Tullow Oil awarded $313m against Heritage in Ugandan tax dispute

Tullow Oil, the exploration company headed by Irishman Aidan Heavey, has won a major London legal battle against Heritage Oil after a judge ruled in the high court that Tullow must be compensated for a $310 million (€233 million) tax bill from the Ugandan authorities.

In 2010 Tullow bought Heritage’s half share in two oil fields in Uganda’s Lake Albert basin for $1.35 billion in cash, which led to the Ugandan revenue authority to impose a $400 million capital gains tax bill.

A third of the bill was paid, while the remaining $283 million was placed in a joint Tullow-Heritage escrow account pending resolution of the dispute between the two independent oil exploration companies.

Insisting that Heritage was liable for the tax bill, Tullow later paid the $283 million outstanding, and an additional $30 million, and then began a legal action to reclaim the money. However, Heritage argued that the tax laws had changed after the sale agreement was signed.

"In the course of this it is apparent that [Tullow] became increasingly irritated with, and critical of [Heritage], at having left them 'holding the baby', and at risk of enormous losses," said Mr Justice Burton in his detailed ruling.

Unhappy with the state of play, the Ugandan ministry of energy and mineral development said in August 2010 the sale had no legal effect because the condition it had stipulated for governmental consent – the payment of the tax bill – had not been fulfilled.

Tullow had been “under enormous pressure” from the Ugandan government to pay the tax bill, the judge said, “with the $1.4 billion purchase price having been paid over and no oil field received”.

Relations between Tullow and the Ugandan authorities deteriorated, with the country's president, Yoweri Museveni, saying Tullow was liable because they had "let the criminal escape", so Tullow must pay $283 million of its own money and recover (if it can) the other $283 million from escrow later".

Heritage disputed with the Ugandan authorities that any tax was payable on the deal, and argued also that the Ugandan authorities had no right to issue any tax assessment.

The judge ruled that Tullow was entitled to the indemnity, and he dismissed Heritage’s counterclaim that Tullow had colluded with the Ugandan revenue authority to extract the tax money from it.

Rejecting the charge of collusion, the judge said it was clear Tullow, "faced with potential economic disaster in Uganda", had sought only to make "desperate attempts" to persuade Uganda "not to punish it for what were seen" to be Heritage's misdeeds.

Last night, Tullow said it was “pleased” by the judgment, though Heritage strongly hinted it may lodge an appeal within the 21-day timetable allowed, saying it would “perform a robust and exhaustive evaluation of its legal options”.

Saying it “strongly disagrees” with the court’s decision, Heritage said it maintained its view that Tullow’s original payments to the Ugandan revenue authority were commercially motivated rather than as the result of a valid legal obligation.

The court will consider the question later of how much interest should be added to the compensation due to Tullow, along with deciding on costs.

Heritage Oil has an arbitration case against the Ugandan tax authorities under way before the United Nations Commission on International Trade Law, while an unsuccessful case taken by it before the Ugandan high court on the validity of the tax is under appeal.