Nigeria: NNPC, Lawyers Saved Nigeria From Huge Arbitration Award

1 October 2019

Davidson Iriekpen and Peter Uzor chronicle how the Nigerian National Petroleum Corporation and its lawyers' proactive actions, effective defence, recently saved Nigeria another multi-billion-dollar arbitration award in the United States unlike the P&ID saga.

Recently, the United States' Southern District Court of New York saved Nigeria from what could have been another huge liability when it delivered a landmark judgment in favour of the Nigerian National Petroleum Corporation and against ESSO Exploration and Production Nigeria Limited and Shell Nigerian Exploration and Production Company Limited (collectively known as ESSO), which saved the country from paying a whopping $2.69 billion.

Unlike the Process and Industrial Development (P&ID) case which resulted in the award of a colossal sum of $9.6billion against the Federal Government of Nigeria, the NNPC vs ESSO case was a combination of proactiveness, diligence and effective defence, thereby saving Nigeria the loss another multi-billion-dollars which could have been enforced against it had the US Southern District Court ruled against it.

The case was the protracted litigation arising from the disputes between NNPC and ESSO regarding the implementation of the Production Sharing Contract dated May 21, 1993 covering OPL 209/OML 133. The agreement assigned ESS the responsibility for the exploration development and extraction of oil from the Erha field in exchange for the right on the part of ESSO to recover its costs through the allocation of crude oil sufficient to defray its costs and to share in the resulting profit with NNPC.

On its part, NNPC was entitled to lift such amount of crude oil sufficient to pay the royalties and petroleum profits tax due on the OML. Whatever amount of crude was left after lifting royalty costs and tax oil became profit oil which was shared among NNPC, ESSO and Snepco. From the terms of the agreement, Esso was given the exclusive right to calculate the oil produced and allocate it into four tranches: (1) Royalty oil - to cover NNPC's payment of royalty to the Nigerian government (2) Cost oil - to cover ESSO's operating cost (3) Tax oil - to cover tax payments to the federal government and (4) Profit oil - which is derived from the remaining oil and spilt between ESSO and NNPC pursuant to a formula.

In addition, ESSO had the exclusive right to prepare tax returns to be filed with the federal Inland Revenue Service (FIRS). The agreement also contained a stabilisation clause which required the parties to modify to terms of the agreement to compensate ESSO for any loss sustained due to changes in Nigerian law, regulation or policies.

Parties further agreed that any dispute arising out of the agreement would be arbitrated in Nigeria subject to Nigerian law.

After the execution the agreement, ESSO explored and developed the Erha oil fields and began production in 2006. Through 2009, ESSO had invested over $6billion in the project. However, due to changing oil prices in 2007, Nigeria and NNPC began to rethink the agreement. By late November 2007, the late President Umaru Musa Yar'Adua established the Presidential Investment Committee to determine whether NNPC should be lifting more oil than ESSO was allocating to the corporation under the agreement.

In early February 2008, the committee issued its report which concluded that Nigeria had been deprived of $646.3 million due to it from the Erha oil field and recommended that the NNPC lift that amount from subsequent oil production in Erha.

According to ESSO in its Points of Claim, the committee then met with President Yar'Adua in April 2008 and based on its recommendation, on May 20, 2008, the President ordered NNPC to lift more oil. However, the corporation had begun lifting more oil in December 2007 or January 2008 before Yar'Adua gave the order. In addition, NNPC refused to submit tax returns prepared by ESSO to the FIRS and instead submitted its own returns to the service.

ESSO objected to what it described as NNPC's over-lifting of oil and commenced arbitration against the corporation in 2009. During the hearing, NNPC argued that the dispute was not contractual in nature but rather a tax dispute subject to the exclusive jurisdiction of the Nigerian Tax Appeal Tribunal. It also contended that Nigeria's 1999 Constitution prevented the arbitration of tax disputes.

However, the arbitral panel found that it had jurisdiction to hear the dispute because it was contractual in nature and proceed to award the sum $1.799billion to ESSO. Specifically, the arbitral panel found that the NNPC over lifted Royalty and tax oil and wrongfully rejected some cost oil due to ESSO. It stated that the actions of NNPC also reduced the profit oil available to ESSO and added the award represented the difference between what NNPC lifted and what it was entitled to lift.

Aggrieved by the award, the NNPC approached the Federal High Court in Abuja with two issues: (1) that the dispute being essentially a tax dispute was inarbitrable having regard to the Petroleum Profits Tax Act and therefore the award was liable to being set aside. (2) That the Federal High Court having previously declared the arbitration illegal null and void pursuant to an action filed by FIRS through its counsel Lucius Nwosu SAN, the award ought to be vacated.

NNPC's counsel Mr. Etigwe Uwa SAN of Streamsowers & Kohn argued before Justice Ibrahim Auta who heard the suit, that the arbitration award was also contrary to public policy as it enjoined NNPC to file tax returns which it believed to be inaccurate and therefore breached the provisions of Sections 52 to 55 of the Petroleum Profits Tax Act (PPTA).

