M&A in emerging markets – don’t lose value through the tax indemnity; lessons to learn from Tullow Uganda v Heritage Oil and Gas


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Getting your tax indemnity right can be worth millions - as the Tullow Uganda v Heritage Oil and Gas case has shown. Heritage has just lost the bulk of its appeal against a ruling that it must pay Tullow c. US$313m. That’s the amount that Tullow had to pay the Ugandan revenue authority in respect of capital gains tax levied on – but disputed by - Heritage. There are three key lessons to learn:

  • Do not think of tax indemnities as standard form drafting, particularly if there is a known issue.
  • If you want something to be a condition to a right – such as the right to an indemnity - you need to make that very clear.
  • If you enter into a supplemental agreement, you need to revisit all the terms of the main agreement and specify if they are affected; simple ‘notwithstanding anything in the agreement’ type wording may not work.

The deal risks of a disputed tax bill: Tullow Uganda v Heritage Oil and Gas

When Heritage sold its 50% stake in two petroleum blocks to Tullow, the Ugandan revenue authority demanded c. US$313m from Tullow in respect of capital gains tax levied on – but disputed by - Heritage. The Ugandan government refused to sanction the deal until the tax was paid. Tullow paid and then claimed reimbursement from Heritage under a tax indemnity. For more on the background to this case, see our report on the earlier ruling.

The Appeal - the three main lessons

Tax indemnities are not standard drafting

Tax indemnities should not be viewed as standard form or boilerplate, particularly when a dispute is known. Parties need to draft the tax indemnity carefully to achieve their objectives - and should check how local law may interact with the requirements of the parties. For example, the right of an authority to recover unpaid tax from another party may be critical – as was the case here, where the Ugandan revenue served ‘agency notices’ on Tullow demanding that it pay capital gains tax levied on Heritage.

If something is a condition, that needs to be clear

Clear words must be used before the court will find that a requirement is a condition. That is not surprising, because conditions have a potentially extreme affect – causing a party to lose all of the affected right, rather than simply reducing the benefit of that right to reflect any loss arising from breach. In this case, Heritage agreed to indemnify Tullow for all ‘Non-Transfer Taxes’ – and the indemnity was stated to be “subject to” a number of provisions, one of which required proper notice of claims to be given within 20 business days. However, the court held that Heritage was still liable under the indemnity, even though Tullow didn’t give Heritage notice of the Ugandan revenue authority’s demands – ie the notice requirement wasn’t a condition. In the context of the sale agreement, the “subject to” wording was not sufficient: the Court held that it seemed unlikely that the parties would intend that a failure to comply with the notice requirement (perhaps by just a day) should result in a party losing all its rights to an indemnity. In addition, where the parties had intended something to be a condition – such as the requirement that any claim had to be made within seven years – they had made that clear (by stating that the indemnities “shall not apply unless…”).

Take great care with amendments and supplemental agreements

When considering amendments to an existing agreement, revisit all the existing terms and specify very clearly how they are affected; simple ‘notwithstanding anything in the agreement’ type wording may not work. In this case, after the capital gains tax dispute arose, the parties entered into a supplemental agreement. It provided that “notwithstanding any other provision in the sale and purchase agreement” Heritage had sole responsibility for the conduct of any proceedings relating to the capital gains tax dispute. Despite this, the court held that there was no clear drafting to the effect that Tullow would only get the benefit of the tax indemnity in the main agreement if it complied with the terms of the supplemental agreement – ie those conduct requirements weren’t a condition simply because they were stated to be “notwithstanding” any other provision. In addition, the “notwithstanding” wording did not disapply the standard form conduct of claims provisions in the sale and purchase agreement. Those provisions meant that Tullow would not have had to resist the revenue authority’s demands in any event, as to do so would have been likely to adversely affect its business and financial interests – which was an exception to the conduct provisions. So, Tullow was still entitled to be paid under the tax indemnity - even though it didn’t give Heritage conduct of the revenue’s claim or even proper notice of it.

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