Petromec Inc v Petroleo Brasileiro S.A. Petrobras & Ors

Introduction

This action arises out of a complex group of inter-related agreements which were executed to give effect to a transaction under which a semi-submersible oil production platform, Spirit of Columbus, was to be upgraded and made available to Petroleo Brasileiro S.A. (“Petrobras”), the Brazilian state petroleum company, for service in the South Marlim oilfield off the coast of Brazil. The parties to the agreements represented a wide range of different interests. They included not only the vessel’s owner, Societa Armamento Navi Appoggio S.p.A. (“SANA”) and the ultimate employer of the vessel, Petrobras, but companies associated with a Brazilian offshore engineering company, Maritima Petroleo e Engenharia Ltda (“Maritima”), and also various companies and financial institutions that had provided funds, services and equipment required for the original construction of the platform. Maritima was ultimately controlled by Mr. German Efromovich who had been responsible for bringing the parties together and who intended to manage the upgrading work.

SANA was incorporated in Italy in the early 1980s to own and operate vessels in the offshore petroleum industry. In the late 1980s it entered into a contract with Sestri Cantieri Navale S.p.A. (“SCN”) for the construction of an oil production platform using finance derived from subsidies made available to shipowners by the Italian government, credit facilities made available by SCN and design and project management services provided by a company called Oil Fields Development Ltd (“OFD”) which also supplied some equipment for the vessel.

Midland and Scottish Resources Plc (“MSR”) was incorporated in England towards the end of the 1970s with a view to carrying on business as an offshore drilling contractor. It subsequently acquired the right to provide equipment and services for the development of the Emerald field in the North Sea. In 1990 MSR acquired Tortin Investments Ltd (“Tortin”) which then owned OFD and a company called Midland & Scottish (Italy) Ltd which was the parent company of SANA. By that means MSR became the ultimate parent company of SANA and obtained the benefit of the contract for the construction of the vessel.

In order to fund the services it had contracted to make available to SANA OFD obtained a loan from its parent company, Tortin, which in turn obtained a loan from Arab Banking Corporation B.S.C. (“ABC”). The indebtedness of Tortin to ABC, which later became known as the ‘Tortin Debt’, was secured by, among other things, a guarantee of repayment by SANA and a first preferred mortgage on the vessel.

In the event the recoverable reserves in the Emerald field proved to be smaller than had originally been expected. The two subsidiaries of MSR involved in the project entered into a creditors voluntary arrangement early in 1994, leaving MSR with four secured loans and four unsecured loans. The only significant asset available to MSR from which it could meet its liabilities was its shareholding in Tortin through which it controlled SANA’s interest in the vessel.

The vessel completed its sea trials in 1994 and was marketed for use in various offshore locations. Petrobras was interested in using it in the South Marlim oilfield and by November 1996 Mr. Efromovich had been able to negotiate terms with Petrobras which provided the basis for a transaction that would make the vessel available to it for service in Brazil while at the same time satisfying the interests of all those who had provided finance for its construction. Those terms were embodied in a Memorandum of Agreement between Maritima and Petrobras dated 26^th November 1996 which formed the basis for the subsequent negotiations. Those negotiations eventually led to the execution of the group of inter-related contracts, each dated 20^th June 1997, which gave effect to the transaction in its final form.

Although the agreements by which it was implemented are numerous and complex, the basic nature of the transaction can be described in fairly simple terms as follows:

The precise structure of the transaction was dictated to a considerable extent by the need to satisfy the diverse requirements of a large number of interested parties, but the scheme as a whole was founded on the premise that the financial obligations to which it gave rise would be funded in one way or another out of the sub-charter hire. The hire payable by Petrobras to Brasoil enabled Brasoil to meet its obligations to Petro-Deep and enabled Petro-Deep in turn to meet two quite separate obligations: its obligation to pay the instalments of the price to SANA under the Purchase Agreement and its obligation to make periodic payments to Petromec in respect of the works to be carried out under the Upgrade Agreement. The instalments of the purchase price payable to SANA provided the source of funds from which the various loans made to finance the construction of the vessel and other indebtedness of MSR and its associated companies (apart from certain debts that Mr. Efromovich agreed to purchase himself) were to be repaid. The payments received by Petromec would finance the upgrading work and were expected to provide Mr. Efromovich or the Maritima group with a reasonable profit on the transaction as a whole. It was no doubt partly for that reason that Mr. Efromovich negotiated the sub-charter hire with Petrobras by reference to prevailing market conditions. The MSR debt that Mr. Efromovich agreed to buy represented a charge on the profits of the transaction as far as he was concerned.

In order to provide the degree of security required by the various parties to the transaction Brasoil, Petro-Deep and SANA entered into an agreement with other interested parties known as the Participation Deed and Security Assignment (“the Participation Deed”) by which they assigned their rights to receive payments under the Bareboat Sub-charter, the Bareboat Charter and the Purchase Agreement respectively to a bank appointed to act as Security Agent for distribution in accordance with an agreed set of priorities. The provisions prescribing the manner in which funds were to be distributed were set out in a Security Agency Agreement in which they were aptly described as a ‘waterfall’, with funds flowing further down as each successive beneficiary received what was currently due to it. Beneficiaries of the waterfall included Petromec, which by that means was assured of receiving the funds it needed to carry out the upgrade work, and also ABC and SCN, which were to receive through that mechanism repayment of the loans they had originally made to finance the vessel’s construction. The parties also agreed that payment by Petrobras to the Security Agent of hire due under the sub-charter was to discharge not only its own liability to Brasoil, but also the liability of Brasoil to Petro-Deep under the Bareboat Charter and the liabilities of Petro-Deep to SANA and Petromec under the Purchase Agreement and the Upgrade Agreement. An associated company of ABC, ABC International Plc, was originally appointed as Security Agent, but was replaced by Den Norske Bank A.S.A. (“DnB”) on 1^st October 2001.

