The unconscionable terms of the PSA establish a case for renegotiation

Jan 10, 2025 Features / Columnists, Peeping Tom

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Peeping Tom…

Kaieteur News- The Production Sharing Agreement (PSA) governing Guyana’s oil resources has drawn severe criticism for its inequitable provisions, which prioritise the interests of oil companies over the welfare of the Guyanese people. These terms are not only morally questionable but also legally challengeable under the doctrine of unconscionability.

When the terms of a contract are so one-sided and oppressive that they shock the conscience of a reasonable observer, they demand scrutiny and, if necessary, renegotiation.  The current PSA is a textbook example of such an agreement, and there exists both a legal and moral imperative to rectify its terms.

The doctrine of unconscionability in contract law provides a robust foundation for challenging agreements that are grossly unfair. Rooted in principles of equity and fairness, this doctrine ensures that no party is subjected to undue hardship or exploitation due to oppressive contractual terms. Contracts that meet the criteria for unconscionability—marked by extreme inequality in bargaining power, lack of informed consent, or overly harsh terms—can be invalidated or revised.

In the case of the PSA, the provisions are glaringly lopsided.  The agreement grants the oil companies substantial tax concessions, mandates paltry royalty payments, and lacks a ring-fencing mechanism to prevent cost-recovery abuses. These provisions deprive Guyana of its rightful share of oil revenues, creating a situation where the nation bears the costs while the oil companies reap the benefits. Such an arrangement is not merely unfair; it is exploitative and shocks the conscience.

The legal framework governing contracts is clear: no party should be unduly advantaged at the expense of another. The imbalance in the PSA violates this principle and calls for immediate renegotiation. Courts worldwide have upheld the principle that unconscionable contracts are subject to revision or nullification. Guyana’s legal system, guided by similar principles, has the authority to deem the PSA unconscionable and facilitate a renegotiation.

One of the arguments often cited against renegotiation is the stability clause in the PSA, which ostensibly protects the terms of the contract from arbitrary changes. However, this clause does not prohibit renegotiation; rather, it ensures that changes to the agreement are consensual and not unilaterally imposed by one party. The stability clause is a safeguard against arbitrary amendments, not a barrier to renegotiation.

In practice, stability clauses are common in international contracts to reassure investors of predictable operating environments. However, they are not absolute. Numerous precedents demonstrate that such clauses can be revisited when the underlying agreement is proven to be grossly unfair or when circumstances change significantly. The right to renegotiate is inherent in any contractual relationship, particularly when one party’s interests are disproportionately affected by the existing terms.

The unconscionable nature of the PSA provides a compelling basis for renegotiation. The principle of pacta sunt servanda (“agreements must be kept”) is not absolute and must be balanced against the principles of equity and fairness.  Stability clauses cannot be weaponized to perpetuate injustice or shield exploitative agreements from scrutiny.

To grasp the extent of the PSA’s inequity, one must examine its specific provisions. First, the agreement’s tax concessions effectively absolve the oil companies from contributing to the national treasury.  While Guyanese citizens and local businesses shoulder their tax burdens, multinational oil corporations enjoy exemptions that undermine the country’s fiscal stability.

Second, the royalty payments under the PSA are a mere two per cent—an embarrassingly low figure compared to global standards.  Countries with comparable oil resources negotiate royalties ranging from 10 to 20 per cent, ensuring a more equitable share of the profits. Guyana’s royalty rate is a glaring anomaly, reflecting the agreement’s deeply flawed nature.

Third, the absence of ring-fencing provisions allows oil companies to offset costs from unprofitable projects against revenues from profitable ones. This loophole significantly reduces Guyana’s share of the profits and incentivizes reckless spending by the oil companies. The lack of ring-fencing exacerbates the imbalance, further depriving Guyana of its rightful benefits.

While the agreement was signed under the previous administration, the current government has a responsibility to act in the national interest. The argument that renegotiation would deter foreign investment is a red herring; many countries have successfully renegotiated contracts with multinational corporations without jeopardising investor confidence. What matters most to investors is the predictability of the legal framework, not the perpetuation of exploitative agreements.

(The views expressed in this article are those of the author and do not necessarily reflect the opinion of this newspaper.)

(The unconscionable terms of the PSA establish a case for renegotiation)

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• contractual terms, Guyana’s legal system, moral imperative, paltry royalty payments, Peeping Tom

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