• Article 181(5) Of the Ghanaian Constitution and International Arbitration Agreements
  • December 16, 2011
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Article 181(5) of the Ghanaian Constitution provides that Parliamentary approval is required in respect of “international business transactions” to which the state of Ghana is a party.

    Following a dispute that has recently arisen (and which has been referred to international arbitration) under a Power Purchase Agreement between Ghana and a Ghanaian subsidiary of Balkan Energy (the PPA), the scope of Article 181(5) has been called into question and is the subject of a forthcoming judgment by the Supreme Court of Ghana. The Supreme Court’s judgment will be of profound importance to international investors who have done or intend to do business in Ghana.

    The PPA contained an arbitration clause providing for UNCITRAL arbitration in the Netherlands. Balkan referred the dispute to arbitration accordingly. Thus far the Ghanaian courts have purported to issue a stay of the arbitral proceedings on the basis that only the courts of Ghana have jurisdiction; and the question of interpretation of Article 181(5) of the Constitution has been referred to the Supreme Court. Meanwhile, the stay is being ignored by the arbitral tribunal; it is presumably Balkan’s intention to continue with the arbitration and, if successful, seek to enforce the award against Ghanaian state assets outside Ghana (in reliance on a waiver of sovereign immunity in the PPA and in the expectation that the enforcing courts outside Ghana will ignore the purported stay).

    Balkan’s argument is simple: since the contracting Balkan entity was a Ghanaian company, no question of an “international business transaction” arises. Balkan refers to the Ghanaian Companies Act 1979, under which the nationality of a company is to be determined by reference to its place of incorporation.

    The state’s arguments in support of the PPA being an “international business transaction” include that:

    • contractual negotiations were undertaken by a foreign Balkan entity, which entity also entered into a memorandum of understanding undertaking to execute the project;
    • such foreign Balkan entity then nominated the Ghanaian Balkan subsidiary to enter into the contract. The subsidiary was formed a mere 11 days prior to the execution of the PPA; and
    • the PPA contains certain indemnities pursuant to which Ghana may incur liabilities in respect of claims brought against the Balkan contacting entity by foreign third parties.

    It is also understood that the state will argue that the inclusion of an international arbitration clause in the PPA in itself invokes Article 181(5).

    Some of these arguments are specific to the facts of the case in hand, although analogous facts would arise in many transactions. We understand that in addition to these fact-specific matters, the state seeks a ruling that Article 181(5) applies to any business transaction between the state and a Ghanaian company wholly owned by foreigners and capable of enjoying the status of a strategic foreign investment under the Ghana Investment Promotion Center Act 1994.

    It remains to be seen whether the Supreme Court adopts a fact-specific approach to the case or seeks to make a more general pronouncement as to the meaning and scope of Article 181(5). So far, the Supreme Court has merely laid down directions at a procedural hearing held on 6 December 2011. The court has asked the parties to address the following two questions in making their submissions in due course:

    1. whether a contract entered into between the government and a Ghanaian legal person can ever be classified as in international business transaction; and
    2. if so, how are such contracts to be distinguished from other contracts entered into between the government and Ghanaian legal persons?

    In a mining context, it is notable that section 26 of the 2006 Mining Law provides, absent certain other arrangements, for UNCITRAL arbitration as an available method of dispute resolution. It would be somewhat perverse if an agreement providing for UNCITRAL arbitration (as envisaged in the legislation applicable to such agreements) were then of no effect because of its inclusion in an “international business transaction”. All the more so since mining leases are approved by the government, albeit under Article 268 of the Constitution rather than under Article 181(5). Some clarity needs to be brought to the question of how Article 181(5) of the Constitution interacts with the laws that apply to mining specifically and with other provisions of the Constitution. If a contract has already been approved by the government, will the government have waived or become estopped from seeking to undo it in reliance on Article 181(5)? This is a nuance that does not arise in the Balkan case, where there was no formal government/Parliamentary approval at all.

    As to the argument that the mere inclusion of an international arbitration agreement invokes Article 181(5):

    • Whilst an arbitration agreement is generally regarded to be a contract separate from the underlying contract in which it is contained, it cannot be wholly divorced from that underlying contract. To regard it as a business transaction in its own right that ought to receive Parliamentary approval seems contrary to received wisdom.
    • An adverse ruling by the Supreme Court would also seem to create scope for mischief in cases involving Ghana state entities under existing contracts, given that the arbitration agreement will not have been the subject of its own Parliamentary approval even if the underlying contract has. It is important that even if there is a dispute as to the validity of the underlying contract, that dispute be referable to arbitration as agreed between the parties.
    • Arbitration agreements are fundamental to the smooth running of international business. An adverse ruling by the Supreme Court would serve to undermine arbitration as a process. It would also run contrary to the progress Ghana has been making in bringing its arbitral laws more in line with international standards, witnessed by its enactment of the Act on Arbitration which came into force on 31 May 2010.
    • The state seems to be arguing that the PPA as a whole would be ineffective. However, the question arises whether the arbitration provision could be severed, leaving the remainder of the agreement afoot.

    The outcome of this debate will plainly be of great significance to any international entity with existing or future business in Ghana which involves contracting with the state. If any of the state’s various arguments prevail, this will result in Article 181(5) being applicable to (and hence Parliament needing to approve) a wider variety of contracts/transactions than previously understood.

    Finally, investors might want to consider how an adverse ruling by the Supreme Court might relate to protections under any applicable bilateral investment treaty with Ghana. This is a complex topic which we will not explore in detail here in the interests of brevity.

    For the moment there are more questions than answers. Anyone with current or imminent business in Ghana needs to take stock of their position given the arguments being raised by the state in the Balkan case. Once the judgment is issued, further analysis of the position will be required.