As further security for the performance of their obligations under the two bareboat charters and the Purchase Agreement Petrobras, Brasoil and Petro-Deep assigned to the Security Agent the whole of their respective interests in the insurances on the vessel and her earnings. SANA also assigned to the Security Agent the whole of its interest in the insurances on the vessel as security for certain obligations it undertook to those who had provided financing for the construction of the vessel.

Towards the end of 1996 a very large new oil field known as the Roncador field was discovered in the Campos Basin off the coast of Brazil. Petrobras came under heavy commercial pressure to bring the new field into production as soon as possible and the Spirit of Columbus was the only platform available at short notice to meet its needs. Accordingly, the parties agreed to modify the original project by upgrading the vessel for service in Roncador rather than South Marlim. A formal proposal to that effect was approved by the board of Petrobras in February 1997 and design work began immediately, but the new arrangements were not recorded in writing at that stage. Petrobras accepted from the outset that it would have to bear the additional costs arising from this change to the project.

The negotiation of the various agreements embodying the provisions necessary to satisfy the different requirements of all the interested parties proved to be a long and complicated affair. Consequently, having reached agreement in principle on terms to implement the South Marlim project, no one wanted to re-open the discussions in order to make the changes needed to accommodate the Roncador project. On 20^th June 1997, therefore, the parties executed the formal agreements designed to give effect to the South Marlim project despite the fact it had been superseded for all practical purposes some months earlier. However, both Mr. Efromovich and Petrobras recognised the need for a further agreement to formalise the change to Roncador and to provide for the payment of any additional costs arising as a result. Accordingly, in August 1998 Petro-Deep, Petromec, Petrobras and Brasoil entered into a Supervision Agreement which provided, among other things, for the vessel to be upgraded to a new specification and for the payment by Brasoil to Petromec of any additional costs incurred as a result. The Supervision Agreement was expressed to be made as of 20^th June 1997 and it is common ground that the parties to it intended it to be read as one with the other transaction documents.

The circumstances surrounding the execution of the Supervision Agreement and the disputes that arose out of it are the subject of separate proceedings between Petrobras, Brasoil, Petro-Deep and Petromec in which I delivered judgment on 2^nd February 2004. None of the issues that arise in those proceedings is directly relevant to the present dispute, but the change from South Marlim to Roncador did have two consequences that need to be borne in mind: the first is that the commercial value of the vessel following the completion of the upgrade reflected the inclusion of additional structural steelwork and equipment that would not have been required for the South Marlim project; the second is that the cost of that steelwork and equipment, which represented a significant part of the total cost of the upgrade, had been borne by Brasoil which had made various payments direct to Petromec outside the terms of the original transaction documents.

By clause 7.2 of the Purchase Agreement, Petro-Deep was obliged to take out, or to procure that Brasoil or Petrobras take out, insurance on the vessel’s hull and machinery in the joint names of SANA, Petro-Deep, Brasoil and Petrobras against usual marine risks. By clause 7.3 the vessel was to be insured for at least its full commercial value, but in any event not less than 110% of the amount that would become payable by Petro-Deep to SANA on the total loss of the vessel in the relevant policy period. That amount, defined in the Purchase Agreement as the “Loss Payment” represented the full amount of all future instalments of the purchase price of the vessel discounted for acceleration.

By clause 7.2 of the Bareboat Charter Brasoil undertook a corresponding obligation to Petro-Deep and by clause 7.2 of the Bareboat Sub-charter Petrobras undertook to take out insurance on the vessel’s hull and machinery in the joint names of SANA, Petro-Deep, Brasoil and itself at its own expense. Each of those contracts contained a provision corresponding to that of the Purchase Agreement for the payment in the event of a total loss of the vessel of a Loss Payment representing the amount of all future instalments of hire discounted for acceleration.

In the event Petrobras insured the vessel’s hull and machinery by adding her to its existing fleet policy with an agreed value of US$500 million, but contrary to the terms of the agreements the policy did not name SANA or Petro-Deep as co-insured and there was some dispute about whether Brasoil was named as a co-insured either. I am satisfied that it was, although nothing ultimately turns on it. There is no reason to think, however, that the amount of cover did not fairly reflect the vessel’s true commercial value.

By clause 3.3 of another agreement called the Assignment of Insurances Brasoil and Petrobras were under an obligation to procure that notice of assignment was given to the hull and machinery insurers as soon as any insurance came into effect and by clause 3.4(i) of that agreement SANA, Petro-Deep, Brasoil and Petrobras (among others) were each obliged do whatever was necessary to create an enforceable security over the insurance in favour of the Security Agent and in particular to ensure that the policy contained a ‘loss payable’ clause in an agreed form. However, neither of those requirements was complied with.

On completion of the upgrade the vessel, by then re-named P-36, entered service in the Roncador field. On 15^th March 2001 an explosion and fire occurred on board and on 20^th March the vessel capsized and sank in deep water. Following the loss of the vessel Petrobras entered into discussions with the hull underwriters and other interested parties with a view to settling the claim and obtaining payment of the insurance proceeds. A dispute immediately arose over the way in which the proceeds should be handled: Petrobras and Brasoil maintained that only an amount sufficient to meet the Loss Payment under the Bareboat Sub-charter should be paid to the Security Agent for distribution; the other parties said that the whole of the insurance proceeds should be paid to the Security Agent. On 18^th June 2001 Petrobras paid US$325,626,616.36 to the Security Agent in respect of the Loss Payment due under the Bareboat Sub-charter and a few weeks later it obtained payment of the whole of the proceeds of insurance amounting to US$496,750,000 from the underwriters, having given them an indemnity against any claims that might be made by other interested parties. The failure of Petrobras to account to the Security Agent for the whole of the sum received from the underwriters led directly to the issue of these proceedings.

