Examining the Case of Zhongshan Fucheng Industrial Investment v. Nigeria
THE AUTHORS:
Joseph Siyaidon, Team Lead at Stren & Blan Partners
Michael Afuye, Associate at Stren & Blan Partners
Stanley Umezuruike, Associate at Stren & Blan Partners
Introduction
Within a year after Nigeria’s famous and much-celebrated victory at the English High Court, wherein the country succeeded in moving the Court to annul an $11 billion arbitral award obtained by Process and Industrial Developments (“P&ID”) against the country, Nigeria has suffered a defeat in another arbitration matter at the English High Court. This time, a Chinese entity, Zhongshan Fucheng Industrial Investment (“ZFII”), has successfully moved the English Commercial Court in London to recognise and enforce a $75 million investment treaty arbitral award against Nigeria. ZFII has also successfully moved the Court to grant final charging orders over two UK residential properties owned by Nigeria in satisfaction of the award sum despite Nigeria’s spirited sovereign immunity defence targeted at resisting the attachment. The two properties are estimated to be worth £1.7 million.
The underlying investment treaty arbitration which led to the current proceedings is in relation to a joint venture dispute between ZFII and Ogun State (a federating unit in Nigeria) to establish a free trade zone near Lagos in 2013. A ZFII subsidiary held a 60% stake in the project, but the government of Ogun State terminated its participation three years later. Nigeria is on the verge of losing two of its properties in the United Kingdom (“UK”) to ZFII in the settlement of a $75 million arbitral award against Nigeria, stemming from Nigeria’s act to terminate Zhongfu’s (an entity created by ZFII) appointment to manage a zone in the Ogun State Free Trade Zone in contravention of a Joint Venture Agreement signed between Zhongfu and Nigeria in 2013.
ZFII commenced arbitration proceedings against Nigeria under the 2001 Bilateral Investment Treaty between the People’s Republic of China and Nigeria (“the China-Nigeria BIT”) seeking compensation and damages for Nigeria’s breach of its obligations under the China-Nigeria BIT. The arbitration found Nigeria in breach of its obligations and awarded the sum of $70 million as compensation to ZFII. In an enforcement action by ZFII before the High Court of Justice of England and Wales (“High Court”) against Nigeria, Nigeria’s attempt to rely on the defence of sovereign immunity failed as the High Court made the charging orders against two of Nigeria’s property in the UK final.
This decision by the High Court sparks discussion as to how effective Nigeria’s defence of sovereign immunity is, bearing in mind previous legal battles on International Investment Treaty Agreements where the defence of sovereign immunity to resist enforcement has failed to vindicate Nigeria. The article seeks to briefly examine Nigeria’s sovereign immunity defence at the proceedings before the English Commercial Court, bearing in mind the fact that Nigeria has had mixed results in its previous attempt to rely on the defence of sovereign immunity to dislodge the enforcement of arbitral awards against the Country.
Zhongshan Fucheng Industrial Investment v. Nigeria
Background Facts
In 2010, Zhongshan, a subsidiary of Zhuhai Zhongfu Industrial Group Co Ltd (Zhuhai) acquired rights through a Deed between Zhuhai, Ogun State Free Trade Zone (OGFTZ), and Zhongshan to develop and operate Fucheng Park, within the Zone located in the southeast of Ogun State, Nigeria. In 2011, Zhongshan set up a local Nigerian entity, Zhongfu International Investment (NIG) FZE (Zhongfu), to manage the work on the ground in Nigeria.
In March 2012, the Ogun State Government appointed Zhongfu as interim manager of the Zone and not just the Fucheng Park. In September 2013, Zhongfu’s appointment was eventually made permanent in a Joint Venture Agreement (“the 2013 JVA”) between Zhongfu and the Ogun State Government (among others) under which Zhongfu also acquired a majority shareholding (60%) in OGFTZ. Zhuhai and Zhongfu carried out significant work at Fucheng Park, and this work consisted of developing infrastructure such as roads, sewerage, and power systems, marketing, and letting sites in Fucheng Park within the Zone.
In July 2016, the Ogun State purported to terminate Zhongfu’s appointment (while immediately attempting to install a new manager for the Zone). This involved a series of actions allegedly aimed at driving Zhongfu out of Nigeria.
