The arbitrability of a dispute refers to the issue of whether a particular dispute can be settled by arbitration. Most legal systems carve out certain matters which cannot be settled by arbitration; usually on grounds of public policy and such matters or disputes are said to be inarbitrable. In this article, we will discuss the concept of arbitrability under Nigerian law, and in particular, the recent developments in case law in relation to the arbitrability of tax disputes arising from production sharing contracts (PSCs) entered into by the Nigerian National Petroleum Corporation (NNPC) and multinational oil companies.
Arbitrability under Nigerian law
Nigeria is a common law country and the principal law on commercial arbitration is the Arbitration and Conciliation Act (ACA).1 Nigeria is, also, a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) and has domesticated the Convention in the ACA. The ACA is in substantial conformity with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, which was adopted at the Convention of the United Nations Commission on International Trade on 18 June 1985, and recommended to member countries by the General Assembly of the United Nations on 11 December 1985. While the ACA recognises that certain disputes may be incapable of being settled by arbitration, it does not provide a list of such inarbitrable matters. Section 35 of the ACA2 simply provides that the ACA shall not affect any other law by virtue of which certain disputes may not be submitted to arbitration. Furthermore, the grounds listed under section 48 of the ACA for which a court may set aside an arbitral award includes where the court finds that the subject matter of the dispute is not capable of being settled by arbitration or that the award is against the public policy of Nigeria. As there is no statutory laundry list setting out the matters that are not arbitrable under Nigerian law, arbitrability is determined by the courts on a case-by-case basis. In the case of Kano State Urban Development Board v Fanz Construction Ltd,3 the Nigerian Supreme Court, relying on Halsbury’s Laws of England,4 held that a dispute or difference which the parties to an arbitration agreement can agree to refer to arbitration must consist of a civilly justiciable issue and that a fair test of whether a dispute is arbitrable is whether the difference can be compromised lawfully by way of accord and satisfaction. The court went further to hold that an indictment for an offence of a public nature, disputes arising out of an illegal contract, disputes arising under an agreement that is void as being by way of gaming or wagering, and disputes leading to change in status such as divorce petition, cannot be referred to arbitration. Also, on the authority of the decision of the Court of Appeal in B.J. Exports & Chemical Processing Company Ltd v Kaduna Refining and Petrochemical Company Ltd,5 allegations of fraud are not arbitrable in Nigerian law.
Tax disputes arising from production sharing contracts entered into by the Nigerian National Petroleum Corporation and multinational oil companies
In 2011, some multinational oil companies operating in Nigeria including Shell Nigeria Exploration and Production Company Ltd, Esso Exploration and Production Nigeria (Deep Water Ltd), AGIP Exploration Ltd and Total Exploration and Production Nigeria Ltd, who had entered into various PSCs with the NNPC,6 had a dispute with the NNPC over the method to be adopted in the computation of petroleum profit tax (PPT7), education tax,8 royalty and investment tax and operating costs.9 Under the PSCs, portions of available crude oil sufficient to generate proceeds to cover payment of these taxes were to be set aside and allocated for the payment of the taxes. The companies alleged that the NNPC had lifted more crude than was allocated under the PSCs for purposes of payment of PPT. Consequently, the oil companies commenced arbitration proceedings against the NNPC based on the respective PSCs that they had executed. The Federal Inland Revenue Service (FIRS) which is the agency of the federal government of Nigeria that is charged with the responsibility of, among other things, assessing and collecting taxes due to the federal government of Nigeria became aware of these arbitrations, and after unsuccessful attempts to intervene in the proceedings as an interested party, commenced law suits in the Federal High Court (FHC) against the oil companies and the NNPC. In those suits, the FIRS sought, among other orders, a declaration that the disputes which the oil companies had submitted to arbitration were essentially tax disputes and that those disputes are not arbitrable under Nigerian law. The two lawsuits that were instituted by the FIRS are as follows.10
- Suit No. FHC/ABJ/CS/774/11: Federal Inland Revenue Service v (1) Nigerian National Petroleum Corporation (2) Shell Nigeria Exploration & Production Company Limited (3) Esso Exploration & Production (Deep Water) Limited and (4) Total Exploration & Production Nigeria Limited (this case shall hereinafter be referred to as FIRS v Shell & NNPC).
