AS a matter of basic investment prudence, it is incumbent upon a foreign investor to ascertain the laws that are applicable in the sector targeted for investment in the host country. African states have recently adopted an approach in which several governments have taken statutory measures to cure what they perceive as an inequitable distribution of their energy and mineral resources.
For example, in 2017, Tanzania introduced a number of laws, including the Natural Wealth and Resources Contracts (Review and Re-negotiation of Unconscionable Terms) Act, 2017 and the Natural Wealth and Resources (Permanent Sovereignty) Act, which accord the government powers to renegotiate contracts with investors on terms more favourable to the state. In 2015, Zimbabwe introduced the Public Debt Management Act (Chapter 22:21) with the objective to “provide for the management of public debt in Zimbabwe”. These various domestic pieces of legislation can have an effect on energy agreements, including the sovereign guarantee framework.
Any serious investor contemplating injecting either debt or capital to energy projects in Africa in general or Zimbabwe in particular has to be cognisant of the fact that there are a number of legal requirements to be complied with. On the other hand, the government (through the relevant ministries or departments and other statutory bodies) should be aware of the duty to ensure that it does not assume obligations or commit to energy agreements which will not be fulfilled. The domestic courts may not offer adequate protection to governments as will be demonstrated by the example from the case of Balkan Energy v Government of Ghana.
An efficacious dispute resolution is one that ultimately serves to preserve relations as parties may need to engage with each other commercially in future. For both the investors and the government, the consequences may be too ghastly to contemplate if careful consideration is not given right at the inception of the agreement.
The importance of paying attention to potential areas of dispute and the mechanisms of resolution can therefore not be overemphasised. In this article, examples are drawn to potential tripwires in energy contracts especially the all-important power purchase agreement (PPA) and the sovereign support agreements, that is what the investor needs to know, the disputes likely to arise therefrom, how to best resolve them and how they can be minimised.
A carefully nuanced approach is suggested herein for both the private sector and the government and statutory bodies when concluding energy agreements. PPAs typically run for long periods and this increases the likelihood of disputes during the course thereof.
This is because in any facet of life where there is interaction between two or among more than two entities, disputes are inevitable. In the context of PPAs, the purpose of any progressive dispute resolution mechanism should be to ensure that whatever type of dispute arises, it gets resolved fast so the parties can revert to concentrating on carrying out their respective obligations under the agreement so that the energy project does not collapse. When a dispute is protracted, neither party achieves victory in its strict sense.
Disputes arise for a variety of reasons. These disputes can relate to a range of issues such as non-delivery of power, non-payment for services or electricity delivered, technical or financial issues, for example, an invoicing dispute, a dispute in the way the power is metered, or an interpretation of an industry term. Disputes can also relate to an interpretation of the energy agreement, especially around areas relating to the manner or timing of each party’s obligations.
The questions which should be then be considered by both investors and the government, the Attorney-General’s Office or statutory bodies such as the Zimbabwe Electricity Transmission and Distribution Company in negotiating not only PPAs, but all energy agreements in general should be as follows:
How should the agreement be structured in the first place so that in the event of a dispute, the matter can be resolved in an effective, affordable and expeditious manner?
What are the likely issues to arise?
How can the entity concerned ensure compliance with the law and perform its obligations in terms of the agreement so as to minimise its exposure?
How can disputes be resolved without damaging relations between the entities concerned?
Is there a likelihood of effective relief if there is victory? Is the victory pyrrhic? Is the victory a resounding gong?
The case of Balkan Energy Limited and Balkan Energy (Ghana) Limited v Government of Ghana
Background of the case
Faced with a severe power shortage in 2007, Ghana negotiated with Balkan Energy LLC for the refurbishment and commissioning of the Osagyefo Barge, an unused power barge located in the Western Region of Ghana. A power barge is a self-contained floating power plant that can be built and installed quickly to supply electricity to coastal areas and regions near rivers or dams in times of crises.
To address that shortage, the Government of Ghana negotiated with Balkan Energy for the refurbishment and commissioning of the Osagyefo Barge which had been unused for a long time. Balkan Energy is an energy company based in Texas but wholly owned by a United Kingdom entity.
The power purchase agreement between the Government of Ghana and Balkan Energy Ghana:
On July 27, 2007, Balkan Energy and the Government of Ghana entered into the power purchase agreement. Under the PPA, Balkan Ghana (an entity solely formed to comply with Ghanaian laws) was responsible for:
refurbishing, equipping, commissioning, testing and operating the Osagyefo barge.
