The first part of this discourse reviewed some of the conditions to be met at all levels of government for a rule-based borrowing. The general thrust of the discourse has shown that due process is not being followed in most of the debt transactions at all levels of government. Factual illegality and lack of due process can only lead to one conclusive end vis, the unsustainability of the debts incurred, because the procedures were set down to cure the mischief in existing law prior to the enactment of the Fiscal Responsibility Act.
S.45 (1) and (2) of the FRA provides for one the biggest elephants in the debt procurement process. It states that: “All banks and financial institutions shall request and obtain proof of compliance with the provisions of this part before lending to any government in the federation.” Furthermore: “Lending by banks and financial institutions in contravention of this part shall be unlawful.”
By the above provision, banks and financial institutions are under a positive legal obligation to ensure that there is compliance with the provisions of the FRA before lending. The word used to qualify “unlawful” is “shall” which implies that it is mandatory (not discretionary) for banks to apply the provisions of this section. Banks are under obligation to request and obtain proof of compliance with the FRA before lending. It is also a directive to the courts to ensure the voiding of contractual obligations entered into in violation of the provision. When banks lend without following the provisions of this Act, the transaction is unlawful. What is the legal status of an unlawful lending transaction? Can the bank recover the loan from the debtor? The term “unlawful” has been defined as contrary to, prohibited or unauthorised by law; acting contrary and in defiance to the law. When the term is applied to agreements and the like, it denotes that they are ineffectual in law because they involve acts that cannot be recognised as grounds for legal rights because they are against public policy.
In Sodipo v Lemminkainen (1985, 2 N.S.C.C., 1102 at 1114., 1115), the Supreme Court held that a contract expressly or implicitly prohibited by statute is illegal and the courts cannot enforce illegality. Prof. Itse Sagay in Nigerian Law of Contract states that where a statute prohibits or bans the making of certain types of contracts, such contracts when made are illegal and void at law. The legal maxim is ex turpi causa, non-oritur actio meaning that a cause of action in law does not arise from a base cause. If the agreement of the parties is to subvert the provisions of the FRA, then the maxim will apply. Furthermore, parties to an agreement regulated by statute are expected to contract within the framework and contemplation of the statute. The law has also been stated as follows:
It is the law that a contract is illegal if the consideration or the promise involved doing something illegal or contrary to public policy or if the intention of the parties in making the contract is thereby to promote something which is illegal and contrary to public policy; and an illegal contract is void and cannot be the foundation of any legal right. Where the subject matter of the promise is illegal or where the consideration or any part of it is illegal, the contract is illegal.
Therefore, lending in contravention of the FRA when properly challenged in the courts may lead to inability of the bank to recover the debt or at best the recovery of the principal without the accruing interest and fees. Ordinarily, only parties to a contract have the locus standi to enforce or repudiate its terms. This is based on the concept of privity of contract. It has been severally held that a contract cannot be enforced by a person who is not a party to it; even if the contract was made for his benefit and purports to give him a right to sue on it. However, S.51 of the FRA states that, “A person shall have legal capacity to enforce the provisions this Act by obtaining prerogative orders or other remedies at the Federal High Court, without having to show any special or particular interest.”Therefore, any person can seek a declaration that a loan transaction is unlawful and ask the court to prohibit a state or a bank from consummating the transaction or claiming rights under it. This position can further be justified under the equitable doctrine propounded in Roberston v Wait (1853 8Exch.229) and Lloyd’s v Harper (1880, 16 Ch.D 290) to the effect that a party to a contract can constitute himself a trustee for a third party of a right under the contract and thus confer such rights enforceable in equity on a third party. The government under the constitution and the social contract is a trust and governments act on behalf of the entire population and as such, everyone has an interest in the enforcement of laws, the rule of law and its due process.
Banks and financial institutions are therefore advised to tread cautiously and stop the continued granting of loans, especially to sub nationals who have been borrowing without meeting the conditions stated in the FRA. But the question arising is, which authority grants the proof of compliance anticipated in S.45 of the FRA? S.44 (4) of the FRA unequivocally invests the authority on the Fiscal Responsibility Commission in the following words: “The commission shall verify on a quarterly basis, compliance with the limits and conditions for borrowing by each government in the federation.” The authority that verifies compliance automatically should be the one in a position to state that the conditions have been met.
In the final analysis, it is important that all tiers of government return to evidence-based debt procurement, management and repayment based on the unambiguous provisions of the FRA. The fact that we are servicing debts with virtually all our actual revenue at the federal level shows that the rules were not followed in debt management. The FRA did not contemplate this as a sustainable debt position. The ball is back in the court of the Ministry of Finance, Debt Management Office, and the Fiscal Responsibility Commission.
Concluded