Zhongshan’s Investment Treaty Arbitration Against Nigeria
Having lost at the proceedings to enforce the terms of the 2013 JVA in Nigerian Courts and international arbitration proceedings at the Singapore International Arbitration Court (“SIAC”), Zhongshan commenced a UNCITRAL International Investment Treaty Arbitration against Nigeria under the 2001 China-Nigeria bilateral investment treaty (BIT) in 2018. In 2021, the London-seated UNCITRAL tribunal found Nigeria liable for expropriation and other breaches of the China-Nigeria BIT and ordered it to pay US$55.6 million plus interest and costs. Nigeria challenged the award in the Commercial Court on jurisdictional grounds, contending the arbitration clause in the BIT was invalid. However, the State withdrew the challenge because ZFII filed an application requesting Nigeria to deposit security for the award and security for costs before Nigeria’s application to challenge the award could be heard.
The Decision of the English Commercial Court in the Action Between ZFII v Nigeria
As mentioned earlier, in the enforcement proceeding commenced by ZFII at the English Commercial Court, Nigeria relied on the defence of sovereign immunity to resist the attachment of its properties in the UK. Sovereign Immunity is a well-established doctrine of international law that is based on the principle of equality of States. It is a legal concept that makes a sovereign entity immune from any suit, be it civil or criminal before the courts of another sovereign entity.
Nigeria argued that the properties in which enforcement was sought were used for non-commercial but diplomatic purposes and based on this, the properties enjoyed sovereign immunity under the Sovereign Immunities Act of 1978 (“the Act”). ZFII’s position was that for the properties to enjoy sovereign immunity under the Act, it is the use of the properties at the time the Application for enforcement was brought and not the future intended use of the properties and that currently, the properties were being leased out to some occupants (who were not diplomats) at an annual rental fee for residential purposes. Nigeria’s position was that the “use” of the property is not the same as the “purpose” of the use, and because of the certificate, the properties are to be available for providing consular services, residences for Nigerian officials, and generally for events to cater to staff, and the rental is to ensure the properties are maintained and secured, and are at below market rent.
In making the charging orders final against Nigeria, the Court held that:
- The test under the Act applies as at the date of the issue of process of execution against the property in question: the words “for the time being” make this clear. The use or intended use of property may change over time.
- Contrary to the purpose stated on the certificate that the properties were to be available for consular services, they have not in fact been in use for any of the matters set out in the certificate for the last 34 years.
- A commercial transaction is a transaction or activity (whether of commercial, industrial, financial, professional, or other similar character) into which a State enters or in which it engages otherwise than in the exercise of sovereign authority, hence, accepting rents below the current market value does not reduce the commercial nature to which the properties were put.
- The properties are currently used for leases to residential tenants unconnected with Nigeria and its Mission. Those are commercial purposes under Section 13(4) of the State Immunities Act (SIA) and therefore the enforcement against the properties is not barred by State immunity.
Nigeria’s Defence of Sovereign Immunity
Nigeria is not a stranger to the defence of sovereign immunity in courts and arbitral award enforcement proceedings. The country has deployed the arsenal of sovereign immunity to resist enforcement in several enforcement proceedings, albeit with mixed results.
In the case of Trendtex Trading Corp. v. Central Bank of Nigeria, (1977) 2 W.L.R. 356, 1 All E.R. 881 (United Kingdom), the first reported arbitration-related case in which Nigeria relied on the defence of sovereign immunity; Nigeria relied on this defence to defeat the claims brought by different companies to obtain payments based on letters of credit issued by its Central Bank. However, in dismissing Nigeria’s defence, Lord Denning held that firstly, the Central Bank cannot enjoy sovereign immunity because the Bank which had been created as a separate legal entity with no clear expression of intent that it should have governmental status, was not an emanation, arm, alter ego, or department of the State of Nigeria and was therefore not entitled to immunity from the suit. Secondly, even if it was decided that the Bank was a department of State, the suit was purely a claim for the letters of credit which is a contractual transaction for which immunity has been waived. In fact, in the proceedings commenced by one of the companies in Germany – Youssef M. Nada Establishment v. Central Bank of Nigeria, 16 Int’l Legal Mat. 501 (1977) (Dist. Ct., Frankfurt/Main, Aug. 25, 1976) (West Germany), the Commercial Court of Frankfurt dismissed the Central Bank’s sovereign immunity defence when it held that “a foreign state may be granted immunity from German jurisdiction only in respect of its sovereign activity (acta jure imperii) but not in respect of its non-sovereign activity (acta jure gestionis) because no general rule of public international law exists under which the domestic jurisdiction for actions against a foreign state in relation to its non-sovereign activity is precluded.”