On the other hand, the Government of Ghana’s responsibilities under the PPA included:
providing electricity onsite;
connecting the site to the national electrical grid through transmission lines;
facilitating the importation of equipment and the acquisition of permits, approvals, and visas; and
taking and paying for all electricity generated by the barge during the contract term.
Provisions of the constitution of Ghana relating to international business transactions:
The constitution of Ghana (in Article 181(5)) requires parliamentary approval for an “international business or economic transaction to which the Government is a party”.
In entering into the PPA, Balkan Ghana insisted on express assurances that the Republic would obtain all necessary approvals — and in particular, assurances that the parliamentary approval requirement of Article 181(5) would not apply.
Warranties by the state
In entering into the PPA, Balkan Ghana insisted on express assurances that the Republic would obtain all necessary approvals — and in particular, assurances that the parliamentary approval requirement of Article 181(5) would not apply. Article 29.2 of the PPA thus expressly represented and warranted that:
“(t)he Government of Ghana has taken all actions necessary … to authorise it to execute . . . the terms and conditions of this agreement” and that “(t)he Government of Ghana has the full legal right, power, and authority for and on behalf of the Government of Ghana to pledge the full faith and credit of the Republic of Ghana under the terms of this Agreement.”
In addition, Article 7.2 of the PPA required, as a condition precedent, that the Government of Ghana furnish a legal opinion concerning its authority to enter into the agreement. That provision called for both “a letter from the Government of Ghana that all the required approvals from the relevant authorities in Ghana have been obtained” as well as “[a] legal opinion of the Attorney-General of the Republic of Ghana as to the validity, enforceability and binding effect of this agreement.”
Consistent with that requirement, Ghana’s Attorney-General issued two legal opinions on October 26, 2007. The first opinion expressly addressed Article 181(5)’s parliamentary approval requirement and represented that it did not apply because Balkan Ghana was a local rather than foreign entity (even if ultimately owned by a foreign parent).
The Attorney-General relied on another energy dispute in the Supreme Court case of Attorney-General versus Faroe Atlantic Co Ltd (2005-2006) SCGLR 271.
The second opinion represented more generally that “Government of Ghana has the power to enter into the Project Agreements and to exercise its rights and perform its obligations thereunder, and execution of the project agreements on behalf of Government of Ghana by the person(s) who executed the project agreements was duly authorised”.
Disputes, the New York Convention and the ‘Great Balkan Arbitration’ When a dispute arose between the parties regarding the failure by Ghana to provide electricity to the barge, Balkan took the dispute to the Netherlands — the country the PPA designated as the place of arbitration and obtained an award in sum of around US$12 million.
Ghana, like Zimbabwe, is party to the New York Convention. The Netherlands, the seat of the arbitration, is also a party.
The New York Convention is an international treaty signed by over 150 countries that is designed to facilitate and expedite the recognition and enforcement of foreign arbitral awards.
To that end, the convention requires that “each contracting state shall recognise arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles”.
The dispute was heavily protracted and raged for more than a decade. In the process, heavy legal costs were expended on both sides.
Some of the lessons
The “obsolescing bargain” theory When negotiating agreements, especially the sovereign guarantee framework, foreign investors ought to acquaint themselves with the relevant legal regime of the host country before assuming any obligations.
During the negotiation process, investors usually have a higher bargaining power over the government as the latter will be typically desperate to attract foreign direct investment. According to the “obsolescing bargain” theory, over time; the bargaining power of government increases relative to that of the investor due to the hostage effect as investors would have committed substantial sums (Investment Treaty News, Robert Howse, Issue 3, Volume 1, April 2011).
As a result, governments sometimes are tempted to shift goal posts to the extent of even demanding a renegotiation of the contracts or reneging on earlier commitments. In the Balkan case, the government even argued that the PPA was not binding on it despite having benefited to the tune of US$12 million by Balkan and despite having made warranties on the binding nature of the agreement.
While the Zimbabwean laws do not have the equivalent of Article 185 of the Constitution of Ghana, there are laws which may affect transactions between investors and the government and which may have overreaching implications if not observed. Section 300 of the constitution provides that an Act of Parliament must set limits on debts and obligations whose repayment is guaranteed by the State.
Section 24 of the Public Debt Management Act provides that any person wishing to enter into any transaction which purporting to bind the ministry, public entity, statutory body may obtain, through the minister, the written opinion of the Attorney-General on the question of whether such transaction is not subject to certain statutory restrictions set out under the Act. The Balkan Energy case demonstrates how advice from the Attorney-General’s Office can have serious consequences for the government.
