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Conditions Precedent

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Oliver Rule

Counsel

London

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24 November 2014

Tullow Uganda Ltd v Heritage Oil and Gas Ltd & anr [2014] EWCA Civ 1048, 23 July 2014

A clause intended to be a condition precedent should be drafted clearly. In refusing to construe a notification clause as a condition precedent to a tax indemnity claim, Beatson LJ relied upon a significant body of case law advocating a cautious approach to labelling contractual requirements as conditions precedent. Furthermore, any amendment which is made to an underlying contract must clearly state the intended amendment in a way which is precise and unambiguous if the amendment is to have the intended effect.

The claim centred on USD 313,477,500 tax that Tullow Uganda Ltd (Tullow) paid to the Ugandan Government to gain consent for the purchase, by Tullow, of a petroleum exploration licence from Heritage Oil and Gas Ltd (Heritage). The tax was owed by Heritage as a result of the sale and purchase agreement (SPA) with Tullow. Heritage disputed the tax and therefore did not pay it. Under Ugandan tax law, Tullow was made liable for Heritage's tax. Despite Tullow having paid substantial consideration to Heritage, the SPA could therefore not take effect until the tax had been paid. Given this, Tullow negotiated and settled the tax liability with the Ugandan Government.

There was a tax indemnity in the SPA in Tullow's favour, but Tullow failed to give the contractually stipulated notice of claim to Heritage. The notice provision required written notice to be given to Heritage within 20 days of the claim arising. Heritage argued that, as the notice provision was a condition precedent to the indemnity, and was breached, no indemnity payment was due. Further, Heritage explained that the SPA was varied through a Supplemental Agreement stating that responsibility for settlement of the tax dispute lay solely with Heritage, and that this was also a condition precedent. Heritage had not agreed the settlement amount paid by Tullow to the Government so this condition precedent was also not satisfied.

Condition Precedent Construction

Agreeing with the decision of Burton J at first instance, the Court of Appeal found that Heritage was liable to indemnify Tullow, in spite of Tullow's failure to give Heritage notice of the tax claim. Beatson LJ held that while classifying a contractual requirement as a condition precedent may provide certainty, it can also deprive a party of a large contractual right because of an insignificant breach causing little or no loss to other parties. There was no prejudice caused to Heritage as it was aware of the tax demands issued by the Ugandan Government, so the notice from Tullow was a mere formality. Beatson LJ relied upon a significant body of case law advocating a cautious approach to labelling contractual requirements as conditions precedent.1

The SPA indemnity was mutual. Given this, Beatson LJ felt it would have been unlikely that the parties would have intended a breach of the notice provision to invalidate the indemnity right. Such a valuable right would have been intended to have survived contractual breach. A later clause in the sale agreement supported this interpretation – it stipulated that indemnities contained within the agreement would apply "irrespective of cause and notwithstanding the negligence or breach of duty…of the indemnified party".

In the SPA, the clause containing the notice provision also contained another sub-clause that the court ruled was not capable of being a condition precedent. The Court of Appeal cautioned that if a sub-clause is to be treated as a condition precedent, it should fit purposively into the wider clause. Beatson LJ ruled that if multiple sub-clauses are introduced by the same sentence, making them conjoined limbs, each limb must alone be capable of being a condition precedent for any limb to be considered as such. Only if they are "separate and free-standing" can sub-clauses be ruled to be of different significance. In this respect, the decision in Aspen Insurance UK Ltd v Pectel Ltd [2008] EWHC 2804 (Comm) was distinguished. Aspen ruled that two parts of a contractual provision can have separate significance. The notice provision was not, therefore, to be treated as a condition precedent.

Beatson LJ further ruled that if appropriate condition precedent wording is used in one clause and not another, this may demonstrate the commercial intention of the parties. In Tullow and Heritage's sale agreement a clause (7.4) within the wider indemnity clause (7) contained sufficient wording to be a condition precedent. Given this, the notice provision clause (7.5) was deemed not to be a condition precedent – it was clear to Beatson LJ that the draftsmen were capable of using clear condition precedent wording when they intended.

Amendment Agreements

The court also considered whether the clause in an amending Supplemental Agreement acted as an overriding condition precedent. The Court of Appeal ruled it did not, finding that there were no express words which made Tullow's right to an indemnity dependent on compliance with the Supplement Agreement.

Importantly, the wording used before the alleged amendment clause, "notwithstanding any provision in the Sale and Purchase Agreement", was deemed to be insufficient for amending the specific clauses in the underlying contract. This was especially true when express language had been used elsewhere in an amendment agreement to alter wording of the underlying contract, as was the case in other clauses of the Supplemental Agreement.

Comment: This case is a potent reminder of the importance of accuracy when drafting a contract. The court confirmed that if parties want a clause to be a condition precedent, then this intention needs to be conveyed by clear words such as "[conditional clause] shall not apply unless".

In respect of clauses where the breach would not cause any, or any material, damage, this clear intention is even more important. A breach where the clause is not a condition precedent will normally only permit normal breach of contract claims. This damage will not, in many cases, equal the amount of an indemnity so as to nullify it (a party with back-to-back indemnity insurance arrangements is one notable exception). Breach of a notice provision, therefore, is unlikely to prevent an indemnity claim. If such a clause is to be a condition precedent, especially in relation to an indemnity, it should be explicitly stated where possible.The case also raised the point that, if an amendment agreement is to amend a clause in an underlying contract, it should state the amendments explicitly, rather than relying on broad language to override previous specific contractual agreements.