Similarly, in Ipitrade Intl S.A. v. Federal Republic of Nigeria (1978) 465 F. Supp. 824, a case where enforcement proceedings were sought in the United States (the “US”) based on a written commercial contract between Nigeria and Ipitrade for the purchase and sale of cement, Nigeria refused to participate both in the arbitration proceedings and the enforcement proceedings commenced at the District Court, relying on the legal defence of sovereign immunity. The District Court, in recognising and enforcing the award, stated that Nigeria’s agreement to adjudicate all disputes arising under the contract in accordance with Swiss law and by arbitration under the International Chamber of Commerce Rules constitutes a waiver of sovereign immunity under the Sovereign Immunities Act.
Most recently, Nigeria succeeded in a defence of sovereign immunity in one of the enforcement proceedings in the P&ID case before the US Court of Appeal. However, Nigeria’s sovereign immunity defence, in this case, was upheld because the now-annulled arbitral award that P&ID was seeking to rely on had been set aside in Nigeria and had been stayed in London.
How Effective Is the Defence of Sovereign Immunity by Nigeria?
The defence of sovereign immunity has, over the years, been a hard rock for Nigeria to crack, especially within the realm of international arbitration enforcement proceedings. From the 1975 case against the Central Bank of Nigeria in England and Germany to Ipitrade’s case, and now to ZFII, the defence of sovereign immunity has not been a potent weapon in arbitration-related enforcement proceedings against Nigeria. Moreover, given the fact that the English Court of Appeal in London has refused to allow Nigeria to bring a late challenge to the recognition and enforcement of the underlying investment treaty award, finding that Nigeria is out of time to file such a challenge, it remains to be seen if Nigeria can turn the tide as it did in the P&ID enforcement proceedings before the US Court of Appeal.
Conclusion
The effectiveness of Nigeria’s sovereign immunity defence in international arbitration cases has been mixed. In some cases, Nigeria has succeeded, such as in the P&ID case before the US Court of Appeals. On the other hand, the Country has often faced challenges, as seen in the cases involving Trendtex and Ipitrade, and more recently with Zhongshan Fucheng Industrial Investment. This underscores the complexity of sovereign immunity in arbitration enforcement. The nuanced balance between respecting sovereign immunity and upholding arbitral awards is crucial and should be carefully considered in each case.
ABOUT THE AUTHORS
Joseph Siyaidon is a Team Lead in Arbitration, Maritime, Construction, and Energy Disputes Practice Groups of Stren & Blan Partners.
He has acted as counsel in several international arbitrations and arbitral award enforcement proceedings under major arbitration rules, including ICC, DIAC, UNCITRAL, MAAN, and RCICAL. His focus is on providing cutting-edge strategies to resolve disputes in the areas of maritime, oil and gas, commercial contracts, construction, corporate, debt recovery, bankruptcy/insolvency, and civil fraud/white-collar crimes.
He is also experienced in advising clients in relation to concession contracts, joint venture agreements, maritime asset acquisition, due diligence, and distressed situation deals.
Michael Afuye is an Associate in the Dispute Resolution department of Stren & Blan Partners. He currently works within the Arbitration, Maritime, Real Estate, and Construction as well as the Transportation team of the firm, where he advises a wide range of local and international clients.
Michael holds a Bachelor of Laws degree from Ekiti State University and a B.L from the Nigerian Law School where he graduated top 19% of his class and bagged three awards for being the Best Graduating Student in Professional Ethics and Skills at the Nigerian Law School 2023 set. He is a member of the Nigerian Bar Association (NBA).
Stanley Umezuruike is an Associate in the Dispute Resolution Department of Stren & Blan Partners. He specializes in Arbitration, Real Estate, and Maritime Practice Groups within the Dispute Resolution Department of the Firm. Additionally, he is an active member of the Technology, Entertainment, Media, and Sports Sectors of the Firm and consistently contributes to thought leadership and industry discussions within the Sector.
Stanley was awarded a bronze medal in the International Mediation Singapore Competition, organized by the Singapore International Mediation Institute (SIMI).
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
