International business transactions in Ghana
In our briefing of December 2011, we discussed the then pending case of Attorney General v Balkan Energy Co. LLC, in which the meaning of an “international business transaction” under Article 181(5) of the Ghanaian Constitution was to be determined by the Supreme Court in Accra. On 16 May 2012, the Supreme Court gave its judgment, in what had then become known as The Attorney General v (1) Balkan Energy Ghana Ltd (2) Balkan Energy LLC and (3) Mr Philip David Elders. The judgment is of fundamental importance to any non-Ghanaian companies or individuals and Ghanaian companies with foreign sponsors who have entered into, or are considering entering into, any contracts with the State or Government of the Republic of Ghana.
Article 181 of the Constitution provides as follows:
- “Parliament may, by a resolution supported by the votes of a majority of all the members of Parliament, authorise the Government to enter into an agreement for the granting of a loan out of any public fund or public account.
- An agreement entered into under clause (1) of this article shall be laid before Parliament and shall not come into operation unless it is approved by a resolution of Parliament.
- No loan shall be raised by the Government on behalf of itself or any other public institution or authority otherwise than by or under the authority of an Act of Parliament.
- An Act of Parliament enacted in accordance with clause (3) of this article shall provide:
(a) that the terms and conditions of a loan shall be laid before Parliament and shall not come into operation unless they have been approved by a resolution of Parliament; and
(b) that any moneys received in respect of that loan shall be paid into the Consolidated Fund and form part of that Fund or into some other public fund of Ghana either existing or created for the purposes of the loan.
- This Article shall, with the necessary modifications by Parliament apply to an international business or economic transaction to which the Government is a party as it applies to a loan.”
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Our December 2011 briefing set out the background. In summary, Balkan Energy Ghana Ltd (“BEG”) entered into a Power Purchase Agreement (the “PPA”) with the Government of Ghana dated 27 July 2007. BEG is a wholly owned Ghanaian subsidiary of Balkan Energy Limited (a company incorporated in England) and Balkan Energy Limited is in turn wholly owned by Syntek West (a company incorporated in the USA)1. The PPA had not been approved by Parliament pursuant to Article 181(5) of the Constitution (Balkan Energy regarding such approval as being unnecessary since the contracting party was a company incorporated in Ghana).
Two questions were referred to the Supreme Court:
- Whether the PPA constitutes an international business transaction within the meaning of Article 181(5) of the Constitution.
- Whether the arbitration agreement contained in the PPA separately constitutes an international business transaction within the meaning of Article 181(5) of the Constitution.
1. Is the PPA an international business transaction?
As regards question (1), Balkan Energy’s position was (in summary) that:
- Since the contracting Balkan Energy entity, i.e. BEG, was a Ghanaian company, no question of an “international” business transaction arises.
- The nationality of a company is to be determined by reference solely to its place of incorporation and hence the contracting party was undeniably Ghanaian.
- BEG had not been incorporated fraudulently and there was no other need to “lift the corporate veil” to see who was behind BEG. In any event, far from being an attempt to evade Ghanaian law, the incorporation of BEG in Ghana was in order to comply with the Energy Commission Act.
- As the PPA contains an “entire agreement” clause the relevant “transactions” to be considered are those contained in the PPA. Any other agreements or arrangements should not be considered in determining if the transaction with the Government is “international” in nature.
- As the transaction is not between two or more countries, does not involve nationals of or resident in two different countries and/or does not involve crossing national borders, it cannot be considered “international”.
- In any event, the inclusion of the words “with the necessary modifications by Parliament” in Article 181(5) mean that unless and until modifications are forthcoming from Parliament, Article 181(5) is of no effect.
The Attorney General (arguing that the PPA is an international business transaction) took a broader view and argued that the following factors were particularly important:
- The negotiation of the PPA was undertaken by a foreign Balkan Energy entity, which entity also entered into a memorandum of understanding undertaking to execute the project.
- Such foreign company then nominated BEG to enter into the PPA.
- BEG was formed a mere 11 days prior to the execution of the PPA.
- BEG is owned as to 100 per cent by an English company, in turn is ultimately owned by a national of the USA.
- BEG’s managing director (Mr. Elders, the Third Defendant) is a national of the USA.
- The place of management, ownership and control of BEG is outside Ghana.
- The fees payable to BEG under the PPA are required to be paid in foreign currency.
- The PPA contains certain indemnities pursuant to which the Government of Ghana may incur liabilities in respect of claims brought against BEG by foreign third parties.
- The PPA contains certain representations and warranties in relation to tax and foreign exchange controls which are usually associated with foreign investment transactions.
- The Bilateral Investment Treaty between the UK and Ghana potentially applies.
- The PPA contains an international arbitration agreement and a waiver of the jurisdiction of the courts of Ghana.
The Attorney General’s position was therefore that Balkan Energy’s argument was unduly narrow. The Attorney General’s submission concluded as follows:
“If all the above factors can be disregarded simply by incorporating a company in Ghana, article 181(5) would be rendered practically nugatory. The better interpretation is that the mere fact that the legal entity with whom the Government has entered into a transaction is incorporated in Ghana does not, by itself, mean that the transaction is not an international business one within the meaning of article 181(5). The constitution of the parties, the provisions of the transaction and its elements must all be looked at in determining whether or not the transaction is an international business one.”
