22 Jun 2018
It is an established principle in arbitration globally, that non-parties to the arbitration agreement (or submission agreement) cannot participate in the arbitration proceedings. In Nigeria, taxation matters are non-arbitrable because Section 251(1)(a) and (b) of the 1999 Constitution (as amended) vests exclusive jurisdiction on matters pertaining to the revenue of the Government of the Federation or taxation of companies, in the Federal High Court. In Shell Nigeria Exploration and Production Co. Ltd & 3 Ors v. Federal Inland Revenue Service & Anor, the Nigerian Court of Appeal permitted the federal tax authority, which was a non-party to the arbitration proceedings, to successfully challenge an award in such proceedings on the basis that the issues in dispute which appeared to be contractual disputes, were in fact tax disputes and therefore not arbitrable.
The Appellants, as Contractor, entered into a Production Sharing Contract (PSC) with the NNPC (the 2nd Respondent at the Court of Appeal) in respect of Deep Offshore Oil Mining Lease 118 (OML 118 PSC), to explore oil in Nigeria’s deep-water acreages. Any crude oil discovered, was to be allocated between the parties in accordance with the lifting allocation contained in OML 118 PSC, based on “Royalty Oil,” “Cost Oil,” “Tax Oil” and “Profit Oil.”
Under the PSC arrangement, NNPC which was the Government representative in the PSC, would lift volumes of oil equivalent to the tax oil, sell the proceeds and remit the cash sum recovered to the federal tax authority, FIRS on behalf of itself and the Contractor.
Under the OML 118 PSC, the Contractor (i.e. the Appellants at the Court of Appeal) had the sole right and responsibility to compute the lifting allocation and parties were enjoined to respect their various obligations under the OML 118 PSC. The Contractor alleged that NNPC had been in breach of its obligations under the OML 118 PSC since May 2007 and had continued to lift crude oil exceeding its entitlement. Therefore, the Contractor, commenced arbitration proceedings against NNPC.
When the federal tax authority, FIRS (which was the 1st Respondent at the Court of Appeal) became aware of the arbitral proceedings, it filed an originating summons at the Abuja Division of the Federal High Court in Suit No: FHC/ABJ/CS/744/2011 challenging the arbitral proceedings. FIRS’ argument at the Federal High Court inter alia was that that the issues before the arbitral tribunal encroached on FIRS’ statutory functions and that the issues before the tribunal were not arbitrable by Section 251(1)(a) and (b) of the 1999 Constitution (as amended) which vests exclusive jurisdiction on matters pertaining to the revenue of the Government of the Federation or taxation of companies, in the Federal High Court.
The Federal High Court held that the claim before the arbitral tribunal had risen out of tax matters relating to the Federal Government revenue and was therefore not arbitrable. Dissatisfied with the decision, the Contractor appealed to the Court of Appeal.
At the Court of Appeal, the Contractor’s position was that FIRS, not having been a party to the arbitral proceedings, lacked the locus to challenge the said proceedings. The Contractor argued that FIRS had not shown how its legal rights, powers or functions had been breached or threatened by the arbitration proceedings since it had the power to receive or refuse accounts or call for further returns under the Petroleum Profits Tax Act.
In arriving at its decision, two of the issues the Court of Appeal identified were:
Was the learned trial judge right in finding in favour of the Plaintiff/Respondent [FIRS] on the issue of locus standi?
Are the claims submitted to arbitration contractual matters or tax matters?
The Court of Appeal considered the issues of locus and arbitrability of the issues submitted for arbitration together. Regarding the issue of locus, the Court of Appeal held that since tax oil was the vehicle used in the payment of tax under the PSC, when placed in the context of the method of estimating petroleum profits tax (PPT), the payment of PPT and timing of capital allowances, it was FIRS’ duty to administer the said tax. Therefore, where there were any proceedings in which assessment, levying, payment, timing and returns were to be determined in accordance with the Petroleum Profits Tax Act, the duties, obligations and responsibilities of FIRS would be called into question. Consequently, FIRS would have a standing in such proceeding. The Court of Appeal stated that since FIRS’ obligations and duties were likely of being adversely affected, since it (FIRS) was not a party to the arbitration proceedings, FIRS had the right to approach the trial court to protest the infringement of its interests and duties.
