Construction - Contractual term - Commercial sense

Petromec Inc v Petroleo Brasileiro S.A. Petrobras and another company: Queen's Bench Division, Commercial Court (Mr Justice Field): 17 November 2011

In August 1995, P 36, a semi-submersible oil production platform (the vessel) was delivered to her owners. However, the owners were unable to employ the vessel and they accordingly allowed a company, Maritima, to negotiate a sale to a third party. Much of Maritima's work was undertaken for the first defendant, 'Petrobras', the Brazilian state petroleum company.

Negotiations began in 1996 between the parties with a view to creating a scheme to upgrade the vessel and deploy it in the South Marlim oil field, off the coast of Brazil. The specification which was finally submitted (the South Marlim GTS) was subsequently amended. The amendments were set out in a document called 'Annex X'. The South Marlim GTS was a generic specification applicable to all Petrobras production platforms to be used in South Marlim.

At meetings between Maritima and Petrobras in July 1996, a possible deviation for gas compression was discussed. In the event, a modified gas compression system was approved (the compression deviation) (see [40] of the judgment). A memorandum of agreement (the MOA) was signed in November 1996 between Maritima and Petrobras. The agreement contemplated that Maritima would acquire the vessel with a view to upgrading it and transferring title to the second defendant, 'Brasoil', a wholly-owned subsidiary of Petrobras, under a 12-year bareboat charter with a purchase option at the end of the period. Brasoil would in turn make the vessel available for use by Petrobras under a bareboat charter.

Towards the end of 1996, however, a very large new oilfield, subsequently known as the Roncador field, was discovered. Petrobras wished to bring the new field into production before the Brazilian state monopoly was ended and thus a new proposal emerged to put the vessel into service at Roncador. It transpired that substantial changes would need to be made to the design of the upgraded platform for use at Roncador owing to the different conditions there.

The financing of the project involved a number of different bodies and a complex contractual structure. Essentially, the parties comprised Maritima and the first claimant, Petromec, its contracting party, on the one hand; and Petrobras and Brasoil on the other. In August 1998, the parties entered into a supervision agreement. Clause 12.1 of that agreement provided that: 'In consideration of Petromec's agreement to upgrade the Vessel in accordance with the Amended Specification Brasoil agrees to pay to Petromec an amount equal to the reasonable extra cost (if any) to Petromec of Upgrading the Vessel in accordance with the Amended Specification over and above the cost that Petromec might reasonably have incurred in Upgrading the Vessel in accordance with the Original Specification.'

Discussions continued as to the funding for the additional costs generated by the Roncandor variation. In the event, the vessel was released to Petrobras to leave its berth in the St Lawrence river and be dry towed to Brazil. Petromec issued proceedings to recover the balance of the amount which it claimed was due in respect of the additional costs generated by the Roncador project pursuant to clause 12.1 of the supervision agreement. Brasoil and Petrobras made a claim for damages for delay in the completion of the upgrade.

It was agreed that the compression deviation represented the finally agreed Annex X deviation in respect of the compression system for the purpose of clause 12.1 of the supervision agreement. The court ordered the trial of preliminary issues, including the legal effect of the MOA.

On 2 February 2004, the court made rulings on the preliminary issues (see [2004] All ER (D) 10 (Feb)). Amongst the rulings made was that 'cost' in clause 12.1 of the supervision agreement did not include a profit element but conferred an entitlement on Petromec to recover not only the direct costs but also the whole of the additional costs, including financing costs, incurred as a result of the change in the nature of the project. That ruling was upheld by the Court of Appeal on 15 July 2005 (see [2005] All ER (D) 209 (Jul)). On 16 June, Petromec's claim that statements made by Petrobras during an attempt to agree a global payment approach to the notional South Marlim costs had been made fraudulently were dismissed (see [2006] All ER (D) 184 (Jun)).

Further preliminary issues arose arising out of Petromec's revised particulars of claim formulated in the light of the various judgments. The preliminary issues included first, the meaning and effect of the provision in Appendix B of the supervision agreement in relation to how the cost that Petromec might reasonably have incurred in upgrading the vessel was to be assessed with regard to the gas compression system (see [18] of the judgment). That issue raised the further question as to whether any further costs that would arise out of Petrobras' compression systems' specification, such as additional deck space and gas processing equipment, were allocated by the compression deviation to Petrobras' account rather than to Petromec's account. Secondly, whether Petromec was expected to install a spider deck similar to that installed for Roncador or could Petromec have utilised 'risers' (conduits that moved the fluids and services vertically between a floating production facility projecting above the sea surface and the sea-bed) (see [66] of the judgment).

The court ruled: (1) It was well established that in construing any contractual provision, the object of the court was to give effect to what the contracting parties had intended. To ascertain the intention of the parties the court had to read the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties' relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties' intentions the court did not inquire into the parties' subjective states of mind but made an objective judgment based on the materials already identified (see [47] of the judgment).

The question posed in the first issue was one of contractual construction. In the instant case, the compression deviation was intended to operate as a cost allocation provision. The meaning and effect of the compression deviation when construed against the relevant background was that, apart from Petromec having to supply the existing compressor and one new 2,000,000 m3/d gas compression train, the whole of the cost of acquiring, installing and accommodating such further compression systems, including additional deck space and processing equipment, as might be specified by Petrobras to meet its compression requirement of 6 million m3/d, was for Petrobras' account (see [46], [59], [60] of the judgment).

Investors Compensation Scheme Ltd v West Bromwich Building Society [1999] All ER (D) 23 applied; BCCI SA (in liquidation) v Ali [2006] All ER (D) 153 (Jul) applied.

(2) In the instant case, Petromec could not reasonably have had to install a spider deck, the same as or similar to that installed for Roncador. Instead, Petromec could reasonably have used the central caisson for the attachment of 52 risers with the remaining 46 being wet-attached to the pontoons (see [99] of the judgment).

Nicholas Vineall QC (instructed by Wikborg Rein LLP) for the claimant; Christopher Hancock QC and Malcolm Jarvis (instructed by Akin Gump LLP) for the defendants.