Nigeria: Case Review: Esso Petroleum And Production Nigeria Limited & SNEPCO v. NNPC*

Last Updated: 4 June 2018
Article by Olufunke A. Adekoya and Ibifubara Berenibara

The Nigerian Court of Appeal confirms that an Arbitral Tribunal has no Jurisdiction to determine contractual disputes, the resolution of which has tax implications for any of the parties.

Introduction

On 22 July 2016, the Nigerian Court of Appeal confirmed in part the decision of the Federal High Court Abuja delivered on 22 May 2012 in Suit No. FHC/ABJ/CS/923/2011. The lower court had set aside an arbitral award made in favour of the appellants on the ground that by issuing an award in a dispute that was "a tax matter" the arbitrators had misconducted themselves and acted without jurisdiction as the dispute was not arbitrable.

The appellate court specifically held that in essence, the appellants' complaints at the arbitral tribunal was that the respondent acted contrary to the terms of a Production Sharing Contract [PSC] between them when it over lifted available crude oil in respect of royalty oil and tax oil to the tune of US$1,584,500,000:00. The over lifting was based on unauthorized Petroleum Profit Tax [PPT] returns which the Respondent had filed with the Federal Inland Revenue Service [FIRS], again contrary to the terms of the PSC.

The appellate court held that a contractual dispute under a Production Sharing Contract which resulted in the over lifting of available crude oil to satisfy royalty and tax obligations under the Petroleum Profit Tax Act [PPTA] was in essence a tax dispute and was therefore not arbitrable.

It found however that disputes as to the contractual right to prepare petroleum profits tax returns and to determine the allocation of oil lifting between the national oil company and the Contractor in the Production Sharing Contract were contractual claims and upheld the arbitration award in that respect.

Background Facts

ESSO Exploration and Production Nigeria Limited and SNEPCO (the Contractors) and the Nigerian National Petroleum Corporation (the Corporation) are partners to a Production Sharing Contract [PSC] aimed at conducting petroleum operations in the contract area.

Under the PSC, the Contractors bear the full cost of operations, prepare the petroleum profits tax returns on behalf of the PSC parties and determine the lifting allocation of available crude oil between the parties. The Corporation is required to file the petroleum profits tax (PPT) returns prepared by the Contractors with the Federal Inland Revenue Service (FIRS), and lift the amount of available crude oil in accordance with the lifting allocation prepared by the Contractors.

The Corporation however unilaterally lifted more cargoes of crude oil than it was entitled to lift under the lifting allocation prepared by the Contractors; and allegedly altered the PPT returns prepared by the Contractors, or unilaterally prepared its own PPT returns and submitted them to the FIRS on behalf of the contract area.

Aggrieved by the Corporation's alleged breach of the contractual agreement between them, the Contractors commenced arbitration against the Corporation in accordance with the arbitration agreement set out in the PSC. The Contractors sought declarations for breach of contract and in particular, that the volume of crude oil lifted by the Corporation is in excess of what it was entitled to and so wrongful; and an order that the Corporation lifts future Crude Oil only in accordance with the Contractors' Lifting Allocation schedules. The Contractors also required the arbitral tribunal to declare that the Corporation cannot under the PSC submit its own unilateral PPT returns or alter tax returns prepared by the Contractors. The Contractors additionally sought orders refunding to them the value of the over lifted crude oil and restraining the Corporation from making or purporting to make tax payments that are inconsistent with tax returns prepared by the Contractors.

The arbitral tribunal delivered its award on 24 October 2010 in favour of the Contractors. The Corporation then applied to the High Court to set aside the arbitral award on the ground that the arbitral tribunal acted without jurisdiction. The basis of the Corporation's application was that the dispute referred to arbitration was a tax dispute which is not arbitrable under Nigeria's Arbitration and Conciliation Act.

The High Court agreed with the Corporation and in 2012 set aside the arbitral award, whereupon the Contractors appealed the decision of the High Court to the Court of Appeal.

Contractors' Submission

On the issue of arbitrability, the Contractors as Appellants argued that the arbitral tribunal had jurisdiction to entertain the dispute because it was a contractual dispute and not a tax dispute. They emphasized that the dispute arose out of the Contractors' right to determine Crude Oil lifting allocation and entitlement under the PSC; the preparation of PPT returns; and the stabilization claim, which are all contractual issues; and which the Corporation was alleged to have breached, by lifting more cargoes of available crude oil than it was entitled to under the allocation prepared by the Contractors, and presenting to the FIRS PPT returns different from the ones prepared by the Contractors.