Regarding arbitrability of the issues in dispute, the court held that when the Nigerian Arbitration and Conciliation Act is read alongside section 251(1)(a) and (b) of the Constitution of the Federal Republic of Nigeria, 1999 (as amended), it becomes evident that tax disputes are not arbitrable. The court also held that the issue of payment of petroleum profits tax was statutory not contractual. Therefore, the Contractor could not justify its argument that they had the right to determine issues relating to the payment of petroleum profits tax under the PSC. The Court of Appeal also held that FIRS had the exclusive power to administer tax legislation including the Petroleum Profits Tax Act and to assess, collect, account and enforce payment of taxes due to the Government of Nigeria or any of its agencies from persons, including companies and enterprises chargeable with tax.
The Court of Appeal further held that the claims before the arbitral tribunal were effectively tax matters since the dispute involved an allegation that NNPC had breached the terms of the PSC by wrongly computing and over lifting tax oil to the detriment of the interest of the Appellants.
On the foregoing basis, the Court of Appeal held that the arbitral tribunal lacked the jurisdiction to entertain the issues in dispute and that the Federal Inland Revenue Service (FIRS), a non-party to the arbitral proceedings, had the locus to challenge the said proceedings.
Within the context of this write-up, the decision of the Court of Appeal is significant in two respects. Firstly, the decision underscores the fact that the determination of whether an issue is contractual and therefore arbitrable, is not always as clear cut as it seems. It is important to remember that the contractual terms in this case, were aimed essentially at determining the profits receivable by each party under the PSC but also had a bearing on their ultimate tax liabilities. The Court favoured an interpretation which sits the case within the realm of taxation and therefore non-arbitrable, without regarding the contractual dispute between the parties. One may argue that this leaning of the Court is in order since the court is after all an arm of government and within the confines of the law, should protect governmental interests, including taxation, as much as possible.
Secondly, the decision establishes the position that in certain instances, a non-party to an arbitral proceeding can challenge the jurisdiction of an arbitral tribunal proceedings in court. When one considers, that there would have been no way FIRS could have intervened in the arbitration proceedings (arbitration being essentially a private affair) without involving the Court, perhaps, one may then rationalise why the arbitration proceedings were reviewed by the Court upon the application of a non-party to the arbitration.
While some commentators may disagree with the Court of Appeal’s decision, what is clear is that the dichotomy between matters that are purely within the realm of arbitration and taxation, can be fluid, making a conflict between the two spheres of law inevitable.
 Appeal No. CA/A/208/2012 delivered on 31st August 2016. The full judgment can be accessed on https://www.dropbox.com/s/li75oiwwzn3rkjd/SHELL%203%20ORS%20v%20FIRS%20%28CA-A-208-2012%29%20JUDGMENT.pdf?dl=0 (last accessed 24th May 2018). This decision also established that a Notice of Arbitration and Statement of Claim by which a claimant commenced an arbitration, were incompetent having been prepared and signed in the name of a law firm rather than the name of an individual lawyer, This decision followed the Supreme Court decision in Okafor & 2 Ors v.Nweke & 2 Ors (2007) 10 NWLR (Pt. 1043) 521 which held that court (not arbitration) processes must be signed by individual lawyers who have their names registered in the roll of the Supreme Court – the Nigerian apex court – and not signed by a firm of lawyers since firms do not have their firm names registered in the roll of the Supreme Court.
 The facts of the appeal are at pp. 2-9 of the Court of Appeal judgment.
 Reference is made to the Federal High Court judgment, particularly pp.33-44, which can be accessed on https://www.dropbox.com/s/li75oiwwzn3rkjd/SHELL%203%20ORS%20v%20FIRS%20%28CA-A-208-2012%29%20JUDGMENT.pdf?dl=0 (last accessed 24th May 2018)
 Pp. 21-41 of the judgment.