Heritage Loses to Tullow Oil in Tax Indemnity Dispute

by Akin Gump Strauss Hauer & Feld LLP

On June 14, 2013, the High Court in London ruled that Heritage should pay Tullow Oil c.$313 million under the terms of a tax indemnity relating to the 2010 transaction that saw it acquire Heritage oil licenses in Lake Albert, Uganda. 

The litigation centered on Heritage’s Ugandan capital gains tax (“CGT”) liability arising from that transaction.  Heritage realized c.$1.45 billion from the sale and the Ugandan government raised a CGT assessment of c.$434 million, calculated as broadly 30 percent of the transaction value.  Heritage disagreed with the amount and paid the Ugandan government only $121.5 million, departing Uganda shortly afterwards.

Originally, the dispute was to be resolved by arbitration and $283 million of the purchase price was placed in escrow pending the conclusion of the dispute. In addition, Heritage paid $121 million to the Ugandan government as a ‘refundable deposit,’ to be returned should the arbitration go in their favor.

However, in February 2011, the Ugandan government insisted that the outstanding CGT liability should be paid in full (notwithstanding their previous agreement to defer payment until the conclusion of the arbitration).  Heritage no longer had any presence in Uganda, giving the government no effective means of enforcing the liability against it.  But Tullow Oil remained in the country and required government consent to turn its oil licenses into ‘production’ contracts (without which the Lake Albert oil fields could not be worked) and to proceed with agreements to sell two thirds of its Ugandan oil assets to China’s CNOOC and France’s Total.

The Ugandan government withheld these consents until, in April 2011, Tullow Oil agreed to pay the $313 million tax liability on Heritage’s behalf.  That sum included the $283 million of the purchase price still in escrow.

Tullow Oil then sued Heritage to reclaim the $313 million under the terms of the tax indemnity that formed part of the share purchase agreement (“SPA”) governing the 2010 transaction.  That indemnity essentially obliged Heritage to pay Tullow Oil an amount equal to any unpaid tax arising as a result of the transaction.

The SPA was governed by English law and so proceedings were heard by an English court. The key question was why Tullow Oil had paid the $313 million to the Ugandan government?  Was it a payment of tax arising from the Heritage transaction (in which case an indemnity claim was valid)? Or was it a payment Tullow Oil had made as a matter of pragmatism in order to expedite the consents it required (in which case it would not be within the ambit of the tax indemnity)?

The High Court found in favour of Tullow Oil.  A claim under the tax indemnity did not require Tullow Oil to finally determine that the CGT assessment was valid as a matter of Ugandan law.  This would place an inappropriately heavy burden on a party seeking to rely on a tax indemnity. Instead, Tullow Oil was required to have a reasonable belief that the Ugandan CGT assessment was valid.  Tullow Oil had taken advice from local counsel which indicated that it was likely to be found valid by a Ugandan court and this satisfied the High Court on this point.

The judgment provides an interesting insight into the courts approach to construing indemnity provisions that are common to many acquisition agreements. It reinforces the need for using clear and express language in any provisions that are intended to limit the indemnified party’s ability to seek recovery under an indemnity.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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