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P&ID and Nigeria’s disregard for sanctity of contracts 17 Sep 2019

Nigerian flag with the English Commercial High Court as an inset

On the 16th of August, 2019, the English Commercial Court, presided over by Justice Butcher, granted Process and Industrial Developments Ltd (P&ID) the right to enforce an arbitral award of $9 billion against Nigeria. The award represents 20 percent of Nigeria’s foreign reserves and 2.4 percent of her 2018 Gross Domestic Product (GDP).
    
The legal judgement, which allows P&ID to seize Nigeria’s international assets of an equivalent value, has generated a lot of debate within and outside the country. The award is based on P&ID's claim that it would have earned $6.6 billion in profit from the aborted project over a 20-year period.

The case was ruled in favour of P&ID in 2017. The court also approved a 7 percent interest to be charged annually from 20th of March, 2013. This increased P&ID's claim to $9 billion as of last month when the London-based court said it would grant the company the right to confiscate Nigeria's assets.

What is clear from reading the available details of the agreement is that Nigerian government’s poor attitudes to sanctity of contract, due process and the need for separation of politics from governance has caught up with her and is costing her in clear monetary terms.

The 20-year gas supply and processing agreement (GSPA) the government signed with P&ID would have transformed the lives of the Nigerian people. In 2010, Ministry of Petroleum Resources, headed by then-Minister of Petroleum Resources, the now late Dr. Rilwanu Lukman, entered into an agreement with P&ID for the processing of wet gas into dry gas to be used for electricity generation.

By the terms of the agreement, natural gas (wet gas) was to be refined – by stripping away the heavy hydrocarbons that made it unsuitable for electricity generation – to lean gas (dry gas). While P&ID was to build the gas processing facility in Adiabo, Odukpani local government area (LGA) of Cross Rivers State, to refine the wet gas, Nigeria was to build the gas supply pipeline to the facility in order to supply the wet gas to the facility. Nigeria was entitled to 85% of the refined gas, which it would use for power generation and other purposes, while P&ID was entitled to 15% of the natural gas liquids (NGLs) (methane, propane, butane) that would be stripped from the wet gas.

The terms of the agreement also prescribed that Nigeria was to meet P&ID’s supply of wet gas (150 million standard cubic feet (scf) per day, which would rise to 400 million scf over the life span of the project). The government was to source the gas supply from oil mining leases (OMLs) 67 and 123 operated by Addax Petroleum.

Undoubtedly, if this project had been successful, it would have brought about a pivotal turn in the Nigerian oil & gas and power industries. Apart from the potential benefits with respect to the prudent use of our natural gas, Nigeria also stood to earn from its 10% stake in P&ID.

But as at 2012, nothing had been done with regard to moving the project forward and P&ID commenced arbitration proceedings. The British Virgin Islands-registered firm alleged that Nigeria had repudiated the agreement by failing to supply gas or build the gas supply pipeline. P&ID claimed to have spent $40 million on preparatory work for the project and sought compensatory award for loss of potential income for the 20-year duration of the agreement. In July 2015, the arbitral tribunal unanimously decided that Nigeria had repudiated the agreement by failing to perform its obligations and that P&ID was entitled to damages for the said repudiation by a sum, which was yet to be determined.

On the 10th of February, 2017, at the conclusion of the quantum of damages proceedings, the tribunal, by a majority decision, awarded the sum of $6.6 billion with interest of 7% per annum effective from the 20th of March, 2013. (Suffice to say that the Nigerian-appointed arbitrator dissented and assessed the quantum of damages as $250 million over the course of three years.) P&ID subsequently began enforcement proceedings both in the United States of America and in the United Kingdom, leading up to the decision of the 16th of August, 2019 in the UK Commercial Court.

Given the circumstances of the entire transaction, it is not illogical to say the country has been defrauded. Nigeria stands the risk of losing a substantial part of its external reserves or foreign assets over an agreement that could have been transformative for the country and her citizens in many respects. But the government shot itself in the foot by its poor disposition towards contractual matters.

