What the Sovereign Immunity Clause Removed from Nigeria’s Loan Agreement with China Really Means

Nigerians have been complaining, under the Buhari-led administration, that the Federal Government has been doing a lot of borrowing.

On Tuesday, the House of Representatives had resolved to review loan facilities already taken by Nigeria from China and other countries, and in the process, they found a clause described as “lethal”.

In a report by ThisDay, in the $400 million loan for the Nigeria National Information and Communication Technology (ICT) Infrastructure Backbone Phase II Project, signed in 2018 between Nigeria and the Export-Import Bank of China, Nigeria allegedly ‘conceded sovereignty of Nigeria to China’.

The clause apparently reads:

The borrower (Nigeria) hereby irrevocably waives any immunity on the grounds of sovereign or otherwise for itself or its property in connection with any arbitration proceeding pursuant to Article 8(5), thereof with the enforcement of any arbitral award pursuant thereto, except for the military assets and diplomatic assets.

But what does this really mean?

First of all ‘Sovereignty’ is the power of a state to do everything necessary to govern itself, such as making, executing, and applying laws; imposing and collecting taxes; making war and peace, and forming treaties or engaging in commerce with foreign nations. It is the full right and power of a country over itself, without any interference from outside countries.

On the other hand, according to an explainer by Twitter user @ayodeleoni the sovereign immunity is a legal doctrine giving immunity to a sovereign state (e.g. Nigeria) from any order, injunctive relief or other execution of any judgment or award against its assets even if made as a consequence of the breach of a binding contract.

What Nigeria has done in that clause is that if they were to breach the loan agreement and the lender won the case in an arbitration, the lender will be able to enforce whatever arbitral award they win against any property of Nigeria except military or diplomatic assets.

Here’s an explainer from Ayodele Oni which reads:

The effect of sovereign immunity, therefore, is that even if a country borrows/obtains Trillions of USD from foreign investors, DFI, other sovereigns & such an amount was used for massive infrastructural projects etc & such a country refuses to pay back or cancels the contract(s) then even if you got a judgment against the country, you can’t enforce same, even against such infrastructure or anything else.

In this case, a country will not see the development or infrastructural growth. In the real sense, there will be no substantial investments or lending especially to countries with low credit ratings or high political risks, as where there was a breach there was not much, the investor/lender could do to enforce such rights in terms of enforcing judgement indebtedness or arbitral awards.

Hence, no lender/investor who is sane will be willing to lend funds to or invest in such a country. This was more so, the case, with African countries & Nigeria in particular. Nigeria’s case was also peculiar because of its negative pledge with The Bretton Woods Institutions.

Waiver of Sovereign Immunity, which is what was quoted by the newspaper, simply means that if the sovereign (e.g. Nigeria) breaches its contract, obligations etc. judgment may be enforced against her or certain assets (especially those which have formed the security or collateral.

Without waiver of sovereign immunity, it would always be difficult, if not completely impossible for states with not very great credit rating or that are considered to have substantial political risk (such as Nigeria) to obtain substantial financing or international investments.

Simply, no one will site a huge infrastructural project or make huge investments in Nigeria without requesting for such waivers- can be different for much smaller investments.

Also, the situation could be different from countries known to consistently honour obligations, with high credit ratings and which have very low political risks!

Simply put, (inter alia) sovereign immunity is a legal doctrine giving immunity to a sovereign state (e.g. Nigeria) from any order, injunctive relief or other execution of any judgment or award against its assets even if made as a consequence of breach of a binding contract.

— Dr. Ayodele Oni (@ayodelegoni) July 30, 2020

then even if you got judgment against the country, you can't enforce same, even against such infrastructure or anything else. In this case, a country will not see development or infrastructural growth. In the real sense, there will be no substantial investments or lending..

— Dr. Ayodele Oni (@ayodelegoni) July 30, 2020

Hence, no lender/investor who is sane will be willing to lend funds to or invest in such country. This was more so, the case, with African countries & Nigeria in particular. Nigeria's case was also peculiar because of its negative pledge with the The Bretton Woods Institutions.

— Dr. Ayodele Oni (@ayodelegoni) July 30, 2020

Without waiver of sovereign immunity, it would always be difficult, if not completely impossible for states with not very great credit rating or that are considered to have substantial political risk (such as Nigeria) to obtain substantial financing or international investments.

— Dr. Ayodele Oni (@ayodelegoni) July 30, 2020