Corporation's Submission

The Corporation submitted that the dispute the Contractors referred to arbitration was a tax dispute which is not arbitrable by virtue of section 35 of Nigeria's Arbitration and Conciliation Act. The Corporation's position was that resolving the dispute entailed the computation and quantum of tax obligations of the parties under Nigeria's Petroleum Profits Tax Act [the PPTA]; that the alleged alteration of the Petroleum Profit Tax returns will affect the obligations and liability of the Contractors under the tax laws and which will eventually determine the allocation of profit oil and cost oil to them.

The Court of Appeal's Decision

The Court of Appeal observed that all the parties conceded that tax matters are not arbitrable in view of section 35 of Nigeria's Arbitration and Conciliation Act, Cap A18, Laws of the Federation of Nigeria 2004 which provides that the Act "...shall not affect any other law by virtue of which certain disputes – (a) may not be submitted to arbitrations; (b) may be submitted to arbitration only in accordance with the provision of that or another law", and that the court may set aside an arbitral award if the court finds that the subject matter of the dispute is not capable of settlement by arbitration under the laws of Nigeria or that the recognition or enforcement of the award is against public policy of Nigeria.

The Court of Appeal also reasoned that by section 251 of the Constitution of the Federal Republic of Nigeria, 1999, it is the Federal High Court that has exclusive jurisdiction over tax disputes, (but after exhaustion of remedies with the Tax Appeal Tribunal). In essence, tax disputes are excluded from arbitration.

In determining whether the dispute presented to the arbitral tribunal was a contractual or a tax dispute, noting that "a tax dispute is a conflict or controversy relating to tax especially one which has given rise to a legal process as set out in the relevant law/s of the land.", the Court of Appeal reviewed the Contractors' claim within this prism. It held that the dispute between the parties was a tax dispute, since a communal reading of the claim before the arbitral tribunal disclosed the Contractors' complaint as the Corporation's over-lifting of available crude oil in respect of royalty oil and tax oil contrary to the agreement, which was based on the unauthorized PPT returns the Corporation filed with the Federal Internal Revenue Service [FIRS]. On this basis the Contractors' sought a refund from the Corporation of the sum paid by it to the FIRS on this basis. The court concluded that since the dispute between the parties was as to the eventual amount of PPT payable, the dispute was a tax dispute in the garb of a commercial dispute, which the arbitral tribunal lacked jurisdiction to entertain.

The Court of Appeal however declared that the aspect of the claim before the arbitral tribunal relating to preparation of the PPT returns and calculation of lifting allocations can be severed from tax dispute. It consequently affirmed the decision of the High Court which held that tax disputes are not arbitrable, but ordered a restoration of the final award of the arbitral tribunal in respect of preparation of PPT returns and calculation of lifting allocation, which were initially decided in favour of the Contractors by the arbitral tribunal but set aside by the High Court.

Our Thoughts

While the dispute was between the parties to the PSC, the appellate court found that non-compliance with some of the contractual terms had a consequential effect on tax liability of the parties.

This decision especially highlights the anomalous nature of Production Sharing Contracts in Nigeria, as the contracts often contain fiscal regimes in clauses that either replicate aspects of tax legislation, reference tax legislation, or which directly impact upon tax assessment issues. If the decision is not set aside upon a further appeal, it then means that companies cannot validly submit contractual disputes to arbitration where the eventual outcome will impact upon tax obligations.

In view of its decision dismissing the appeal and upholding the lack of jurisdiction of the arbitral tribunal on the ground that the dispute has tax implications, the scope and effectiveness of an arbitration clause in Nigerian PSCs is currently unclear as a claim before a court may be met with an objection based on the existence of an arbitration clause. Meanwhile, and with all due respect to the Court of Appeal, its restoration of the award with respect to the declarations confirming the Contractors' contractual right to prepare PPT returns and calculate of lifting allocation is a pyrrhic victory for the Contractor parties, as any breaches which will result in overlifting of crude oil Appeal has been held to be a 'tax' dispute and non arbitrable.

Footnote

* Appeal No. CA/A/507/2012

Originally published by Lexology.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions