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P&ID Vs FGN

VR CAPITAL BUY 25% OF P&ID AS NIGERIA FACE $9BN FINE

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First, a health warning. This article is about recalcitrant, inept and quite possibly corrupt Nigerian politicians and government ministers. It is certainly about incompetence and misconduct in public office. It should be about prosecution and incarceration.  You will read about how government officials have conspired to create  and place a liability on the Nigeria people, a burden capable of crippling a generation. So staggering is the highly likely outcome it will wreck Nigeria's economy. If you are Nigerian but not of stout disposition I would urge you to sit down or better still  look away now. .

 Process and Industrial Development Ltd  (P&ID)  entered into a contract with the Ministry of Petroleum Resources of the Federal Government of Nigeria (FGN) in 2010. The 20-year Gas Supply & Processing Agreement (GSPA) obliged P&ID to build a natural gas processing plant and  the FGN to build pipelines and to bring untreated gas to the plant. It will be remembered by many as a time the unicorn that is the Gas Master plan was a byword for confusion and ineptitude.

In August 2012, P&ID served the Nigerian government a Request for Arbitration. P&ID alleged that it invested US$40m in the project, although it did not actually build a plant. The company also alleged that the FGN did not build the pipelines as specified in the agreement. Therefore, P&ID  is entitled to compensation for lost earnings .

The arbitration hearing was conducted by a three-member  panel  chaired by The Right Honourable Lord Hoffmann, a retired British judge, Bayo Ojo, SAN representing Nigeria and Sir Anthony Evans QC representing P&ID.  Following a series of hearings in London, the Tribunal issued a first part final award on 3 July 2014 determining that it had jurisdiction to determine its own jurisdiction under the English Arbitration Act 1996, which it held was the law of the seat of the arbitration. This was because Nigeria’s petroleum ministry had challenged whether the Tribunal had jurisdiction on the matter at all.  On 17 July 2015, the Tribunal issued a second Part final award on liability concluding that the government’s failure to satisfy its contractual obligations was a breach of the agreement. 

At a point during the tribunal hearing, counsel to the Nigerian government, Supo Shasore, a senior advocate of Nigeria (SAN), gave a legal opinion that the government's defence for failure to discharge its obligation under the contract was "feeble and unsustainable.  Nigeria’s lawyers  participated in the proceedings in London over the quantum of damages.

The Goodluck Jonathan government actually reached a settlement with P&ID to pay  $850m. A government negotiation team constituted by Goodluck Jonathan's Administration successfully negotiated an out-of-tribunal settlement with P&ID and got the company to accept a $850 million settlement, about 9.6 per cent of the $8.9billion award. The Jonathan administration did not, however, pay the settlement sum and handed over to the incoming Buhari government. The Buhari government then astoundingly decided against proceeding with the settlement and instead instructed its lawyers to set aside the award.

 

n December 2015, the ministry applied to the Commercial Court in London to set aside the liability award, but the Court dismissed the application in February 2016, finding that it had been filed more than four months out of the statutory period for such an application and that the grounds of the action had no merit. In an attempt to circumvent  this, the ministry approached the Federal High Court of Nigeria, requesting  it to set aside the liability award.  The Nigerian court duly obliged and in April 2016, it issued an order setting aside  the liability award on the grounds that the seat of arbitration is Nigeria and the reference to ‘venue’ in the arbitration clause is not definitive of seat.

 Lord Hoffmann told the parties that the Federal High Court had no jurisdiction to annul the liability award and that the case would proceed to the ‘quantum phase’ – where the amount to be paid by the losing party is determined.  On 31 January 2017, the Tribunal issued the final award, granting P&ID damages in the sum of  US$6.597 billion. Furthermore, the award was to accumulate interest at the rate of 7 per cent per year, working out at US$1.265 million per day.

  P&ID’s next step was to apply the award of the English court in the United States (US), following  the New York Convention which allows winners of arbitral awards to  enforce them in signatory countries. On 16 March 2017, P&ID filed a petition before the US courts to confirm the award. P&ID in its application seeking enforcement of the award said "The final award is governed by such a treaty, the New York Convention. So, Nigeria's status as a foreign sovereign does not deprive the court of jurisdiction to confirm the award," the company said.  A United States District Court  issued a default judgement affirming a $6.59 billion arbitral award against the Federal Government (FG), plus $2.3 billion in interest. The judgement was awarded against Nigeria because shockingly the FG did not appear in court to mount a defence.

 Nigeria’s foreign affairs ministry was served with the petition in March 2018 and had two months to oppose it. The document was received and signed for by the ministry on 27 March 2018. The two months expired by the end of May 2018 with Nigeria failing to appear to defend itself. The Solicitor General of Nigeria and Permanent Secretary of the justice ministry reportedly contacted two American law firms regarding the case but  stopped short of actually instructing them . As the deadline loomed large, international law firms sent letters to Nigeria’s justice minister,  Abubakar Malami, warning him of the seriousness  of the situation and the  urgent need to act promptly to avoid the dire consequences of case.