In early July 2001 the Security Agent distributed the funds it had received from Petrobras together with accrued interest. It deducted US$628,658.39 in respect of its own fees and expenses, paid US$4,586,105.24 to ABC in respect of the purchase by Brasoil of the outstanding part of the Tortin Debt, and paid US$173,717,312.34 into the SANA Security Account for distribution to various creditors. The devaluation of the Lire against the US Dollar meant that the amount paid to SANA was sufficient in Lire terms to cover the whole of the Loss Payment due under the Purchase Agreement at the then current rate of exchange.

Another dispute that arose at an early stage was whether the sum of US$325,626,616.36 that Petrobras had paid to the Security Agent represented the full amount of the Loss Payment due under the Bareboat Sub-charter. That turned on whether future instalments of hire were to be discounted back to the date of the loss (20^th March 2001) or the date on which the Loss Payment became due (18^th June 2001). Directions were given for that dispute to be tried as a preliminary issue and on 18^th February 2003 Tomlinson J., in a judgment that was subsequently upheld by the Court of Appeal, held that the correct date was 18^th June 2001. (Those decisions, numbers [2003] EWHC 179 (Comm) and [2004] EWCA Civ 156 respectively, can be found on the BAILII web site.) On that basis the correct amount of the Loss Payment was US$334,557,499.34 and the payment by Petrobras fell short by US$8,930,882.98.

Tomlinson J. directed that two further preliminary issues be tried to determine whether Petrobras was bound to account to the Security Agent for the full amount of the proceeds of insurance so as to enable them to be distributed in accordance with the terms of the Security Agency Agreement. However, the proceedings were compromised when Petrobras agreed to provide an undertaking from a first class bank to stand in place of the balance of the proceeds. The order of 16^th April 2003 giving effect to that compromise recites that the parties had agreed that by the provision of an undertaking in the sum of US$167,990,702.89 (representing a principal sum of US$162,192,566 and interest of US$5,798,202.23)

“. . . . that (1) . . . . . the Undertaking shall stand in place of the monies to be credited to the Vessel Security Account constituted pursuant to the Security Agency Agreement dated 20^th June 1997, representing US$162,192,566 plus interest paid into that account on the date of the establishment of the Undertaking and is deemed to constitute payment of such sum into the Vessel Security Account pursuant to the Security Agency Agreement and (2) the provision of the undertaking shall be deemed to be and shall be treated as a payment in the sum of the undertaking to the Vessel Security Account as defined in and for the purposes of the Security Agency Agreement.”

The undertaking was issued on 30^th April 2003.

On 6^th June a further order was made by consent that Petrobras or Brasoil should pay the sum of US$8,930,882.98 and interest into court by 27^th June whereupon they should be treated as having paid the Loss Payment and Overdue Interest due under the Bareboat Charter and Bareboat Sub-charter in full on that date. Petrobras paid the sum of US$10.6 million into court on 25^th June 2003 pursuant to that order.

It was accepted that the money paid into court in respect of the balance of the Loss Payment and interest should be distributed in accordance with the waterfall and constituted payment of the final amount due from Brasoil under the terms of the Bareboat Charter. That being so, there is only one remaining issue of any real substance in these proceedings, namely, who is entitled to the remaining proceeds of insurance represented by the undertaking issued on 30^th April. That depends, first, on who is entitled to recover as an insured under the policy, and secondly, on how the proceeds of insurance are to be distributed under the transaction documents.

As far as the first of these questions is concerned, Petromec maintains that it is entitled to recover part of the proceeds of insurance on the grounds that it was the owner of some of the equipment on board the vessel at the time it sank. On that basis it is said that it was entitled to recover under the policy and that Petrobras therefore holds part of the proceeds to its order.

As to the second question, the following competing claims to the fund are being made:

In addition a number of other claims were made, not all of which were still being actively pursued by the time the trial began. These included

It was accepted that DnB was entitled to recover the amount claimed in respect of its basic remuneration, but by the end of the trial it had become clear that it would not be possible to determine the issues relating to its entitlement to be reimbursed out of the Vessel Security Account in respect of its expenses. It had also become clear that Petrobras accepted in principle that SANA was entitled to relief in respect of its failure to make it a co-insured on the vessel’s hull and machinery policy. For different reasons, therefore, I adjourned further consideration of those two claims to another occasion.

The parties agreed that SANA’s claim for costs incurred before the commencement of the proceedings should be treated as part of the costs of the proceedings to be disposed of in the ordinary way (either under existing orders or orders that might be made in the future), subject to a detailed assessment as necessary.

As a result of the outcome of the earlier proceedings it was unnecessary for Petro-Deep to pursue its claim to be indemnified against any liability in relation to the upgrading of the vessel and the costs of the earlier proceedings. Moreover, since no claim was still being actively pursued against it in this action either, it did not need to pursue its claim to be indemnified against any liability it might be held to have incurred towards SANA. The costs of these proceedings will be a matter for the court to deal with in due course. All this meant that these particular claims, if not formally withdrawn, were not seriously pursued.

The result of these developments was that the parties were left free to concentrate on the disputed claims to the proceeds of insurance.

It is convenient to deal first with Petromec’s claim to be entitled to part of the insurance proceeds on the grounds that it retained an interest in the vessel and its equipment at the time of the loss.

