Arbitral Awards As Sovereign Debt Risks: Impact Of P&Id And Eurafic Cases | OAL

 

Background

Deriving
from the sovereignty principle, sovereign debt literary refers to how much a country’s government owes. Often times the primary source is
through outside borrowing hence it can be defined as national or
government debt because
the word “sovereign” connotes national government. However, due to its
nationalistic nature and the fact that internal national borrowing is rarely
existent especially in developing economies like Nigeria, it generally refers
to how much a country owes
to external creditors. While borrowing remains the principal source of
sovereign debts, debts also accrue from other sources and one of such is
Judgement Debt(s) from Court Cases or Arbitral Awards arising from Arbitral
proceedings in disputes involving federal government. Simply explained, it
implies what a National government owe to foreign Judgement Creditors. It is
imperative that developing nations focus on mitigation, reduction or management
of judgement debts or arbitral awards that are of such critical importance or
volume that they portend risk for a country in form of sovereign debt risk. The
reason is that huge exposure to national debts of whatever nature and form has adverse
economic and investment implications.

 

P&ID and Eurafic Power
Cases

 

In
January 2017, an ad-hoc arbitral tribunal sitting in London by a majority of
two is to one made a final award of $6.597 billion, together with interest at
the rate of 7% starting from 20 March 2013 until the payment is made, in favour
of Process and Industrial Development Limited (“P&ID”), a company based in
the British Virgin Islands and against the Federal Government of Nigerian (“FGN”).
This was following an alleged
breach of a gas supply and processing agreement (“GSPA”) between the FGN and P&ID,
which was signed on 11 January 2010, based on which, FGN was to supply natural gas to P&ID’s production facility over a
20-year period. In return, P&ID would process the wet gas by removing
natural gas liquids and return approximately 85% of the processed gas to the
government at no cost to the Nigerian government. However, according to P&ID,
FGN renounced their obligation under the agreement by failing to take any steps
to supply the wet gas to the processing facility for three years. Consequently,
in March 2013, P&ID commenced arbitration proceedings against the FGN pursuant to Clause 20 of
the agreement and a final award of $6.597 billion was made by the
tribunal. P&ID was granted leave to enforce the
arbitral tribunal’s final award which now stands at about $9.6 billion by the Queen’s
Bench Division of the English Commercial Court. However, on 4 September 2020,
Sir Ross Cranston of the Queen’s Bench Division of the High Court of England
granted an application made by FGN for extension of time to challenge the
award. The application was granted on the ground that there is prima facie
evidence that the award was obtained by fraud and that Nigeria ought to be
allowed time to prove the allegation of fraud.

 

Also, 28 January 2017, an arbitral tribunal sitting at the London
Court of International Arbitration (“LCIA”) awarded a combined sum of ₦1.12
billion to Eurafric Power Limited (“Eurafric Power”) against FGN for the
alleged breach of a share sale agreement between Eurafic Power and FGN over the
assets of Sapele Power Station. A High Court in United Kingdom presided over by
Justice Popple Well subsequently recognized the award as a court judgment on 15
January 2018. As at 23 October 2019, Eurafric Power has identified about 33
assets belonging to the government of Nigeria and situate in England over which
it intends to enforce the award if the Nigerian government fails to pay the
award sum.

 

These incidents generated massive public interest, accusations and
counter-accusations of professional negligence and how an execution of such
heavy judgements would affect a large chunk of Nigeria’s revenue position. The
economy is already bleeding and the Nation became wary of further economic
pillage. Expectedly, it has revived or shown the need for Nigeria to review her
arbitration policy especially as it affects to international commercial agreements
to which Nigeria is a party. This article therefore examines the impact of these
arbitral awards and the consequent enforcement proceedings commenced in foreign
jurisdictions vis-à-vis the sovereignty of Nigeria and the impact of these
debts on the nation’s economy.