- Suit No. FHC/ABJ/CS/764/11: Federal Inland Revenue Service v (1) Nigerian National Petroleum Corporation (2) Esso Exploration & Production Nigeria (Deep Water) Limited (3) Shell Nigeria Exploration & Production Company Limited (hereinafter referred to as FIRS v Esso & NNPC).
Summary of the facts
This summary of the facts of the tax disputes is based mainly on FIRS v Shell & NNPC. This is because it was the first in the arbitrability cases involving the FIRS, the NNPC and the oil companies and, moreover, the facts and decisions in this matter are on all fours with the facts and decisions in the sister cases. Indeed, the decisions in the two later judgments merely followed and adopted the reasoning of the Honourable Justice Adamu Bello in FIRS v Shell.11 In the case of FIRS v Shell & NNPC, the FIRS sought the determination of three questions.
- Whether the Arbitral Tribunal, in the matter of the arbitration between (1) Esso Exploration and Production Limited, (2) Shell Nigeria Exploration and Production Limited, and (3) Nigeria National Petroleum Corporation, has jurisdiction to determine the subject matter of the arbitration which deals with taxation of the defendants by the Federal Inland Revenue Service, which jurisdiction is conferred on the FHC by section 251 of the Constitution of the Federal Republic of Nigeria, 1999 (as amended).
- Whether the Arbitral Tribunal has jurisdiction to enter a valid award on the taxation of the defendants which will have a binding effect on the plaintiff (the FIRS) in the interpretation, application and administration of the PPT Act, the Deep Offshore Act, the Education Tax Act and the Company Income Tax Act, and any other statutes for the time being in force in Nigeria, as to entitle the plaintiff to seek the reliefs being sought in this suit.
- Whether upon a proper reading of section 251(1) (n) of the Constitution of the Federal Republic of Nigeria 1999 (as amended), the questions in dispute between the parties therein are not within the exclusive jurisdiction of the FHC and thereby rendering the entire arbitral proceedings unconstitutional, null and void ab initio.
In response to the originating summons from the FIRS, the oil companies launched a two-pronged defence. Firstly, they filed a preliminary objection and challenged the locus standi of the FIRS to institute the action and, a fortiori, the court’s jurisdictional competence to entertain the suit. They also joined issues with the FIRS on the merits of the originating summons. There were three grounds on which the preliminary objection was anchored, namely:
- that the FIRS lacked the locus standi to file the suit;
- that the FHC lacked subject matter jurisdiction to entertain the suit; and
- that in any event, the suit was anticipatory, speculative, pre-emptive and premature.
In fleshing out the grounds of the objection, the oil companies argued, regarding the issue of locus standi:
- that the FIRS failed to disclose any real, actual or threatened breach or interference with its powers, functions or obligations;
- that the FIRS had not disclosed how the outcome of the arbitration proceedings would affect it in the discharge of its statutory duties; and
- that the FIRS was not a party to the arbitration proceedings and would not be affected by its outcome.
Regarding the objection that the court lacked subject matter jurisdiction over the dispute that they submitted for arbitration, the defendants characterised their dispute as a contractual dispute which the FHC lacked the jurisdiction to determine.
In response to the preliminary objection, the FIRS argued the following:
- That the huge amounts claimed by the oil companies before the arbitral tribunals comprised revenues which the FIRS had already taxed against the oil companies based on production, royalties, cost oil, PPT, etc.
- That, in the event that the award is made, the FIRS, the Central Bank of Nigeria and indeed the Federal Republic of Nigeria would be compelled to disgorge the revenues already collected.