The case for dispute resolution
The dispute in the case pitting the Government of Ghana and Balkan Energy took more than a decade to resolve in various courts and tribunals across the world and at vast expense to both parties. From the Government of Ghana example, it can be gleaned that arbitration is not always the cheapest and expedient avenue with which to settle disputes.
Not all disputes are worth fighting in arbitration as significant legal costs and time may be expended if careful consideration is not given. Besides the legal expenses which can run into millions of United States dollars, there is also the opportunity cost to consider.
Legal counsel experienced in commercial drafting will often ensure that tiered or escalation clauses are inserted in a commercial agreement especially in an energy deal as they are most effective in relationship preservation. Typically, the parties agree that before any litigation or arbitration can be embarked upon, other forms of alternative dispute resolution should be followed such as structured negotiations, mediation, early neutral evaluation, dispute review board, expert determination or adjudication.
For technical issues such as the achievement of Commercial Operations Date (COD), metering, measurement or capacity issues, the dispute can be submitted to an independent engineer. The independent expert (a lawyer, chartered accountant or electrical or power engineer) can help resolve the dispute, without resorting to the Arbitration Act (Chapter 7:15) within a period not exceeding a set number of days.
In most PPAs in Zimbabwe, the usual standard period is 20 days. The list of issues that can be submitted to an independent expert can be agreed on during the negotiation stage and then be included in the PPA. The mandate of the independent expert is then recorded in a separate agreement between the independent expert and the PPA contracting parties.
Stabilisation clauses are encouraged, especially in sovereign guarantees where there is direct engagement with the government. A stabilisation clause is one that seeks to address changes in law in the host state during the life of the project. These usually come in three forms and are the most effective weapon for investors to counter the obsolescing bargain by host governments.
Firstly, there are freezing clauses i.e. those which freeze or fix the domestic legislation or regulations affecting the foreign investor for the life of the project notwithstanding any subsequent changes in law.
In March 2018, a report was prepared for the International Finance and United Nations Special Business Representative to the Secretary-General on Business and Human Rights raising concerns on how these are being used in poorer countries such as those in Sub-Saharan Africa, especially in mining projects with burdensome consequences on the states.
Secondly, there are economic equilibrium clauses i.e. those which require an investor to comply with the new laws, but to be compensated by the host government for doing so. The third form is the hybrid clause which combines the freezing and economic equilibrium clause. The World Bank and other multi-lateral development organisations encourage the adoption of clauses that allow an investor to sue a state if the terms on which they invested change, as a way of increasing investment in Africa and developing economies in general.
Investors need to insist on these as a way of mitigating risk. Government should also carefully scrutinise these before appending signatures to sovereign guarantees in the euphoria of the prospects of foreign investment. A breach of these clauses can have serious consequences for the government such as the downgrading of credit status by the rating agencies.
Case study: Municipal courts protection and the defence of immunity versus the New York Convention
Using enforcement mechanisms in the New York Convention, foreign companies have successfully brought arbitrations against African states that have tried to renege on undertakings made in agreements, especially in the energy and infrastructure sectors. In most instances, the domestic or municipal courts always tried to protect their states. The Balkan case is a clear example of this. But that case is not isolated:
In 2010, the Nigerian government (through its Ministry of Petroleum Resources) entered into a Gas Supply and Processing Agreement with a UK firm, Process & Industrial Developments Limited (P&ID). The Nigerian government was to supply natural gas (wet gas) at no cost via a government pipeline to the site of P&ID’s production facility. P&ID was required to construct and operate the facility.
When a dispute arose between the parties, an arbitral award was issued against the Nigerian Government in the sum of US$9,6 billion or have its assets in the United Kingdom attached to satisfy the amount. The Nigerian courts could not stop enforcement of the arbitral award.
In 2019, the English commercial court upheld the validity of the award (see: Process & Industrial Developments Limited v Federal State of Nigeria (2019) EWHC 2241).
The same can also be said of the construction dispute between CMC (an Italian company) and the Government of Mozambique concerning the dispute around rehabilitation works carried out on part of Mozambique’s main road (the N1) which runs from Maputo in the south to Pemba in the north (the Namacurra-Rio Ligonha Project).
In overall, the Balkan Energy case shows that the New York Convention is effective in protecting investors. Nyangwa is an energy and commercial litigation lawyer at MawereSibanda Commercial Lawyers where he is a partner. This article is part of a series focussing on the legal, economic and other areas around the energy sector in Zimbabwe.