Arbitral Awards As Sovereign Debt Risks: Impact of P&ID and EURAFIC Cases
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 the 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 judgment 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 its 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 the 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 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 that provides for arbitration in the event of a 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 pactasunctservanda in international law.
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 of 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: the absence of a valid arbitration agreement, lack of fair hearing, award in excess of the jurisdiction of the arbitral tribunal, improper composition or procedure of the arbitral tribunal, the 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. 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 and that recognition and enforcement of the award will be contrary to the public policy of the country of enforcement.
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.
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.
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, 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. 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).
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, 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 a waiver hardly applies to the 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, the English court accepted the following waiver of the 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, 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 theState 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. TepeInsaatSanayii AS, 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, 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.
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 center 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 ICSIDarbitration; in so far as the award is made against a member of the World Bank.
The Way Forward
In light of the foregoing, it is recommended that there is an 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. SocialistPeople’s Libyan Arab Jamahirya 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 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.
For instance, Ecuador began to terminate BITs in 2018 and as of 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 a 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, an 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 a 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 contains 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 the 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 the demands of current reality in terms of national policy thrust vis-à-visinternational frameworks.
Additionally, there is a need for diligence in prosecuting arbitration cases involving Nigeria. While granting Nigeria an 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 a 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.
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.
Written By: Victor Akazue Nwakasi (Partner/Head– ADR/Arbitration Practice Group & Ugochukwu Eze (Trainee Associate, ADR/Arbitration Practice Group, Olisa Agbakoba Legal)