In the recently published Abuja Court of Appeal case of Statoil (Nigeria) Limited & Anor v. Federal Inland Revenue Service & Anor ((2014) LPELR-23144(CA)) (“Statoil”) dated 13 June 2014,  the Nigerian court held that a third party had locus standi to challenge an arbitration agreement to which it was not a party.

This decision has been highly criticised by the Nigerian arbitration community, as it appears to have no basis in Nigeria’s Arbitration and Conciliation Act 2004 (“ACA”).  This decision may undermine many of the positive steps taken by Nigeria in recent years to establish itself as one of the more arbitration-friendly jurisdictions in Africa.

Statoil and Texaco, the appellants in Statoil, were one of several oil consortia to have initiated arbitration proceedings against the Nigerian National Petroleum Corporation (“NNPC”).  These arbitrations concerned the payment of “petroleum tax” on oil lifted under production sharing contracts (“PSC”) dating back to 1993.  Initially, the NNPC had obtained a court injunction against the arbitration proceedings on the grounds that tax disputes were not arbitrable under Nigerian law.  However, the injunction was subsequently overturned by the Lagos Court of Appeal in July 2013.

As a further attempt to frustrate the arbitration, the Federal Inland Revenue Service (“FIRS”) applied to the courts to challenge the validity of the arbitration agreement between Statoil, Texaco and the NNPC.  Counsel for the FIRS argued that the purpose of the arbitration was to avoid the proper computation of taxes accruable to its account, stating that:

“[t]he whole game […] was to exclude the [FIRS] from the clandestine arrangement in the Arbitration Tribunal so that in the event the award is made, as it is evident that the tribunal is rail-roaded and programmed for that purpose, the [FIRS] as the Central and component part of the Government of the Federation, will be compelled to disgorge revenues already and severally collected, and allocated, which will form part of the awards to be eventually made by the Arbitral Tribunal.”

The Abuja Court of Appeal agreed and confirmed that FIRS had locus standi to make such a challenge, despite the fact that it was not party to the agreement itself.  In its decision, the Court of Appeal noted that if the claimants were successful with their claim, the FIRS would lose tax revenue and therefore would be affected by the outcome of the arbitration.  With this in mind, Tine Tur J of the Abuja Court of Appeal stated:

“[i]f a party to an arbitral agreement can challenge the jurisdiction of the Arbitration Tribunal, or that the arbitral agreement was ab initio, null and void, what about a person or authority, such as the [FIRS], who was not a party to the agreement but complains […] that the proceedings or subsequent award by an arbitral tribunal constitute an infringement of some provisions of the Constitution or the laws of the land or impede her constitutional and statutory functions or powers?  Would the person be debarred from seeking declaratory remedies, or by originating summons?  I do not think so.  Where there is a proved wrong, there has to be a remedy.”   

Neither the ACA nor any other Nigerian statute suggests that the courts have the power to allow third parties to challenge the validity of an arbitration agreement or the jurisdiction of the tribunal.  Indeed, the decision appears to contradict Section 34 ACA, which provides that “a Court shall not intervene [in arbitral proceedings] in any matter governed by this Act except where so provided in this Act.”  While the reasoning in the judgment is difficult to follow, it appears that Tine Tur J, on identifying a perceived wrong, considered it necessary to remedy such a wrong, regardless of whether or not statute allows for such a remedy.

The court issued its decision despite the fact that the arbitration was still pending.  In the words of Tine Tur J :

“I am of the humble opinion that it will be in the best interest of the [FIRS] not to wait or stand by for the Arbitration Tribunal to complete the proceedings and make an award.  [The FIRS] has the locus standing to act timeously to arrest the situation by a declaratory action or originating summons in a Court of Law.  Where the claim succeeds, the Court may make a declaration that the arbitral agreement was void ab initio or that the Arbitral Tribunal lacked the jurisdiction to have entertained the dispute on grounds of constitutional or statutory illegality etc.”

The decision is particularly damaging to international arbitration in Nigeria, as it conflicts with two arbitration-friendly Nigerian Court of Appeal decisions from July 2013 and February 2014.  These decisions had upheld the principle of non-intervention as set out in Section 34 ACA.  In these decisions the Court of Appeal had overturned injunctions seeking to restrain arbitral proceedings, relying on Section 34 ACA and holding that the courts had no power under the ACA to restrain arbitral proceedings with an ex-parte injunction.  Such conflicting decisions create an unpredictable environment for arbitration.

Despite the recent decision of Statoil, Nigeria has taken positive steps to establish a suitable legal framework for international arbitration.  The ACA, enacted in 2004, is based on the UNCITRAL Model Law and the Lagos Court of Appeal has confirmed that foreign arbitral awards will be enforced directly in Nigeria under Section 51(1) ACA and the New York Convention.

However, the decision in Statoil, which appears to have been based on the whims of the judge in question rather than the applicable arbitration law, shows that arbitration in Nigeria remains unpredictable.  Therefore, parties looking to invest in Nigeria should be aware of these risks when negotiating the dispute resolution clauses of their agreements.