The contract of insurance was governed by the law of Brazil. Ms. Prevezer submitted that under Brazilian law if property is insured against loss or damage a person who has an interest in that property as owner or part-owner has a right to recover against the insurers in respect of loss or damage to the extent of his interest. The first question that arises for consideration, therefore, is whether Petromec did have an interest of that kind in the vessel or her equipment at the date of the loss.

The upgrading of the vessel involved essentially two kinds of work: the provision of additional structural steelwork, notably the construction of a new spider deck to carry part of the additional equipment required to operate in the Roncador field, and the provision of various items of equipment. There is no evidence of the terms on which materials and equipment required for the upgrade were supplied to Petromec, but for the purposes of these proceedings Mr. Hancock was prepared to accept that ownership of them passed to Petromec on delivery to the shipyard, if not before. I am also willing to assume for present purposes that at least some of the equipment to which Petromec lays claim had not been paid for in full and was capable of being removed without seriously damaging the integrity of either the equipment or the vessel.

The transaction documents are silent on the passing of property in materials and equipment affixed to the vessel. However, they do proceed on the basis that title to the vessel was to remain in SANA throughout the period of the charter and provided expressly for it to be transferred to Brasoil following payment for the vessel in full. It is clear that the transfer of title in the vessel was intended to include title to all its equipment and the parties must therefore have intended that at some point title in materials and equipment supplied as part of the upgrade work would pass from Petromec to SANA or Brasoil. The Supervision Agreement is also silent on this issue and one must therefore infer that the parties intended that the position under the original transaction documents was to apply in relation to any additional materials and equipment supplied for the Roncador project.

Although all the materials and equipment were put on board the vessel either in Canada or Brazil, neither party sought to adduce evidence of foreign law and it was therefore common ground that the passing of title was to be determined in accordance with the principles of English law. One starts, therefore, from the principle that where goods are supplied pursuant to a contract property passes when the parties intend that it should pass. The Upgrade Agreement in the present case was a contract for work and materials which involved the modification of a vessel owned by a third party, SANA. Surprisingly, perhaps, SANA was not itself a party to the Upgrade Agreement or the Supervision Agreement, but it was a party to the transaction as a whole and must be taken to have given its consent to the work, including the additional work required by the Roncador project. The contract contained no provisions purporting to reserve title in any of the materials or equipment to Petromec and although SANA did agree to grant a mortgage over the vessel to secure the performance of Petro-Deep’s obligations to Petromec, that extended to the vessel as a whole rather than any individual items of equipment. Moreover, no provision was made in any of the primary contractual documents for Petromec to be a co-insured under the hull and machinery policy. That, of course, is not determinative of where property was intended to lie, but it is certainly consistent with the conclusion that the parties did not intend Petromec to retain an interest in the materials or equipment supplied as part of the upgrade once they had been put on board, or that they intended it to acquire an interest of any kind in the vessel’s hull and machinery.

Having regard to the contractual arrangements, I have no doubt that property in any materials used to modify the vessel’s structure passed by accession to SANA immediately upon their incorporation into the vessel. Moreover, in the absence of any indication that the parties intended otherwise, I think that the same is true of equipment, whether it became part of the vessel’s structure or was of a kind that could be removed without damage. In each case that seems to me to be consistent both with the intention of the parties, insofar as it can be collected from the transaction documents, and with general principles of law: see Benjamin’s Sale of Goods, 6^th ed., §1-043 and Anglo-Egyptian Navigation Co v Rennie (1875) L.R. 10 C.P. 271. I am unable to accept, therefore, that Petromec retained title to any of the equipment on board the vessel at the time of the loss and accordingly its claim to a share of the proceeds of insurance based on the existence of an insurable interest fails on this ground alone.

This makes it unnecessary to decide whether, if Petromec had had title to any equipment on board the vessel at the time of the loss, it would be entitled to recover part of the hull insurance proceeds from Petrobras or Brasoil. However, in case the matter goes further I propose to express my conclusions on the issue shortly.

I heard evidence from two Brazilian lawyers, Mr. Marcolo Haddad and Mr. Claudio Pigatti. Not surprisingly, there was much on which they were agreed, but the nub of the disagreement between them was this: Mr. Haddad was of the opinion that it is sufficient for a third party (that is, a person other than the named insured) to be entitled to claim on a contract of insurance on property that he have an ‘insurable interest’ in the property; Mr. Pigatti, on the other hand, considered that a third party is entitled to recover under the policy only if the contract was made for his benefit in one of the ways recognised by Brazilian law. In other words, they approached the problem from opposite directions: whereas Mr. Haddad argued from the existence of an insurable interest to a right to recover, Mr. Pigatti began by looking at the contract to see whether it had been made in a way that would confer on the third party a right to recover.

Before going any further it is necessary to say a little more about the way in which the witnesses used the expression ‘insurable interest’. English lawyers are accustomed to using that expression in the context of property insurance to mean the existence of a relationship to the property in question such that the insured will suffer loss of some kind if the property is damaged or destroyed. Both witnesses in the present case, however, used it in the rather narrower sense of a proprietary interest. In effect, therefore, Mr. Haddad was saying that where property is insured against loss by someone who does not enjoy the whole of the proprietary interest in it, a third party who also has a proprietary interest in it is entitled to recover for his interest as an insured.

