In Heritage Oil and Gas & Anor v Tullow Uganda Ltd the Court of Appeal upheld Tullow's right to be indemnified for a USD 313,447,500 payment it made to the Government of Uganda in connection with the acquisition of a petroleum exploration licence from Heritage. This recent decision provides a stark reminder of the need to ensure that close attention is paid to the drafting of tax clauses in a sale and purchase agreement.
The Ugandan revenue authority initially assessed Heritage for tax in respect of the proceeds of disposal of the licence. However, the burden was shifted on to Tullow because Heritage (a non-resident company) disputed liability. The difficulty for Tullow was that the Ugandan Government was not prepared to give its required consent for the transfer unless the tax liability was dealt with first.
Tullow entered into negotiations with the Ugandan Government and subsequently gave Heritage notice that it had received a tax demand from the Ugandan revenue authority, which it had agreed to pay.
Tullow made a claim under a clause of the sale and purchase agreement with Heritage (SPA), which broadly provided that transfer taxes were the responsibility of Heritage and that, in the event that it was charged to Tullow, Heritage would indemnify Tullow for the tax.
One of the key arguments put forward by Heritage was that Tullow had not given it notice of the tax claim within the time period specified in the SPA which, Heritage argued, was a condition precedent to Tullow's ability to claim under the indemnity. Notification had not been given by Tullow within the requisite period, so Heritage argued that Tullow's claim had to fail.
The Court did not accept that the requirement to give notice was a condition precedent, and was mindful that construing it as such would mean that the most trivial of breaches could deny a claim completely. Tullow's position was helped by the fact that a separate clause, dealing with time limits for making claims, was drafted in clear language that made it clear that making a claim within time was a condition precedent. The Court held that the notification requirement would have needed to have been similarly drafted, to make it clear that it was a condition precedent, if it was intended to operate in that way.
If the requirement to give notice had been a condition precedent preventing a claim, then Tullow's purchase price for the licence would effectively have increased by USD 313 million. On these sorts of numbers it may be worth reading the tax clauses in an agreement a little more closely.
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