Esso Petroleum and Production Nigeria Limited & SNEPCO v. NNPC
Recently 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.
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
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.
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.
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
While the dispute was between the parties to the PSC, the appellate court found that noncompliance
with some of the contractual terms had a consequential effect on tax liability of the
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
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.
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