Having heard both experts explain their views I am satisfied that Brazilian law recognises three ways in which a contract may be made on behalf of a third party. One way is by the doctrine of legal representation, for example, when personal representatives act on behalf of a deceased person. This does not apply in the present case and nothing further need be said about it. Another way is by making a contract as agent for a third party, either in the exercise of authority granted by a formal power of attorney, as contemplated by articles 1288–1289 of the Civil Code, or in the exercise of authority granted informally as contemplated by articles 1290–1292. (A contract made as a result of the ratification by a third party of unauthorised acts purportedly committed on his behalf can be viewed as another example of the principles of agency in operation.) The third way is by making the contract in the course of the management of a business, as contemplated by Chapter VII of the Civil Code, this being, in effect, a form of agency of necessity. These are all examples of agency in one form or another, but in addition to these a person may enter into a contract for the benefit of a third party as contemplated by article 1098 of the Code, that is, a contract which expressly provides for a third party to receive a benefit under it. In such a case the contract may be enforced either by one of the parties to it or by the third party himself, provided he is willing to accept its terms.

Normally a contract cannot be treated as having been made for the benefit of a third party unless that appears from its terms, but in some cases extrinsic evidence is admissible to prove that a third party was intended to benefit from it instead of, or in addition to, the person in whose name it was made. In the context of contracts of insurance evidence is admissible to establish such an intention in cases where the insurer of property was aware that the insured was holding the goods as a bailee. This commonly occurs in cases where the insurer knows that the insured carries on business as a warehousekeeper or forwarding agent.

Although in the Brazilian legal system the Codes are the primary source of law, judicial decisions and doctrine, in the form of the writings of jurists, helps to ensure that the construction placed by the judges on the language of the Codes keeps pace with commercial and social changes. To that extent works published by recognised authorities play an important part in the development of the law and their views must be taken into account when deciding what conclusion the courts would reach on a matter of this kind. Mr. Haddad said that many commentators hold that a person who has a proprietary interest in buildings or goods that are insured against physical loss or damage is entitled to recover under a contract of insurance even though he is not expressed to be a party to it, although they reach that conclusion by different routes and by way of different principles. However, he was unable to identify any judicial decision upholding the right of a third party to recover in respect of an interest in property which was not explicable by reference to one or other of the principles mentioned earlier, nor did he refer me to any commentators who did not base their conclusions on one or more of the same principles. I am unable to accept, therefore, that there is a general rule in Brazilian law that a third party who has a proprietary interest in goods can by virtue of his interest alone recover under a contract of insurance on the goods. The right to make such a claim depends on the existence of a relationship between the claimant and the insurer brought about in one of the ways mentioned earlier. I accept, however, that there is a tendency to apply those principles in an increasingly liberal manner in order to ensure that legitimate commercial expectations are not frustrated.

I do not think that the present case falls within any of the principles that would enable Petromec as a third party to maintain a claim under the policy in its own right. Petrobras was under no obligation to insure for the benefit of Petromec and did not purport to do so, whether as agent or as a principal seeking a benefit for a third party. The policy does not purport to cover anyone who might have an interest in the vessel; it identifies the insured persons by name without mentioning Petromec in any way. Nor is this the kind of case in which evidence would be admissible to show that the insured was, and was known to be, contracting for the benefit of a third party. Accordingly, the claim fails on this ground as well.

Ms. Prevezer Q.C. for Petro-Deep and Mr. Scorey for SANA both submitted that the proceeds of insurance fell to be distributed strictly in accordance with the waterfall provisions of the Security Agency Agreement, regardless of their original character or origin. In their submission that would result in Petro-Deep’s receiving about US$93 million, either in respect of amounts outstanding under the Bareboat Charter or in respect of the Tortin Debt, and SANA’s receiving the balance (about US$75 million) as the ultimate recipient of any funds not otherwise disbursed pursuant to the waterfall. Neither Brasoil nor Petrobras would receive anything.

Mr. Hancock Q.C. for Petrobras and Brasoil submitted, however, that the Security Agency Agreement was only one element of the whole transaction and could not be construed in isolation from the other documents. These contemplated that once SANA, Petro-Deep and Petromec had been paid all that they were intended to receive under the Purchase Agreement, the Upgrade Agreement and the Bareboat Charter, title to the vessel would be transferred to Brasoil and that if there had been a total loss of the vessel, any balance of the insurance proceeds that might remain after satisfying all outstanding obligations was to be paid to Brasoil. To the extent that any other party received a share of them it would obtain an uncovenanted windfall and Brasoil would be deprived of part of the indemnity it ought to receive in respect of the loss of the vessel.

I think Mr. Hancock was right in submitting that the Security Agency Agreement must be construed in the context of the other transaction documents. It is necessary at this stage, therefore, to refer in more detail to the terms of that agreement and of the other agreements that have a bearing on the financial obligations of the parties.

It is convenient to begin, however, by saying a little more about the relationship between the various contracts that make up the transaction as a whole. I referred earlier to the Purchase Agreement and the two bareboat charters as ‘primary’ contracts. I did so, not because they are expressed to take precedence over any of the other contracts making up the transaction - it is clear from terms of the individual contracts and the detail of the drafting that they were intended to dovetail with each other and be mutually consistent - but because, together with the Upgrade Agreement, they encapsulate the essence of the transaction insofar as it concerned the vessel itself. In saying that I have not overlooked the central importance of the other agreements, including the Security Agency Agreement, as the means by which the indebtedness of SANA and other companies in the MSR group was to be discharged. However, with the exception of the Tortin Debt, no issue arises in relation to that aspect of the transaction and it is unnecessary to discuss it in any detail. Moreover, although the security arrangements were the principal means by which MSR’s creditors were to receive payment, I think it is right to regard them as essentially ‘secondary’ in the sense that the intention behind them was to ensure that those who ought to be paid were paid. They were not themselves the source of the obligations to buy and sell the vessel, to pay the price for it, to insure it, to carry out the upgrade work on it and to pass title to it. All these were contained in the Purchase Agreement, the bareboat charters and the Upgrade Agreement. Nor were they the primary source of the financial obligations owed to the various creditors of SANA and the other MSR companies. In my view, therefore, Mr. Hancock was right in submitting that, insofar as the parties’ intentions in relation to these matters emerge clearly from the primary contracts, the security agreements should, in the event of doubt, be construed in a way consistent with them.