 

Enforcement
of Arbitration Awards

 

Arbitration as a dispute resolution mechanism is only valuable to
the extent that parties can enforce an agreement to arbitrate and a resulting
award. Ordinarily, international law does not recognise the obligation to
arbitrate or enforce an arbitral award. However, contracting states can by
agreement impose such obligation on themselves. Therefore, where a state enters
into a bilateral treaty which provides for arbitration in the event of dispute,
the state is bound by the agreement to arbitrate and an award from such arbitration
will be enforced accordingly. This is in line with the principle of pacta sunct
servanda in international law.[1]

 

Further
to the foregoing, the New York Convention of 1958 (“the Convention”) makes
provisions for the direct recognition and enforcement of arbitral awards as
judgments of the courts of any state party, subject to review by that court on
the grounds of fairness, non-arbitrability, public policy and due process. As
at August 2020, the New York Convention has 165 state parties. By Article III of the
Convention, these state parties have the obligation, subject to the conditions
set forth in the Convention, to recognize arbitral awards as binding and
enforce them in accordance with the rules of procedure of the territory where
the award is relied on. Thus, foreign arbitral awards are enforced by state
parties to the Convention in the same manner and without additional obligations
as domestic arbitral awards.

 

A person against
whom an arbitral award is sought to be enforced has the burden of establishing
the invalidity of the award. This burden may be discharged by proving one of
the grounds provided in Article V of
the Convention. These grounds include: absence of a valid arbitration
agreement[2], lack of fair hearing[3], award in excess of jurisdiction
of the arbitral tribunal[4], improper composition or
procedure of the arbitral tribunal[5], award has not yet become
binding on the parties or has been set aside or suspended by a competent
authority in the country in which or under the law of the country in which it
was made[6]. In addition to the above
grounds, the court may on its own motion refuse to recognize and enforce an
arbitral award on the grounds that the subject matter of the dispute is not
arbitrable[7] and that recognition and
enforcement of the award will be contrary to the public policy of the country
of enforcement[8].

 

Generally, the courts
recognize and enforce international arbitral awards whenever possible. Thus,
application for recognition and enforcement under the New York Convention is seldom
refused.

 

Sovereign
Immunity

 

Under the doctrine
of sovereign immunity, a sovereign state may not, without its consent, be made
a defendant in the courts of another state. The policy behind this doctrine is
that national interest will be better served if disputes with parties who are related
to foreign powers are resolved through diplomatic negotiations rather than by
the compulsions of judicial proceedings. This doctrine has a number of
exceptions. The first is that where a vessel is the subject of controversy, a
claim of immunity will only succeed if the foreign government is able to show
that at the time the suit was filed, the ship was actually in its possession
and control.[9]
Secondly, foreign state-controlled corporations engaged in commercial
activities are usually subject to local jurisdiction. In addition to the
foregoing, sovereign immunity can be waived. In National City Bank v. Republic
of China[10], the Republic of China had brought
suit to recover a bank deposit.
The bank filed a counterclaim based on defaulted treasury notes of the Republic. The plaintiff claimed sovereign
immunity as a defense to the
counterclaim. The Court held that the Republic had waived its immunity by bringing suit, and that the
counterclaim would be permitted
even though it did not arise out of the same transaction as the original claim.

 

The doctrine of
sovereign immunity has evolved over time and states have gradually shifted from
the concept of absolute immunity to the concept of restrictive immunity.
Absolute immunity is the traditional principle that a sovereign cannot be made
a defendant in the court of another state. On the other hand, restrictive
immunity makes a distinction between commercial activities and sovereign
governmental activities.[11] In many jurisdictions, a
foreign sovereign’s immunity from proceedings in local courts is recognised
with regard to sovereign or public acts (jure imperii) of the state and not
with respect to private acts (jure gestionis)[12]. Consequently, sovereign
states cannot invoke the shield of sovereign immunity for disputes arising from
or assets stemming from commercial activities. The rationale behind this is
that where the government of a sovereign engages in business activities, it is
necessary to enable persons doing business with them to have their rights
determined in court. In National City Bank v. Republic of China[13],
the majority of the court approved, in principle, the restrictive theory of sovereign immunity.

