Corruption and confidentiality in contract-based ISDS: The case of P&ID v Nigeria

In September 2020, the English High Court handed down a key decision in the case P&ID v Nigeria. The court was considering Nigeria’s attempt to overturn a USD 10 billion award rendered in an arbitration under a contract between a foreign investor and Nigeria.[1] Although Nigeria did not raise allegations of corruption during the arbitration, it now alleges that the investor obtained the underlying contract by bribing Nigerian officials and that the investor subsequently bribed Nigeria’s legal counsel to ensure that the country would not contest the arbitration vigorously. The court found there was a “strong prima facie case” that the contract was procured by bribes and that the investor’s main witness in the arbitration gave perjured evidence.[2] It further found there was a possibility that Nigeria’s legal counsel in the case had been corrupted.[3] The effect of this judgement is that these issues can now proceed to a full hearing, to determine whether the award should be set aside, which is unlikely to take place until 2022.

Regardless of whether the allegations of corruption in this particular case are true, the saga highlights wider policy concerns about the way that investor–state arbitration intersects with corruption. Given the significant public interests at stake in investor–state arbitration, including the possibility that arbitration may facilitate the corrupt transfer of public funds to private actors, they should not be conducted in private. In addition to the concerns about the lack of transparency in contract-based investor–state arbitration, the case raises more profound questions about whether arbitration is ever an appropriate forum for resolving investor–state disputes.

Background to the arbitration

In 2010, the Nigerian Ministry of Petroleum Resources signed a contract for the construction and operation of a new gas processing facility with P&ID, a company incorporated in the British Virgin Islands.

Under the contract Nigeria was to supply natural gas (“wet gas”) at no cost to P&ID’s facility. For its part, P&ID was to construct and operate the facility. It would process the gas to remove natural gas liquids—which P&ID was entitled to—and return lean gas to Nigeria at no cost, which would be suitable for use in power generation and other purposes.[4]

Both the contract and the circumstances relating to its conclusion were unusual. For one, the contract was based on an unsolicited proposal presented to the Nigerian government by P&ID.[5] No tender was conducted. Moreover, P&ID did not appear to have the experience in the gas sector that would be expected of a company responsible for a multibillion-dollar project—it was an offshore entity with “no assets, only a handful of employees, and was without a website or other presence.”[6]

Under clause 20 of the contract, the parties agreed that the contract was governed by Nigerian law and that disputes under it would be resolved through arbitration at the “venue” of London, England.[7] In August 2012, P&ID initiated arbitration, alleging that Nigeria had repudiated the contract. At that time, P&ID had not commenced construction of the facility or even purchased a site on which the facility could be built.[8] Nevertheless, P&ID argued that it stood ready to carry out its obligations under the contract and that the project foundered due to Nigeria’s failure to perform its side of the deal.

As is common in contract-based investor–state arbitration, the arbitration was conducted in private. Indeed, even the fact that the arbitration was taking place did not become public knowledge until 2015, following a change of government in Nigeria, at which point in time the jurisdictional and merits phases of the arbitration had already concluded. Despite a number of “red flags” of corruption relating to the contract,[9] Nigeria did not directly raise the issue of corruption in its defence of the arbitration. (Nigeria’s lawyers in the arbitration did obliquely describe the Minister of Petroleum Resources at the time the contract was signed “as having been a ‘friendly’ Minister who purported to commit the Government to obligations and concessions which exceeded his powers.”[10]) Based on documents that are publicly available, it seems that the tribunal also did not take any steps to determine whether the contract might have been procured through corruption.

Given the many billions of dollars at stake, the way the arbitration unfolded was also unusual. Nigeria’s lawyers failed to file expert evidence on jurisdictional issues of Nigerian law,[11] or insist on an oral hearing on jurisdiction where P&ID’s evidence might have been tested through cross-examination.[12] At the merits phase, Nigeria failed to challenge the key claims contained in the statement of P&ID’s central witness, its chairman, Michael Quinn.[13] It put forward only one ineffectual witness of its own who did ‘not claim to have first-hand knowledge of any of the relevant events.’[14] The tribunal did hold a hearing on the merits, but it lasted only a few hours.[15] The tribunal concluded that Nigeria had repudiated the contract.