I have already summarised the commercial scheme of the contracts which provided for title to the vessel to be transferred from SANA to Brasoil on payment in full of the price due under the Purchase Agreement and of hire due under the Bareboat Charter. The following provisions of the Purchase Agreement are of particular relevance to the present dispute:

“1 DEFINITIONS

“Final Payment” means the sum payable by Petro-Deep to SANA, in order to effect transfer of title to the Vessel to Petro-Deep or its nominee, equal to Lire 206,250,000,000.00.

11

TOTAL LOSS

11.1

Loss Payment

. . . . . if the Vessel shall become a Total Loss . . . . Petro-Deep shall pay or procure the payment to SANA . . . . . of the Loss Payment . . . . . within 90 days of the occurrence of such total loss . . .

11.4

After Full Payment

Upon the full payment of the Loss Payment . . . . the Price for the Vessel shall be deemed to be paid in full and Petro-Deep shall or SANA shall ensure that Petro-Deep shall . . . . . (ii) receive from SANA a bill of sale transferring to Petro-Deep or its nominee . . . . . all of SANA’s right, title and interest, if any, in the Vessel, including its right, title and interest in and to any insurance proceeds . . . .

12.2

Payment of Instalments

(1)

Petro-Deep shall, throughout the Payment Period, pay the Instalments to SANA for the Vessel on any and each of the Payment Dates up to (and including) 31^st December 2008.

(2)

The amount of any and each of the instalments to be payable on 1^st through last Payment Dates shall be (i) zero (0) for the first (1^st) to (and including) the eighteenth (18^th) Payment Dates; (ii) Lire 11,458,333,333.00 for the nineteenth (19^th) to (and including) the forty-seventh (47^th) Payment Dates; and (iii) the aggregate of Lire 11,458,333,333.00 and the Final Payment on the forty-eighth (48^th) Payment Date.”

It is important to note, first, that the purchase price in this agreement was denominated in Lire, whereas payments due under the two bareboat charters were denominated in US dollars. The depreciation of the Lire against the US dollar between the date of the contract and the loss of the vessel has given rise to certain arguments to which I shall have to return at a later stage.

The provision in clause 12.2(2) for nothing to be paid in respect of the price during the first four and a half years was directly linked to the provision for a Final Payment at the end of the twelfth year. The Final Payment is in fact the amount of the 18 deferred instalments. This provision was linked to the agreement for the purchase by Brasoil of the Tortin Debt, to which I shall come a little later.

For present purposes clause 11.4 is of most significance since it makes clear that once SANA had received the whole amount of the price the entirety of its interest in the vessel and the proceeds of insurance (in the event of a total loss) was to be transferred to Petro-Deep or its nominee.

The Bareboat Charter between Petro-Deep and Brasoil contained broadly corresponding provisions as follows:

“1 DEFINITIONS

“Final Payment” means the sum payable by Brasoil to Petro-Deep, in order to effect transfer of title to the Vessel to Brasoil, equal to that amount of the Outstanding Indebtedness under the ABC loan which Brasoil acquires from ABC pursuant to the Debt Purchase Agreement.

11

TOTAL LOSS

11.1

Loss Payment

. . . . . if the Vessel shall become a Total Loss . . . . Brasoil shall pay or procure the payment to Petro-Deep . . . . . of the Loss Payment . . . . . within 90 days of the occurrence of such Total Loss . . . . .

11.4

After Full Payment

Upon the full payment of the Loss Payment . . . . the Charter Hire for the Vessel shall cease to accrue and Brasoil shall or Petro-Deep shall ensure that Brasoil shall . . . . . (ii) receive from SANA a bill of sale transferring to Brasoil . . . . . all of SANA’s right, title and interest, if any, in the Vessel, including its right, title and interest in and to any insurance proceeds . . . .

12

PAYMENT OF CHARTER HIRES

12.2

Payment of Fixed Hire

(1)

Brasoil shall, throughout the Charter Period, pay the Fixed Hires to Petro-Deep for the Vessel on any and each of the Hire Payment Dates up to (and including) 31^st December 2008.

(2)

The amount of any and each of the Fixed Hires to be payable on 1^st through last Hire Payment Dates shall be equal to 1/48^th of the total hire payable in respect of the Bareboat Charter of the Vessel hereunder . . . . . being US$13,678,612.50 per quarter.”

By Schedule 2 to the Participation Deed the Bareboat Charter was amended to provide that, in the event of the vessel’s becoming a total loss, Brasoil should be obliged to make the Final Payment on the same date as the Loss Payment.

Part of the hire payable under the Bareboat Charter was intended to enable Petro-Deep to meet its liabilities to SANA and to enable SANA in turn to discharge its own indebtedness and the indebtedness of other companies in the MSR group. This element was known as the ‘Basic Hire’. The balance was intended to enable Petro-Deep to pay Petromec for upgrading the vessel and was known as the ‘Upgrade Hire’. Pursuant to the security arrangements, however, the whole of the charter hire was in fact paid to the Security Agent and was distributed direct to the nominated recipients through the operation of the waterfall.

