Tullow Uganda Ltd v Heritage Oil and Gas Ltd & Anor

A contractual tax indemnity may operate where a buyer is charged with tax, even if the underlying charge is later shown to be invalid. The buyer need not establish an objective probability that the charge was lawful. It is sufficient that the charge was apparently valid, unless the buyer knew or believed it was invalid, or the asserted basis was absurd or fanciful. Notice provisions will not be treated as conditions precedent without clear language. An indemnified party may protect its own commercial interests where the contract permits that course. Implied restrictions such as a requirement that the recipient be passive, or that benefits obtained from a related transaction defeat the indemnity, should not be introduced into clear commercial wording.

The claimant purchased the defendants’ interest in Ugandan petroleum licences under a sale and purchase agreement containing a tax indemnity. Following the transaction, the Ugandan Revenue Authority issued agency notices requiring the claimant to pay tax assessed against the defendants. The claimant paid US$313,447,500 and sought recovery under the indemnity, alternatively in restitution.

The defendants disputed the validity of the agency notices and relied on contractual defences, including late notice, the claimant’s alleged interference with the defendants’ conduct of the tax dispute, alleged collusion, and benefits obtained from the Ugandan Government. The court also considered the construction of the Ugandan Income Tax Act and whether the claimant genuinely believed that the notices were valid.

1. Claim allowed. Judgment was given for the claimant against both defendants under Article 7.2 of the sale and purchase agreement.
2. The indemnity applied where a non-transfer tax was charged to the buyer in connection with the transaction. The agreement did not impose a general objective test requiring the buyer to prove that the charge was more likely than not to be lawful. There was, however, limited scope to deny recovery where the charge was obviously bad on its face, or where the buyer knew or believed that it was invalid or fanciful ([2013] EWHC 1656 (Comm), paras [66]-[70]).
3. On the facts, the claimant relied on Ugandan legal advice and genuinely believed at the time of payment that the agency notices were valid. That belief was neither fanciful nor absurd, and was one to which a reasonable person in the claimant’s position could come ([2013] EWHC 1656 (Comm), paras [71]-[75]).
4. Applying the approach in MCC Proceeds Inc v Bishopsgate Investment Trust Plc, the court had to predict the likely decision of a Ugandan court rather than adopt an expert’s personal view of Ugandan law. Section 108 of the Income Tax Act imposed personal liability on the recipient of an agency notice, and permitted recovery even though the taxpayer’s liability was disputed or not yet payable. The claimant’s control over the escrow arrangements constituted possession in the relevant statutory sense. The first agency notice and the second notice, insofar as based on section 108, were therefore valid at Ugandan law ([2013] EWHC 1656 (Comm), paras [76]-[97]).
5. The notice obligation in Article 7.5(a) was not a condition precedent. Article 7.4 was expressly framed as a condition precedent, whereas Article 7.5 was not. In any event, the defendants knew of the notices, took no effective steps under Article 7.5(b), and could not have required the claimant to take action which fell within Article 7.6(b) ([2013] EWHC 1656 (Comm), paras [98]-[102]).
6. Clause 3.1(a) of the Supplemental Agreement preserved the defendants’ right and responsibility to conduct the tax dispute, but did not prevent the claimant from protecting its own commercial interests. No breach was established. The suggested guarantee-law duty of good faith, passive-recipient limitation, and valuable-benefits defence were rejected. The contractual indemnity was a debt claim, and no credit or mitigation issue arose ([2013] EWHC 1656 (Comm), paras [103]-[111]).
7. The alternative restitutionary claim and the counterclaim did not require determination. The court nevertheless indicated that the claimant’s payment under legal compulsion would in principle support an unjust-enrichment claim, and that the counterclaim failed because there was no breach of Clause 3.1(a) and no loss ([2013] EWHC 1656 (Comm), paras [112]-[116]).