Home Analysis Sanctity of contract and well defined property rights drives foreign investment

Sanctity of contract and well defined property rights drives foreign investment

by Business News Report

The key driver in President Goodluck Jonathan’s transformation agenda is massive investment. This is why the ministries of Commerce and Industry were merged to form ministry of Trade and Investment. While it is important to seek to attract foreign direct investment into the country, creating the ministry is not bait for foreign investor to want to come to Nigeria. Globally investors are interested in places where their return on investments is high. Nigeria certainly qualifies as investors have found out that they reap higher benefit if they invest in Nigeria. The few that have done so have found this to be true. Yet, Nigeria is not a haven to foreign investors.

There must be reasons why they shy away from Nigeria. Many investors out there who speak privately to Nigerians at investment fora are quick to point out that in Nigeria there is no sanctity of contract and property rights are not clearly defined. Most foreign investors see this as the most inhibiting factor that scares away would be investors. They are not worried about f the lack of infrastructure as is always claimed by those who explain away the Nigeria situation. Shell, Mobil, Chevron, MTN, UACN and others know too well the infra structural deficiency in the country, yet they invested and are reaping the benefits.

The truth is that both local and foreign investors are wary of investing in Nigeria because the state and its agents have no respect for property rights and sanctity of contract. They are worried that if they invest in Nigeria their investment can be taken over by the state. CBN Governor has said that the CBN is to protect depositors only and has no business with investors. It was little wonder that despite the grand standing of the CBN to sell rescued banks to foreign investors none showed up.

Sanctity of Contract is a general idea that once parties duly enter into a contract, they must honor their obligations under that contract. . Contracts have been breached with impunity by federal and states agents and servants who out rightly disregard or disobey courts orders. Bi-Courtney Aviation Service Limited and Maevis Nigeria Limited are two examples of the major concessionaires in the aviation sector with complaints on breach of contracts. The two companies have said the Federal Airport Authority of Nigeria (FAAN) is to be blamed for the confusion and controversy that have trailed their concession pacts. Fagbemi who manages Maevis said “We are here under what you will refer to as PPP project in which we deploy assets that are required to keep the operations of FAAN at internationally acceptable standard”.

Justice Binta Murtala Nyako of the Federal High Court in Lagos had ruled that Federal Airport Authority of Nigeria (FAAN) has no right to terminate Maevis’ Airport Operations Management Services (AOMS) contract. The judge had in an order of December 17, 2010 referred parties in the conflict to arbitration, since the agreement between them provided for it in the event of a dispute. The management of Maevis had approached the court for relief then, when it complained that its rights as contained in the agreement document were being infringed upon. Maevis has an agreement with FAAN to provide the airport operations management system. The agreement was entered into in October 2007 by both parties under the PPP arrangement which would last for 10 years. In a twist to the conflict after the initial ruling, FAAN had in a letter dated March 24, 2011 served a two-month termination notice to Maevis. On receipt of the termination notice, Maevis headed to the court for relief, claiming that the purported termination letter was a clear disregard for the High Court ruling.

Reacting to the issue of lack sanctity of contract in Nigeria Central Bank Governor, Sanusi Lamido Sanusi, described the lifting of ban on tooth picks and furniture early in the year as a breach of contract stressing that it portends lack of credibility on the side of government. Sanusi said the CBN saw no urgency in that policy and wondered why it should be reversed without warning. The Central Bank governor who was briefing members of the monetary policy committee of the CBN on why banks were not usually disposed to lending to the real sector given current efforts being made to de-risk the industry and get banks to lend to the real economy, said: “This was because, a bank would only lend if it was satisfied with the risk criteria. Investors any where in the world look for environment where there is certainty, enduring economic policies and standard rules that are not changed over night as in Nigeria and where they can perm the risk associated in a given project or investment.

Normally, before any foreign investor commits his capital into a project, he will want to be assured that there shall be stability in the investment regime. That is to say, the whole or key aspects of the agreement will be respected by the host state and that the rules of the game will not be changed unilaterally. The foreign investor needs such an assurance not only as a means of ensuring that he realises the expected benefits for his shareholders, but also to convince other sponsors of the project that the project will generate enough capital to pay off their loans and meet their supply requirements. These objectives may only be realised if the terms of the investment agreement are respected by the host state. Hence, for that reason, the principle of sanctity of contract is regarded as one of the most important legal concepts in the investment process.

The concept of sanctity of contract is based on the 19th century classical contract theory which is founded in the Aristotelian virtue of promise keeping, and liberality. According to the theory, a contract is an expression of the parties’ free will or choice. It is an exercise of the parties’ freedom and autonomy as such; it should be honoured and not be interfered with by the court. The terms of the contract must be implemented to the letter no matter how onerous or burdensome they may prove to be. The individual is the best judge of his own interest and if he strikes a bad deal then he should blame himself and bear the risk. It is neither the duty of the court nor that of the state to inquire into the fairness or otherwise of the contract; their role is to enforce what the parties have agreed to do. After all, enforcing contracts enhances economic efficiency.

The federal military government in 1978 promulgated the Land Use Act in which it delegated authority over land allocation to the 36 states and their local governments in an effort to ensure that rural and urban populations had access and secure tenure to land. While the physical land area is under the control of state governments the minerals contained in such land belongs to the federal government in the mineral act. While a corporate body or individual seeking land for investment goes to the state to obtain certificate of occupancy, he has to obtain mining lease licence from the federal government. It is this confused and lack of defined property rights that have resulted in the contention between the federal government and the states as to who owns what.
Enforcing individual right to property in the Nigerian courts is tortuous, time wasting as it takes years to get judgments and costly.

In most cases federal agencies without due process encroache on individual property rights. The Nationalisation of three Nigerian banks recently is a case in point. The sacking of bank chiefs without due process is still fresh in the minds of Nigerians. What about the removal of the Nigerian Stock Exchange Director General without due process. The concessionaire contracted by the Nigerian Airport Authority, Meavis is another case where civil servants want to have their way against the term of engagement. The Lekki road concession is yet another. While the company has built the road for it to commence tolling the road, the right of ownership arose and the contract is being frustrated. The fact that this government wants investment in infrastructure on the basis of Public Private Partnership makes its illusory.

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