 

It must be noted
that in arbitral proceedings, arbitrators derive their powers from the
arbitration agreement. The arbitration agreement constitutes a waiver of
immunity from jurisdiction. However, in the absence of express words to that
effect, immunity from execution is not waived by entering into an arbitration agreement.
Therefore, while a sovereign may waive his immunity from being a defendant
before a foreign court, such waiver hardly applies to execution of judgments
and awards.

 

The
asset of a sovereign is usually immune from execution except where the
sovereign consents to the execution in writing or where the relevant property
is used or intended to be used for commercial purposes. In Donegal International v. Republic of Zambia[14], the English court accepted the following waiver of immunity
clause as effective consent to execution:

 

“If
proceedings are brought against it or its assets, no immunity from those
proceedings (including without limitation, suit, attachment prior to the
judgment, other attachment, the obtaining of the judgment, execution or other
enforcement) will be claimed by or on behalf of itself or with respect to its
assets.”

 

On
the other hand, in L R Avionics[15], proceedings were brought
to enforce a judgment (together with an arbitration award) against the Federal
Government of Nigeria. L R Avionics was granted permission to register the judgment
in England and it subsequently obtained a final charging order in respect of
premises located in London, which were owned by Nigeria. The London premises
were leased to a company for the purpose of providing Nigerian visa and
passport services, amongst other things. Nigeria applied to set aside the
charging order on the basis that the property was immune from enforcement. It
was accepted that the use by a state of its own premises to carry out consular
activities such as providing visa and passport services, could not be said to
be a use for commercial purposes within the meaning of Section 13(4) of the
State Immunity Act 1978. However, the Court had to consider the position if,
instead of handling the applications itself, the state had granted a lease of
the premises to a privately-owned company, to which the processing services
were outsourced. The court held that the London premises were not being used
for commercial purposes within the meaning of the State Immunity Act but were being
used for a consular activity which, even if outsourced, is only carried out on
behalf of the state.

 

In
Botas Petroleum Pipeline Corporation v.
Tepe Insaat Sanayii AS[16], the Privy Council held
that the question of whether assets are state property is to be determined by
first considering whether the property was owned by the state or a separate
entity. Thus, the state must have some proprietary interest in the property for
immunity to be conferred. While separate entities may have close relationship
with the state, they are not covered by state immunity unless they are acting
“in exercise of sovereign authority”.

Additionally,
embassies, goods and monies held in banks account for a sovereign’s diplomatic
mission will not be generally available for enforcement.

 

A
Central Bank of a foreign sovereign is also given absolute immunity under
English law, subject to the written consent of the Central Bank. In AIC Limited v. The Federal Government of
Nigeria & Anor.[17], the question before the court was whether funds in a bank account
in the name of the Central Bank of Nigeria were liable to execution if those
funds were used or intended for use for commercial purposes. The court held
that even where the use of the funds would be commercial, the property of a
Central Bank should not be subject to execution. This English court also considered
and applied this reasoning in Thai-Lao
Lignite (Thailand) Co. Ltd. v. Government of the Lao People’s Democratic
Republic[18].

 

Arbitration
Awards as sovereign debt risks

 

Considering
the nature of arbitration and the minimal procedural delay in enforcing
arbitral awards, sovereign states may suffer debt risks on account of arbitral
awards made against them. First, such an arbitration award may be recognised and
enforced as a judgment of a court in any country that is a state party to the
New York Convention. Where an award is so recognised, the assets of the state
used for non-consular activities stand the risk of being attached to satisfy
the award.

 

It is
noteworthy that Eurafric Power has identified about 33 assets belonging to the
Nigerian government but situate in England, which are used for non-consular
activities and against which the company intends to enforce the arbitral award made
against the government of Nigeria. This was communicated through a letter by
the company’s counsel, Godwin Obla, SAN to the Attorney-General of the
Federation.

 

In
addition to identifying the assets a state judgment debtor and enforcing the
judgment debt against such assets, where the award was made
by the International Centre for the Settlement of investment Disputes (“ICSID”),
being an organisation of the World Bank, the centre could utilise the capacity of
the Bank to compel compliance. It is also noteworthy that the World Bank may
aid a judgment debtor even where the award is not a product of ICSID arbitration;
in so far as the award is made against a member of the World Bank.