- That the oil companies who were the claimants in the arbitration proceedings were seeking declarations to the effect that tax oil, which is the mechanism by which PPT is paid for, can only be calculated based on the PPT returns prepared by them12 without any amendment by NNPC.
- That the claim of the oil companies in the arbitration was subversive of and amounts to the usurpation of the fiscal sovereignty of the Federal Republic of Nigeria and therefore, outside the jurisdiction of an arbitral tribunal comprised of private individuals.
- That should such a claim succeed and orders made against NNPC directing it to lift tax oil only on the basis of the computation and returns made by the oil companies, then tax oil from which PPT would be realised and paid to the FIRS would become solely determinable by the oil companies.
- Lastly, it was submitted by the FIRS that should such an award or order be made, it would mean that if a false or incorrect calculation of PPT was made by the oil companies, NNPC would be bound by it and would lift tax oil only with reference to such a false calculation, thereby reducing revenues accruable to the Federal Government of Nigeria.
The decision of the FHC on the issue of the locus standi of the FIRS to commence the action
On the issue of the locus standi of the FIRS to institute the action, the FHC held that the FIRS, being a statutory body established as the sole federal authority responsible for the assessment and collection of taxes on behalf of the Federal Government of Nigeria, had the locus standi to bring an action to seek remedy in respect of any dispute where its statutory functions could be potentially affected. The FHC described the contention by the oil companies that the FIRS lacked locus standi because it was not a party to the arbitral proceedings as preposterous, stating further that it was for the very reason of not being a party to the arbitral proceedings that it brought the court action in the first place.
On the issue of whether or not the FHC had subject matter jurisdiction over the matter, which the oil companies described as contractual, the FHC disagreed with the characterisation of the matter as contractual and took the view that the core of the FIRS’ case was the interpretation of the provisions of section 251 of the 1999 Constitution dealing with the exclusive jurisdiction of the FHC on revenue matters, as well as the provisions of the relevant tax legislations including the PPT Act and whether those issues could be submitted to arbitration as the defendants purported to have done. Based on this characterisation, the court held that the FIRS, being the statutory body established for the purpose of assessment, collection and accounting for all taxes payable to the federal government, could file an action to seek the interpretation of the Constitution as it related to the jurisdiction of the FHC on taxes or revenue of the federal government.
The decision of the FHC on the merits of the action
In its decision on the merits of the case, the FHC held that the tax disputes were not arbitrable. There were five bases for the decision, namely the following.
- Under the PPTA, in particular, sections 3(g), 41 and 42, there is no provision by which the parties to a PSC could refer tax disputes to arbitration.
- The mechanism provided for the resolution of such disputes under section 41 of the PPTA is by appeal to the Body of Appeal Commissioners (now replaced with the Tax Appeal Tribunal) from which a further appeal could be prosecuted to the FHC.
- The PSC is a special contract with statutory flavour in, that, some of its terms are governed by statutes, such as the PPTA, Deep Offshore and Inland Basin Production Sharing Contract Act, among others and that such contracts are within the jurisdiction of the FHC vide section 251(1) (u) of the 1999 Constitution relating to mines and minerals including oilfields, oil mining, geological surveys and natural gas.
- The Constitution of the Federal Republic of Nigeria precludes any other court in Nigeria other than the FHC from exercising jurisdiction over tax matters relating to the federal government revenue.
- • Any determination of the issues raised in the claim by the oil companies before the Arbitration Tribunal will have a negative impact and will not only infringe on the functions and duties of the FIRS but will adversely affect the revenue that would accrue or had accrued to the federal government of Nigeria.
The decision of the Court of Appeal (Shell v FIRS & NNPC)
The oil companies were dissatisfied with the decision of the FHC and prosecuted an appeal to the Court of Appeal. On 31 August 2016, the Court of Appeal, Abuja Judicial Division, handed down its judgment in Appeal No. CA/A/208/2018: Shell Nigeria Exploration and Production & and Others v Federal Inland Revenue Service & NNPC (Shell v FIRS & NNPC)13 . In its judgment, the court agreed with the FHC and held that the FIRS had the locus standi to institute the action and that the claims before the arbitral tribunal were inarbitrable because they were ‘centrally and effectively’ tax matters not contractual disputes. The court also relied on the provisions of section 25114 of the 1999 Constitution of the Federal Republic of Nigeria as the basis for its decision that tax disputes are not arbitrable.