The Supreme Court’s decision
By reference to the issues referred to above, the Supreme Court decided as follows:
The PPA is an international business transaction within the meaning of Article 181(5) of the Constitution.
The judgment acknowledges the force of both parties’ arguments, borne as they are out of a lack of clarity in the wording of Article 181(5).
First, the court dismissed the argument that Article 181(5) was yet come into effect pending “modification” by Parliament.
As to the central issues, the court held that Article 181(5) is to be construed purposively and that one cannot merely look at the nationality of the contracting party. “The phrase “international business or economic transaction to which the Government is a party”, if purposively construed, should not lead to the result that only agreements between entities resident abroad and the Ghana Government can be embraced within the meaning of the term. Given the complexity of contemporary international business transactions, there will be transactions of such a clear international nature that they come within any reasonable definition of an international business transaction, but which may have been concluded with the Ghana Government by an entity resident in Ghana.” The court held that it is the substance, and not the form, of a transaction which is relevant. In assessing whether a transaction is “international”, both the nature of the transaction and the parties have to be considered. The court acknowledged that this may create complications and that in so holding it was choosing complexity over simplicity. In spite of that, it was held that “this court has to accept that the substance should rule, rather than form, and thus grasp the nettle.”
Interestingly, the court held that it is necessary to imply into Article 181(5) an understanding that only “major” transactions are to be subject to its provisions. No definition of “major” is offered in the judgment although certain situations are mentioned. Picking up on Balkan Energy’s argument that Article 181(5) would potentially apply to mundane contracts entered into by the State for (for instance) air tickets, vehicles and stationery, the court held that transactions of “ordinary commerce” are not within the scope of Article 181(5). Examples given by the court of transactions that would fall outside Article 181(5) are “documentary letters of credit and contracts for the international sale of ordinary goods or the carriage of goods by sea.” The court did, however, agree with Balkan Energy that the present situation is unsatisfactory and that Parliament needs to intervene to provide clarity as to the scope of Article 181(5). The court also suggests that, pending clarification from Parliament, parties obtain certification (albeit non-binding) from the Attorney General as to whether particular transactions are to be regarded as “major”.
The court held that to be “international”, it is required that “the subject-matter of the transaction is international in the sense of having a significant foreign element or the parties to the transaction (other than the Government) have a foreign nationality or reside in different countries or, in the case of companies, the place of their central management and control is outside Ghana.”
A transaction will be a business transaction, it was held, “where the transaction is commercial in nature or pertains to or impacts on the wealth and resources of the country”.
Overall, as against the facts of this particular case taken together, the Supreme Court’s view was that “the overall transaction involved here was a foreign investment by a US investor in a power generation project to supply power to the Ghana Government and that the Government was a party to this transaction. We are viewing the transaction in the round, without resorting technically to the piercing of the corporate veil doctrine. We interpret “transaction” in this context as meaning a series of agreements or acts united by their purpose of attaining the project objective of the parties to it.” Accordingly, the Supreme Court determined that the PPA was an international business transaction within the meaning of Article 181(5) of the Constitution. The facts which the court held to have been of particular note (on a cumulative basis) in favour of its conclusion are:
- The PPA resulted from negotiations between a foreign investor (Mr. Elders acting on behalf of Balkan Energy LLC) and the Government of Ghana.
- BEG is wholly owned by a foreign entity.
- The managing director of BEG is a foreigner and management control of BEG is in foreign hands.
- The PPA contained an international arbitration agreement.
- The PPA contained other clauses usually associated with foreign investment transactions such as a waiver of sovereign immunity and representations and warranties dealing with tax and foreign exchange controls.
2. Is the arbitration agreement of itself an international business transaction?
As regards question (2), the Supreme Court determined that the arbitration agreement was not an international business transaction stating that “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 draws its life from the transaction whose dispute-resolution it deals with. We therefore have difficulty in conceiving of it as a transaction separate and independent from the transaction that has generated the dispute it is required to resolve.”
This echoes our comments from our December 2011 briefing, and the Supreme Court’s decision is welcome for the reasons we previously summarised.
1. The Defendants BEG, Balkan Energy LLC and Mr. Elders (the managing director of BEG) are together referred to in this briefing as Balkan Energy.
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The Supreme Court has not gone so far as to declare the PPA void. Rather, it has remitted the matter back to the underlying referring commercial court directing that court to decide the underlying case according to the Supreme Court’s declarations regarding Article 181(5). The likely conclusion is therefore that the referring court will declare the PPA void.
The Supreme Court’s decision on issue (1) reverses the received wisdom. The generally held view in Ghana has been that a contract between the State and a Ghanaian counterparty (even if that counterparty is owned and controlled by non-Ghanaians) could not amount to an international business transaction.
The effect of the case on contracts/transactions already entered into but which did not receive Parliamentary approval under Article 181(5) will need to be assessed. This may not be straightforward given the number of factors taken into account in the judgment.
Looking to the future, anyone doing business in Ghana will need to do so with the judgment in mind. Parties will need to consider whether to seek Parliamentary approval in circumstances where they might previously not have done so. Parties may also consider seeking a certificate from the Attorney General as suggested, although it remains to be seen whether this is a workable solution.
We hope that Parliament will take up the Supreme Court’s invitation to clarify matters in the near future. No doubt there will be different views on the issues at stake. What is certain, however, is that the judgment creates uncertainty which could usefully (as the Supreme Court acknowledges) be resolved by the legislature.
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