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Enforceability in Nigeria of Choice of Law Clauses in Oil & Gas Contracts

Published: 21 Jul 2020

Introduction

Nigeria is the most populous nation in Africa with an estimated population of 202 million people1. The country is also blessed with a cache of mineral resources including crude oil which has grown to be the major foreign-exchange earner and mainstay for the Nigerian economy. So vital is the oil and gas industry in Nigeria, that the country’s annual budgeted revenue is usually benchmarked against projected global oil prices. Presently, Nigeria is the biggest oil exporter in Africa, with the largest proven natural gas reserves in the continent2. Expectedly, the oil & gas industry has been under intense and continued scrutiny by way of legislative and regulatory interventions by the government, having regard to its strategic importance to the economy3.

Furthermore, it is a known fact that petroleum-related contracts are frequently multi-jurisdictional in nature, sometimes portending international ramifications. This is no less as a result of the fact that the exploration, pricing and trading of crude-oil as a commodity are internationally regulated. Besides, the financial outlay and technical expertise required for executing oil and gas projects makes it imperative for collaboration between local stakeholders, government and multinationals, which necessarily throws up questions on the applicable to govern such collaborative ventures. Accordingly, it is incumbent on parties to petroleum contracts (particularly contracts with international elements) to ascertain the validity and enforceability in Nigeria of foreign law clauses before incorporating such clauses in their contracts.

Position Under Nigerian Law

The Nigerian law of contract is laissez-faire in principle, meaning that contracts (including contracts between private parties in the petroleum sector) are ordinarily governed by the law chosen by the contracting parties. This principle of freedom of contract has been endorsed by the Nigerian Courts in a plethora of cases, subject only to the requirements that the choice of law by the parties is bonafide, legal, not in any way unreasonable and not contrary to public policy or in conflict with the country mandatory legal principles. 

The Court of Appeal of Nigeria, per Ogunbiyi, JCA in Lignes Aeriennes Congolaises v. Air Atlantic Nigeria Ltd4 restated this settled position of law as follows:

“There is no doubt that parties to a contract are allowed within the law to regulate their rights and liabilities themselves. See the case of Gott v. Gandy 2 E & B 845 at p.847 per Erle, J. The courts do not make contracts for the parties. The duty of the court is to give effect to the intention of the parties as it is expressed in and by their contract – see Bramwell B. in Stadhard v Lee 3 B & S 364 at p 372. It is also conceded that when the intention of parties to a contract, as to the law governing the contract, is expressed in words, this certainly expressed intention in general and as a general rule determines the proper law of the contract. For this to be effective, however, the choice of the law must be bona fide, legal and reasonable. In other words, it should not be capricious and absurd, but clearly identifiable and clear cut. Lord Dening M. R. in answer to a question "can parties by their private act remove the jurisdiction vested by our constitution in our court?" had this to say in The Fehmorn (1958) 1 All E.R. 333 at p.335. " ... English courts are in charge of their own proceedings and one of the rules which they apply is that a stipulation that all disputes should be judged by the tribunals of a particular country is not absolutely binding. Such a stipulation is a matter to which the courts of this country will pay much regard and to which they will normally give effect, but it is subject to the overriding principle that no one by his private stipulation can oust these courts of their jurisdiction in a matter that properly belongs to them. I would ask myself, therefore, is this dispute a matter which properly belongs to the courts of this country.”

The Supreme Court has in an array of decisions, pronounced that the rationale for this rule is founded on public policy: men of full age and competent understanding are deemed to have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily must be held sacred and be enforced by Courts of law5. In light of the foregoing, it is settled that in interpreting any contractual instrument under Nigerian law, recourse will be first be made to the choice of law agreed by the parties. 

However, it is useful to note while Nigerian Courts will generally give credence to and enforce the governing law chosen by parties in their contracts in determining their respective legal rights and obligations under the contract, this rule is not sacrosanct. The Supreme Court of Nigeria has held that Nigerian courts may rightfully deviate from the choice of law of the parties where the peculiar facts and circumstances of the contract dictate so. As a matter of fact, Nigerian courts will disregard a foreign law chosen by the parties and apply Nigerian law where the choice of law is unreasonable, absurd, unreal, or capricious6 or where the matter in question is mandatorily governed by Nigerian law. For example, Nigerian law will always be applied to matters relating to the transfer of title of real property situate in Nigeria regardless of the law chosen by the parties, since that is the prescription under our corpus juris. In Osagie v. Osagie & Anor7 Ogunwumiju, J.C.A8 it was held that:
 
"Under the conflict of law rules, wills of immovable or disposition of immovables are governed by the lex situs. This is the law in force in the area where the immovable is located, and it also determines the capacity for disposition and distribution of immovable.”

Notably, the Supreme Court, in the celebrated case of Sonner (Nig.) Ltd v. Partnereedn M.S. Nordwind9, enunciated as follows:

“It is also conceded that when the intention of parties to a contract, as to the law governing the contract, is expressed in words, this expressed intention in general and as a general rule determines the proper law of the contract. But to be effective, the choice of law must be real, genuine, bona fide, legal and reasonable. It should not be capricious and absurd. Choosing German law to govern a contract between a Nigerian shipper and a Liberian ‘shipowner’ is to my mind capricious and unreasonable.