Brasoil wished to acquire the Tortin Debt from ABC in order to obtain the benefit of the first preferred mortgage on the vessel by which it was secured. ABC had been in a strong enough commercial position to insist that it received payment out of the Basic Hire in priority to other creditors of the MSR group. Accordingly, the parties agreed that Brasoil should use the amount it received in respect of the Basic Hire to buy the Tortin Debt from ABC in instalments. The money would still reach ABC, but by a route that did not include Petro-Deep or SANA. In order to give effect to that arrangement it was necessary to relieve Brasoil from the obligation under clause 12.2 of the Bareboat Charter to pay the corresponding instalments of Basic Hire and to substitute a Final Payment at the end of the charter period representing the total of the instalments withheld (equivalent to the amount of the Tortin Debt that Brasoil had purchased by that date). It was also necessary to ensure that Petro-Deep was not liable for instalments of the price during the period in which Brasoil was not paying Basic Hire. The first of these objectives was achieved by clause 9.7 of the Participation Deed (to which I shall come in a moment); the remainder by the provisions of the Purchase Agreement and Bareboat Charter to which I have already referred. To complete these arrangements Brasoil and ABC entered into a Debt Purchase Agreement under which Brasoil agreed to buy the Tortin Debt from ABC in instalments.

Again, clause 11.4 of the Bareboat Charter, which mirrors clause 11.4 of the Purchase Agreement, made clear that once Brasoil had paid the whole amount of the hire due under the charter the whole of SANA’s interest in the vessel and the proceeds of insurance (in the event of a total loss) was to be transferred to it.

Since Petrobras was not involved in the purchase of the Tortin Debt and the parties to the transaction did not intend that title to the vessel should pass to Petrobras at any stage, the Bareboat Sub-charter did not contain any provisions for a Final Payment or the transfer of title corresponding to those in the Bareboat Charter. It did, however, contain provisions for the quarterly payment of hire and for the payment of a Loss Payment in the event of the vessel’s becoming a total loss.

The Participation Deed was one of the two principal agreements by which the parties established security arrangements for the discharge of the various financial obligations to which the transaction gave rise. (The other was the Security Agency Agreement.) By clause 3 SANA, Petro-Deep and Brasoil assigned their respective interests in the Purchase Agreement, the Bareboat Charter and the Bareboat Sub-charter to the Security Agent as security for the performance of their respective obligations. Clause 9 of the agreement provided as follows:

“9 Application of Payments

9.1

All sums received into the Vessel Security Account pursuant hereto shall be applied in accordance with the provisions of the Security Agency Agreement and this clause 9.

9.2

SANA and each of the Obligors [i.e. Brasoil and Petro-Deep] and the Security Agent agree that to the extent that any amount is paid under any Charter Document directly into the Vessel Security Account as a result of the assignments by SANA or either of the Obligors contained herein, except as provided in clause 9.7, such payment shall be regarded as satisfying pro tanto the obligation of the Obligor which would, but for such assignment, have been the recipient thereof, to make the corresponding payment due from it to SANA or another Obligor under any other Charter Document.

9.3

The provisions of clause 9.2 shall apply notwithstanding that Petro-Deep’s obligation is to pay each instalment of the price in Italian Lire under the Head Purchase Agreement

9.7

It is agreed between all the parties hereto that out of the amount (which shall never exceed US$7,490,000 together with Overdue Interest thereon except in the event of a Loss Payment . . . . . ) of each Fixed Hire Payment, an amount determined in accordance with the Debt Purchase Agreement shall be applied by the Security Agent on behalf of Brasoil towards purchases of the Aggregate Drawings . . . until such time as ABC confirm that they are no longer owed any amounts of principal in respect of the Tortin Debt. . . . . . [T]he parties agree that, notwithstanding clause 9.2, to the extent that any part of such Fixed Hire is paid out of the Vessel Security Account to ABC, such amount shall be deemed to be a direct purchase by Brasoil from ABC of Aggregate Drawings under the Debt Purchase Agreement. Upon such payment and purchase, Brasoil shall be released from its obligation to pay a like amount of Fixed Hire under the Bareboat Charter and Purchase Agreement to Petro-Deep and shall, in lieu thereof, have an obligation to make the Final Payment on the terms and subject to the conditions contained or referred to in clause 12.4 hereof.”

Clause 9 was thus designed to achieve three objects. First, it ensured that a payment of charter hire by Petrobras to the Security Agent discharged not only its own liability to Brasoil, but also Brasoil’s liability to Petro-Deep under the Bareboat Charter and Petro-Deep’s liability to SANA under the Purchase Agreement. That was essential if the security arrangements were to operate effectively. Secondly, it made it clear that a payment should have that effect despite the fact that Petro-Deep’s obligation to SANA was denominated in Lire whereas Brasoil’s liability to Petro-Deep was denominated in US dollars. That too was essential to ensure that Petro-Deep (which was not expected to receive funds from any other source) did not become liable to pay additional amounts to SANA if the Lire appreciated against the US dollar over the period of the transaction. Thirdly, it tied in the arrangements for the purchase by Brasoil of the Tortin Debt from ABC by ensuring that Brasoil was relieved of its obligation to pay charter hire to Petro-Deep, to the extent that funds were paid to ABC, and by substituting an obligation to make the Final Payment. Petrobras was not a party to that agreement, but it must be taken to have had knowledge of its terms and to have consented to them insofar as they formed part of the documents constituting the transaction as a whole.

