UK: The Wide Reach Of The English Courts: Commercial Court Rules On Matters Of Foreign Law When Determining Whether A Contract Is Void For Illegality

Last Updated: 29 July 2011
Article by Christopher Benson

The Commercial Court has held that Ceylon Petroleum Corp ("CPC"), a Sri-Lankan state owned oil company, failed to show that it was not liable for substantial payments totalling US$161,733,500 due to Standard Chartered Bank ("SCB") pursuant to two derivative contracts.

Why do you need to know?

The judgment provides an up to date example of the English courts' willingness to rule on issues of foreign law. In particular, it is a rare example of a court ruling on whether or not a contract will be void for illegality under English law on the basis that it failed to comply with the law of a foreign jurisdiction (in this case, the law of Sri Lanka).

Under English law, the 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. In December 2008, some four months after the payments which formed the basis of the claim became due to SCB, the Central Bank of Sri Lanka's Banking Supervision Department ("CBSL") issued a direction to SCB that the transactions were materially affected and substantially tainted, and required SCB not to give effect to the transactions. CPC claimed that it was mandatory to comply with this directive, and failure to comply could result in criminal sanctions.

Mr Justice Hamblen held that there was nothing in the ISDA Master Agreement and Confirmations which governed the transaction which required payment to be made from Sri Lanka and it would therefore not be caught by the illegality rules. He also found that the directive was aimed at SCB, not CPC, therefore CPC's payment obligations were unaffected. Perhaps more extraordinary, the court found that if CBSL were to have this broad ranging power, it would have to be set out very clearly in a statute, and that the statutory provision which CPC sought to rely on was not broad enough. The English court was therefore happy to rule on matters of Sri Lankan law, including the correct interpretation of Sri Lankan statutory provisions, in dismissing CPC's illegality arguments.

This was not the only issue of Sri Lankan law decided by the English court in this judgment. It was also guided by Sri Lankan law experts in determining that CPC had the capacity to enter into the transactions, and that the directors had the actual authority to enter into them.

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Conclusion

The English court has once again demonstrated that it feels able and willing to rule on matters of foreign law, including the correct interpretation of statutory provisions, when determining disputes. This is the latest in a long line of cases in which a foreign defendant has sought to remove itself from potential liabilities by claiming that it did not have the capacity to enter into the transaction in its home jurisdiction¹. Once again, the English court has demonstrated that it is happy to rule on these issues of foreign law, and once again, find in favour of the bank. It also serves as a helpful reminder on the rules whereby a contract can be held to be void due to illegality in another jurisdiction.

The judgment is also a salient example of the Commercial Court's willingness to uphold contractual terms agreed between substantial commercial entities. The courts have given their support to the standard form "non-reliance" and "entire agreement" clauses in their ISDA Master Agreements, which will be a relief to the many industry participants which have incorporated these provisions into their transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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