Tullow Oil found itself in a charged legal battle in the UK High Court last week when the company was accused of colluding with the Ugandan government to extract tax from its former exploration partner, Heritage Oil.

Tullow, which also has operations in Ghana and Kenya, however disagreed, saying that it had no alternative but to pay capital gains tax of over $400 million on behalf of Heritage after it sold its oil licenses in Uganda to Tullow for $1.45 billion.

Now Tullow has taken legal action against Heritage to recover the money paid to the Ugandan government.

But Heritage is claiming that the tax, which it is disputing, was fixed by the Ugandan government in collusion with Tullow, which was allegedly seeking favors in Uganda.

Heritage's lawyer Khawar Qureshi told the court: "From early in 2010, Tullow was engaged in discussions of a questionable nature with Ugandan government officials. The collusion took several forms. It was continuous and extensive and all behind the back of Heritage."

David Wolfson, representing Tullow, countered by saying that Heritage's claim of collusion was "creative, but incorrect" and said his case would hinge on showing that advice on Ugandan law that Tullow should pay up was "honestly held".

Tullow itself has been involved in another tax litigation with the Ugandan government. In October last year, the company went to the World Bank-established International Center for Settlement of Investment Disputes (ICSID) challenging value added tax placed on goods and services it buys for its oil exploration activities in Uganda. The specifics of the case have not been made available to the public.

The murky nature of the oil business is being exposed as the case continues. Evidence given in court showed that Tullow asked British Foreign Minister William Hague to intervene on its behalf over the capital gains issue. A newspaper report had earlier indicated that Mr. Hague had telephoned Ugandan President Yoweri Museveni in 2010 to lobby on Tullow's behalf.

Later, the then UK Foreign and Commonwealth Office Minister for Africa, Henry Bellingham, sent a confidential letter to the Ugandan government urging it to let Tullow of the hook.

Somehow, Tullow directors got hold of the letter marked "restricted", the court was told.

In normal circumstances, such a letter should not have been seen by anyone without a UK government security clearance.

But the court heard that Tullow's founder, Aidan Heavey, who did not have such clearance, had however made a $15,000 contribution to the 2010 election campaign of one of Mr. Hague's party members.

Mr. Qureshi told the court that "it is wholly improper" for the document to be circulated outside Whitehall, the seat of the British government.

The court also heard that Tullow bosses plotted a smear campaign against Heritage.

Tullow's Tim O'Hanlon was alleged to have suggested Mr. Museveni slur Heritage as part of a deal to settle the tax dispute by suggesting that the Ugandan leader tell the presidents of Mali, Kenya and Tanzania that "Heritage are gangsters".

There are also concerns over some of Tullow's witnesses in the London court case.

One of them is Peter Kabatsi, a former Ugandan Solicitor General and managing partner of Tullow's Ugandan lawyers, Kampala Associated Advocates (KAA).

Mr. Kabatsi previously told the Daily Monitor newspaper in Uganda that neither he nor his department negotiated agreements with foreign oil firms while he was Solicitor General and that there was no risk of a possible conflict of interest in relation to his standing as a witness on Tullow's behalf.

However, KAA's founder, Elly Karuhanga, is also president of Tullow Uganda, thus raising further questions about the impartiality of Tullow's witnesses in the case.

A Ugandan parliamentary committee recently censured Mr. Karuhanga for his alleged role in a scheme that resulted in a $15 million loss to the government. A report compiled by the Public Accounts Committee claimed that Mr. Karuhanga, along with high court judge, Billy Kainamura, and Nyabushozi MP, Fred Mwesigye, transferred a mining sublease from National Enterprise Corporation (NEC) to Hima Cement, and later to Dura Cement Limited without tendering.

Another senior Ugandan, Patrick Bitature, will also be standing as an expert witness for Tullow. Mr. Bitature is chairman of the Uganda Investment Authority. He owns a company called Electro-maxx, which entered into negotiations to buy Ugandan crude from Tullow in 2010. Bitature has reportedly acted as an advisor to the company since it entered Uganda.