Guestblog by Taimour Lay, Former Platform researcher, Uganda and DRC. Download the full court papers (30 megabytes)
A court case in London between Tullow and Heritage will reveal much of what went wrong in the battle over Uganda’s oil.
It is a long way from the shores of Lake Albert to the new commercial court building in central London, from fishermen and farmers in poverty, the heat and dust of Kaiso-Tonya, to £500-an-hour barristers and the concrete cold of a British autumn.
But on Friday 18 November Tullow and Heritage, former oil exploration partners in Uganda, began their preparations for a $313 million legal fight. The case is about Uganda’s oil, Uganda’s tax laws and, ultimately, Uganda’s politics, but it will be decided by an English judge in an English court.
Half-a-dozen lawyers for each side filed into Court 8; sharp suits under bright lights, papers piled high. Mr Justice Teare leaned forward to address the parties at the case’s opening hearing. “I should declare now that I may be a shareholder in Tullow Oil,” he said.
So it began. The judge’s potential conflict of interest will be addressed later when the trial begins in earnest. Teare is more than likely to have to step down. Even the appearance of bias is enough to justify a change. In the meantime, Tullow and Heritage are already stating their cases in writing. And for the first time Ugandans can read what they are saying.
Platform is today publishing the ‘statements of case’ or ‘pleadings’ submitted by Tullow and Heritage to the High Court in London ahead of the trial. It is an autopsy of a contract between partners whose relationship irretrievably broke down and provides an insight into commercial tactics, regulatory failures and political secrecy.
They also suggest a Ugandan government that has made tactical decisions rather than strategic ones, and a President who, faced by two companies seeking to make billions from the country’s natural resources, pressured by an electoral timetable and wanting to increase military spending, decided to play hardball to maximise revenues.
The full statements of case are available here (30meg). Below is a summary guide to the main issues and a preliminary analysis of the morass of problems the two sides will be arguing over. (page references are to the court papers in pdf)
Unlike the separate arbitration proceedings between the Government of Uganda and Heritage Oil in London, which are currently being held in secret, Tullow’s $313 million claim against Heritage will be in open court and is due to begin at the end of 2012. By June next year we will have witness statements and disclosure – and a further opportunity to shed light on much that has remained hidden from view since January 2010.
What is in dispute?
Tullow is suing Heritage, its former partner in Uganda, for $313mn in the commercial court in London. It follows the $1.45bn purchase in July 2010 by Tullow of Heritage’s share of oil licenses at Lake Albert.
As soon as Tullow handed the purchase money over, the problems began. Heritage paid no ‘income tax’ on the cash it received. It left Uganda, arguing that the Production Sharing Agreements made no mention of capital gains tax and that there was no basis for the Government to claim $434mn from the transaction.
Heritage says in its defence that Tullow simply made the fundamental error of paying $1.45bn for assets which were worthless until the government of Uganda actually approved the deal. Once the tax dispute arose, the government paused the entire process, demanded tax, secured $121m of the total from Heritage as a ‘deposit’ (subject to arbitration) and turned its attentions to getting the rest from Tullow, who remained in the country and desperately needed the licenses it had bought to be turned into ‘production’ contracts.
Legal arguments, political realities
The agreement to sell had been worked out in January 2010 but the dispute over tax delayed the payment by Heritage to Tullow until 26 July that year. It was a payment made under a “Supplemental Agreement”, much of it detailed in these court papers, under which $283,447,500 of the purchase price was not given to Heritage but rather was placed in an escrow account pending the conclusion of Heritage’s tax dispute with the government. In addition, $121,477,500 was paid to the Ugandan government as a ‘refundable deposit’ by Heritage. If the tax arbitration ruled in Heritage’s favour, Kampala would have to hand it back.
So Heritage left the country with a potential liability pending the arbitration in London (which is currently ongoing and could last many months) and with some of the purchase price temporarily held in escrow, but the Ugandan government had not got its tax.
This is where the politics begins; because looming in February 2011 was an election that was to prove expensive for President Yoweri Museveni. It made sense to press the pause button, delay approval and make sure the state maximised its revenue, particularly when Italian oil company Eni wanted to enter the field.
Given the deal already struck with Heritage by the Government (in essence, an agreement to leave it to arbitration), the next development surprised all observers at the time. The Government began to demand that Tullow pay the tax Heritage had not delivered. Even though Heritage had made a compromise payment in escrow, and may be required to pay even more if it loses at arbitration, Tullow went ahead and coughed up.