 

The Way
Forward

 

In the light of the foregoing, it is recommended that there is
urgent need to review all existing bilateral agreements to which Nigeria is a
party. Nigeria has over 30 Bilateral Investment Treaties (“BITs”) signed with
various foreign countries, though only 15 of them are in force.
These BITs explicitly afford various forms of protection in cases of disputes
and provide a right of recourse to international arbitration. The BITs with
France, Germany, Korea, the Netherlands, and the United Kingdom provide
exclusively for ICSID arbitration. All the other BITs allow investors to pursue
an arbitration claim through ICSID or ad hoc arbitration in accordance with the
UNCITRAL rules or any other rules as the parties may mutually agree. It is
important to note that the seats of arbitration in these treaties are all
foreign. In any case, Nigeria is bound by these provisions of these BITs as
they have the force of law by virtue of being treaties as identified under Article
2 (1) (a) of the Vienna Convention on the Law of Treaties (VCLT), to which
Nigeria is a party.

 

However, by submitting to a foreign jurisdiction in a BIT, Nigeria
waives its sovereign immunity. Therefore, she can be made a party to
proceedings in a foreign court. The case of Libyan American Oil Co. (LIAMCO) v. Socialist People’s Libyan Arab Jamahirya[19] illustrates this. Around 1973/1974,
Libya nationalised LIAMCO’s rights under petroleum concessions that it had
granted nearly twenty years earlier. Dissatisfied with the compensation for its
interest and equipment, LIAMCO pursued arbitration and an award was rendered in
Geneva in favour of LIAMCO. When LIAMCO tried to enforce the award in the
United States, Libya opposed it by claiming, inter alia, that the Libya is
immune from proceedings in a foreign jurisdiction. The court denied Libya’s sovereign immunity claim on the
grounds that by agreeing to arbitration governed by foreign law, Libya waived
its sovereign immunity.

 

In
the light of the foregoing, there is therefore an urgent need to review these existing
BITs and all future BITs. It is suggested that future treaties be negotiated to
include a dispute resolution provision with Nigeria as the seat. With respect
to existing BITs, it is suggested that the provisions be renegotiated with the
aim of making Nigeria the seat of arbitration. Where renegotiation is not
possible, it is further suggested that the BITs be revoked. While it may be a
concern that revocation or termination of BITs may discourage investors and
reduce the inflow of foreign direct investments (“FDI”), recent studies have
shown than investment inflows are driven by a number of facts and the presence
of BITs is clearly not a determining factor.[20]

 

For
instance, Ecuador began to terminate BITs in 2018 and as at 2018, the overall
FDI stock into Ecuador increased by 38 percent, from $13 billion to $17
billion. Notably, after Ecuador terminated its investment treaty with Uruguay
in 2008, FDI from Uruguay into Ecuador increased by 420 percent, from an annual
average of $6.3 million before termination to $32.6 million after termination.
Similar indices are seen in Bolivia, South Africa and Indonesia.

 

The
article, therefore, calls on the Federal Government of Nigeria through the
office of the Attorney-General of the Federation, the Minister for Trade and
Investment and the National Office on Trade Negotiation to set up a committee
for the review of all bilateral agreements between Nigeria and foreign
entities.

  

Furthermore,
there is need to amend relevant statutes that govern investment promotion and
arbitration in Nigeria. This will help not only to protect Nigeria’s sovereign
immunity but also to improve the arbitration framework in Nigeria and make
Nigeria an arbitration hub.

 

It
is noteworthy that some countries are already taking steps in this regard. For
instance, South Africa enacted the Protection of Investment Act (the “PIA”) in
2015. The PIA creates a framework for the resolution of investment disputes in
South Africa. Section 13 of the PIA provides that where a foreign investor is
aggrieved by an action of the government, he may request the Department of
Trade and Industry to appoint a mediator to resolve the dispute. Alternatively,
the investor may approach any competent court, independent tribunal or
statutory body within South Africa for the resolution of such an investment
dispute.

