Kali Yuga or Yugadanavi?

The GOSL could have got a corporate guarantee from NFEI that NFE would perform its obligations. The GOSL could have also got an agreement from NFEI that it would not sell the shares of NFE to any third party with the permission of GOSL. But that basic precaution would be too much

As a subsidiary of a global company, NFE, would have access to blue chip law firms in the City of London who can advise it on its rights and obligations of NFE under English law. Would the cash strapped GOSL have the funds to match this legal firepower? If not, how competent are local lawyers to advise on English contract law and company law, a body of complex law?

 Tuesday, 4 January 2022

Dear Minister:

You have asked me to read the Sale and Purchase Agreement dated 17 September 2021 (the “Agreement”) between NFE Sri Lanka Power Holdings (“NFE”) and the Government of Sri Lanka (“GOSL”). The Agreement provides for the purchase of 40% of the issued share capital of West Coast Power (the “Company”), the owner of the 310 MW Yugadanavi together with the rights to develop a new LNG Terminal off the coast of Colombo. As part of the transaction, NFE will have gas supply rights to the Kerawalapitiya Power Complex for several decades on a “take or pay” basis.We are both time-stressed. So, my comments will be confined to a few topics. 

My feedback relates to the following: (a) The implications of contracting with the NFE and not with New Fortress Energy Inc. (“NFEI”); (b) Fraudulent misrepresentation; (c) Governing Law; and (d) Arbitration. As the court astrologers tell us, the country is in the grip of the Kali Yuga. This might be the charitable explanation for your mates to sign an agreement so obviously unfavourable to the blessed land. 

NFE: A shelf company or legitimate SPV?

As its name implies, a shelf company is a company that is already formed but which has not conducted any business and which does not have assets. NFE might have been called “XYZ Company”, a two-dollar shelf company, with its name changed to NFE. A shelf company could also be used as a special purpose vehicle (“SPV”) to engage in a specialised business. In project finance transactions, doing business through an SPV is required because there are multiple stakeholders and it is more convenient for all of them to transact with the SPV. 

It is likely that NFE is a shelf company but not an SPV. Using NFE reduces the exposure of NFEI to a bare minimum while keeping the exposure of the GOSL to the maximum.

NFEI has smartly reduced its exposure in the following ways: Instead of capitalising NFE, NFEI can give large loans to NFE. If it had capitalised NFE, NFEI would be able to receive its investment through dividends which can be declared and paid only after taxes. But if the funds flowing from NFE to NFEI is booked as a repayment of the principal amount, NFE could do so before it pays taxes. If the GOSL tries to sue NFE, it will find an undercapitalised company without the funds to meet its obligations to the GOSL. But if NFE sues the GOSL, it can recover damages from the entirety of the GOSL funds.

More troubling is the ability of NFEI to sell off the shares it owns in NFE to anyone of its choice. What happens if after a nasty dispute with the GOSL, NFEI decides to teach the GOSL a lesson by selling all of its shares in NFE to a Global This Forum or a Global That Forum? This would be a scary Trojan Horse, wouldn’t it? A hostile force, the new owner of NFE will, because of the powers given to it under the Agreement, be in control of a highly strategic asset!

The GOSL could have got a corporate guarantee from NFEI that NFE would perform its obligations. The GOSL could have also got an agreement from NFEI that it would not sell the shares of NFE to any third party with the permission of GOSL. But that basic precaution would be too much, way too much, to ask of your fellow geniuses who sign midnight agreements and accept unsolicited bids from blacklisted Chinese companies wouldn’t it? Just as a simple clause in the Seawin contract that importation would be conditional on approval of the sample by the local standards authority would have saved the country millions of dollars. Yet again, some basic due diligence on the Agreement could have prevented multiple troubles coming down the pike.

 

Fraudulent misrepresentation:

 For the past 50 years or so, you and your merry band have been making fraudulent promises and misrepresentations to the electorate who have rewarded you by voting you into office time and time again. But making a fraudulent misrepresentation to a contractual party in an international contract governed by English law is a completely different kettle of fish. But here again, it will not be you and your fellow buccaneers who will be carrying the can. 

