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Uganda prays for victory in “defining battle” with Heritage

“I sense this is the defining battle.  Let those who are on the Lord’s side stand up and be counted,” wrote Uganda Revenue Authority Commissioner, Allen Kagina, in an email to senior colleagues, as behind-closed-doors arbitration proceedings opened in London last week to settle a dispute between the government of Uganda and Heritage Oil.

The case concerns Heritage’s sale to Tullow Oil of its exploration and production rights in Uganda. The URA claims Heritage Oil owes US$ 435 million in capital gains tax from the US$ 1.45 billion deal.  Heritage contests the tax bill.

In a telling sign of how important the case is to Uganda, Ms. Kagina added that the Attorney General encouraged URA colleagues to “fast and pray” for a positive outcome.

Whether favourable to Uganda or not, an early result is unlikely, and nor will it be made public—because the London Court of International Arbitration  (LCIA) is bound by rules of secrecy.

Sources familiar with the situation told Oil in Uganda that the preliminary hearing of the LCIA tribunal, on August 28 and 29, considered only the issue of whether the LCIA has jurisdiction in the matter.  Heritage argues that the Production Sharing Agreement it signed with the government bound both parties to arbitration in the LCIA in the case of any legal dispute.  The government of Uganda argues that this does not apply to tax disputes, which should be settled by the Uganda Tax Appeals Tribunal.  That tribunal has already ruled in favour of the government.

Ugandan Member of Parliament, Stephen Tashobya (NRM, Kajara County, Ntungamo), who led a team of four MPs to observe the two-day hearing in London, confirmed in a telephone interview that it was limited to receiving evidence and arguments about whether the tribunal is lawfully empowered to arbitrate the case.  The tribunal will now weigh that evidence and decide whether it can proceed to arbitration.

Hon. Tashobya, who chairs the Legal and Parliamentary Affairs Committee of Uganda’s parliament, said he did not know how long it would take the tribunal to decide on this, but guessed it would probably reach a conclusion “by the end of the year.”

“I have confidence in the process, and believe that they will reach a just decision,” added the MP, who is a Makerere-trained lawyer.

Asked whether the Government of Uganda would accept the tribunal’s decision if it rules on this initial matter in favour of Heritage, he said “I am not able to answer that.”

Asked if he knew how much the case has so far cost Uganda in legal fees and related expenses, the MP commented that “Parliament has also asked that same question and we do not yet know the answer.”

Arbitration is generally defined  as a process in which “a dispute is resolved by impartial individuals, to avoid costly and lengthy litigation through courts of law.”   However, it seems increasingly likely that this arbitration case will itself prove both costly and lengthy.

Transparency vs. confidentiality  

Transparency campaigners and NGOs have meanwhile also denounced the secrecy of the proceedings.

“The Heritage Oil arbitration case in London deprives Ugandan citizens of the right to information,” according to a Global Witness press release.

The statement  quotes Dickens Mugisha, Chair of the Oil Watch coalition of NGOs in Uganda, as saying that “Ugandans do not understand why their Government is being forced to spend millions of pounds on a tax dispute thousands of miles away in London when it has already been decided by Uganda’s courts. They understand even less why the dispute is taking place behind closed doors and this secrecy is making them deeply mistrustful.”

Defenders of the arbitration process argue, however, that confidentiality helps to secure a quick and fair conclusion, because it encourages parties to the dispute to submit documents and other evidence that might be prejudicial to their commercial interests if made public.

The London Court of International Arbitration dates back to 1892 when it was established to settle transnational disputes.   It is not a British state institution, but, rather, a private, not-for-profit company that offers arbitration services worldwide.  Around 70 percent of the cases that it considers do not involve UK-based parties.  Its governing body comprises up to 35 members, highly experienced in commercial arbitration, of whom no more than six can be of UK nationality.  (At present, only three UK citizens are members).  This governing body, the Arbitration Court, appoints Arbitration Tribunals, overseen by between one and three arbitrators, to hear cases that are submitted.  According to the LCIA rules:

“Unless the parties expressly agree in writing to the contrary, the parties undertake as a general principle to keep confidential all awards in their arbitration, together with all materials in the proceedings created for the purpose of the arbitration and all other documents produced by another party in the proceedings not otherwise in the public domain.”  (Article 30)

Although the proceedings, and the eventual ruling, will not be made public, experts say that it should be possible to infer the result by watching the government budget and Heritage’s published accounts.

Messy background

Although disputing the tax bill, Heritage followed the procedure required by Ugandan law in depositing one third of the demanded sum with the Uganda Revenue Authority, pending resolution of the case.   The company deposited the remaining two thirds in an escrow account, earmarked for payment of the bill if it loses the case.

The case is further complicated by the fact that Tullow Oil paid to the URA, in April of last year, the remaining amount owed by Heritage, in order to unlock negotiations with the government of Uganda over the sale of licencing rights to TOTAL and CNOOC. Tullow then began legal proceedings, through the London courts—the state courts, not the LCIA— to recover that money from Heritage.

That case is due to be open soon.  However, because it is so intertwined with the arbitration proceedings, it is hard to see how the courts can arrive at a decision before the arbitration hearing is concluded.

Another looming dispute will also be critically affected by the outcome of the arbitration proceedings.

When Tullow Oil sold on to TOTAL and CNOOC the rights it had bought from Heritage, the URA presented Tullow with a capital gains tax bill. Tullow, following the precedent set by Heritage, deposited one third of the sum demanded with the URA, but contested the full amount.  A final settlement has yet to be reached.  The current arbitration proceedings are likely, in effect, to also determine the outcome of the tax dispute between Tullow and the government.

Report by NY