Morgan Stanley in Legal Tussle Over Hedging Contract

HONG KONG -- Morgan Stanley is in the midst of a legal tussle in England and China with a Chinese company over yuan-dollar hedges worth several tens of millions of dollars, people familiar with the proceedings said Thursday.

In a sign that mainland enterprises continue to be at odds with foreign investment banks over earlier derivatives deals, Morgan Stanley is suing Hong Kong-listed China Haisheng Juice Holdings in London for US$26 million over its refusal to put up collateral for a hedging contract, according to these people and legal filings.

Morgan Stanley and China Haisheng Juice are in a legal battle over derivatives contracts.

The Chinese firm in turn is countersuing the Wall Street bank in China for allegedly misselling it the contracts.

The case, which was first reported in the Financial Times, is the latest illustration of the tension between Chinese companies that have problems with derivatives contracts they bought before the financial crisis and the investment banks that sold these contracts.

Some of China's biggest airlines and shippers, who lost hundreds of millions of dollars last year on derivative trades when the price of oil plunged, are now seeking to claw back those losses.

In early August, China Eastern Airlines Corp., Air China Ltd. and China Ocean Shipping (Group) Co., or Cosco, sent letters to six international investment banks warning that certain transactions "may be void, invalid or unenforceable," said a person familiar with the letters last month.

Among the banks understood to have received such letters are Deutsche Bank AG, Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Citigroup Inc. and Morgan Stanley, according to three people familiar with the situation.

The disclosure of those losses comes after China's state assets regulator said last month it backed Chinese state-owned enterprises in reserving the right to seek payment and take legal action against counterparties on oil-related derivatives contracts that have gone sour.

But the Haisheng case is unrelated to the disclosure in September by China's State-Owned Assets Supervision and Administration Commission that it is backing state-owned enterprises in challenging foreign banks over huge losses from commodity-related derivative contracts, China-based people familiar with the situation said.

One person said the derivatives sold to Haisheng involved a straightforward currency swap transaction between the U.S. dollar and the Chinese yuan, and weren't loss-making. The contracts contained a clause that any dispute would be heard in a U.K. court.

The English High Court, on Oct. 5, dismissed Morgan Stanley's plea that its dispute with Haisheng only be heard in England, according to a statement by Haisheng to the Hong Kong stock exchange dated Oct. 12.

It concluded that "there is no strong reason for ... restraining the company from pursuing its claims against the Counterparty in the Intermediate Peoples' Court of Xi'an, Shaanxi province in the PRC," Haisheng said.

The Chinese court case, in Xian in Shaanxi province, where Haisheng is based, has yet to start, the person said.

Haisheng, a privately owned enterprise, couldn't immediately be reached for comment.

However, in its interim earnings released last month, Haisheng said it started legal proceedings on April 2 over foreign exchange structured currency swap contracts with an unnamed financial institution. The contracts were entered into in July and August 2008 and restructured in October 2008.

The financial institution then terminated the contract on April 14, calculating a claim of 180 million yuan (about $26.3 million).

Lawyers said that stating a jurisdiction such as New York or English courts to hear disputes around derivatives was common.

"But it is also common for a company to countersue in a jurisdiction where it thinks the courts will be more favorable," said one Hong Kong-based lawyer familiar with Chinese companies and derivatives transactions. "It is quite common for companies to claim misselling as a basis for trying to get out of a derivatives contract that is no longer in their favor."