Nigeria has a poor reputation with respect to adherence to the rule of law and sanctity of contracts. This is partly due to its lack of careful considerations and attention to the fine details when entering agreements. The P&ID issue began with the agreement itself. Although the full details of the agreement have not been made public, it is safe to state that the agreement was not properly negotiated. This assertion is based on P&ID’s ability to successfully establish a breach of contract and demand its entitlement to the profit it would have earned over the 20-year lifespan of the agreement when the firm itself did not purchase the land nor begin the process of building the processing facility.

A poor drafting of the arbitration clause for an agreement of that nature (which was extensively considered in the enforcement judgment) is indicative of a generally poorly-drafted agreement. This case is a classic evidence to the truism that there is nothing more expensive than a poorly-drafted contract. A party who understands the implications of executing an agreement would be more careful with the negotiations and would seek the right professionals to draft the terms.

In the arbitral proceedings, part of the defence put forth by Nigeria was that the Ministry of Petroleum Resources lacked ‘factual’ and ‘legal’ authority or capacity to perform its obligations under the GSPA. The arbitral tribunal found the ministry and the Federal Republic of Nigeria to be one and the same under the circumstances. It also found that Nigeria repudiated the contract. It is quite incomprehensible that a party would contract to perform an act that it knows it is ‘factually’ and ‘legally’ incapable of performing. The sheer arrogance of such an act speaks to the lack of appreciation of the sanctity of contracts.

There is also the issue of due process. It had been reported in several media outlets that the Attorney General of the Federation (AGF) at the time, Michael Aondoakaa, was not aware of the agreement. This suggests that the Federal Executive Council (FEC) might not have approved the agreement. However, Nigeria’s obligations under the GSPA necessitated the involvement of the Federal Ministries of Justice, Finance, Power and Petroleum Resources right from the point of negotiations up until the execution of the agreement.

It is better for institutions to take precedence in running the affairs of a country than by having men take precedence over institutions. Thus, there is a very serious problem with our governance structure if a sitting Minister can unilaterally enter the country into an agreement such as the GSPA, which has now run into troubled waters.

Media reports suggest that Nigeria attempted to settle the dispute and had, sometime in 2015, reached a compromise with P&ID for a settlement sum of $850 million that was to be paid in three tranches. However, Nigeria was undergoing a change of government at that time and the then-outgoing President, Goodluck Jonathan, did not want to authorize the payments, probably in an effort to avoid allegations of corruption. The new administration of President Muhammadu Buhari was not inclined to proceed with the settlement process. When Nigeria was eventually found liable for breach of contract in July 2015 by the arbitral tribunal, the government attempted to set aside the award.

The Nigerian government filed an application before the UK Commercial Court, seeking to set aside the award on the 23rd of December, 2015, four months and eight days after the time permitted by the applicable rules of procedure. In an application for extension of time, which the UK court rejected, a director of legal services at the Ministry of Petroleum Resources said the reason for the government’s inability to respond on time to the tribunal’s judgement was the change of government and non-appointment of ministers.

Nigeria, thereafter, proceeded to file an action at the Federal High Court in Nigeria, seeking similar reliefs. The Nigerian suit was eventually struck out for lack of diligent prosecution by the court.

Since government is a continuum, Buhari’s delay in appointing his cabinet turned out to not only have colossal economic cost but also put the country in legal jeopardy as this case has now proved.

Once again, at the time the latest judgment was pronounced, allowing the enforcement of the arbitral award, Nigeria had no substantive AGF, 79 days after Buhari was sworn in for his second term of office. Abubakar Malami has subsequently been retained as AGF and he has stated the intention of the government to prosecute officials responsible for signing the agreement for economic sabotage. Linking it to corruption, he stated that the ruling is one of the “consequences of the underhand dealings of the past administration” in the negotiation and signing of the agreement.

Whether or not certain persons conspired to ‘defraud’ Nigeria through this agreement (which is left for the AGF to prove if and when such persons are charged to court), Nigeria would find herself in a similar boat soon if it does not correct the underlying deficiencies in governance that led to this mess. The Nigerian state must begin to respect the sanctity of contract, uphold due process and build strong institutions.

A certain form of continuity in government is important, no matter the political power that holds sway in the country at the time. If we do not begin to imbibe these values, we might not only be losing $9 billion but also failing to learn the necessary lessons from the loss.