TOOLS OF THE TRADE – JUNE 2024
CHALLENGING AN ARBITRATION AWARD ON THE GROUNDS OF
SERIOUS IRREGULARITY – LESSONS FROM THE UK
Introduction
This tale is about two Irish businessmen who came ever so close to striking it very rich in Nigeria.
Mr Michael Quinn and Mr Brendan Cahill had operated various businesses through various entities and guises since 1992 in the morally and ethically fluid economic landscape of Nigeria.
They had on a number of occasions transacted with the Nigerian Federal Government through its Ministries of Police Affairs and Defence.
Quinn and Cahill had long been interested in undertaking a project which would use gas being flared at the oil and gas sites in Nigeria for the generation of electricity.
In 2005 they were asked by a Nigerian politician and businessman, General Danjuma, to put together a petrochemical plant project outside Lagos to take wet gas and process it into its constituent parts for industrial use, particularly in the generation of electricity, to assist in addressing the electricity deficit in Nigeria.
The project was designated Project Alpha. Agreements were signed and there was a considerable investment of effort and money by them, upwards of US$ 40m, to get the project off the ground. Ultimately, the project foundered in 2007 when Quinn and Cahill could not secure the requisite supply of wet gas from private oil and gas companies. This caused them to look towards the public sector as a source of wet gas.
In 2007, the year in which President Umaru Yaŕ Adua became President, Nigeria announced a Gas Master Plan to address issues in the domestic gas supply market.
In January 2008, Process & Industrial Developments Limited (P & ID), a British Virgin Islands-registered company controlled by Quinn and Cahill, applied to the NNPC (an acronym for the Nigerian National Petroleum Corporation) for their Project Alpha to be included in the Gas Master Plan.
The NNPC expressed interest in the proposal but on the basis that the petrochemical plant be located at Calabar in Nigeria and not Lagos.
An investors’ roadshow relating to the Gas Master Plan was held in Abuja in May 2008.
Following the roadshow, P & ID engaged with the Ministry of Petroleum Resources (the Ministry) in furtherance of the project which culminated in conclusion of a Memorandum of Understanding (MOU) in July 2009.
The objective as recorded in the MOU was the construction of a natural gas processing plant to incorporate two process streams with a total capacity of 400 MMSCFD (i.e., a common volume of gas measured in ‘Million standard cubic feet of gas per day’ – hence ‘MMSCFD’) together with all utilities and storage facilities at Calabar.
Further negotiations between the parties ensued and, in September 2009, P & ID produced a first draft of a Gas Supply and Processing Agreement (GSPA) for consideration by the Ministry.
P & ID solicited comments on the draft GSPA from a firm called ‘Arcadia’, experts in the field. One of their comments was that the GSPA was somewhat sparse and they assumed that a more comprehensive construction contract and gas processing contract would follow.
P & ID engaged with Mrs Grace Taiga, the legal director at the Ministry, and negotiated a final version of the document with her. She had previously worked at the Ministry of Defence when the companies controlled by Quinn and Cahill had contracted with the latter Ministry.
The GSPA obliged Nigeria to supply specified quantities of wet gas to the gas processing facility constructed by P & ID which then would strip the wet gas into lean gas to be delivered to Nigeria for use in power generation, with the remaining natural gas liquids to be retained by P & ID for onward sale, either domestically or by export. The stated duration of the GSPA was 20 years.
Nigeria’s obligation included the identification of the requisite sources of wet gas and the construction of a pipeline network to deliver the gas to the Calabar site.
The GSPA contained a clause to the effect that, if Nigeria failed to produce the gas required by the project for P & ID, irrespective of whether P & ID had constructed the envisaged plant at Calabar, P & ID would be entitled to terminate the contract and hold Nigeria liable in damages. Needless to say, although unexpressed, such damages could run into billions of dollars.
P & ID’s obligations in the GSPA had been watered down from those set out in the MOU. Initially, in the MOU, P & ID’s primary obligation was to ensure that implementation of the project was fast-tracked. This was subsequently watered down to an obligation to only use its best endeavours.
