AN ASSESSMENT OF THE IMPLICATIONS OF ARTICLE 8(1) OF THE CHINA-NIGERIA COMMERCIAL LOAN AGREEMENT. By Abdulganiy Olayinka & Halima Adeola-Bello.

ABSTRACT

The apocryphal story about the Nigerian government ceding the sovereignty of Nigeria to China in the name of a commercial loan agreement has elicited serious interest from the public on the details and outcome of this deal. This is borne out of the fact that the House of Representatives Committee raised the alarm over the alleged waiver of Nigeria’s sovereignty. The Federal House of Representatives, as part of its oversight function, claimed to have discovered that the loan agreement contained a clause in which Nigeria’s sovereignty was supposedly traded off. Due to the sensitivity of this issue, it is not surprising that the conversation has been heavily politicized and the public space has been awash with comments and outrage which are not completely based on facts due to evident misunderstanding of the legal terms in these agreements. The ambition of this article is to contribute to these discussions from a legal perspective while also going further to give demystifying answers to some queries (which are mostly borne out of confusion) which might come up on the mind of many Nigerians.

INTRODUCTION.  

Recently, the House of Representatives summoned the Minister of Transportation, Hon. Rotimi Amaechi; Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed; and Minister of Communications and Digital Economy, Alhaji Isa Pantami; over a commercial loan agreement with China, which contained a waiver clause. Article 8(1) of the commercial loan agreement signed on September 5, 2018, between the Federal Ministry of Finance and the Export-Import Bank of China for the Nigeria National Information and Communication Technology (ICT) Infrastructure Backbone Phase II Project is said to concede Nigeria’s sovereignty to China. The controversial article states:

“The borrower hereby irrevocably waives any immunity on the grounds of sovereign or otherwise for itself or its property in connection with any arbitration proceeding pursuant to Article 8(5), thereof with the enforcement of any arbitral award pursuant thereto, except for the military assets and diplomatic assets”

From the wordings above, it is pellucid that this clause does not in any way cede Nigeria’s sovereignty to the Asian world power. The effect of this clause is to waive Nigeria’s immunity as a sovereign state which ordinarily would have prevented it from being sued in the local court of another state without its consent and also protect state assets from being seized by law enforcement agents of another state. It must be recognized that root of the controversy germinated from the use of the term “sovereign immunity” which is misconstrued and clearly unappreciated by many commentators on this subject. This article would answer the following questions in order to lay these controversies to rest:

• What is State Immunity?
•  Can a state waive its immunity and on what grounds?
• Which type of borrower asks for this type of assurance and for what reason?
• Is the government allowed to use our sovereignty as a bargaining chip without the knowledge of the people and the national assembly?
• What are the possible implications of this commercial loan agreement for Nigeria?

WHAT IS STATE IMMUNITY?

State Immunity is a principle of public International Law that is often relied on by states to claim that the particular court or tribunal does not have jurisdiction over it or to prevent enforcement of an award or judgment against any of its assets. The concept of State Immunity is one hinged on equality of States. This is often expressed by the maxim “par in parem non habet imperium” meaning “equals do not have authority over one another”. Simply put, no state has the right to judge the actions of another by the standards of its national law. Article 5 of the United Nations Convention on Jurisdictional Immunities of States and Their Property provides that “A State enjoys immunity, in respect of itself and its property, from the jurisdiction of the courts of another State subject to the provisions of the present Convention.”

From the above provision of the convention, State immunity under international law comes up in two forms which are:

• Immunity from Jurisdiction
•  Immunity from Execution

Immunity from Jurisdiction: This entails that in particular situations, a court is prevented from exercising jurisdiction over a foreign state. Jurisdictional immunity protects a state from being sued before the court of another sovereign state and by extension, arbitral tribunals. When a party is immune from adjudication, the court will be prevented from considering claims against that party and awarding a judgment or declaring rights and obligations against it. This goes to say that a state like Nigeria can refuse to participate in a litigation suit against her in the court of a foreign state or before an arbitral tribunal in that state.