From the papers obtained from the court, the learned silk canvassed a very novel argument relying on the provisions of Section 3(g) of the PPTA to the effect that any dispute, any right, any claim, any demand or set off arising from that Act, can be ventilated only in the manner provided in that Act. The Act does not provide for arbitration. So, he argued that on that basis, the arbitral tribunal had no jurisdiction because tax issues arising from the PPTA are not arbitrable, because the Act provides that any dispute arising from the act may only be exercised by reference to remedies provided under the PPTA, which does not include arbitration.

On the FIRS decision, Justice Auta held that the arbitral panel lacked jurisdiction because the dispute affected the amount of the revenue by FIRS which was akin to a tax.

The argument that the award affected the interests of FIRS which is the authority charged to collect taxes in Nigeria and which is not a party to the PSC and arbitration award and therefore liable to being set aside found favour with the Justice Auta. This argument was made stronger because FIRS through its counsel, Lucius Nwosu SAN, had successfully obtained a declaration in another suit that the arbitration proceedings were null and void the underlying dispute being inarbitrable.

The proactiveness of FIRS and NNPC through their respective legal practitioners saved Nigeria huge amounts of money including the ESSO award of $1.799 billion which together with interest would have amounted to $2.66 billion as at today.

The ESSO case has set the precedent with regard to similar disputes including that involving SNEPCO which stood at about $3.5billion as at 2011. There are other similar arbitrations involving other IOCs all of which had a combined value of $10.8 billion as at 2011. If ESSO had won, it would have laid a precedent which the other similar cases would have followed. Cumulatively, all these IOCs were demanding $10.8 billion, which today may be up to $25 billion.

Upon ESSO's appeal, the Court of Appeal found that the Federal High Court properly set aside the award because the matter was primarily a tax dispute. The appellate court however reinstated some of the non-monetary aspects of the award, finding that the High Court should have severed the claim related to the preparation of Petroleum Tax Profit returns and the calculation of lifting allocations from the rest of the award because they were contractual in nature.

It concluded that NNPC had breached the agreement by over lifting oil and failing to submit the tax returns prepared by ESSO and that these portions of the award should be restored.

With regard to the appeal arising from the SNEPCO decision, the Court of Appeal declared that the entire arbitration was void and did not severe contractual claims from non-contractual claims.

While ESSO appealed the Court of Appeal decision at the Supreme Court, it turned around and went to the US District Court, praying that the award be enforced even though it had been set aside on the basis that the setting aside by Nigerian courts was tainted by bias in favour of the Nigerian government and alleged that the Nigerian judiciary is not independent. It sought to rely on a previous decision of the US courts which enforced an award in the Pemex case regardless of the fact that the award had been set aside in Mexico largely due to a new law which invalidated the arbitration.

At this point, NNPC promptly dispatched its counsel, Etigwe Uwa (SAN) of Streamsowers & Kohn who had been conducting the case and two lawyers from its legal department Messers Omige and Okoye to the US. They went to New York and painstakingly sat down with the American lawyers to review every document and hashed out a case strategy with the American lawyers of NNPC, Chaffetz Lindsey. They challenged ESSO's application on the grounds that there was no award, which the US court could enforce as a competent court in Nigeria had since set aside the award.

NNPC also contended that there was no legal basis for the US court to exercise jurisdiction over it as it had no presence in the US, owned no property and does not conduct its businesses therein.

ESSO contended that NNPC as the alter ego of the Federal Government of Nigeria, owned assets in the USA including bank accounts and also conducts businesses in the USA.

It obtained the leave of court to conduct Jurisdictional Discovery to ascertain if the US court could assert personal jurisdiction over NNPC. NNPC painstakingly responded to all the discovery requests producing documents running into thousands of pages and had its key officials including Mr. Mele Kyari now GMD file key affidavits and statements. The legal department led by Mr. Hadiza Coomassie and ably assisted by Ahmed Khalid and others worked tirelessly with both local and foreign counsel and had legal experts including Justice Olayinka Ayoola and Professor Fidelis Oditah QC SAN prepare and file expert statements and opinions on its behalf.

At the close of the Discovery Procedure, the court ordered NNPC and ESSO to appear for oral hearing, which was held before Judge W. H. Pauley on February 1, 2019, for parties to canvass their respective positions.

On September 4, the US court delivered its judgment by which it upheld NNPC's application to dismiss ESSO's enforcement application on the grounds that a competent Nigerian court had set aside the underlying award. It also directed the Clerk of the court to terminate and discontinue all motions and processes filed by ESSO in the matter.

By this development, NNPC successfully secured the dismissal of ESSO's application to secure recognition and enforcement of its arbitral award valued in excess of US$2,699,405,616 inclusive of interests. The effect is that ESSO, which had sought the order of the US court to enforce the said award, has lost the right. While ESSO is at liberty to appeal this decision, NNPC is optimistic that its case on appeal is very strong.

This is a significant decision in the history of this case as the US court has not only discharged NNPC from any indebtedness to ESSO but also set the stage for NNPC's pursuit of the challenge of three other outstanding enforcement applications filed in the US court by other PSC contractors. The decision of the US Court would lend weight to the effort of NNPC and the PSC contractors to explore amicable resolution of underlying PSC disputes.

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