The decision of the Court of Appeal in Esso v FIRS & NNPC
On 10 March 2017, the same Court of Appeal, Abuja Division, handed down its judgment in the sister case in Suit No. CA/A/402/2012:15 Esso Exploration and Production Nigeria Limited & Shell Nigeria Exploration & Production Nigeria Limited v Federal Inland Revenue Service (FIRS) and Nigerian National Petroleum Corporation (Esso v FIRS & NNPC). On the nature of the dispute before the arbitral tribunal, the Court of Appeal held that the dispute which the oil companies submitted to arbitration was basically a contractual dispute on the obligation of the parties not to lift crude oil beyond the allocated quota including tax oil, as well as the right to prepare PPT returns even though the parties decided to guide themselves by the provisions of the relevant tax legislations in determining the lifting allocation of tax oil or in making PPT returns. The court referred to its earlier decisions in the cases of Esso Exploration Nigeria Limited & Anor v NNPC16 and Shell Nigeria Exploration and Production & Ors. v FIRS and Anor17 where it held on facts (which were on all fours with the facts of this case) that the disputes in those cases were centrally and effectively tax matters and held that those decisions were reached per incuriam. However, the Court held that while the dispute was primarily contractual, some of the reliefs which the oil companies sought from the arbitral tribunal raised tax disputes. Specifically, the court held that those aspects of the claim seeking to order the NNPC to cease making PPT returns that are inconsistent with the tax returns prepared by the oil companies themselves and seeking award of damages and other compensation for all losses caused by NNPC’s breaches of the PSC, including wrongful over-lifting of crude oil cargoes with value of approximately US$1.5 billion raised tax disputes for the following reasons:
- those claims and the award of same by the arbitral tribunal eroded the discretionary power of the FIRS pursuant to section 35 (2) and (3) of the PPTA to accept returns filed with it and assess a taxpayer’s liability on the basis of them or refuse to accept the returns and then assess the taxpayer on its own best judgments;
- those claims and the award of same by the arbitral tribunal completely eroded the statutory power vested on the FIRS18 to assess and determine the tax payable under the PPTA;
- those claims and the award of same by the arbitral tribunal made the oil companies the absolute determinant of PPT payable contrary to the provisions of the PPTA and the FIRS Establishment Act;
- those claims and the award of same by the arbitral tribunal defeated the provisions of the PPTA19 which make it an offence to file inaccurate PPT returns;
- those claims and the award of same by the arbitral tribunal defeated the provisions of the PPTA20 which impose a duty on the parties to a PSC to pay PPT as assessed and determined by the FIRS or the Body of Appeal Commissioners21; and
- the claim for and award of damages and compensation would have the effect of ordering the NNPC to refund tax already paid to the Federal Government of Nigeria when neither the FIRS nor the Tax Appeal Tribunal has determined that a refund should be made.
Based on the above findings, the Court of Appeal upheld the part of the judgment of the FHC that nullified the award of those claims which raised tax disputes. The Court, however, held that the FHC was wrong to have nullified the entire arbitral award on the ground that the dispute referred to arbitration was not arbitrable. Lastly, on the question of whether or not the matter was inarbitrable as a result of the exclusive jurisdiction that is conferred on the FHC under section 251(1) of the Constitution, the Court of Appeal held the following:
- vesting of subject matter jurisdiction in a court does not forbid the resolution of such dispute by arbitration unless the dispute is such that it is incapable of being settled by arbitration;
- the exclusive jurisdiction that has been vested on the FHC over certain matters is to preclude the exercise of judicial power by any other court to which section 6 of the Constitution applies;
- an arbitral tribunal sitting in or outside Nigeria is not one of the courts to which section 6 of the Constitution relates and is for that reason incapable of exercising the judicial powers vested in courts under section 6 of the Constitution; and
- arbitration over any of the arbitrable subject matters in respect of which the FHC has been vested with exclusive jurisdiction under section 251(1) of the Constitution is not an encroachment by an arbitral tribunal into the exclusive jurisdiction of the FHC.
