Test Case

July 25, 2010 (LBO) – An arbitration of a disputed derivative contract between an oil distributor in Sri Lanka and a German bank would be a test case on whether such deals would come under bi-lateral investment protection treaties, a media report said.

Standard Chartered and Citibank had separately started action for breach of contract against CPC in the English High Court and the London Court of International Arbitration, the report said.

The Sunday Times report said Sri Lanka was arguing that derivative contracts were not an ‘investment’. Among other reasons cited was that it was contingent liability and had not involved a contribution to the counter party or the Sri Lanka economy.

The report said ISDA had been advised by their lawyers that if the arbitration panel decides that it had no jurisdiction it would set a precedent about the use of bilateral investment treaty protection for financial services.

On the other hand a decision to hear the case would may result on more claims under the treaty and be a deterrent for other governments, as similar claims could come up.

The first hearing of an arbitration action started by Deutshe Bank over the non-payment of complex derivative by Sri Lanka’s state-run oil distributor Ce