Please look at Article 1.2 of Schedule 5 of the Agreement. There, the GOSL warrants that the Agreement and other documents “have been duly and validly authorised by the cabinet of Ministers of the GoSL’, but it seems that some of your colleagues live in a parallel universe. They loudly claim that they never authorised the Agreement, have gone to court to have the Agreement invalidated, and the opposition MP who divulged the agreement claimed that cabinet ministers asked him for a copy of the Agreement. Did the official who signed the midnight agreement ask to see a document confirming cabinet approval of the Agreement? So, someone is fibbing, massively fibbing, with bad consequences for the country. An objective assessment of the protests from cabinet members and the midnight signing on an agreement obviously drafted by NEII lawyers would support the view that Article 1.2 of Schedule 5 is a fraudulent misrepresentation. 

So, the Sri Lankan people must hope and pray that the courts will not invalidate the Agreement. If it does, the GOSL would have to pay the massive consequential damages to NFE that NFE could claim under the Misrepresentation Act under English law. NFE wouldn’t have to show that this misrepresentation induced it to sign the Agreement, inducement being a requirement for actionable misrepresentation. This inducement is presumed when there is a fraudulent misrepresentation.

Even though a Sri Lankan court might declare the entire Agreement illegal, Section 7 of the UK Arbitration Act states that the agreement to arbitrate will survive the invalidation of the container contract, the Agreement. In an arbitration, NFE would undoubtedly claim that the representation contained in Article 1.2 of Schedule 5 was fraudulent, citing the many public statements of cabinet ministers that they had no inkling of the Agreement. The arbitral tribunal would most probably believe the objecting cabinet ministers rather than the GOSL, delivering yet another blow to the tattered reputation for truth telling of the country. 

NFE would also make an additional claim that a decision of a Sri Lankan court purporting to adjudge the legality of the Agreement would breach Clause 20 that provides, amongst other things, that any dispute regarding the formation of the contract shall be decided in accordance with English law. A court applying Sri Lankan law would breach the undertaking to apply English law. 

Under section 2(1) of the Misrepresentation Act 1967 applicable in England, NFE could claim both rescission and consequential damages. These damages would be in the tens of millions of dollars. 

So, keep your fingers crossed that the court challenges to the Agreement fail. Otherwise, the People will yet again be taken to the cleaners by a company that would not have delivered one kilowatt of electricity to the country. 

As you fellows have no qualms or shame about paying millions of dollars in damages to the Chinese shipper of contaminated fertiliser, Seawin, without receiving a gram of organic fertiliser, you will have no problem with paying millions of dollars in consequential damages with receiving a kilowatt of electricity so long as you continue to enjoy luxury cars, luxury houses, and other luxury perks paid for by money belonging to the People. 

 

Governing law

Now take a deep breath. Ready? Now read Clause 20 which reads as follows: “This Agreement (including the arbitration agreement set out in Clause 21) and any dispute or claim (including any non-contractual dispute or claim) arising out of or in connection with its subject matter or formation shall be governed and construed in accordance with the laws of England.”

In a sale of shares agreement between Perera and Silva relating to the shares of Seenibola Ltd., a Sri Lankan company, assume that the parties provide that English law will apply to the transaction. Would the Sri Lankan courts hold this to be an illegal agreement unenforceable under Sri Lankan law? Party autonomy in contract law means that the law allows parties to choose the terms of the contract. However, the Sri Lankan state has an interest in all matters relating to the transfer of shares in a company that Sri Lankan law allows to be formed. 

It will rightly hold that Sri Lankan law must be the only law that is applicable to a company incorporated in Sri Lanka. Can the law of directors’ duties and the law of meetings of a Sri Lankan company be governed by English law? The courts are the principal guardians of Sri Lankan law and would probably declare that the ousting of Sri Lankan law in favour of English law makes the agreement illegal. 