It is our view that the judgment of the Court of Appeal in Esso v FIRS & NNPC represents a more robust and nuanced analysis on the issue of the arbitrability of tax disputes arising under PSCs entered into between various oil companies and the Nigerian National Petroleum Corporation. The earlier decisions of the FHC which were upheld by the Court of Appeal in the cases of Esso Exploration Nigeria Limited & Anor v NNPC and Shell Nigeria Exploration and Production & Ors v FIRS and Anor conflated the concept of arbitrability with the exclusive jurisdiction of the FHC under section 251 of the 1999 Constitution (as amended) and gave the erroneous impression that matters listed in section 251 of the Constitution are completely inarbitrable. As argued elsewhere,22 while some of the matters listed in section 251 of the Constitution may, by their very nature, be incapable of being resolved by arbitration; the exclusive jurisdiction of the FHC over certain matters under section 251 has nothing to do with the jurisdiction of an arbitral tribunal or arbitrability for that matter. The decision of the FHC which was affirmed by the Court of Appeal in Shell & Ors v FIRS & NNPC suggesting that the matters listed in section 251 of the 1999 Constitution of Nigeria are inarbitrable is, in our view incorrect. That interpretation would have had a chilling effect on arbitration in Nigeria as it would mean, for instance, that commercial disputes over such matters as admiralty, banking, copyright, patents, trademarks, passing-off, industrial designs and shipping (all of which are matters in respect of which the FHC has been vested with exclusive jurisdiction) are not arbitrable.23 Admiralty matters, for instance, are arbitrable under Nigerian law even though admiralty matters come within the exclusive jurisdiction of the FHC. The decision of the Court of Appeal in Esso v FIRS & NNPC presents a better doctrinal basis for the opinion that specific tax claims or relief sought by the oil companies should not be arbitrable. As noted by the court, the award of those specific tax claims by the arbitral tribunal would completely erode the statutory power vested on the FIRS to assess and determine the tax payable under the PPTA as well as make the oil companies the absolute determinant of PPT payable by them contrary to the provisions of the PPTA and the FIRS Establishment Act. Also, the claim for and award of damages and compensation for the alleged over-lifting of crude oil that was used to pay PPT would have required the NNPC to, as it were, disgorge and refund PPT already paid by the oil companies in circumstances where neither the FIRS nor the Tax Appeal Tribunal had determined that a refund of tax should be made. It is clear, therefore, that the specific tax issues involved significant public interest and some public policy considerations which make them inappropriate for arbitration.
As a standard part of arbitration law, the inarbitrability defence reinforces the fundamentally contractual character of the arbitral process. It provides that non-contractual issues, regardless of their implications for transaction, cannot be submitted to arbitration, because they infringe upon or involve, directly, matters of public law.24 It is agreed among arbitration scholars that the core of the arbitrability argument is that the public – which never signed the arbitration agreement – is hurt directly when a law of fundamental importance to democratic capitalism is improperly enforced.25 It has, therefore, been argued that the idea of an arbitration tribunal that has no national or state powers yet has the jurisdiction to decide on sovereign prerogatives of nations is very unusual.26
In conclusion, the decision of the Court of Appeal in Esso v FIRS & NNPC has clearly straightened the analytical wrinkles that the decisions of both the Federal High Court and the Court of Appeal in the case of Shell v FIRS & NNPC had left on the question of the arbitrability of tax disputes arising under production sharing contracts. The decision has, also, addressed the concerns of arbitration practitioners and users that arose from the suggestion in those decisions that all the matters in respect of which the Federal High Court has been vested with exclusive jurisdiction under section 251 of the Constitution are not arbitrable.
