Commercial Court upholds tax covenant claim notwithstanding Claimant’s dishonest conduct

03/03/17

Atheer Telecom Iraq Limited v Orascom Telecom Iraq Corp Limited (Judgment 17/02/07)

In a robust judgment Mr Justice Knowles awarded the Claimant, Atheer Telecom Iraq Limited, the full amount of its claim ($60m plus interest) under a tax covenant given by Orascom following the sale of an Iraqi telecommunications business, Iraqna, in 2007. This was notwithstanding that Atheer had behaved dishonestly (as was admitted) at an earlier stage in matters related to the claim and notwithstanding his view that Atheer’s witnesses at the trial were not open, straightforward or frank. The simple point was that such dishonesty was, despite the attempts of Orascom’s counsel, Lord Falconer QC, to establish the contrary, entirely irrelevant to the claim as Atheer had contended.

The SPA included a covenant to pay an amount equal to any tax liability of Iraqna which arose as a result of an Event which occurred or any income or profits earned, accrued or received on or before closing. Following the sale the Iraqi authorities levelled claims on Iraqna for large amounts of tax. The precise juridical basis of at least some of the assessments was not clear and the Judge found that one of the demands, and by far the largest, was simply inspired by a sense that a tax receipt should accompany such a major sale as had taken place. If the demand had been for a form of capital gains tax, such a demand would more naturally have been made on Orascom as the seller. Moreover, such tax did not exist in Iraq. But because the demand on its face related to earnings prior to the date of the sale, it was covered by the indemnity whether it was properly made or not. The tax had not in fact been paid. But the Judge held that did not matter and that the recipient was “finally liable” to pay the tax at the date when, under the Iraqi tax code, liabilities to interest and penalties accrued which was in early 2012.

The dishonesty of Atheer arose out of one of its employees purporting to represent Orascom before the courts in Iraq to make admissions on its behalf which course of conduct was dishonest. This was admitted by Atheer but the Judge expressed disquiet about the honesty of the evidence of the witnesses in relation to this and subsequent dealings with the Iraqi tax authorities. However, he found that episode was irrelevant as the dishonesty did not lead to the issue of the tax demands but came later: the dishonesty, including in evidence at the trial, had no causative effect. Numerous other defences were also rejected.

The Court, as well as allowing the claim, also awarded Atheer 80% of its costs of the proceedings and refused Orascom permission to appeal and a stay of execution.

The judgment appears here.

Judgment