The Great Balkan Arbitration: It’s a Wrap (1)

Introduction

In 2007, Ghana was faced with an energy crisis. The Akosombo Dam, the country’s main source of hydro-energy was in distress. The water levels could not sustain power generation. The Ghanaian government had to find other means of generating electricity to cater for domestic and industrial needs. The Government had a number of ideas. One was to rehabilitate an old power barge – the Osagyefo Power Barge. The barge was a one hundred and twenty-five megawatt dual fired barge located in the Western Region of Ghana. What the state needed was a  private sector investor to fix the barge and make it generate electricity. This is how Balkan Energy LLC (“BEC”) and the Government of Ghana (GoG) first came together. 

BEC first entered into a Memorandum of Understanding with the GoG.  BEC, however, had a problem. By virtue of a domestic law, it did not qualify to enter into a Power Purchasing Agreement (“PPA”) with the government^[1]. As a way out, BEC was advised to incorporate a local subsidiary. This marked the birth of Balkan Energy Ghana Ltd (“BEG”).

BEG, 11 days after its incorporation, entered into a PPA with the GoG. Before the parties entered into the PPA, the then Attorney-General, Honourable Joe Ghartey, issued two legal opinions. The first legal opinion dealt with whether the PPA required parliamentary approval. The Attorney-General did not think so. The second opinion dealt with whether the GoG had capacity to enter into the PPA. The Attorney-General thought so. The Attorney-General was of the opinion that: “GoG has the corporate or other power to enter into the Project Agreements and to exercise its rights and perform its obligations there under…”^[2]. The Attorney-General further opined that “[T]he obligations of GoG under the Project Agreements are legal and valid obligations binding on GoG and enforceable in accordance with the terms of the Project Agreements.^[3]”

Timelines and deliverables were agreed upon. It was for instance agreed that the barge will be fixed in 90 days. This did not happen. And the government went ahead to terminate the PPA. GoG justified its decision to terminate the agreement on the grounds that BEG had misrepresented to it that they could make the power barge work in 90 days. GoG argued that it was on the basis of the 90-day turn-around-time that it entered into the agreement with BEG. And if that could not be delivered, then it had no option but to terminate. BEG also had a lot to say. BEG argued that it could not meet the timelines because the GoG failed to live up to its responsibilities under the PPA. The parties had agreed to resolve their differences by arbitration at the Permanent Court of Arbitration in The Hague, Netherlands. 

After termination of PPA, what next?

BEG initiated arbitration proceedings by a Notice of Arbitration dated 23 December 2009. The Hague, Netherlands was venue for the arbitration. And as already indicated, the arbitration was to be conducted under the auspices of the Permanent Court of Arbitration. The parties opted for the UNCITRAL rules. The PPA was to be governed and construed in accordance with Ghanaian law. But no specific law was provided for the arbitration. 

Ghana responded to the Notice of Arbitration. Three arbitrators were chosen. BEG chose Judge M Schwebel. GoG opted for Justice Mensah. Together, the two arbitrators chose Professor Francisco Orrego Vicuña.  On 22 February 2010, BEG applied to the District Court of Amsterdam for leave to attach some assets of Ghana in the Netherlands pending the determination of the arbitration. The order was granted. But the search for assets yielded no fruits. On the back of BEG’s attempt at getting assets before the start of arbitration, GoG sought and obtained a High Court injunction (i) preventing BEG from going ahead with the arbitration; and (ii) taking further steps to attach the assets of GoG. 

Jurisdictional Objection

Before the Tribunal could go into the substantive matter, the GoG alleged that there was a fundamental issue with the PPA entered into between it and BEG. The Tribunal (on the back of GoG’s attack on the PPA and arbitral clause) asked the parties to address it on a number of issues. There were four issues in all: (a) whether the tribunal is competent to rule on the validity of the PPA and of the arbitration agreement contained in there; (b) whether the PPA is valid; (c) whether the Parties are bound by an agreement to arbitrate in respect of the proceedings initiated by the claimant in its Notice of arbitration; and (d) the effect of an injunction granted by the High Court on the jurisdiction of the Tribunal. 

In summary, GoG argued that the PPA and the arbitration agreement (contained in the PPA) was defective because it was in breach of a constitutional provision which required that international business transactions between the GoG and non-Ghanaian entities be approved by parliament^[4]. It was GoG’s case that the PPA was invalid for want of parliamentary approval. GoG further argued that the invalidity of the PPA extended to the arbitration clause as well. 