Immunity from Execution: If a party is immune from enforcement and execution, the court will be prevented from recognizing a foreign judgment or an arbitral award against the immune party and from making and executing orders or injunctions against it. Immunity from execution protects a state from having its assets seized for any reason by a foreign state. By it, state assets are protected from seizure by the law enforcement agencies of another state.

CAN A STATE WAIVE ITS IMMUNITY AND ON WHAT GROUNDS?

A waiver of immunity means the voluntary submission of a sovereign state to the jurisdiction of the courts in another state. Article 7[1] of the United Nations Convention on Jurisdictional Immunities of States and Their Property provides exceptions to the principle of State Immunity. Going by that provision, a State cannot invoke immunity from jurisdiction in a proceeding before a court of another State with regard to a matter or case if it has expressly consented to the exercise of jurisdiction by the court with regard to the matter or case. The waiver of state immunity could be indicated either by international agreement, in a written contract, or by a declaration before the court or by written communication in a specific proceeding. Other ways in which a state can waive her immunity is by instituting proceedings without claiming immunity, and by intervening in or taking any steps in any suit (other than to claim immunity).[2]

Similar to how a private individual can choose to waive certain rights accruing to him, a state can elect to waive its immunity rights in certain situations which includes the signing of commercial agreements[3] or employment contracts[4]. If a State engages in a commercial transaction with a foreign natural or juridical person and, under the applicable rules of private international law, differences relating to the commercial transaction fall within the jurisdiction of a court of another State, the State cannot invoke immunity from that jurisdiction in a proceeding arising out of that commercial transaction. In the instant case, Nigeria by that clause waived its immunity from jurisdiction and also execution. The effect of this is that in the event of a breach of the contract, Nigeria would be compelled to appear before an arbitral tribunal and be bound by its award. Its properties would also not be protected by immunity from execution in the event that it comes to a situation where China would have to take over some of its properties to offset the said debt. It is noteworthy that a waiver of this sort is limited to the legal instrument under which they are given, that is, the sovereign immunity privilege is only waived for the implementation of this particular loan agreement between Nigeria and the Exim Bank of China in 2018.  

WHICH TYPE OF BORROWER ASKS FOR THIS TYPE OF ASSURANCE AND FOR WHAT REASON?

The accelerating level of involvement of states in world trade activities led to the development of a more restrictive approach to state immunity, where a distinction is drawn between acts of a sovereign nature and acts of a commercial nature. These days, many jurisdictions have abandoned the principle of absolute immunity and instead, adopted the principle of restricted immunity which prevents states from pleading sovereign immunity in commercial transactions or agreements.  Under the restrictive approach, immunity is only available in respect of acts resulting from the exercise of sovereign power. As such, states may not claim immunity in respect of commercial activities or over commercial assets.

Approaching this issue objectively, one would appreciate why China needed to include the waiver of the immunity clause in the Commercial loan agreement. It does not require a thorough due-diligence test to realize that the Nigerian government and its agencies are notorious for shielding themselves against claims of breach of contract, by relying on sovereign immunity. In the case of AIC Ltd v Federal Government of Nigeria (2003) EWHC 1357 (QB), it was held that the Federal Government of Nigeria and its Attorney General are immune from the jurisdiction. Holding further that the bank accounts that have been attached are the subject of immunity from execution. Also, in the case of Avionics Technologies Limited v. The Federal Republic of Nigeria, Attorney General of the Federation of Nigeria [2016] EWHC 1761 (Comm) and Continental Transfer Technical Limited v FRN & Ors. (2009) EWHC 2898 amongst others, the plaintiffs lost huge sums of money flowing from the fact that the Nigerian government was able to successfully plead sovereign immunity.

Based on the likelihood of states to breach agreements and then invoke sovereign immunity to evade liability, it is now common practice for commercial parties often try to manage the risks associated with state immunity by obtaining a contractual waiver of immunity, whereby the state waives and agrees not to claim the immunity it would otherwise be entitled to. This would enable them to seek legal redress in courts or arbitration tribunals if and when required. The waiver of the sovereign immunity clause is therefore a standard clause in international commercial agreements. Broadly speaking, any lender granting such a huge loan will require that some security be attached as a guarantee in the event of a default from the borrower.