The GSPA included an arbitration clause providing for all disputes to be determined by an Arbitration Tribunal, comprised of a panel of three persons, in London under the Rules of the Nigerian Arbitration and Conciliation Act (Cap A 18 LFN 2004). Each party had the right to appoint an arbitrator, with the third arbitrator to be appointed by agreement between the party-appointed arbitrators.
In December 2009, Mrs Taiga submitted the GSPA to the then Minister of Petroleum Resources, Dr Lukman, with the recommendation that he sign it on behalf of the Ministry. Dr Lukman was a former President of OPEC and had served as OPEC’s Secretary-General on nine occasions.
On 11 January 2010, the GSPA was signed by Dr Lukman for Nigeria, with Mrs Taiga as a witness, Quinn signing on behalf of P & ID.
The evidence subsequently showed that Mrs Taiga had played a pivotal role in bringing about the conclusion of the GSPA. It also showed that she had received numerous payments from or on behalf of P & ID leading up to the conclusion of the GSPA, as well as thereafter. Although each individual payment was not necessarily unusually large, in some instances the amounts paid to her equated to her annual salary.
These payments continued after Mrs Taiga’s retirement in September 2010 and during the arbitration proceedings mentioned below.
Implementation of the project did not proceed apace.
P & ID did not acquire the land necessary for the plant in Calabar. It also did not secure the necessary funding for the project although it untruthfully asserted that it had done so to the NNPC. It also did not advance the engineering designs for the project despite asserting that it had completed 90% of that work. That was true in relation to Project Alpha but not in relation to the Calabar project.
By the end of 2012 nothing meaningful had been done by either party to further the project.
In January 2013, P & ID, relying on the Ministry’s failure to do anything to perform its obligations under the GSPA, wrote to the Ministry stating that its conduct amounted to a repudiation of the contract, which P & ID had accepted, and that the GSPA was terminated as result thereof.
The Arbitration
Following termination of the GSPA, P & ID initiated arbitration proceedings for its damages in the sum of US$ 6.6 bn together with interest at a rate of 7% per annum.
An eminent Arbitral Tribunal was established. It comprised Sir Anthony Evans nominated by P & ID, Chief Bayo Ojo SAN nominated by Nigeria, and Lord Hoffmann appointed by them as chairman. Lord Hoffmann, a Rhodes Scholar, is a South African born lawyer and author and the son of the co-founder of the legal firm now known as ENS (Edward Nathan Sonnenbergs). After moving to the United Kingdom, he rose to the pinnacle of its judiciary as a member of the House of Lords, which, at the time, was the highest court in the United Kingdom.
P & ID filed its statement of claim in the arbitration in June 2013. Nigeria failed to deliver its statement of defence timeously but, eventually in October 2013, filed a notice disputing the Tribunal’s jurisdiction.
The Tribunal ruled that this issue should be dealt with in advance.
P & ID filed its submissions timeously in relation to this issue. Nigeria did not.
The arbitration process was beset by delays caused by Nigeria, apparently due to an inability or lack of will to fund a proper defence to the claim against it.
Be that as it may, in July 2014, the Tribunal issued an interim award dismissing Nigeria’s objection to its jurisdiction.
In its award the Tribunal summarised the dispute between the parties as follows:
‘3.
On 11 January 2010 Claimant and Respondent (“the parties”) entered into a written Gas Supply and Processing Agreement (“GSPA”) whereby the Government agreed that for a term of 20 years it would make available to P&ID 400 MMScuFD of Wet Gas and P&ID agreed to process the gas and return approximately 85% by volume to the Government in the form of Lean Gas.
4.
For the purpose of enabling the Wet Gas to be processed, P&ID agreed to construct two or more process streams with ancillary facilities.
5.
The supply of Wet Gas by the Government was to take place in two phases. In Phase 1, the Government was to supply 150 MMScuFD “during or before the last quarter of 2001”. In Phase 2, the remaining 250 MMScuFD were to be supplied “on or before the third quarter of 2012”.
6.
The Claimant alleges that the Government, in breach of its obligations, did not provide any Wet Gas by the dates stipulated or at all. On 20 March 2013, no Wet Gas having been delivered, P&ID wrote to the Ministry alleging that it had repudiated the GSPA and accepting the repudiation. It claims about US$ 6 billion damages for lost profits.’
The arbitration then proceeded on the issue of liability in advance of quantum.
After more prevarication and ineptitude from the Nigerian side, an oral hearing on liability eventually took place in London on 1 June 2015.
The hearing was dealt with mainly on the basis of witness statements. P & ID relied on a comprehensive witness statement by Quinn, who had by that stage passed away. Nigeria only filed a statement recording the facts in Quinn’s statement that were challenged by it.
The Tribunal issued its award on liability on 17 July 2015, finding in favour of P & ID on the evidence as presented to it.
The Tribunal held that the Nigerian Government had repudiated its obligations under the GSPA and that P & ID had been entitled to accept that repudiation and claim damages for breach.
Along the way the parties engaged in settlement discussions. At one point P & ID indicated that it would accept US$ 850m in settlement but Nigeria was only prepared to offer US$ 400m.
The arbitration then proceeded on the question of quantum in a sporadic fashion due to the dilatoriness and slackness of Nigeria.
In December 2015, Nigeria applied to the Commercial Court in England to set aside the award on liability on less than convincing grounds. The English Commercial Court dismissed the application in February 2016.
At the same time Nigeria applied to the Nigerian High Court for an interdict staying the continuation of the arbitration. On 20 April 2016 the Nigerian High Court granted the interdict. However, on 26 April 2016, the Tribunal ruled that the seat of the arbitration was London, not Nigeria, and as such the procedural law governing the arbitration proceedings was English law and that it would have to be an English court that interdicted the proceedings.
P & ID put up comprehensive expert reports in support of the quantum that it was claiming. Nigeria on the other hand put up some lightweight expert reports.
The hearing on quantum was conducted on 30 and 31 August 2016.
On 31 January 2017, the Tribunal issued its final award in which it ruled that Nigeria was liable to P & ID in damages in the sum of $6.597 bn plus interest.
The final award was the majority award of Lord Hoffmann and Sir Anthony Evans, with Chief Bayo Ojo dissenting.
The Tribunal majority calculated P & ID’s damages on the basis of the income it would have received over 20 years from the sale of natural gas liquids extracted from the wet gas less the capital expenditure it would have incurred to acquire the site and construct the gas processing facilities and, also, less the operating expenditure it would have had to incur to operate the processing facilities over the contract’s duration. The Tribunal then applied an appropriate discount rate to determine the present value of P & ID’s loss as US$6.597 bn.
Challenge to the Award
In December 2019, Nigeria instituted application proceedings in the English Commercial Court[1] for the setting aside of the Tribunal’s award on the grounds that it had been procured by fraud and/or other conduct contrary to public policy.
Section 68 of the English Arbitration Act, 1996, provides:
‘Challenging the award; serious irregularity.
(1)
A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award. A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).
(2)
Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant –
(a) …
(b) …
(c) …
(d) …
(e) …
(f) …
(g) the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy;
(h) …
(i) …
(3)
If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may –
(a) …;
(b) set the award aside in whole or in part; or
(c) declare the award to be of no effect, in whole or in part.’
The equivalent provision in the South African Arbitration Act, 42 of 1965 reads as follows:
‘33. Setting aside of award
(1)
Where –
(a) …
(b) …
(c) an award has been improperly obtained,
the court may, on the application of any party to the reference after due notice to the other party or parties, make an order setting the award aside.’
The rationale and approach of the English court in deciding Nigeria’s application would likely be persuasive for any South African court seized of a matter presenting similar facts and circumstances.
