Heritage Oil and Gas Ltd and Another v Tullow Uganda Ltd

JurisdictionEngland & Wales
JudgeLord Justice Beatson,Lady Justice Gloster,Lord Justice Rimer
Judgment Date23 July 2014
Neutral Citation[2014] EWCA Civ 1048
Docket NumberCase No: A3/2013/2175
CourtCourt of Appeal (Civil Division)
Date23 July 2014

[2014] EWCA Civ 1048

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE, QUEEN'S BENCH DIVISION

COMMERCIAL COURT

The Hon. Mr Justice Burton

[2013] EWHC 1656 (Comm)

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lord Justice Rimer

Lord Justice Beatson

and

Lady Justice Gloster

Case No: A3/2013/2175

Between:
(1) Heritage Oil and Gas Ltd
(2) Heritage Oil PLC
Appellants
and
Tullow Uganda Ltd
Respondent

Raymond Cox QC, Jonathan BrettlerandAlexander Cook (instructed by McCarthy Tetrault) for the Appellants

David Wolfson QC and Richard Mott (instructed by Ashurst LLP) for the Respondent

Hearing dates: 7 and 8 May 2014

Lord Justice Beatson

I. Introduction

1

This appeal concerns a right to indemnity in a Sale and Purchase Agreement ("the SPA") dated 26 January 2010 between the first appellant, Heritage Oil and Gas Ltd ("Heritage"), now a Mauritian company, and the respondent, Tullow Uganda Ltd ("Tullow"), varied by a Supplemental Agreement dated 26 July 2010 ("the Supplemental Agreement"). Heritage agreed to sell its rights in two petroleum exploration areas in Uganda to Tullow. The question for decision is whether Article 7.2 of the SPA entitled Tullow to be indemnified by Heritage for a payment of US$313,447,500 it made to the Government of Uganda ("the Government") on 7 April 2011 in respect of what the Government contended was Heritage's tax liability from the transaction.

2

Article 7.2 of the SPA gives Tullow a right to an indemnity in respect of capital gains tax imposed on Heritage but charged to Tullow by the Government. Article 7.5(a) requires the "indemnified party" to give notice of the tax claim to the indemnifying party within 20 business days. Article 7.5(b) requires the indemnified party to take such action as the indemnifying party may reasonably request to dispute and defend the tax claim, including providing to the indemnifying party such records and information as are reasonably relevant and are reasonably requested by the indemnifying party. Article 7.6, however, provides that the indemnified party is not required to take any action requested unless it is properly indemnified against losses and costs, or where, in the indemnified party's reasonable opinion, the action is likely to affect adversely either its future liability or its business or financial interests. These provisions are set out in paragraph 4 of the Appendix to this judgment, which contains the material parts of the SPA and other contractual documents. 1

3

Heritage pleaded nine defences to Tullow's claim for indemnity. 2 These fall into four broad categories which can be summarised as follows. First, the mechanism under which Tullow was made liable to make the payment to the Government was not within Article 7.2 because it was an "execution remedy". Secondly, in any event Tullow had not satisfied the notice requirement in Article 7.5(a) of the SPA, which Heritage maintained was a condition precedent to the rights of indemnity under Article 7.2. Thirdly, Heritage submitted that it was not liable to indemnify Tullow because Tullow was in breach of clause 3.1(a) of the Supplemental Agreement, which provided that Heritage was to have the right of conduct of the tax dispute with the Government which was to be "its sole responsibility". Fourthly, Heritage contended that, as a result of what it maintained was "collusion" between Tullow and the Uganda Revenue Authority ("the Revenue Authority"), Tullow was disentitled from recovery under the indemnity. It also contended that the indemnity is inapplicable where the party seeking to be indemnified has obtained benefits as part of a "package". 3

4

Following a twelve day trial, on 14 June 2013 Burton J held that Tullow was entitled to be indemnified in respect of the US$313,447,500 it had paid: see [2013] EWHC 1656 (Comm). He ordered Heritage to pay that sum to Tullow. He also ordered it to pay Tullow a total of, in round figures, US$1.6 million pre and post judgment interest, and ordered the second appellant, Heritage Oil PLC ("Heritage PLC"), Heritage's ultimate parent company, to pay Tullow the same principal and interest payments as Heritage. The appellants invite this court to set aside Burton J's order.

