What is international arbitration?

As the fraud trial P&ID v. Federal Government of Nigeria approaches, we take a closer look at international arbitration, and what this method of dispute resolution means for Nigeria’s prospects.

Two of the highest-profile international arbitration cases this year are both being disputed between energy investors and sovereign states. The first is a highly politically contentious and potentially costly claim stemming from the Biden administration’s decision to scrap the Keystone pipeline, which had been the focal point of environmentalists’ struggle against fossil fuels and the Canadian oil deposits. Having formally begun the arbitration process in November of last year, TC Energy is seeking over USD 15 billion in damages from the United States government due to the cancellation of the Keystone XL project.

The second most prominent case, however, is one that would have serious repercussions on the economy of a developing country: Process & Industrial Developments v. Federal Republic of Nigeria. The result of this dispute, considered one of the world’s biggest lawsuits, will have profound implications for the future of transnational justice. If the alleged sham company P&ID wins, the decision could set a legal precedent for other predatory vulture funds to take advantage of emerging African economies for decades to come.

What is international arbitration and why is it important?

Arbitration refers to a private and confidential method of resolving disputes in which each party has agreed that their dispute will be decided upon by an arbitrator, rather than a judge in a court of law. The most typical application of international arbitration relates to international commercial contracts and corporate agreements, assisting companies or individuals in resolving cross-border disputes and allowing each party to avoid public litigation in their national courts. This ease of enforceability, the ability to choose a neutral deciding party for the dispute, confidentiality, and flexibility are the main benefits of international arbitration.

The agreements and awards which arise from these processes are enforced under the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, more commonly known as the “New York Convention”. To date, 169 countries are signatories to the New York Convention, meaning that judgments can be enforced across the world.

When and how did international arbitration come to exist?

Arbitration between states has been used as a solution to disagreements that diplomacy cannot settle since the time of ancient Greece, where the approach was used to manage disputes between city-states. In the Middle Ages, the pope often acted as the sole arbitrator appointed to resolve such conflicts.

Modern international arbitration as we know it arguably arose in 1794, when the Jay Treaty between the United Kingdom and the United States created three arbitral panels to adjudicate issues and complaints originating from the American Revolution. This treaty helped to avert war and allowed for 10 years of stable trade between the US and Britain.

The Hague Convention of 1899 and 1907, widely considered the first formal declaration of the laws of war, gave international arbitration a more permanent basis and described its purpose as “the settlement of disputes between States by judges of their own choice and on the basis of respect for law”.

How does international arbitration work?

A formal agreement to arbitrate is required prior to any arbitration, since arbitration is a consensual method for dispute resolution. This is usually achieved by incorporating a clause into the parties’ contract requiring them to settle any potential disputes arising “out of or in connection with” that contract via arbitration. Several significant aspects of the arbitration procedure may be agreed upon in the arbitration clause itself, including the number of independent arbitrators, the language and location of the arbitration, and the procedural standards which will govern it.

Following this, one or several arbitrators must be appointed; this individual or group will be responsible for giving the final decision, or award, of the arbitration process. Disputes are often submitted to one or three arbitrators, known as a tribunal. In the case of three arbitrators, it is typical for each party to recommend one. The third arbitrator is then commonly nominated by the relevant institution leading the arbitration process, or by the two previously appointed arbitrators. For sole arbitrators, a designated appointing body usually manages the appointment of the individual or by agreement of the parties.

The procedure for international arbitration varies from institution to institution, but in general, the whole process from the start of the arbitration, the formation of the tribunal, the undertaking of the proceeding to the delivery of the usually takes between 16 and 26 months.

Why is the P&ID v. Nigeria case particularly significant?

Playing out over three continents, this case is seeing Nigeria dispute a USD 10 billion arbitration award granted to P&ID, a British Virgin Islands-based company founded by two Irish businessmen with no employees, financing or past record of carrying out any business in Nigeria. P&ID is seeking to enforce the arbitration award for damages for the collapse of a natural gas contract, which it claims would have led to hundreds of millions of dollars of yearly profits. In September 2020, however, the London High Court ruled that there was a strong prima facie case that P&ID procured the contract through bribery.

Many will be watching how the case proceeds this year, after the Nigerian government reemphasized its commitment to overturning the USD 10 billion award, an amount equal to ten times the country’s health budget, and which could pay Nigeria’s national security budget for twenty years.

This dispute is of crucial importance for the future of international arbitration in Nigeria. While the arbitration took place in London, and enforcement proceedings are ongoing in England and the US, these have had a significant impact on how Nigerian parties will conduct international arbitration processes. The National Arbitration Policy Committee was established as a direct response to the P&ID case and its impact on Nigeria, showing that the country is taking positive steps to protect itself from substantial future liabilities. The fine line that Nigeria must walk, however, is being able to direct future arbitration policy to defend its national interest whilst avoiding the risk of alienating foreign investors.