“Everywhere in the world, all contracts or agreements are subject to national law”- Energy Expert

Dec 25, 2024 News

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Kaieteur News –  “Everywhere in the world, all contracts or agreements are subject to national law, so if a contract contains terms that are at variance with national law, those terms may not be enforceable.” This was recently explained by an energy expert in an invited comment.

The source, who has worked for decades in the petroleum industry, explained that from the commentary in the media in Guyana and views shared by associates in the sector, it is clear that there are Clauses in the Production Sharing Agreement (PSA) with American super major, ExxonMobil, that are by international norms, so one-sided and disproportionate that they may be considered “unconscionable” or “odious.”

“As an example, in one of the clauses, the Minister has agreed not to change fiscal (tax) terms. This typically does not fall under the control of a Minister responsible for extractives, but is the responsibility of a Minister of Finance. That said, the minister for extractives acts on behalf of the government and would have had the approval of the Cabinet to agree to the terms of such an Agreement,” the source noted.

It was, however, pointed out that all contracts or agreements across the world are subject to national law. This therefore means that if a contract contains terms that are at variance with national law, those terms may not be enforceable. “In other words, no Minister can legally enter into a contract that contravenes an existing law. Similarly, can a Minister or government can bind Parliament to not change laws in the future. In some cases, international trade dispute resolutions authorities have taken a different view, basing their rulings on the legitimate expectations of investors. Given what has happened on the international scene in recent years, it appears there are different rules for different players,” the Energy expert pointed out.

In the case of Guyana’s Agreement with Exxon, the specialist said the Minister of Finance placed the Agreement before Parliament for its ratification. In so doing, Parliament effectively made the Agreement law and may have amended or repealed existing statutes, just for this Agreement.

According to the source, “In discussing whether the conditions in the Agreement can be unilaterally changed, the question therefore arises whether a Parliament can bind future Parliaments and prevent it from amending or repealing laws in the future.”

It was noted that this is where another of those contentious clauses kicks in. According to Guyana’s contract with Exxon, should any change be made in the future, the Minister has agreed to make up any perceived shortfall in return on investment that the Contractor may have reasonably expected.

“That suggests to me that a Minister would have to get prior Parliamentary approval of a budget to allow for that. The language in this clause is very cleverly drafted, but not necessarily bullet-proof. One question that has arisen is why the Minister would agree to such terms. That was answered by the Minister, in testimony before a Parliamentary Committee, in response to a question posed by none other than the Minister of Finance,” the expert reasoned.

Renegotiation of odious contracts

There is a body of work on the unenforceability of unconscionable or odious contracts, including cases where negotiators have been deemed as “lacking the capacity to contract.”

The source pointed out, “Although no party wants to renegotiate a contract without cause, renegotiation of contract terms in the industry is routine, particularly if there is a material change in conditions like geological understanding or markets (costs of services, prices of product, etc.) from what was expected at the time the contract was negotiated.”

Similarly, he explained that it is also not unusual if one party wants to open a specific clause or condition that it finds particularly unattractive. This means that every time Exxon asks for something, which they always will do, Guyana can ask for something in return.

The energy expert however, pointed out that the desire to revisit the terms of the agreement hinges on the concept of economic stability. “Simply put, this means that an investor has an expectation and, in this case, is given a guarantee, that it will achieve a specific return on its investment. This is typically premised on costs, production levels and market prices, while providing for risks and some level of variation.

These would have been agreed upon and documented on the approval of the Field Development Plan, by the government, and the Final Investment Decision, by the respective boards of the partners who make up the Contractor,” the source said.

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• contracts, Parliament, Paul., renegotiation, subject

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