 

Taking
a cue from the foregoing, especially given that investment treaty arbitration
is statute driven, there is need to review the relevant statutes governing
investment arbitration in Nigeria. These statutes include the Nigerian Investment
Promotion Commission Act, Cap N117, Laws of the Federation of Nigeria 2004
(“NIPC Act”). Specifically, Section 26 of the NIPC Act provides that disputes
between Nigeria and foreign investors shall be determined in accordance with
the provisions in the BITs. It is suggested that the provision of this section
be amended to include a proviso that notwithstanding anything contrary contain
in the BITs, the seat of the arbitration must be Nigeria where the dispute
arises between an investor and the Government of Nigeria.

 

It
is also recommended that the provisions of Arbitration and Conciliation Act
(Cap A18, Laws of the Federation of Nigeria 2004) (“the ACA”) which defines
international arbitration in Section 57(2)(b)(i) and (d) to include an
arbitration that has its place in a foreign country and where the parties agree
that the arbitration should be treated as an international arbitration should
be amended. Section 16 of the ACA which allows the arbitral tribunal to
determine the place of arbitration deserves a review to ensure it meets demands
of current reality in terms of national policy thrust vis-à-vis international frameworks.

 

Additionally, there is need for diligence in prosecuting
arbitration cases involving Nigeria. While granting Nigeria extension of time
to challenge the award in the P&ID case, the Queen’s Bench Division of the
High Court of England per Sir Ross Cranston noted that “there is strong prima
facie case
that (P&ID) main witness in the arbitration, Mr Quinn, gave a perjured
evidence to the Tribunal, and that contrary to that evidence, P&ID was not
in the position to perform the contract”. The judge also noted that there is
possibility that the counsel to the Nigerian government at preliminary and
jurisdiction stages of the arbitration was corrupted, in view of statements
made to the Economic and Financial Crimes Commission (“EFCC”) by the then Legal
Director of NNPC and the legal adviser to the Ministry of Justice in which both
persons admitted receiving $100,000 each from the said counsel while the
arbitral proceedings are pending.

 

Nigeria
should not merely rummage on allegations of corruption upon which it secured
its current reprieve but the consequential lack of broader policy,
institutional and professional protocols on Arbitration undertakings especially
where the Country is a party as a sovereign entity. The corruption allegations
might have buoyed up the UK Court in granting the relief sought by Nigeria for
extension of time, but the lessons should be of broader significance in terms
of fostering attitudinal change in people and procedure. For instance, a
National practice framework on international commercial arbitration and
adoption of critical principles that emphasize and guarantee sincerity,
selflessness, loyalty, conscientiousness and diligence in arbitral proceedings
to which Nigeria is a party, would be of wholesome effect. This will help to
curb the legal risks and economic implications of having an award rendered
against Nigeria.

 

 

 

Conclusion

 

Interestingly, the Honourable Attorney-General of the Federation,
Mr. Abubakar Malami has announced the Federal Government’s intention to launch
the National Arbitration Policy. Originally the brainchild of Dr. Olisa
Agbakoba, SAN, the policy is premised upon the concept that arbitration
agreements in respect of all disputes arising from contractual relationships in
Nigeria will have Nigeria as the seat of arbitration.

 

It is recognized that the implementation of this policy will
require statutory interventions and amendments, legislative advocacy, regulatory
frameworks review, policy directives and extensive stakeholders’ consultations
to ensure that the basic principles of international arbitration are upheld and
avoid the risk of engendering the Country to become an arbitration pariah state.
For instance, statutes which contain provisions on arbitration, especially
investment arbitration ought to be amended to accommodate this policy.

 

It is expected that with the implementation of the National
Arbitration Policy bearing in mind the suggestions made in this paper and other
critical opinion and contributions harmonized through series of consultations, Nigeria
would achieve a highly recognized and balanced status as an Arbitration
destination supported by systems that ensure the exposure to legal and economic
risks on account of arbitral awards rendered and enforced in foreign
jurisdictions will be greatly reduced.

 

 

Victor Akazue
Nwakasi                            Ugochukwu
Eze

Partner/Head– ADR/Arb. Group               
Associate Counsel, ADR/Arb.Group