The sweep of Clause 20 of the Agreement provides for the application of English law to deciding a wide range of affairs, “arising out of or in connection with” the Agreement. It is absurd to think that English law on the subject should govern the multiple topics of company law regulated by the Sri Lanka company law. In practice, an arbitral tribunal faced with a company law issue will be guided by English conflict of law principles which would direct the tribunal to look at Sri Lankan law. This needlessly complicates the issue.

As a subsidiary of a global company, NFE, would have access to blue chip law firms in the City of London who can advise it on its rights and obligations of NFE under English law. Would the cash strapped GOSL have the funds to match this legal firepower? If not, how competent are local lawyers to advise on English contract law and company law, a body of complex law? 

Arbitration: 

 Clause 21 of the Agreement requires that any dispute arising under or ‘in connection’ with the Agreement shall be decided by arbitration. Most countries, including Sri Lanka and Singapore, have converted the UNCITRAL Model Code of Arbitration into local law. The Model Law severely restricts the circumstances in which a court could interfere with an ongoing arbitration. But the English law of arbitration, unlike the UNCITRAL Model Law, allows an English court to interfere in many circumstances. During the arbitration, a party could appeal a point of law to an English court. In addition, English law allows the court to remove arbitrators in certain circumstances. The arbitration is subject to UNCITRAL rules which function like the codes of civil procedure for courts.

Properly advised, the GOSL should have insisted that because the arbitration would be held in Singapore, its International Arbitration Act would have been a much better choice as the law governing arbitration. The Singapore courts have a good reputation for interpreting this law in a correct way justifying its reputation as a global arbitration hub. Instead, because of Clause 21, the GOSL and the NFE would have to shuttle between Singapore and London when they have a dispute about the conduct of the arbitration proceeding. But hope springs eternal!

By choosing English law as the governing law on all matters, NFEI might have been, as the saying goes, “too clever by half” and may be hoisted on their own petard. This is because of the English law on non-signatory liability and the operation of Article V of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“NY Convention”).

Because an arbitration is the result of a private agreement between A and B, the tribunal does not have the power to impose liability on C. But the UK Supreme Court in Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan recognised that there could be some circumstances in which a non-signatory, C in the above example, can be made liable. This would be in circumstances where C was the controlling power behind B. 

NFEI has bragged on its website that “New Fortress Energy Inc. (“New Fortress”) and The Government of the Democratic Socialist Republic of Sri Lanka (“GOSL”) jointly announced today that they have executed a definitive agreement for New Fortress’ investment in West Coast Power Ltd. (“WCP”)”. Enough to attached non-signatory liability, but quickly Minister, take a screenshot before they wipe it out.

Article V of the NY Convention will allow the GOSL to resist enforcement of an award on the ground that the Agreement was not valid under the law to which the parties have subjected it, i.e. English law. Let us hope, dear Minister, that an enforcing court would hold that the Agreement, because it subjected the affairs of a Sri Lankan company to English law would under English law be invalid. But then there is a doctrine of severability, and I will not tax your brainpower with an explanation on that topic.

Finally, because NEI as a shareholder of WCP and therefore amenable to the jurisdiction of the Sri Lankan courts, if it attempts to start an arbitration, the Sri Lankan courts could issue an anti-suit injunction, which if properly applied, will be recognised by the English courts. 

 

Properly advised, the GOSL should have insisted that because the arbitration would be held in Singapore, its International Arbitration Act would have been a much better choice as the law governing arbitration. The Singapore courts have a good reputation for interpreting this law in a correct way justifying its reputation as a global arbitration hub. Instead, because of Clause 21, the GOSL and the NFE would have to shuttle between Singapore and London when they have a dispute about the conduct of the arbitration proceeding.

 

The Kali Yuga Effect

If the Agreement collapses, the consequences will be a catastrophe on par with the sinking of the X-Press Pearl. Naturally, your coterie of goons would, as usual, deny any responsibility. To a country convulsed by violence, food shortages, exploding gas cylinders, parched paddy fields, this would be further proof of the era in which life has to be endured while the freeloaders go on their merry ways.