           Researchers have also pointed out that clauses like this appear to be standard in Chinese loan contracts. In similar transactions with other developing states, China has employed similar clauses of waived sovereign immunity as terms and conditions where the borrower defaults in servicing debts – save for military or diplomatic assets, China recovers its loans by taking hold of the infrastructures of its borrowers as contained in the commercial loan agreement. Similar clauses can be seen in the Commercial loan agreement for the construction of the Kenya standard gauge railway and Mombasa port[5], Hambantota, Sri Lanka[6], Zambia[7] amongst others.

Is the government allowed to use our sovereignty as a bargaining chip without the knowledge of the people and the national assembly?

The words of Mr. Femi Fani-Kayode in his tweet while reacting to the controversy is very apt and instructive, he said: “You cannot take over another country’s sovereignty without a war. They would have to kill us all first before they can take over our nation’s sovereignty &independence. They would have to come here, conquer us by force of arms, remove our flag & raise theirs over our territory…”[8] As a nation-state, Nigeria can only lose her sovereignty, if there is no more Nigeria as a State defined by territory, government, and population. In the absence of the dissolution of Nigeria as it is, there cannot be any loss of national sovereignty. It is only a part of sovereignty that can be ceded in form of exercise of authority. Sovereignty is not an asset that is capable of being used as a bargaining chip by the government. It is vested in the nation, in the people.

It is ludicrous that the House of Representatives has made an issue out of a controversy that could have been resolved by merely consulting with legal practitioners to shed more light on the “controversial clause”. It is, in fact, more ludicrous that the National Assembly was bypassed by an important defect in securing the commercial loan agreement which runs contrary to section 21 (1) of the DEBT MANAGEMENT OFFICE ACT ESTABLISHMENT (E.T.C.) ACT 2003 which provides that: No external loan shall be approved or obtained by the Minister unless its terms and conditions shall have been laid before the National Assembly and approved by, its resolution.” It is therefore submitted on this note that the FG is required by law to have informed the National Assembly of the terms of the loan and also wait for approval by resolution of the house before going further with such commercial loan agreement.

What are the possible implications of this commercial loan agreement for Nigeria?

By signing this commercial loan agreement, there are two possible implications for Nigeria. First is that, since the clause is a condition, Nigeria would be granted the loan having waived their state immunity as a security to the Chinese creditor. If the loan is judiciously channeled to carry out the projects in which the loan is originally supposed to serve, then the further implication is improved infrastructure in a key sector of the Nigerian economy. Contrary to the spurious narratives engineered out of lack of understanding of the contractual clause, this waiver is restricted to this particular contract and does not extend to other contracts where such term is expressly agreed upon. Therefore, the sovereign immunity privilege was only waived here for the implementation of the loan agreement with the Exim Bank of China of 2018. The state of Nigeria retains its privilege for any other circumstance; even in the context of the agreement, only the contractual counterpart Exim Bank (excluding another third party) can claim to benefit from the waiver. For this reason, Nigeria’s inherent sovereignty remains untouched by the signature of such a clause.

Unlike a national court, an arbitration tribunal has no inherent power of jurisdiction, and its authority arises from the parties’ consent to appear before them. The material implication of Article 8(1) of the commercial loan agreement is that in the event that Nigeria is unable to repay the debt within the agreed time, our creditors can sue and enforce the judgment reached by the arbitral tribunal. Another implication which follows this is that Nigeria might lose her valuable assets to the Chinese in order to execute the judgment of the arbitral tribunal. Research shows that China is infamous for not pardoning debts and therefore not likely to pardon this. In Sri Lanka, Hambantota port was handed over to the Chinese Government and 15, 000 acres of land around it for 99 years in December[9]. Tonga also suffered a similar fate, when the EXIM Bank of China, to whom the loans were owed, did not forgive them. The loans claimed 44% of Tonga’s GDP.[10]

