Quantum of suffering
The English High Court recently provided the Federal Government of Nigeria (FGN) some respite in its ongoing dispute with the British Virgin Islands company, Process & Industrial Developments Ltd (P&ID) by granting FGN leave to appeal and a stay on enforcement of the arbitral award made against it in January 2017. Having seen the arbitral award converted to an English High Court judgment in August 2019, P&ID had set about attempting to enforce the judgment against FGN’s foreign assets. This was no small matter for FGN, as the amount of the arbitral award (initially US $6.6 billion, now US $9.6 billion, given the eye-watering interest of US $1.3 million per day) would have a significant impact on Nigerian reserves and the Nigerian economy in general. US $9.6 billion represents around 20% of FGN’s total foreign reserves, one third of FGN’s 2019 fiscal budget, 2.5% of its total GDP and more than 50% of its earnings from crude oil in 2018. FGN unsuccessfully contested the award in August 2019 on several grounds, including that the award was “manifestly excessive” and, therefore, contrary to public policy. But a question that many readers will be wondering is: how did we even get here?
Licence to drill
The dispute stems from a 2010 gas supply and processing agreement (GSPA) between FGN and P&ID, in which it was agreed that FGN would build pipelines to supply gas to a gas processing plant in Calabar, eastern Nigeria. This plant was to be built free of charge by P&ID, which would then refine the natural gas (also free of charge) for the state. For its troubles, P&ID would be allowed to sell on 15% of the propane, ethane and butane by-products from the refined gas, with the remaining 85% provided back to FGN to be used to generate electricity for a large part of eastern Nigeria.
P&ID expected this arrangement to generate US $5-6 billion in profits over a 20 year period, which is effectively how the tribunal decided the quantum of the award. However, the deal fell through in 2012 without a single pipeline or processing plant being constructed. P&ID claimed that FGN failed to provide the necessary infrastructure to enable them to fulfil the contract, whilst FGN argued that P&ID’s failure to build the gas processing plant was a fundamental and repudiatory breach of the GSPA.
In August 2012, the dispute was referred to arbitration as per the arbitration agreement in the GSPA, despite the arguments of FGN that the arbitral tribunal lacked the jurisdiction to rule on the agreement. FGN submitted no documentary or expert evidence on this point, and the matter was decided as a preliminary issue by the tribunal, which ruled that it had jurisdiction and also rejected FGN’s submissions that P&ID was “carrying on business” in Nigeria illegally.
On the issue of liability, the tribunal rejected the more nuanced arguments by FGN that the Ministry for Petroleum Resources acted ultra vires in agreeing the GSPA, or that FGN’s obligations had been frustrated by third party owners of gas fields, or by P&ID’s non-performance of its obligation to build a processing plant. The tribunal found that FGN failed to perform its obligations under the GSPA, and that P&ID was entitled to claim damages for the repudiatory breach.
Neither the issue of jurisdiction nor liability can be considered to be overly controversial, but the award on damages is what has caused the world to sit up and take notice. The tribunal rejected FGN’s arguments that, given that P&ID had not yet undertaken any of its obligations under the contract, P&ID’s loss of profits for 20 years’ worth of gas sales did not “flow naturally” from its repudiatory breach of the GSPA. The tribunal did not consider the correct test for damages to be a question of whether P&ID would have complied with its obligations. It clarified that, once FGN had repudiated the contract, P&ID’s obligations essentially came to an end. The tribunal therefore had to consider damages in respect of placing P&ID “in the same situation… as if the contract had been performed”. The tribunal added that it may have changed its decision had FGN adduced evidence that P&ID would not have been able to fulfil its obligations in any event, but FGN did not produce any evidence to support this. Following the expert evidence provided by P&ID, the tribunal decided that the measure of damages would be the net present value of the profits which P&ID would have earned from the GSPA, totaling US $6.597 billion. The award was compounded by the tribunal also ordering FGN to pay 7% interest on the award until payment.
Never say never again: where does FGN go from here?
Given the aforementioned significance of the award, it is not surprising to see that FGN has refused to accept the decision lying down. A corruption and bribery investigation has been launched by the Nigerian Economic & Financial Crimes Commission. This has already led to one former petroleum ministry official being charged with accepting bribes and failure to follow protocol in relation to the GSPA. Two further men, linked to P&ID, were arrested in Nigeria on charges of fraud and tax evasion, to which they pleaded guilty on behalf of the company. The men were not personally charged, but P&ID was ordered to forfeit all of its local assets to FGN.
P&ID has called the fraud allegations a “red herring”, and claimed that neither of the men were “current employees or representatives of P&ID”. P&ID also claimed violations of human rights laws, stating that “no evidence was produced, no defence allowed, no charges laid and no due process followed” in relation to the two men.
In tandem with the criminal investigation, FGN continues to assert that the GSPA can be avoided given “certain anomalies in the process leading to the award of the contract”. A Nigerian court has already ruled that the arbitral award should be set aside on this, and FGN was sufficiently able to convince the English High Court to grant a stay of execution and permission to appeal the award. However, the English enforcement case is just one of a myriad of problems for FGN, and it is still contesting parallel enforcement proceedings in the US.
Although the English High Court’s recent decision may be seen to strengthen FGN’s hand slightly in potential settlement negotiations, the two parties remain a way off settlement, with the principally agreed settlement with FGN’s previous administration rejected by the current Buhari government.
It’s difficult to predict how this dispute will be resolved, but, for now at least, it appears that FGN may get a second chance to make its case.