The High Court, in the case of Minera Las Bambas -v- Glencore, has considered the interpretation of a tax indemnity entered into alongside a share transfer in some detail. In doing so, it highlights areas of drafting within a tax indemnity that do require careful thought to ensure that one or other of the parties' intentions are not thwarted in the event of a claim.
The indemnity was in respect of "tax payable" by that part of the Glencore mining group which was being sold to Minera Las Bambas (MLB) that related to pre-completion periods and which had not already been discharged by the time of completion. It was relatively short-form as compared to a standard UK-style tax covenant and the difficulties encountered here perhaps illustrate why such detailed provisions are generally thought to be necessary.
Prior to completion of the share sale, the target group had entered into a swap agreement with a Peruvian community in relation to some land. No VAT was considered to be payable at the time but the Peruvian tax authorities subsequently requested information regarding the swap arrangements and ultimately issued a VAT assessment. Glencore, as permitted by the tax indemnity, exercised its right to take conduct of the claim made by the authorities.
Questions then arose as to whether the tax was "payable" immediately as a direct result of the assessment or only when the tax appeal was finally determined in favour of the Peruvian tax authorities, the interaction of this with any limitation periods, whether sums deducted from the target group's VAT credit balance with the tax authorities constituted an actual loss for these purposes, and what was the scope of the conduct rights?
Contractual interpretation
Following Wood –v- Capita, the Court considered the language of the relevant clause, the documentary context, the factual matrix of the transaction and the commercial consequences of possible interpretations of the clause when determining at what point the VAT was "payable".
Given the nature and quality of drafting of the document, i.e. a sophisticated formal document which was negotiated and prepared with the assistance of leading international law firms, the factual matrix was not considered to help the interpretation. Instead, a close textual analysis was carried out with particular focus on the terminology used in other parts of the document, with inferences drawn from any differences, for example the use of the wider phrase "charged, paid or payable" elsewhere.
This demonstrates the necessity of producing a coherent set of documents where standard language is used throughout, save where a different meaning is actively sought. Time constraints and large teams working on various issues or areas of transaction documents can lead to inconsistencies arising so it is important to be aware that the possible consequences of such inconsistencies could be significant.
Timing of payments
In this case, the specific wording of the indemnity and the SPA led to the conclusion that a narrow meaning of "payable" was appropriate so that Glencore would only become liable when a payment actually had to be made to the tax authorities. This makes sense commercially, as that is when the purchaser is itself out of pocket. However, with tax disputes often taking many years to resolve, this could lead to claims falling outside any limitation period.
One would normally expect to see very specific wording relating to the timing of payments under a tax indemnity which should generally avoid this problem. In particular, it is important for a purchaser to resist any requirement that proceedings are issued in respect of a claim within a certain period of notification of a claim as it is highly unlikely that the underlying tax liability will be settled by then and it may not always be possible to issue court proceedings under the indemnity and obtain a stay of those pending resolution of matters with the tax authoritiy.
Disputes can still arise, however, if all situations are not catered for, for example it is still relatively unusual to include drafting in relation to applications to tax authorities requesting a postponement of the tax due; in such situations, covenantors may wish to include specific drafting to ensure that the payment obligation is delayed until the postponement ceases to apply.
Lost tax assets
One surprising conclusion drawn by the High Court was that the reduction of the target group's VAT credit balance by the tax authorities did not equate to a payment. It was not critical in this case, as the reduction was unauthorised and the balance was swiftly reinstated but, in the absence of express and considered agreement otherwise, the loss of tax assets should be covered in the same way as actual payments of tax since, economically, they amount to the same thing.
Again, this was a function of this particular tax indemnity being short-form and very limited in respect of tax assets. One would normally expect to see these dealt with explicitly and with appropriate recompense for any loss.
Conduct rights
The indemnity permitted Glencore to take conduct of this VAT dispute and to take such action as it deemed necessary provided that it did nothing which could reasonably be considered to be likely to be materially prejudicial to the legitimate commercial interests of the Las Bambas project (to which the swap agreement related) or the target group.
The High Court saw no basis to import into this any broader requirement for Glencore to act in the interests of the purchaser. The purchaser is protected by a full indemnity and, so, subject to the express proviso protecting the specific project and the commercial interests of the owner of that project, Glencore was entitled to exercise its conduct rights under the indemnity to the detriment of the purchaser.
Conduct rights are often glossed over as mere administrative matters. However, as it is important that these are workable for the parties' specific needs and in the context of the relevant business or industry, it should always be the case that a senior tax representative comprehensively reviews these rights.
