In September last year, the Sri Lankan government banned a shipment of 20,000 tonnes of fertilizer, worth $6.9 million, from China’s Qingdao Seawin Biotech Group Co., alleging that the fertilizer contained harmful bacteria. The ensuing controversy has created a lively debate among analysts.
After months of “lawfare” in Sri Lankan courts and endless missives between the Sri Lankan government and Qingdao Seawin Biotech, the People’s Bank of Sri Lanka has paid $6.9 million to the Sri Lanka-based fertilizer company. China in early January as compensation. Previously, the Colombo High Court of Commerce dissolved the restraining order preventing the payment of a letter of credit to Qingdao Seawin Biotech, as all parties agreed to settle their dispute by shipping new stock of standardized fertilizer. – although Sri Lanka has rejected two previous shipments. .
The disagreement between government institutions and Qingdao Seawin Biotech not only created a rare diplomatic tussle between China and Sri Lanka, but nearly saw Sri Lanka brought before international arbitration tribunals.
Although arbitration is an important tool for resolving international business disputes, it is expensive and powerful. International entities can exert their dominance over sovereign governments that are already reeling from underdeveloped legal infrastructure and capacity. Sri Lanka has been taken to arbitration tribunals in the past, and its performance there has been less than stellar.
These forays have shown that Sri Lanka has much to learn about the conclusion of international agreements and the repercussions of breaking them for reasons of mere expediency. Sri Lanka’s lack of capacity to confront international legal experts employed by multinational corporations was recently evident in the X-Press Pearl disaster. More than six months later, the country is still struggling to get adequate compensation for the damage caused to its environment and the fishing industry by the massive chemical spill that resulted from a fire aboard the vessel.
This time, however, the risks are greater. International companies are already hesitant to do business with Sri Lanka, given its severe currency crisis and declining credit rating. KLS Energy Lanka, a subsidiary of a Malaysian renewable energy producer, has an ongoing arbitration case against Sri Lanka; a high-profile arbitration issue with a major Chinese company on top of that could have a significant negative effect on Sri Lanka’s ability to trade with foreign entities.
While the need for Chinese aid to deal with Sri Lanka’s economic crisis obviously played a role in brokering an agreement between the Sri Lankan government and Chinese society, he also confirmed that it is the Sri Lanka which violated the agreement with Qingdao Seawin Biotech. Essentially, the agreement with Qingdao Seawin Biotech was another international agreement that Sri Lanka entered into without proper consideration and drafted without input from people with expertise or experience in international trade law.
Sri Lankan politicians and politics buffs view this crisis through the usual prism of China’s sovereignty and ability to influence, if not shape, politics in Sri Lanka. Yet, the two main reasons for the crisis are the country’s underdeveloped legal infrastructure and the lack of capacity of various government entities to negotiate or sign agreements with international companies. Given that the country has been dragged before international arbitration tribunals by international corporations on several occasions in the recent past and it may face similar quagmires and clashes in the future, Sri Lanka should pull itself together when making deals with multinational corporations.
As mentioned, this is not the first time that Sri Lanka has entered into an ill-advised deal with an international company. The most famous of these cases is the hedging agreement with CITI Bank, Standard Chartered Bank and Deutsche Bank in 2008, to buy crude oil at a predetermined price following a rise in world prices. Sri Lanka’s state-run Ceylon Petroleum Corporation (CPC) entered into this novel and rather unprecedented transaction, with no prior experience, on questionable instructions.
However, crude oil prices on the world market fell drastically months after the deal was struck and Sri Lanka decided to suspend all hedging-related payments, following the court ruling. Supreme Court that the agreement was unconstitutional.
Deutsche Bank AG promptly initiated arbitration proceedings under the Bilateral Investment Treaty (BIT) between Germany and Sri Lanka. The Bank claimed that Sri Lanka’s actions deprived it of the economic value of the hedging agreement and that the withdrawal of payments violated Article 4(2) of the BIT, which prohibited the expropriation of property of an investor. The Bank’s position was that the intervention of the Supreme Court and the Central Bank “amount to an indirect expropriation of their rights under the hedging agreement”.
The Tribunal’s analysis of these issues is very relevant. Some of the defenses cited by the Sri Lankan state in the ICSID arbitration – i.e. lack of capacity, lack of authority and the occurrence of illegality – have raised serious concerns among investors foreigners, because these are conditions that affect any foreign investment. The hedging transactions had been discussed and approved at Cabinet level, before being concluded and duly approved by the CPC Board of Directors. Moreover, the actions of the Central Bank of Sri Lanka in the wake of the CPC failure have raised serious concerns about the regulator itself.
While the case was settled in 2016, it seems unlikely that Sri Lankan policymakers have learned the lesson. In 2018, KLS Energy Lanka, a subsidiary of Malaysian renewable energy producer Energy SdnBhd, filed for arbitration against the Sri Lankan government under the Malaysia-Sri Lanka BIT 1982. The arbitration was filed in about the cancellation of a $150 million wind-solar hybrid plant. Sri Lankan government project. Sri Lanka Cricket Control Board v WSG Nimbus Pte Ltd. was another example in which confusing agreements caused problems in Sri Lanka.
More recently, agreements between Sri Lanka and India to develop the Trincomalee Oilfield as a joint venture between CPC and Lanka IOC stipulate that both parties must refer any disputes to the arbitration courts in Singapore. Under the terms of previous memorandums of understanding between the IOC of Lanka and Sri Lanka regarding the tank farm, any issues arising between the two parties would have been resolved by Sri Lankan law.
Since the agreements between the parties – a lease agreement, an agreement on terms and an agreement on the joint company, i.e. Trinco Petroleum Terminal Ltd – have remained secret, only the agreement on terms being presented to Parliament, it is likely that as critics claim the deal is disadvantageous for Sri Lanka. Frontline Socialist Party Education Secretary Pubudu Jayagoda said: “Our previous performance in arbitration tribunals has been less than stellar. In this context, this seems to be another agreement that puts us in trouble before international arbitration tribunals.
Sri Lanka has tended to strike deals with international companies which have proven to be less than perfect. Sri Lankan politicians and courts then responded to the questions raised by these agreements on an ad hoc basis.
In cases such as Light Weight Body Armor Ltd v Sri Lanka Army and Elgitread Lanka (Private) Limited v Bino Tires (Private) Limited, Sri Lankan courts appear to have felt that they should circumscribe their powers within the framework of the arbitration law and that parties should be encouraged to settle disputes through arbitration. However, regarding the Qingdao Seawin Biotech case, the Colombo Commercial High Court ordered the People’s Bank not to honor the letter of credit it had issued. Perhaps the similarity of the legal action and behavior of politicians in this case to the cancellation of the hedging agreement is what prompted the Chinese to act quickly.
As Sri Lanka increasingly seeks deals with foreign companies in several areas, the risks of the country becoming embroiled in trade disputes will increase. It is the responsibility of the state to enter into agreements with foreign nations that are transparent and subject to public dialogue before they are signed, so that contributions from broader sources can help rectify any potential problems.