The first thing to note is that there was no suggestion of impropriety or fraud on the part of the Arbitration Tribunal itself. The judge did observe that, despite the severe criticism that could be levelled at Nigeria and the far from stellar performance of its legal team, he thought that the Tribunal could have been more rigorous in its assessment of the veracity of P & ID’s case.
Having regard to the adversarial nature of the arbitration proceedings the learned judge’s latter observation is, in my view, not well founded.
Importantly, the Tribunal had absolutely no knowledge of the bribery and other nefarious conduct on the part of P & ID and its legal team in relation to the arbitration proceedings mentioned below.
An interesting point made by the court is that the bribery and corruption, which led to the conclusion of the GSPA, would not in itself suffice for treating the award as having been obtained by fraud. For that to be the case, the arbitration proceedings themselves would have had to be part of an overall fraudulent enterprise or plan from the outset to procure an arbitration award. In other words, it would have to be shown that the GSPA from the very start was simply a device as part of a fraudulent scheme to procure an arbitration award in favour of P&ID. That was clearly not shown to be the case in this matter.
The court also observed that, while bribery is clearly contrary to English public policy, contracts which have been procured by bribes are not unenforceable.
The Evidence
The evidence relied on by Nigeria in its setting aside application was:
- The evidence tendered by Quinn in his witness statement, which dealt with how the GSPA had come about, made no mention of the bribery that clearly had materially influenced its conclusion. The role played by Mrs Taiga (and likely a number of other Nigerian officials) was not disclosed by Quinn in his statement. In other words, the evidence put up by P & ID in support of its claim and in order to procure the award was dishonest and fraudulent for want of disclosure of the bribery involved.
- Through the rigorous document disclosure process during the proceedings, innumerable confidential Nigerian documents were found to have come into the possession of P & ID during the course of the arbitration. These documents had manifestly been procured through bribery and/or other unlawful means, were clearly privileged and ought not to have been received or used by P & ID’s then legal team, comprising an experienced solicitor and a King’s Counsel, who the judge heavily censured in his judgment. The court took the view that the nature and content of the documents and the scale, continuity and circumstances of P & ID’s conduct in this regard were such as to utterly compromise Nigeria’s right to confidential access to legal advice during the arbitration process. The court found that this conduct on the part of P & ID and its legal team tainted the arbitration proceedings and facilitated the procuring of the award in a manner contrary to public policy.
- The ongoing bribery, specifically of Mrs Taiga, during and after the conclusion of the arbitration proceedings, to secure her silence with regard to the corrupt procuring of the contract was dishonest in itself and tainted the arbitration process.
The court considered that, had any of the aforementioned matters come to the attention of the Tribunal, the outcome of the arbitration would not have been what it was.
The court noted that, while in no small measure the award was obtained due to the incompetence and neglect throughout the arbitration process on the part of Nigeria and its legal team, such ineptitude and neglect was not sufficient to outweigh the wrongful conduct on the part of P & ID.
Conclusion
In the event, the court upheld Nigeria’s challenge under section 68 of the Arbitration Act and held that the award was obtained by fraud and in a way that was contrary to public policy.
The court remarked that, if the award was allowed to stand, which at the time of the judgment, 23 October 2023, amounted to approximately US$ 11bn, a very serious injustice would have been perpetrated, with equally serious economic consequences, impacting the population of Nigeria. Fundamental damage to the integrity of the process of arbitration would also have resulted.
In closing, the court recorded that it would be referring its judgment to the legal regulatory bodies in the United Kingdom having jurisdiction over the King’s Counsel and solicitor who had represented P & ID in the arbitration process due to their unprofessional retention and use of Nigeria’s confidential documents.
The fact that they were working on contingency and stood to receive £850 m and £3 bn respectively on a successful outcome to the arbitration may have been a contributory factor to their injudicious conduct.
ALASTAIR HAY
COX YEATS
Direct Tel: 031 – 536 8508
E-mail: ahay@coxyeats.co.za
The Federal Republic of Nigeria v Process & Industrial Developments Ltd [2023] EWHC 2638 (Comm) Date of judgment, 23 October 2023.