Mechanisms for dispute settlement in the oil sector
The typical structure of the oil industry in a developing country results in a manifold, multilayered dispute settlement mechanism that may potentially strain the process. Since the resource belongs to the sovereign state, engaging in its production can only be with its permission, evidenced in the form of a license, lease, concession, or through other petroleum development contracts in favour of the investor. Agreements of this nature are referred to as state contracts involving a sovereign state (or its agency), and an investor from another country. For such a state, this contract is important as it embodies its permission for its resources to be lawfully exploited; for the investor, the contract is just as important as it constitutes proof of its economic/ property rights in another country in the event that there is a rupture in the relationship.
The settlement of disputes that arise out of this relationship creates special challenges. Being a party to the contract, the state is also involved in the dispute, the settlement of which falls within its jurisdiction for adjudication by virtue of principles of public international law that vest in states the jurisdiction to make laws and adjudicate over matters within their territory, in addition to the fact that as a party to the dispute who also enjoys sovereign status, a state is generally impervious to actions outside its legal system.
Private international law similarly dictates that in respect of disputes with an international element, courts with the closest connection to the facts of the suit would have jurisdiction. Such connection in the context of a dispute in the oil sector would be the oil exploration activity that is carried out within that state. The United Nations General Assembly Resolutions 1803 and 3201 in furtherance of the above well established legal principles provide that any dispute arising from foreign investment is to be settled in the court of the host state, unless arbitration is agreed upon.
Investors in the natural resources sector seek to avoid the courts of host states many of them developing and geologically endowed. There are a number of reasons for thislitigating in the courts exposes them to varying internal procedural laws considered not favourable (inability of a foreign company to bring an action in some legal systems because its legal personality is not recognised, requirement of pre-action notice, requirement that foreign registered companies deposit security before suing, consent to enforce execution of judgement against government/public authority, etc.); the general justice administration system (perception of bias, delay, ill equipment, etc). Investors therefore seek, through a process commonly known as internationalisation, for the state contracts they execute with sovereign states to rise above these courts and the legal system of the states by putting a clause in the contracts that allows them to either litigate in the courts of a third, neutral country, or go to international arbitration and in accordance with some external law as governing law.
Going to a third state comes with its own challenges: these courts have been known to turn down requests to litigate before them on ground that the facts of the actions bear no connection with their jurisdiction; where the dispute manages to get past this huddle, the sovereign status of the state party still gets in the way to an extent. This is in addition to the challenges that come with seeking to bring the judgement back to the host state where assets are available for enforcement. Unlike arbitral awards, there is no international framework for the enforcement of judgements of national courts Ultimately, international arbitration has come to be embraced as the most trouble free mechanism in the circumstances. Within it’s the broad framework, there exists various arbitration processes. Thus, in many of these developing states, eager to attract foreign investment, it is not unusual to provide for varying forms of arbitration both in sector specific laws as well as in general investment codes, while the state contract between the parties prescribes another arbitral process. Still, as is often the practice these days, it is not unusual that a Bilateral Investment Treaty would exist between the host state and the home state of the investor allowing the investor to invoke yet a totally different form of arbitration. In the event, should a dispute ensue over these oil exploration activities, we see immediately the possibility of a clash in principles of public and private international law which vest jurisdiction in the host state’s courts which is entrenched in that state’s constitution, and investment codes/sector specific laws that simultaneously prescribe another form of arbitration. The possibility is also there of some inconsistency in contractual clauses between provision for the courts of a neutral third state stipulated under a forum clause in a contract, or as is far more commonly the case, some form of arbitration stipulated in the state contract on one hand, vis a viz another form of arbitration provided in a Bilateral Investment Treaty.