1 Chapter A18, Laws of the Federation of Nigeria 2004.
2 Section 35(a) of the ACA.
3 (1990) 4 NWLR (Pt142)1 at 32-33.
4 4th Edition, page 256, para. 503
5 (2002) LPELR -12175 (A) where the Court of Appeal upheld the decision of the High Court, Kaduna State which granted a party leave to revoke an arbitration agreement and the authority of the arbitrator on the ground that the claim submitted to the arbitration was prima facie fraudulent.
6 NNPC is the Nigerian state-owned oil company.
7 As defined in the Petroleum Profit Tax Act Cap.P13, L.F.N., 2004.
8 As defined in the Education Tax Act Cap. E4 L.F.N, 2004.
9 As defined in the PSC.
10 The third suit was Suit No. FHC/ABJ/CS/923/11: Nigerian National Petroleum Corporation v (1) Esso Exploration & Production Nigeria Limited & (2) Shell Nigeria Exploration & Production Company Limited which the NNPC instituted to set aside the arbitral award that was made against it in one of the arbitral proceedings.
11 Indeed, the Honourable Justice Adamu Belo decided FIRS v Esso, while the set aside suit of NNPC v Esso & Shell was decided by the Honourable Justice Ibrahim Auta who felt persuaded by and adopted the reasoning of Honourable Justice Adamu Bello in the two earlier cases.
12 The companies involved are Shell Nigeria Exploration and Production Company Limited, Esso Exploration and Production (Deep Water) Limited, Nigeria AGIP Exploration Limited and Total Nigeria Exploration and Production Nigeria Limited.
13 This is the appeal that arose from Suit No. FHC/ABJ/CS/744/2011 – FIRS v NNPC.
14 That section confers jurisdiction on the Federal High Court to the exclusion of any other court in civil cases and matters, relating to the revenue of the government of Nigeria and matters connected with or pertaining to taxation of companies.
15 This suit is unreported and arose from Suit No. FHC/AB/CS/764/2011.
16 Suit No. CA/A/507/2012 unreported judgment delivered on 22 July 2016.
17 Suit No.CA/208/2012 unreported judgment delivered on 31 August 2016.
18 Pursuant to sections 35, 36, 37 and 43(1) of the PPTA.
19 Sections 52 and 53 of the PPTA.
20 Sections 43(1) and 46(2) of the PPTA.
21 The Body of Appeal Commissioners has now been replaced by the Tax Appeal Tribunal.
22 See Festus Onyia, Arbitrability of Tax Disputes under Nigerian Law: A Tale of Three Cases 2013 Tax Law Reports of Nigeria (TLRN).
23 According to Asouzu, the import of section 251 of the 1999 Constitution (as amended) and such other statutes by which exclusive jurisdiction is conferred on the Federal High Court in certain matter may be that with respect to those subject matters and the courts (i.e. as between courts), the Federal High Court has exclusive jurisdiction, not necessarily that, in appropriate cases, the relevant subject matters are incapable of being submitted to arbitration. See Amazu A. Asouzu, International Commercial Arbitration and African States: Practice, Participation and Institutional Development (2001) at page 155.
24 Thomas E Charbonneau and Andrew W Sheldrack, Tax Liability and Inarbitrability in International Commercial Arbitration, Florida State University, Journal of Transnational Law & Policy, 27 (1992).
25 See for example, Professor William W Park, Private Adjudicators and the Public Interest: The Expanding Scope of International Arbitration, 12 Brooklyn Journal of International Law, 629 (1986) 630. Park argues, however, that in international commercial matters, the international business community’s need for neutral dispute resolution outweighs society’s interest in supervising adjudication of public law claims.
26 See Luca C M Melchionna; Arbitrability of Tax Disputes, 2004 International Bar Association Newsletter, Vol.9 No. 1 at page 22.