From a private sector perspective, political risk is one of the most significant considerations in a Public Private Partnership (PPP) project. Political risk refers to government’s lack of commitment to a project which may manifest as an outright cancellation or change in the legal/regulatory regime which has material adverse impact on the project. Standard PPP agreements allocate political risks to the contracting authority and provide for penalties such as liquidated damages as an assurance of government’s commitment to the transaction.
When recourse is had to the courts in resolution of disputes arising from crystalized political risks, the efficacy of liquidated damages provisions and other protective measures set out in PPP contracts are subject to judicial interpretation.
Recently, the Federal High Court passed a judgment upholding the right of a private party to a PPP agreement to enjoy its contractual benefits without intrusion from third parties. The rationale for the court’s decision and its effect on PPPs in Nigeria are analyzed below.
MAEVIS LIMITED V. SITA TELECOMMUNICATIONS NIGERIA LIMITED & ANOR.
On 17th June 2013, a Federal High Court sitting in Lagos held that the Agreement between Federal Airport Authority of Nigeria (FAAN) and Maevis Limited (MAEVIS) is valid and subsisting. The court also ordered that Sita Telecommunications Nigeria Limited (SITA) should pay the sum of N5 Billion Naira to MAEVIS as damages for procuring and inducing FAAN to act in breach of its Agreement with MAEVIS.
In 2006, FAAN publicized its need for infrastructure and personnel to support efficient operation of air transport and revenue collection at the Lagos, Kano, Abuja and Port Harcourt airports. A bidding process was initiated and bids were submitted by four companies, including MAEVIS and SITA. Following evaluation of bids, MAEVIS was declared as the successful bidder. In 2007, the project agreement (‘Maevis Agreement’) was signed for an initial term of 10 years.
In 2010, after MAEVIS had made substantial financial investment in implementing the project, a dispute arose between FAAN and MAEVIS, following which MAEVIS instituted an action against FAAN before Justice Nyako of the Federal High Court. Justice Nyako ordered that the matter be referred to arbitration as stated in the Maevis Agreement and that status quo be maintained. This decision was appealed.
Prior to the resolution of the appeal, SITA commenced negotiations with FAAN for the performance of some of the services that were the subject of the Maevis Agreement. Upon completion of negotiation in February 2012, FAAN entered into a contract with SITA (‘SITA Agreement’) and subsequently, FAAN sent a notice of termination of the Maevis Agreement to MAEVIS.
MAEVIS instituted this action before Justice Buba of the Federal High Court, seeking a declaration that the Maevis Agreement is valid and subsisting and a declaration that SITA is liable for willfully and intentionally inducing FAAN to act in breach of the Maevis Agreement.
The court decided that MAEVIS’ case had merit and granted the reliefs sought.
Reason for the Court’s Decision
The Court’s principal rationale was that parties to a contract have a right to have their contractual relations preserved without unlawful interference from others. Other reasons adduced by the court on issues raised are summarized below:
- The Maevis Agreement is valid and subsisting in view of Justice Nyako’s decision that status quo be maintained pending the outcome of arbitration or appeal. MAEVIS rightly continued performance of its obligations under the Maevis Agreement after Justice Nyako’s judgment because failure to do so would have led to a shutdown of activities at the relevant airports.
- SITA acted with adequate knowledge of all the relevant facts having participated in the initial procurement and having received written notices of the pending appeal. The testimony of one of SITA’s witnesses proved that it had been informed by FAAN of Justice Nyako’s judgment and the pending appeal.
- SITA induced FAAN to act in breach of the Maevis Agreement when it went ahead to hold several negotiation meetings with FAAN and undertook several other acts that were deliberately targeted to induce FAAN to enter into the SITA Agreement in breach of the Maevis Agreement.
The court posited that the central question before it was whether the Defendants had knowledge of the Maevis Agreement and whether the Defendants induced FAAN to act in breach of same. Both questions were answered in the affirmative, and the court decided in favor of MAEVIS.
In view of the substantial damages awarded against SITA, it was very unlikely that Justice Buba’s judgment would be the final word on this matter; an appeal against this decision is foreseeable. For one, the outcome of the appeal against Justice Nyako’s decision will have a significant impact on SITA’s decision on how to proceed.
IMPACT ON PPPS IN NIGERIA
Nigerian courts have a vital role to play in allaying the fears of investors regarding political risks. A private party needs to be assured of judicial commitment to uphold the principles agreed by the parties as reflected by the terms of their contract. In view of the fact that Nigeria operates the common law system of precedents, investors need to be reasonably guaranteed of the probable judicial position in a variety of situations when a PPP contract comes before the court for interpretation.
The MAEVIS case shows the commitment of Nigerian courts to PPPs. Particularly beneficial to PPPs is the court’s decision validating the direct procurement provisions in Section 42(1)(b)of the Public Procurement Act in appropriate circumstances which include cases where there is an urgent need for goods or works and engaging in tender proceedings is impracticable due to unforeseeable circumstances giving rise to urgency. The court held that direct procurement does not suggest inducement of a contracting authority.
The fact that the court upheld the arbitration provisions of the Maevis Agreement is also laudable. This proves that Nigerian courts recognize arbitration as a viable form of dispute resolution and would not assume jurisdiction until the arbitration provision in a PPP agreement has been explored.
This judgment sends a strong message to investors that Nigerian courts uphold arbitration provisions, respect the sanctity of contracts and have the independence to rule against a government agency.