The explanation from Nigeria stated “Although the claim form was passed from the Ministry of Foreign Affairs and received at the Ministry of Justice, it was simply immediately filed and not passed up the chain of command. The relevant senior figures within the Ministry of Justice only became aware of the matter after the deadline for filing and acknowledgment of service had already passed and only after it was drawn to [the attention of Nigeria’s English counsel] following receipt of correspondence from the claimant’s solicitors.”

 

Thankfully  the English courts took into consideration the extraordinary amount of the award and the effect on the citizens and tax payers in Nigeria,  and on 15 February 2019 the English High Court  granted Nigeria an extension  to file its arguments  and defend the enforcement proceedings and  scheduled the hearing for 21 May 2019. This has now been adjourned

Ominously a  sovereign debt hedge fund VR Capital Group are reported to have acquired a 25% stake in P & ID. VR Capital  founded and run by London-based hedge fund manager Richard Deitz, is well known for  buying distressed sovereign debt, with a track record in  Russia (1998), Argentina (2001), Greece (2012) and Ukraine (2014) among others. The involvement of  VR Capital Group is a clear indication that there is a high degree of  confidence in the outcome  of P&ID’s case.

In the byzantine world of Nigerian politics it is difficult to distinguish incompetence from malfeasance, whether acts of omission are contrived with the objective of creating space for corruption. The P &ID case is disturbing not least because of the uncertainty as to who awarded such a contract and via what process. The company has no track record in the gas industry and appears to have  spent little or no money in preparing to fulfill its own contractual obligations. It purports to have spent US$40m in front end engineering and design but has not been challenged on this and has shown no evidence that such a sum has been spent.

Marion Lespiau of Grant Thornton commented on the outcome of the arbitration. " It shows the importance of the Respondent (Nigeria) challenging facts, assumptions and calculations provided by the Claimant (P&ID)and of providing alternative evidence to the Tribunal."  Yet again it is hard to fathom out why the Nigeria's lawyers did not challenge P & ID on its calculations and provide alternative ones. surely such a action is fundamental.

 Nigeria's lawyers  claimed that P&ID should only be entitled to nominal damages as it had not fully performed its obligations under the GSPA at the date of the repudiation. It  also argued bizarrely  that production would be disrupted by militancy in the Niger Delta so that utilisation should be reduced to 40-50%.

Nigeria's Lawyers   insisted that damages could only be awarded for a period of three years as the Claimant had a duty to mitigate its loss and it should have pursued other investment opportunities.

The Tribunal considered that there was no evidence that the Claimant was unable or did not intend to perform its obligations under the GSPA. Consequently, the Tribunal rejected the Nigeria’s argument on nominal damages. Furthermore it  determined that there was no actual evidence that militancy in the Niger Delta had any impact on gas production or transport around the site earmarked by P&ID, or that other NGL prices than the ones forecast by the Claimant should be used.

In the absence of a meaningful challenge from the the Nigerian lawyers, the Tribunal agreed with the Claimant on key aspects of the measure and calculation of damages, including the 20-year period, the other underlying assumptions to project net income, and the discount rate.

 

 Nigeria is now resisting enforcement of the award in the U.S. by claiming it is protected by sovereign immunity. Although states can be immune from legal proceedings in the courts of other countries, that is only true in certain situations. In this case, Nigeria will find it difficult to  claim immunity because it agreed to resolve its dispute with P&ID through arbitration in London. The amount is staggering and raises real questions as how Nigeria would be able to pay such a sum. The Buhari administration's refusal to comply with the out of arbitration agreement requires further scrutiny. Though the cost would have been high, in relative term it would have amounted to 10% of the eventual award which is still running.

 It seems to me that the failure to honour the agreement by Buhari was political and did not adequately assess the outcome of reneging on the agreement despite the advice of the then Attorney-General and Minister of Justice, Mohammed Adoke. It was a monumental failure of common sense and policy decision making. Quite what he hoped to achieve is anyone’s guess. He may well argue that the debt was not incurred under his watch and he would be right, but that does not obviate him of the responsibility to act diligently and exercise good judgement.

Indeed there has been a disconcerting lack of seriousness by the Executive which belies the gravity of the situation. The size of the award which is unprecedented adds to a  surreal sense and perhaps the notion of disbelief. As it stands Nigeria is facing calamitous payments of damages it cannot make. We can only hope , the oversight power of the National Assembly is exercised judiciously to identify and investigate those culprits  responsible for this act of economic sabotage and have them answer to the Nigerian people

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