Conditions for claiming under an indemnity
HERITAGE OIL v TULLOW (CA) [2014]
This case looked at whether a buyer's strict compliance with a contractual notice provision had to be met in order for the buyer to be able to exercise its right to an indemnity from the seller under the terms of the agreement.
Facts:
- The parties entered into a sale and purchase agreement (SPA) regarding the seller's stake in a licence in relation to two Ugandan oilfields. The seller gave an indemnity in respect of certain taxes arising from the transaction, under which the buyer had to notify the seller within 20 business days of any tax claim that could give rise to a liability under this indemnity.
- The Ugandan tax authorities assessed the seller’s aggregate tax liability relating to the sale, which it disputed. The tax authorities then demanded payment from the buyer as a ‘collection agent’ for the seller. After some time, the buyer paid the tax demand and tried to recover the payment from the seller under the tax indemnity in the SPA. The buyer had not provided notice of the claim within the period specified in the SPA but the seller had been notified of the tax demand by the relevant authorities.
- The dispute surrounded the issue of whether the requirement to give notice of any tax claim within the 20 business day period was a so-called ‘condition precedent’ and, as it was not complied with, whether the buyer was entitled to the benefit of the indemnity. A ‘condition precedent’ is a condition or clause in a contract which provides that certain obligations under a contract (or a contract itself) only come into existence if the specified condition is met. The seller maintained that as the buyer had not met the notice requirements, it could not rely on the indemnity.
- The High Court (HC) held that the notice requirement was not a condition precedent and so the lack of notice did not prevent the buyer bringing a claim under the indemnity.
- The seller appealed.
Decision:
- The Court of Appeal (CA) upheld the HC’s decision. It confirmed that the notice requirement was not a condition precedent and the buyer’s claim under the indemnity was therefore allowed.
- The reasons given by the CA for its decision were:
- the wording in the relevant indemnity was insufficient to show that it was the clear intention of the parties that the requirement to give the notice as specified was to be a condition precedent. The CA pointed to what it clearly regarded as critical differences in drafting between two different clauses. The notice clause in the indemnity stated that the indemnified party: “shall, within 20 Business Days, give notice in writing of the claim". This was seemingly distinguished with another clause which said that the indemnity: “shall not apply unless notice of the … claim is given … within 7 years of the Closing Date”. This latter ‘unless’ wording was felt to be sufficient to create a condition precedent although why this should be any more mandatory than the other clause is difficult to fathom;
- the fact that the effects of the breach of the notice requirement could vary enormously from very serious to very minor;
- while classifying a term as a condition precedent may provide certainty, it can also deprive a party of a contractual right simply because of a trivial breach, such as service of notice a day late which causes the other party little or no loss. The CA assumed that the parties did not intend the automatic loss of the right to claim under the indemnity.
Points to note:
- Indemnities are typically subject to a number of conditions such as promptly notifying the indemnifying party of circumstances giving rise to a claim, not making admissions without consent and allowing the indemnifying party to control the defence and settlement of any claim. What this case illustrates is that such conditions will not generally be reviewed as ‘conditions precedent’, so a breach of them will not automatically prevent a claim under the indemnity.
- Express wording to that effect would be required if it is intended that a condition should operate as a ‘condition precedent’. However, we suspect that in most cases any such wording would be strenuously resisted since the risk of losing the benefit of the indemnity through a relatively minor breach would simply be too great.
- The outcome from this decision is a fairly sensible one and in our view it is unlikely that the drafting of indemnities will change significantly. Indemnified parties do not need to worry that a minor breach of the conditions, at least so far as a delay in notification is concerned, would result in the complete loss of protection from the indemnity. However, one possible consequence of the judgment is that there may be less certainty as between the parties – something which indemnities seek to avoid.