IS A "WATER BILL" A TAX?

In Innophos, Inc. v. Rhodia, S.A., Innophos contested a $130 million water-usage fee which the Government of Mexico demanded be paid after Rhodia’s operations had been acquired by Innophos.

In early 2004, the Comision Nacional del Agua (CNA) informed Rhodia the latter owed money for water usage. In June 2004, Innophos purchased Rhodia’s operations unaware of the past-due fees owed.

The parties’ purchase and sale agreement provided Rhodia would be obligated to indemnify Innophos from “taxes of Mexican Subsidiaries,” and defined “taxes” as “assessments, charges, duties, levies, of other similar charges of any nature .…” The agreement further provided that Innophos would be indemnified for any “losses” arising from “the breach of any representation or warranty made in the agreement,” subject to a cap.

After receiving notice CNA was owed $130 million for water usage by Rhodia over a five year period, Innophos filed suit in the New York County Supreme Court, seeking a declaration the CNA fees were “taxes,” as defined by the parties’ agreement. Rhodia refused to pay, claiming the fees were “losses,” as defined by that same contract, and that it would only pay up to the capped amount.

The Supreme Court sided with Innophos and noted the agreement hadn’t limited “taxes” to its traditional sense. On appeal, the Appellate Division, First Department, affirmed, noting the word should be broadly construed.

When the dispute reached our state’s highest court, it also affirmed. Since the Government of Mexico was acting in its sovereign capacity when CNA assessed these fees, and because the charge was “imposed on the value of natural resources extracted from the earth,” the water-usage charges were “taxes” encompassed by the parties’ agreement.

Now that was taxing!