How these mechanisms overlap in Nigeria
These various settlement processes overlap within the Nigerian oil sector. For instance, pursuant to the norms of international law, the Nigerian Constitution in s.6 vests the country’s judicial powers in the courts, and states in s.6 (6) (b) that these powers “shall” extend to “all matters between persons, or between government or authority and to any person in Nigeria…” As if to assuage investors of their concern of bias, s.36 (1) speaks to a “fair hearing by an independent court or tribunal in the determination of civil rights and obligations including determination by or against government or authority.” S. 251(1) (n) vests the Federal High Court with exclusive jurisdiction over matters relating to mines, mining, including oil fields, oil mining etc, while s.251 (1)® equally vests these courts with jurisdiction in actions involving the federal government or its authorities. There are also statutes such as the Petroleum Act that states in Regulation 41 of its First Schedule that questions and disputes connected with oil licenses/leases shall be settled by arbitration. According to s.11 (1) and (2) of that Act this is settlement in accordance with the arbitration law of the state agreed upon and in its absence, the law relating to arbitration in the Federal Capital Territory (which is the Federal Law, Arbitration and Conciliation Act).
It must be pointed out here that some states have their own arbitration law that is separate from the Arbitration and Conciliation Act, the federal law. This presents its own twist and there is a debate among Nigerian scholars and practitioners, as to whether there can be a federal law on Arbitration in the absence of an express power in the National Assembly under the Exclusive list in the 1999 Constitution; if such a law can exist, whether the doctrine of covering the field is applicable to make it override the various existing state laws on arbitration; and if so, the effect of the application of such doctrine on the arbitration laws of states-are they void or just in abeyance in the lifetime of the federal law?
This is a very arcane issue that is outside the scope of this discussion but which has received attention by some Nigerian scholars. The point however is that in Nigeria today state laws exist side by side the federal law on Arbitration, creating an additional wrinkle to an already convoluted situation.
On its part, the Nigerian Investment Promotion Commission (NIPC) Act provides in
- 26 for the settlement of disputes in accordance with the Bilateral Investment Treaty between Nigeria and the home state of the investor, and in its absence, ICSID rules would apply. And in all this PSCs and Joint Ventures, the more popular petroleum development agreements in Nigeria, provide for arbitration in accordance with the Nigerian Arbitration and Conciliation Act.
Thus, we see easily that a real chance exists that a dispute over oil exploration and production in Nigeria may be subject to at least four broad forms of dispute settlement at once: (1) the jurisdiction of the Federal High Court which the Constitution says shall be exclusive,(2) ad hoc arbitration under the Arbitration and Conciliation Act in accordance with(a) the settlement clause in PSCs and Joint Ventures, and(b) the Petroleum Act, where it is the Arbitration law of the FCT that is applicable,(3) ad hoc arbitration in accordance with the Petroleum Act where it is the Arbitration Law of a state that applies,(4) and finally, institutional arbitration under the ICSID Rules, in accordance with(a) the NIPC Act or, (b) the Bilateral Investment Treaty between Nigeria and the home state of the investor.
Nigeria began to enter into Bilateral Investment Treaties rather slowly. Nonetheless, as at June 2006 it had entered into such treaties with some 20 other countries, namely France, Italy, United Kingdom, Netherlands, Taiwan Province of China, Turkey, Republic of Korea, Romania, Bulgaria, Germany, Egypt, China, Switzerland, Sweden, Spain, Jamaica, Serbia and Montenegro, Uganda, and Finland. Although Nigeria has a substantial economic relationship with the United States, which promises to increase in the oil sector because of the ever growing restlessness in the Middle East and the rest of the Arab World it is instructive that no BIT exists between the two countries as yet.
The question therefore naturally follows as to which of these mechanisms would apply in the event of a dispute in the circumstances examined above? This is even more so as the above laws (Constitution, Petroleum Act and NIPC Act) variously outdo each other in employing mandatory words-“shall”, “exclusive,” in vesting jurisdiction.
