- Commercial Indemnity Provisions: The Devil’s in the Detail
- October 17, 2014 | Authors: Kenra Parris-Whittaker; Kenra Parris-Whittaker; Jacy A. J. Whittaker; Jacy A. J. Whittaker
- Law Firm: Parris Whittaker - Freeport Office
In a recent case, the Court of Appeal in the UK considered the question of whether the requirement for notice under a sale and purchase agreement was a condition precedent to a claim for an indemnity under that agreement.
A company (the appellant) lost its appeal against a ruling that it pay a sum of US$313m to the other party - an amounted demanded by the Ugandan revenue authority for capital gains tax levied on the sale by one party to the other of a 50% stake in two petroleum blocks. The sum was paid up on the basis that the Ugandan government refused to sanction the deal until it was paid; then claimed it back from the other side under a tax indemnity in the sale agreement.
The appeal specifically concerned the drafting of the sale and purchase agreement and a supplemental agreement to it (entered into in light of the capital gains tax dispute). Notably, the issues concerned the drafting of conditions precedent, variations or supplemental agreements and indemnities.
WHAT DID THE COURT DECIDE?
The court found there was no clear drafting that the appellant would only get the benefit of the tax indemnity if it complied with the terms of the supplemental agreement.
In addition, the supplemental agreement in this case had not achieved what the appellant said it intended it to. The other party was still, therefore, entitled to be paid under the tax indemnity.
The court clarified: “The words ‘condition precedent’ are often expressly used in notification of claims clauses. But it is clear that other words can have the same effect, so long as the clause is apt to make that effect the ‘clear intention of the parties’.”
This means, in a nutshell, that the effect of indemnity provisions is dependent upon the detail of their drafting. The ruling simply clarifies the fundamental principle that clear drafting is paramount to establish a condition precedent, what the indemnity covers and how it is to operate. In this case, clear drafting was required in order to establish that something is a condition precedent or to override a provision in another agreement.
Where there is already an issue (in this case the tax dispute with the Ugandan authorities) special care must be taken in the drafting.
WHAT CAN BUSINESSES LEARN?
Clear words must be used in order for the courts to construe a term as a condition precedent or a condition. Where commercial contracts are complex and/or have supplemental agreements, for instance, and need to include conditions precedent, indemnities or variations to existing terms, the wording of the terms and conditions is critical to achieve the effect intended by the parties.