context they are no more than statements of what is more fully and accurately described in the Term Sheets.
562.	In relation to the alleged implied representations I find as follows:
(1)	For the reasons set out above, the express statements in the Term Sheets are not a sound or proper foundation for the implied representations alleged.  
(2)	In any event there is no basis in the Term Sheets or their context for the glosses which make up the alleged implied representations, namely that they were “true” hedges, or that they were “part of a proper hedging strategy” or that “were consistent with the justification for hedging stated in the Study Group Report”.  
(3)	The Term Sheets do not refer to any of these matters and they are vague, imprecise and inherently implausible statements for a selling bank to make.  The vague and uncertain nature of the statements mean that they are ill-suited to constitute actionable statements.  What, for example, is meant by a “true hedge”, a “proper hedging strategy” and how, precisely, is a bank meant to judge whether the benefits for its counterparty of any transaction outweigh the risks?  A reasonable person would not have understood that SCB was making representations in such vague and ill-defined terms.
(4)	This is all the more so when one considers the disclaimers set out in the Term Sheets and all the other documentation relating to the transactions.  In particular the Term Sheets stated at the bottom of every page “This document … is for discussion purposes only and does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy” that “SCB has no fiduciary duty towards you, and assumes no responsibility to advise on and makes no representation as to the appropriateness or possible consequences of the prospective transaction” and that “You are advised to make your own independent judgment with respect to any matter contained herein”.  The alleged representations may be said to be as to the “appropriateness” of the transaction, and in particular its appropriateness as a matter of hedging strategy, which is specifically something the document makes no recommendations on and upon which CPC is to make its own independent judgment.
(5)	I accordingly find that none of the alleged implied representations were made.
563.	Further, even assuming that SCB had represented that the transactions constituted “a true hedge”, that they “formed part of a proper hedging strategy” and that they “were consistent with the Stated Justification”, I find that such representations would have been no more than expressions of belief, which would only be falsified by dishonesty, which is not alleged.  There would accordingly have been no misrepresentation.
564.	Yet further, on CPC’s own evidence there was no inducement.  CPC would have entered the Transactions even if the alleged statements had not been made by SCB.
565.	The foundation of CPC’s case on misrepresentation concerns representations expressly made in the Term Sheets and further representations said to be implied from such express representations.  Such a claim requires a conscious awareness of and reliance on the statements in these documents but it was the evidence of Mr de Mel and Mr Karunaratne that they did not read or focus on these parts of the Term Sheets.
566.	Further, it was the features of the transactions as set out in the Term Sheets which Mr de Mel and Mr Karunaratne focussed and relied on, not the transaction’s title or general description.   
567.	Further, if necessary, I would hold CPC was contractually estopped from asserting its claim in misrepresentation by Section 9(2) of the Master Agreement, which was a term of each of the Confirmations: 
“(a)	Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a party for fraud.”
568.	The parties have thereby contractually agreed that (absent fraud) they are not relying upon any representation that may have been made and are waiving any rights and remedies which might otherwise be available to them in respect thereof.
569.	I would also have held that this clause satisfied the requirement of reasonableness in s 3 of the Misrepresentation Act 1967, bearing in mind in particular:
(1)	It is contained in a standard form document produced by the industry body, ISDA, in the interests of all market participants and end-users, and has been used for almost 20 years.  
(2)	The use of the ISDA documentation was required by the CBSL, the relevant bank regulator in Sri Lanka. 
(3)	From the outset of the relationship, it was the common understanding of CPC and SCB that ISDA documentation would be used.  
(4)	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.
(5)	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.
(6)	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. 
(7)	These were large, arm’s length Transactions, entered into between significant commercial counterparties.
(8)	There is nothing inherently unreasonable or unfair in provisions, which seek to allocate commercial risks between the parties and to avoid disputes over pre-contractual discussions and “the debatable ambit of implied representations” in a manner productive of certainty and clarity, so that all can know where they stand - see RZB, [323]. 
(9)	The provision is mutual and subject to exceptions.  It applies equally to both parties and would not apply if SCB were guilty of fraud - see Raiffeisen, [325]. 
570.	The main reason advanced by CPC for contending otherwise was that SCB had undertaken to guide and advise CPC.  However, I have found that there was no such general undertaking and, in any event, even if that had been established it would have been primarily relevant to provisions negating advisory duties rather than those concerned with non-contractual representations. 
571.	Finally, it should be  noted that the courts have repeatedly emphasised the undesirability of intervening in commercial transactions, whether under UCTA or under s 3: see Raiffeisen, at 321-7, referring to Photo Production Ltd v. Securicor Ltd [1980] AC 827, at 843D-E (per Lord Wilberforce); Granville Oil & Chemicals v. Davis Turner [2003] 2 Lloyd’s Rep 356, [31] (per Tuckey LJ);  IFE, [54] (per Toulson J); Grimstead v. McGarrigan [1999] EWCA Civ. 3029, at 413 (per Chadwick LJ); Watford Electronics v. Sanderson CFL Ltd [2001] 1 All ER (Comm) 696, [55] (per Chadwick LJ). 
572.	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.
Conclusion on misrepresentation
573.	I accordingly find that the alleged misrepresentations were not made and that CPC has in any event not proved inducement.  Even if that be incorrect, I find that CPC is contractually estopped from asserting its misrepresentation claim.   Its counterclaim founded on misrepresentation accordingly fails.
Conclusion on Counterclaim
574.	For the reasons set out above the Counterclaim fails.  In the above circumstances it is not necessary to rule upon the issues raised of causation and loss and damage.
F.	CONCLUSION
575.	I conclude that SCB’s claim in respect of T8 and T9 succeeds and that CPC’s counterclaim be dismissed.