“Luckily, nowadays, a choice of the proper law by the parties is not considered by the Courts as conclusive. Two decisions from the Australian Courts disregarded the law chosen by the parties as the proper law – see Golden Acres Ltd. v. Queensland Estates Ltd. (1969) St. R. Qd 378 and Queensland Estate Ltd. v. Collas (1971) St. R. Qd 75; see also Freehold Land Investment Ltd. v. Queensland Estate Ltd. (1970) 123 C.L.R. 418. All these cases affirm the principle that the foreign law chosen by the parties as the proper law of the contract must have some relationship to and must also be connected with the realities of the contract considered as a whole. In this case, the rice was to be supplied from Thailand, the shippers are in Nigeria, and the contract was to be performed in Nigeria by delivery of 15,322 bags of parboiled rice to the Plaintiffs in Lagos Nigeria. The Bill of Lading was issued by a Liberian Company. The whole transaction from beginning to end had little at nothing to do with Germany. Why then invoke German law as the proper law of the contract?”

Essentially, the above judicial analysis sums up the prevailing approach by Nigerian courts on the subject. Put differently, a foreign law chosen by contracting parties as the law of the contract must have some relationship to and must be connected with the realities of the contract, considered as a whole, i.e. there must be a close connection between the agreed choice of law and the nature of the transaction for the choice to be upheld by the courts (other than in the case of mandatory laws where Nigerian law would apply regardless of the chosen law). In the event the chosen law did not have such a relationship with the contract, Nigerian Courts would nevertheless uphold the parties’ choice if the transaction has no connection with Nigerian law. However, if (i) the agreed choice of law has no relationship whatsoever with the contracting parties or the nature of the contract, and (ii) the contract has a close connection with Nigerian law, the parties’ choice of a foreign law may be deemed by the Nigerian Courts as unreasonable, absurd and capricious and may not be enforced. 

As stated earlier, where the subject matter is mandatorily governed by Nigerian law, the Nigerian courts will apply Nigerian law, regardless of the choice of law by the parties to the contract. The overriding objective for the application of Nigerian mandatory rules is simply the preservation of the integrity of certain vital statutes embodying state policy, such as criminal law or tax laws, as well as competition laws or environmental laws. For petroleum contracts, such mandatory Nigerian laws include the Oil Pipelines Act which regulates the construction and operation of oil & gas transportation; the Associated Gas Re-Injection Act, which requires operators to obtain the requisite permission before flaring gas produced in association with oil; the Environmental Impact Assessment Act; the Environmental Guidelines and Standards for the Petroleum Industry in Nigeria; the National Environmental Standards and Regulations Enforcement Agency Act; the Petroleum (Drilling and Production) Regulations.

Furthermore, from a practical standpoint, it bears noting that the majority of Production Sharing Contracts (PSCs) and Joint Operating Agreements (JOAs), tend to have the Nigerian National Petroleum Corporation (NNPC) or its incorporated subsidiary, Nigerian Petroleum Development Company Limited (NPDC), as parties. As such, such contracts are typically governed by Nigerian law because NNPC and its subsidiaries, being government entities, would ordinarily insist on Nigerian law as the governing law.

In the same vein, licenses, leases and other concession agreements in Nigeria are governed by Nigerian law, since they effectively grant rights and/or interest in an immovable asset, which contract must be mandatorily governed by Nigerian law. In addition, those contracts, usually, further provide that no term or provision of the contract including the agreement of the parties to submit to arbitration shall prevent or limit the government of Nigeria from exercising its inalienable rights over its natural wealth and resources. This standard clause tends to protect the rights of the Government of Nigeria over oil investments within the country and to assert primacy over the exploitation of its natural resources.

On the other hand, joint venture agreements and service contracts where the Nigerian government (and its agencies) is not a party are more likely to be governed by English law10. As espoused above, the Nigerian courts will readily enforce the choice of the parties to those agreement in consonance with the principle of freedom of contract so long as there are no circumstantial reasons earlier mentioned, dissuading the court from doing so.

Conclusion

It is without a doubt that Nigerian law is increasingly gaining popularity as the preferred choice of law between parties to a contract. Be that as it may, contracts involving foreign entities mostly tend to have English law as the governing law. Where this is the case, the choice of foreign law will be recognized and upheld by the Nigerian courts subject to certain conditions. These conditions include inter alia that mandatory laws of Nigeria would prevail over any agreement of the parties that is contrary to public policy or where the application of such foreign law will constitute a contravention of another relevant law within the Nigerian jurisdiction.

Article written by Olayinka Alao, Managing Partner of Renaissance practice: o.alao@renaissancepractice.com

*

1 See World Bank report on Nigeria available at www.worldbank.org/en/country/nigeria/overview 
2 See United States Energy Information Administration report on Nigeria available at www.eia.gov/international/analysis/country/NGA; See also Gas Exporting Countries Forum (GECF), available at https://www.gecf.org/countries/nigeria 
3 There are a panoply of laws and policies regulating the oil and gas industry in Nigeria. These include the Petroleum Act, the Oil in Navigable Waters Act, Oil Pipelines Act etc.
4 (2005) LPELR 5808 (CA).
5 Per Pats Acholonu, JSC in West Construction Company Ltd v. Batalha (2006) LPELR 3478 (SC).
6 Lignes Aeriennes Congolaises v. Air Atlantic Nigeria Ltd (supra).
7 (2009) LPELR-4533(CA).
8 Page 28 (paras. A-B).
9 (1987) LPELR 3494 (SC); (1987) 4 NWLR (Pt. 66) 520; (1987) All NLR 548 at 567-568.
10 The reference here is joint venture contracts executed as between private parties.

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