Tullow admits it eventually paid the government of Uganda $313,447,500 as “tax” in April 2011 as a result of Heritage escaping capital gains liability. Although they didn’t quite call it tax at the time; they said it was paid as a “security” to the Uganda Revenue Authority, suggesting that if Heritage ultimately has to pay the tax after arbitration, Uganda will reimburse Tullow. That last step isn’t at all clear, in political or legal terms.
The key question is why Tullow paid the money. Was it really “tax”, as Tullow claim? If it was, Tullow are seeking the money back from Heritage under an indemnity agreement between the parties signed when the purchase price was paid in 2010 (Heritage, it is claimed by Tullow, agreed to cover their former partner for any extra tax liabilities post-sale).
If it wasn’t “tax” – if it was in fact a political payment with no legal basis, as Heritage appears to be arguing – then Tullow will struggle to convince the court that Heritage should reimburse the money. And, in any case, the determining decision should be the arbitration case, not this high court battle.
Heritage states its case
Central to the case will be the indemnity clause (see Tullow’s particulars of claim, pp 4-13) and a commitment seemingly made by Tullow to Heritage that any tax dispute relating to income from the sale was Heritage’s responsibility to fight – after all, Heritage received the income and is still battling the government in arbitration over the tax; why would Tullow pay another company’s tax bill when that bill was still the subject of legal proceedings? And if the government had already struck a deal over the tax dispute with Heritage, and was intent on arbitration, why was it taxing Tullow for the same amount? And why did Tullow pay up?
Ugandans have been asking this for nearly two years. We may be about to get some answers.
As Heritage argues in its defence (p.15): “Tullow made the payment to [Uganda] for its own commercial reasons. Tullow had placed itself in the position where it had paid out $1.45bn on 26 July 2010 [in the] absence of the Government’s unconditional consent to the transaction. Tullow therefore had no legal license rights for which it had paid [and] had no Government consent for the necessary farmdown transactions under which Tullow would transfer interests to CNOOC and Total for … $2,933,330,400. Tullow also faced the loss of its existing assets in Uganda…It was in these circumstances that, in the absence of any legal obligation to pay the Government or the URA, Tullow elected to make payment.”
And Heritage doesn’t let the government off the hook either, arguing in its defence that the
deal Kampala and Tullow struck over the $313,447,500 ‘tax’ payment in April 2011 under a Memorandum of Understanding (see page 20 for the MoU) was, effectively, a sham.
It claims: “[Even though] Tullow knew the payment of $313,447,500 [was not a payment due under the tax statute], Tullow joined with the Government and/or the URA in purporting to present is as such.” (see page 23) Heritage, who are in turn suing Tullow for the release of the $283,447,500 held in escrow under their July 2010 agreement (ie. The rest of the full purchase price), will be expected to substantiate these allegations at trial.
Tullow reply to Heritage’s defence (page 35) is that “the fundamental question that arises is: was a Non transfer tax charged to Tullow in respect of the transaction? The [Uganda Revenue Authority Tax] Notices … each demanded immediate payment by Tullow under specified provisions of Ugandan law…Tullow had no choice but to make payment.”
Another political question then arises: why did the Ugandan government use a “Third-party agency Notice” to purportedly charge Tullow with the tax for which Heritage was liable while at the same time, as revealed in these court papers (p.37), approving Heritage’s sale? If Heritage is liable for the tax, why wasn’t the deal stopped until Heritage paid up? According to these court papers, Fred Kabagambe-Kaliisa sent a letter to Heritage’s solicitors, dated 16 July 2010, confirming that the Government would consent to the transfer of assets if Heritage merely deposited $121mn in escrow and provided a bank guarantee for the remainder pending arbitration.
It may be that the Government realised it was very likely to lose at arbitration in London, and even if it won, the money would be a long time coming. Its strategy appears to have been to pursue Tullow, not Heritage, if that meant getting usable money earlier. But there are questions over why more pressure was not put on Heritage before the deal was approved. Whether it was incompetence or political favouritism towards a company with whom it had a long relationship will be one major theme in the trial.
The upshot is that if Heritage wins its tax arbitration, it will owe Kampala nothing. Indeed it will be seeking the return of the US$121 million it paid as a deposit. And if at the same time Tullow wins its High Court claim against Heritage in early 2013, Tullow will then want the US$313 million back from the government of Uganda that it paid as a ‘security’ in May 2011.
Suddenly these distant legal battles will have real consequences for the Ugandan budget. The worry, of course, is that the money Kampala received in such opaque circumstances will already have been spent and these legal problems have only just begun.
Platform previously leaked the Production Sharing Agreements and published analysis of them. The court documents for the trial can be downloaded here (30 meg).
Any inquiries or for further information, email taimourlayATgmail.com
A version of this blog was published in The Independent (Uganda) on Friday 25 November 2011.