These arguments did not find favour with the arbitral tribunal. The Tribunal, siding with BEG, made the following observations. First, the tribunal was of the opinion that it was clothed with jurisdiction to determine it own competency (i.e. under the Compentez-Competenz rule). Secondly, the arbitral tribunal stressed that the arbitration was separate and distinct from the arbitration agreement itself. And a result, a defect with the PPA did not extend to the arbitration clause itself. Thirdly, the tribunal ruled that the parties were bound by the agreement to arbitrate. 

Intervening legal action 

In June 2010, whiles the arbitration was ongoing, the Attorney-General issued a writ. The aim of the writ was to stop the arbitral proceedings since, in her view, the PPA (together with the arbitration clause incorporated in the PPA) was in breach of the Constitution. 

The main issue before the High Court was whether the PPA was an international business transaction. An auxiliary issue was whether the arbitration clause itself constituted an international business transaction in the context of Article 181(5) of the 1992 Constitution. The Attorney-General urged the High Court to refer the matter to the Supreme Court for interpretation, since the key issues involved the interpretation of Article 181(5) of the 1992 constitution. The High Court (presided by Justice I.O. Tanko ) refused to refer the matter to the Supreme Court since in his view, previous cases had dealt with the interpretation of Article 181 (5)^[5].

The trial judge’s decision was subsequently quashed by the Supreme Court. In the Supreme Court’s view, the BEG-GoG dispute was unique in the sense that the parties involved (at least on the face of it) were all Ghanaians and resident in Ghana. The Supreme Court, per Sophia Akuffo JSC (as she then was), went ahead to set out the issues for interpretation by the Supreme Court.  The issues included (a) the definition of an international business transaction within the meaning and context of article 181(5) of the Constitution; and (b) whether a GOG contract with a Ghanaian entity (i.e. BEG) can ever be an international business transaction. 

It was the GoG’s case that (a) it was possible for an international business transaction to be reached between a Ghanaian entity and the government of Ghana; and (b) arbitration clause constitutes an international business transaction. BEG thought otherwise. 

The Supreme Court, in determining what an international business transaction is, was careful not to box itself in. The Court acknowledged that owing to the complexity of business transactions, it was still possible to have an international business transaction between the Government of Ghana and a resident incorporated entity. By reaching this conclusion, the Supreme Court accepted the Attorney-General’s argument who had urged the court to take into consideration the following factors in determining whether BEG was an indigenous Ghana Company in reality: (a) the fact that BEG was wholly owned by a foreign entity; (b) the fact that BEG was formed at the direction of a foreign entity; (c) the fact that BEG was managed by foreigners; and (d) the fact that foreign contractors worked for the company. In the Court’s view, it was necessary to adopt a substance over form approach in determining the nationality of the company. 

Regarding the second issue of whether the arbitration agreement was part of the PPA and as a result, the invalidity of one affected the other, the Supreme Court’s answer was not clear. According to Date-Bah JSC:

“An international commercial arbitration is not by itself an autonomous transaction commercial in nature which pertains to or impacts on the wealth and resources of the country…An international commercial arbitration derives its life from the transaction whose dispute resolution it deals. We therefore have difficulty in conceiving of a transaction separate and independent from the transaction that has generated the dispute it is required to resolve.” 

 BEG relied on the first three lines of the above quote:

“An international commercial arbitration is not by itself an autonomous transaction commercial in nature which pertains to or impacts on the wealth and resources of the country.”

BEG, in the District of Columbia proceedings, relied on the statement above as basis for the proposition that the Supreme Court came to the conclusion that the arbitration clause did not require parliamentary approval.

Then the second statement by his Lordship Date-Bah JSC:

“An international commercial arbitration derives its life from the transaction whose dispute resolution it deals. We, therefore, have difficulty in conceiving of a transaction separate and independent from the transaction that has generated the dispute it is required to resolve.” 

GoG relied on the second statement as authority for the proposition that the arbitration agreement was part and parcel of the PPA. The tribunal preferred the first.

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^[1]Section 12 of Energy Commission Act, 1997 (Act 541)

^[2]Attorney-General’s Opinion (26 October 2007) 

^[3]Attorney-General’s Opinion (26 October 2007)

[4] Article 181 (5) of the Constitution, 1992