The tribunal’s decision on quantum was based on a single witness statement from the investor. It did not order the production of documents that might have proved (or disproved) these self-serving claims.[16] On the strength of the investor’s evidence, it awarded P&ID USD 6.6 billion in damages plus interest of 7% p.a. The size of the award is extraordinary, given that the investor had not commenced construction of the gas facility and estimated its own expenditure in relation to the project at around USD 40 million.[17] (In the subsequent British court proceedings, the investor conceded that this expenditure had not been incurred by P&ID at all but, rather, by another company owned by a former Nigerian general.)[18]

Nigeria’s attempt to set aside the award in English courts

The arbitral tribunal’s award triggered further litigation in several jurisdictions. However, it was not until November 2019 that Nigeria first raised allegations of corruption in an attempt to convince English courts to set aside the award. As the arbitral tribunal had interpreted the contract as designating London as the seat of the arbitration, English courts had jurisdiction to hear challenges to the award by way of an application to set it aside. Corruption is one of a handful of grounds on which an English court has the power to set aside an arbitral award.[19] If Nigeria does ultimately succeed in getting the award set aside, it will become nearly impossible for P&ID to enforce the award anywhere in the world.

The immediate challenge for Nigeria was that the deadline for commencing proceedings to set aside an award in English courts is 28 days from when the award was rendered. Nigeria had missed this deadline by almost three years. In this context, the English court had to consider whether there was enough prima facie evidence of corruption to justify granting Nigeria an exceptional and unprecedented extension of time in bringing its application to set aside the award.

In clearing this high bar, Nigeria was assisted by new evidence obtained through an application for discovery of banking records made in New York earlier in 2020.[20] As a result of disclosure orders made by the U.S. court, Nigeria was able to introduce evidence of bank transfers to Nigerian government officials that had been made by entities affiliated with P&ID,[21] as well as evidence of large, unexplained cash withdrawals from a P&ID affiliated entity’s Nigerian bank account around the time the contract was signed.[22] This evidence, when considered in light of the many other unusual aspects of the case, led to the court’s conclusion that there was a ‘strong prima facie case’ that the contract was procured by bribes and the granting of an extension of time.

Is private arbitration an appropriate forum for resolving investor–state disputes?

The fact that questions of corruption are being litigated now, almost a decade after the arbitration began, is hardly an ideal outcome. That a USD 10 billion award obtained in these circumstances came so close to being enforced without the question of corruption being examined is even more alarming. The burden of paying such an award would fall on Nigeria’s citizens and taxpayers, not on the government officials involved in the allegedly corrupt transaction.

Regardless of whether Nigeria’s allegations of corruption are ultimately substantiated, the case of P&ID v Nigeria points to two related concerns about arbitration as a method for resolving disputes between states and investors. The first concern relates to confidentiality in contract-based investor–state arbitration. As was the case in P&ID v Nigeria, such arbitrations are normally conducted in private. This prevents timely public scrutiny. Such scrutiny might increase the pressure on a state to provide an account of its own conduct, including the circumstances in which a contract with a foreign investor was negotiated and concluded. In the case of P&ID v Nigeria, for example, it’s hard to imagine that questions about corruption could have been avoided for so long if the public had known that a foreign investor was seeking billions of US dollars compensation for a gas processing facility that was never built. Greater transparency might also lead to the intervention of third parties, with new evidence, in the dispute.

The 2014 UNCITRAL Rules on Transparency in Treaty-Based Investor–State Arbitration provide a model for what greater transparency in contract-based investor–state arbitration could look like.[23] These rules establish default presumptions in favour of transparency, subject to limited exceptions – for example, to protect against disclosure of confidential business information. The fact that equivalent transparency rules do not yet apply in contract-based investor–state arbitrations reflects idiosyncrasies in the way the transparency debate evolved over time; it is not a result of considered arguments that contract-based investor–state arbitration should be exempt from the same level of transparency that applies in treaty-based investor–state arbitration.

Second, the case of P&ID v Nigeria points to wider concerns about arbitration as a forum for the resolution of investor–state disputes. In particular, there is a tension between the political economy of corruption and doctrines, disciplinary practices, and embedded assumptions in the field of arbitration. These include that:

• Arbitration is a mechanism for resolving disputes based on parties’ consent. For this reason, tribunals have historically confined themselves to deciding issues raised by the parties. This means that tribunals tend not to consider the possibility of corruption, unless a clear allegation is made by one of the parties to the disputes.
• Lawyers and officials representing the state in an arbitration may themselves be the beneficiaries of corruption or be subject to institutional constraints that prevent them from speaking out. For this reason, the fact that those representing the state have not raised allegations of corruption does not mean a transaction was legitimate.
• International legal doctrine tends to see the state as a unitary actor, rather than a site of political contestation between groups. These habits of thought can encourage arbitrators to attribute corruption and incompetence on the part of government officials to the state itself. This way of seeing the world makes arbitrators less sympathetic to a state’s allegations of bribery on the part of the investors when such allegations are raised, because such allegations can be perceived as a state raising its own misconduct in having accepted a bribe to defeat a claim against it.
• International arbitrators have a tendency to view arguments based on the law of the host state as technical and irrelevant, even if the purpose of such laws is to prevent corruption or implement a system of oversight over decisions relating to public resources.[24]

There are no easy solutions to these challenges within the existing framework of investor–state arbitration. On this basis, states may wish to go further and consider whether contract disputes are more appropriately resolved in courts than through arbitration.

Author

Jonathan Bonnitcha is an associate with IISD’s Economic Law and Policy Program who is based in Sydney, Australia. He is also a Senior Lecturer at the Law Faculty of the University of New South Wales.

Notes

[1] The dispute has been the subject of detailed investigative reporting by Bloomberg and the Financial Times. See “The $6bn judgment pitting Nigeria against a London court.” (2020.) https://www.bloomberg.com/news/features/2019-09-04/is-one-of-the-world-s-biggest-lawsuits-built-on-a-sham https://www.ft.com/content/91ddbd53-a754-4190-944e-d472921bb81e

[2] Federal Republic of Nigeria v Process & Industrial Developments Limited [2020] EWHC 2379 (Comm), para 226.

[3] Ibid., para 225.

[4] Ibid., para 21.

[5] P&ID v Nigeria, Part Final Award on Liability, ¶37(e) (Jul. 15, 2015).

[6] Supra note 3, para 6.

[7] P&ID v Nigeria, Part Final Award on Jurisdiction, ¶ 7 (Jun. 3, 2014).

[8] Supra note 3, para 209.

[9] The term “red flags” refers to circumstantial evidence that suggests possible corruption. The existence of red flags does not necessarily mean a transaction was corrupt but, rather, points to the need for further inquiries to determine whether a transaction was corrupt: Sayne, A., Gillies, A., & Watkins, A., (2017). Twelve red flags: Corruption risks in the award of extractive sector licenses and contracts. Natural Resource Governance Institute https://resourcegovernance.org/sites/default/files/documents/corruption-risks-in-the-award-of-extractive-sector-licenses-and-contracts.pdf

[10] Supra note 6, ¶41 (Jul. 15, 2015).

[11] Supra note 8, ¶ 33. (Jun. 3, 2014).

[12] Ibid., ¶¶ 30-31 (Jun. 3, 2014).

[13] Ibid. ¶ 29 (Jun. 3, 2014).

[14] Supra note 6, ¶ 68 (Jul. 15, 2015).

[15] Supra note 3, para 52.

[16] Supra note 3, para 205.

[17] First Witness Statement of Michael Quinn, 10 February 2014, para 47.

[18] Supra note 3, para 204.

[19] Arbitration Act (1996) section 68(2)(g)

[20] Supra note 3, paras 111–112

[21] Supra note 3, paras 196–199.

[22] Supra note 3, para 191

[23] UNCITRAL. (2014). UNCITRAL rules on transparency in treaty-based investor-state arbitration. https://www.uncitral.org/pdf/english/texts/arbitration/rules-on-transparency/Rules-on-Transparency-E.pdf.

[24] By way of example, in the award on jurisdiction in P&ID v Nigeria, the tribunal gave short shrift to Nigeria’s argument that the Ministry of Petroleum Resources possessed the capacity to enter into contracts on behalf of the Government of Nigeria: P&ID v Nigeria, Part Final Award on Jurisdiction, ¶¶ 39-41 (Jun. 3, 2014). In the award on the merits, the tribunal described Nigeria’s argument that only the Nigerian National Petroleum Corporation possessed the power to bind Nigeria in relation to gas contracts (and, therefore, that the Ministry of Petroleum Resources lacked this power) as ‘technical in the highest degree’: P&ID v Nigeria, Part Final Award on Jurisdiction, ¶¶ 48 (Jun. 3, 2014). To be sure, neither argument was linked to a concrete allegation of corruption. Nevertheless, the way the tribunal handled these arguments failed to recognise that substantive and procedural limits on government officials’ power to enter into contracts may serve important purposes in ensuring probity in government contracting.