An attempt at reconciling these overlaps
Although the Constitution vests jurisdiction in the courts, there are two separate principles of law why this is yielded in favour of another forum, and each one triggers different consequences. The first derives from the practice of the courts that recognises the autonomy of parties and honours terms that they have freely agreed upon. The result is that where the parties agree to settle their disputes before another forum, the courts generally would give consideration to this. In Sonnar V Partenreedri M.S Norwind the Supreme Court however stated that our courts should not be too eager to divest themselves from jurisdiction conferred by the constitution. While the court in that case accorded an arbitration clause priority over a forum clause, a trend appears to be creeping in, where Nigerian courts are increasingly resisting even arbitral clauses and treating them as though they seek to oust their jurisdiction.
The second principle derives from treaty practice and this area is rather complicated. Thus, on one hand are provisions in a treaty (New York Convention; BITs) directing a dispute to be resolved before arbitration. On the other hand is the constitutional provision that stipulates the Federal High Court. It is possible that a Nigerian court may allow itself to be bound by the constitutional provision, the supreme law in Nigeria. While such a decision may be unassailable within Nigerian legal system on the strength of the decision in Abacha V Fawehinmi where the Supreme Court perked the constitution above other laws, including those with treaty flavour, such an action would invite international law consequences against the Nigerian state. This is because by Article 27 of the Vienna Convention, a country is not in a position to use its local laws (including its constitution) to avoid its obligations in treaties it entered into, except in specific cases. The decisions of the courts of states which frustrate the international law obligations of such states results in direct state responsibility against such a state in international law based on Article 3 of the International Law Commission Draft Articles. Lately, there have been international claims against states such as Bangladesh and Ukraine and a few others for decisions of their courts in similar circumstances and this trend has attracted criticisms. Consequently, having signed and ratified the New York Convention on Enforcement of Arbitral Awards, Nigerian courts are bound by its provisions that guide on when and how the courts ought to yield their jurisdiction in favour of an arbitral tribunal. Nigerian courts would therefore be bound by provisions of the Arbitration and Conciliation Act because of its treaty flavour, being the Nigerian law that ratified the New York Convention. However, as this writer has noted elsewhere it is not clear whether these courts would be bound by provisions in Nigerian statutes that stipulate arbitration inthe light of Article II of the New York Convention (incorporated in the Arbitration and Conciliation Act) which obligates Nigerian courts to stay their jurisdiction in favour of arbitral proceedings emanating from “agreements in writing,” covers clauses in contracts, and not provisions in statutes such as the Petroleum Act, and the NIPC Act. At any rate, the provision in the NIPC Act that stipulates arbitration in accordance “with ICSID rules” is poorly drafted and therefore defective as applying ICSID rules to arbitration not initiated under the ICSID Institution is not possible.
As for arbitral clauses in BITs, these provisions were designed to prevent sovereign states that, as we see, are typically contractual parties with investors in oil exploration activities, from using their sovereign status to avoid arbitration that they previously agreed to. Unlike the New York Convention, a treaty that guides on the enforcement of awards within countries, in a BIT, an arbitral clause is put directly in the treaty that the investor invokes against the country.
This presents a rather difficult challenge relating to the conflict between the arbitral clause in such a treaty and that in the state contract. For instance, an oil multinational of British nationality enters into a PSC that stipulates ad hoc arbitration in accordance with the Arbitration and Conciliation Act. The BIT entered into between the United Kingdom and Nigeria also allows this investor to declare arbitration against Nigeria over the same issues, but before ICSID. The question is which one prevails. This practical problem has come up repeatedly before international arbitral tribunals as a very fundamental jurisdictional issue and it is yet to be fully resolved in theory. In international practice however the trend is to honour a BIT clause and this has the potential of a further complication. Not being instruments in the mould of traditional contracts, the argument is attractive that awards emanating from BITs, should they require enforcement in Nigeria might not be approved for enforcement by Nigerian courts based on the Arbitration and Conciliation Act without any consequence against the Nigerian state in international law.
The various statutes above reflect the changing eras in Nigeria both in terms of the country’s present receptiveness towards foreign investment as well as its period of military rule. Now that its democracy is restored and a National Assembly is in operation, it is hoped that some harmony would be achieved with all these laws.
Dr. Bayo Adaralegbe