CONCLUSION

Based on the argument canvassed above on the necessity of such a waiver in the commercial loan agreement, it is apposite to conclude that the conditions of the clause in the event of our inability to honor our debt is condign for Nigeria. In the absence of other clauses in the agreement that were not publicly commented on, and which contradict this interpretation of the controversial Article 8(1), Nigerian’s position is not in our opinion, unreasonable and it is in fact in line with standard practice in international contracts involving states. Even though it is highly unlikely for Nigeria to honor the debt at the maturity stage of the loan deal.

Serious concerns must be expressed as to the country’s borrowing habit, the Debt Management Office states that the total value of loans taken by Nigeria from China as at March 31, 2020, was $3.121 billion.[11] Similarly, in terms of external sources of funds, loans from China accounted for 11.28% of the external debt stock of $27.67 on the same date.[12] Available data shows Nigeria’s external debt levels of $27 billion is now about 75% of external reserves of $35 billion. This is the highest we have seen since 2005. An inverse of the data means Nigeria’s external reserves can now only cover 133% of its external debts and 23 times its debt service.[13]Not to also forget that Nigeria left the Paris Club debts through the debt wiping out of US$18b it conceded Nigeria in 2006 and the resulting payment of US$12b. In the long run, economic pressure that would arise from failing to settle debts may influence a state’s sovereignty. While borrowing is a form of economic activity that could lead to a futuristic surplus when the borrowed money commissions lucrative projects, borrowing is a pathway to sovereign debt unsustainability. The government needs to “calm down” and carefully consider the commercial loan agreements entered between Nigeria and China because the ripple effects of excessive credits can be unbearable and could birth economic colonialism as seen in Sri Lanka, Zambia, and Tonga.

It is recommended that the government considers the Build-Own-Operate and Transfer (BOT) system to carry out key infrastructural development. Under a build-operate-transfer (BOOT) contract, an entity, usually a government, grants a concession to a private company to finance, build and operate a project for a period of 20-30 years, hoping to earn a profit. After that period, the project is returned to the public entity that was originally granted the concession. Using the BOOT model, the public sector can take advantage of the efficiencies found in the private sector for a minimal investment. Also, unlike borrowing, Private companies assume the debts involved in the initial phases of a BOOT relationship. Even in PPP structures where some initial funding may be provided by the public sector, the majority of the initial development cost will be the responsibility of the private organization. This allows the public sector to maintain a balanced budget while reducing its influence on how the new infrastructure is developed.

[1] The issue of waiver is also provided for in Article 32 of the Vienna Convention on diplomatic Immunities.

[2] See Article 8 of United Nations Convention on Jurisdictional Immunities of States and Their Property

[3] See Article 10 United Nations Convention on Jurisdictional Immunities of States and Their Property.

[4] See Article 11 United Nations Convention on Jurisdictional Immunities of States and Their Property.

[5] Niba, “Will Kenya’s Mombasa Port be Taken over by the Chinese?”

[6] June 25, 2018, the New York Times

[7] The EXX Africa’s research

[8]Eastwood Christian, ‘What Will Happen Before Nigeria Loses Sovereignty To China – Fani-Kayode’ AB-TC News (August 2020)

<https://ab-tc.com/what-will-happen-before-nigeria-loses-sovereignty-to-china-fani-kayode/> accessed 16 August 2020

[9] June 25, 2018, the New York Times reported the fate of Hambantota, Sri Lanka.

[10] In 2006, Tonga sought to rebuild infrastructure where from 2013 to 2014, the country suffered a debt crisis.

[11] This represents only about 3.94% of Nigeria’s total public debt of $79.303 as at March 31, 2020.

[12] https://nairametrics.com/2020/06/20/dmo-discloses-facts-about-chinese-loans-to-nigeria-states-terms-of-the-loans/

[13] https://nairametrics.com/2020/04/11/nigerias-foreign-debt-has-breached-a-15-year-trigger/