II. The factual background

5

Heritage and Tullow each held a 50% interest in the licence of certain petroleum exploration areas in the area of Lake Albert, in west Uganda on the border with the Democratic Republic of Congo. The licence provided that the prior written consent of the Government through the relevant Minister was required for any assignment in whole or in part of their rights or obligations under the licence. A Joint Operating Agreement between Heritage and Tullow 4 provided that if Heritage agreed a sale of its interest to a third party, Tullow was to have a right to pre-empt the agreement on the same terms.

6

In December 2009, Heritage agreed to sell its rights in those exploration areas (known as Block 1 and Block 3A) to Eni International BV ("Eni"), a large Italian multinational oil and gas company, and entered into a sale agreement. That agreement triggered Tullow's right of pre-emption under the Joint Operating Agreement, and, on 17 January 2010 Tullow exercised its right. As a result, on 26 January 2010 Tullow and Heritage entered into the SPA on the same terms as those agreed between Heritage and Eni. Heritage agreed to sell its rights to Tullow for (a) a base price of US$1.35 billion, (b) an Adjustment Amount to be determined, and (c) a Contingent Amount set at US$150 million, but which could be reduced if certain circumstances applied ("the Contingent Amount"). Heritage PLC was Heritage's guarantor under the SPA. Completion was to be on 26 July 2010. Tullow believed that the Government was aware of the details of the transaction and had approved them. At the time of the SPA, Heritage was a Bahamas company. In about the middle of March 2010, after the SPA was made, it changed its corporate registration from the Bahamas to Mauritius.

7

The Revenue Authority considered that Heritage was liable to pay tax in respect of the profit it made on the disposal of its interests in Blocks 1 and 3A to Tullow. Heritage maintained that the transaction was not taxable in Uganda. Its claim not to be subject to Ugandan tax in respect of the transfer was in part (see judgment, [51]) based on a double tax treaty between Mauritius and Uganda. The Revenue Authority assessed Heritage's profit as approximately US$1.3 billion. It issued a tax assessment against Heritage in relation to the sale on 9 April 2010, but withdrew that assessment "without prejudice" on 22 April. In May 2010, the Permanent Secretary of the Ugandan Ministry of Energy and Mineral Development invited Heritage and Tullow to attend a meeting to discuss the mechanism by which Heritage's tax liability would be paid. Heritage considered that this was a matter for Heritage and not the business of any other company, and stated so in an email dated 25 May 2010.

8

On 6 July 2010, the Revenue Authority issued another tax assessment notice against Heritage in the sum of US$404,925,000. This sum was calculated by reference to the US$1.35 billion base price. As a result of the dispute about the tax, the Government imposed conditions on its consent to the SPA. A letter, also dated 6 July, was sent to Tullow and Heritage by the then Minister of Energy and Mineral Development, stating that the Government's consent to the transaction was given on the basis that Heritage pay all taxes accruing from the transaction as assessed by the Revenue Authority.

9

In a letter dated 16 July 2010, the Permanent Secretary of the Ministry of Energy and Mineral Development wrote to Heritage's lawyers stating that, upon Heritage depositing with the Revenue Authority 30% of the tax in the assessment and providing a bank guarantee acceptable to the Government to secure the remainder, unconditional approval of the sale would be given. In the light of this, shortly afterwards, on 23 July 2010 Tullow, Heritage and Standard Chartered Bank entered into an Escrow Agreement ("the Escrow Agreement") appointing the Bank as Escrow Agent in relation to an account in London to be held on Heritage's behalf, the purpose of which was to hold the consideration to be paid to Heritage by Tullow under the SPA. Tullow and Heritage also varied the terms of the SPA in the Supplemental Agreement to which I have referred and agreed the terms on which the SPA transaction would complete on 26 July.

10

The Supplemental Agreement provided that US$1,045,075,000 would be paid directly to Heritage. Broadly speaking, this sum formed part of the US$1.35 billion base price in the SPA and US$100 million which Tullow and Heritage had agreed was to be paid by way of Contingent Amount. This agreement also provided that US$121,477,500, the statutory 30% deposit required to contest a tax assessment, would be paid to the Government by Tullow on Heritage's behalf, and the balance of US$283,447,500 would be paid, pursuant to the Escrow Agreement, into an escrow account with Standard Chartered Bank in London. Clause 3 of the Supplemental Agreement (see Appendix, paragraph 12) provided that Heritage should have the right to conduct the tax dispute and that its conduct "shall be the sole responsibility of" Heritage. The payments specified in the agreement were paid. As a result of the agreement between Tullow and Heritage that US$100 million was to be paid by way of Contingent Amount, on 19 August 2010 a further tax assessment in the sum of US$30 million was issued.

11

The circumstances in which Tullow came to pay the...

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1 books & journal articles
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