If the transaction had run its full course, the Final Payment that Brasoil thus became liable to pay Petro-Deep would have been equal to the full amount of the Tortin Debt. The hire payable by Petrobras under the Bareboat Sub-charter had always been the source of the funds required to repay the Tortin Debt, though the precise manner in which they were to be made available to Tortin was a matter within the discretion of the companies in the MSR group. That was expressly provided for in another agreement, the Upstreaming and Standstill Agreement, to which SANA, Petro-Deep, Brasoil, ABC, MSR, OFD and Tortin (among others) were all parties. When completed, therefore, the practical effect of Brasoil’s purchase of the Tortin Debt would be to “close the circle”: Tortin would owe money to Brasoil; Brasoil would owe the same amount to Petro-Deep in the form of the Final Payment under the Bareboat Charter; Petro-Deep would owe an amount denominated in Lire to SANA in the form of the Final Payment due under the Purchase Agreement; SANA was not bound to make funds available to enable Tortin to meet its liability to Brasoil, but that is clearly what was contemplated and if Tortin had remained liable to ABC, there is little doubt that ABC would have obtained payment in exactly the same way out of the Basic Hire through the operation of the waterfall in the Security Agency Agreement.

Since the Final Payment under the Purchase Agreement was a fixed amount, whereas the Final Payment under the Bareboat Charter depended on how much of the Tortin Debt Brasoil had bought by the time the charter came to an end, there was no reason to assume that the two would correspond; indeed it was unlikely that they would, and they certainly would not do so if, as actually happened, the Bareboat Charter were to come to an end early in its life by reason of the loss of the vessel. However, in those circumstances the Loss Payment payable under the Bareboat Charter would have been correspondingly greater than the Loss Payment payable under the Purchase Agreement, so in each case the whole of the amount payable over the life of the contract would be fully accounted for. The same would have applied in the event of early termination for some other reason because a Termination Payment equal to the amount of the Loss Payment would then have become payable.

In these circumstances it is not surprising that the parties made specific arrangements for the payment of the Tortin Debt and the Final Payment under the Bareboat Charter. These are to be found in clause 12 of the Participation Deed and Security Assignment which provided as follows:

“12.

Acknowledgment and Variations to Charter Documents

12.1

The parties to this Deed each acknowledge that when Brasoil is required to make the Final Payment in accordance with the Bareboat Charter and Purchase Agreement . . . . . then

(i)

immediately prior to making the Final Payment, Brasoil will agree to waive and release Tortin from its obligations to pay any interest in respect of the Tortin Debt . . . . .

(ii)

Brasoil shall pay the Final Payment subject to (a) Tortin simultaneously repaying to Brasoil in full the amount of the Tortin Debt . . . . ; and (b) title to the Vessel passing from SANA to Brasoil simultaneously with or immediately prior to the making of such Final Payment (except as provided in the Second Schedule hereto in the event of a Loss Payment falling due); and

(iii)

the parties hereto agree that [the] obligation to make the Final Payment referred to in (ii) above may be netted off against and/or effected by instructions to pay, the obligation of Tortin referred to in (ii)(a) above;

(iv)

upon such payments or netting being made, Petro-Deep shall be deemed to have fulfilled its obligation to pay a corresponding amount of the Final Payment (as defined in the Head Purchase Agreement) in respect of the Price to SANA and SANA shall have recourse solely to Tortin for that amount; and

(v)

Brasoil shall enter into such additional documents as Petro-Deep, Tortin and SANA may reasonably require to release and discharge the ABC mortgage, the ABC security and the Tortin Debt.

12.2

The parties hereto agree that the operation of the provisions of each of clause 12.1(ii), (iii), (iv) and (v) shall each be conditional on the others and shall occur simultaneously with or immediately after title to the Vessel passing to Brasoil or its nominee pursuant to the Bareboat Charter and Purchase Agreement.”

This clause gave rise to a good deal of argument, but before considering its effect it is necessary to refer to the Upstreaming and Standstill Agreement and to the Security Agency Agreement.

The Upstreaming and Standstill Agreement was intended primarily to regulate the relationships between the different companies in the MSR group (SANA, MSR, MSI, OFD and Tortin) and between those companies and their creditors. Only one clause is of particular relevance to the present dispute, namely, clause 6.16 which provided as follows:

“Petro-Deep agrees that if, as a result of the security assignments contained in the Participation Agreement and pursuant to the provisions of clauses 9.2 and 9.3 of the Participation Agreement it might have been entitled to claim that it had made any overpayment or early payment under the Head Purchase Agreement to SANA, it will waive and irrevocably forego its right to claim any such amount back from SANA, the consideration for such agreement being SANA’s agreement to conditionally sell the Vessel to Petro-Deep on terms that the Charter Documents are all entered into simultaneously.”

“Charter Document” was defined as including the Purchase Agreement as well as the Bareboat Charter and the Bareboat Sub-charter.

It is clear that the parties were very much alive to the fact that the price payable by Petro-Deep under the Purchase Agreement was denominated in Lire whereas the hire payable by Brasoil under the Bareboat Charter was denominated in US dollars and that they had foreseen the risk that the Lire might depreciate against the dollar during the lifetime of the agreement. If that happened, the amount paid by Brasoil by way of an instalment of Basic Hire would exceed in Lire terms the amount due from Petromec by way of the corresponding instalment of the price. By virtue of clause 9.2 of the Participation Deed payment by Petrobras to the Security Agent would have the effect of discharging Brasoil’s obligation to Petro-Deep and also Petro-Deep’s obligation to SANA, but it might be said that Petro-Deep had thereby paid too much in Lire terms. This clause was intended to ensure that in those circumstances Petro-Deep could not recover any apparent overpayment from SANA by contending that as a result of the payment of Basic Hire in US dollars it had paid more in terms of Lire than was actually due under the Purchase Agreement.

It follows that the parties must have proceeded on the understanding that the expression

“such payment shall be regarded as satisfying pro tanto the obligation of the Obligor which would, but for the assignment, have been the recipient thereof”

in clause 9.2 of the Participation Deed meant that the person who would have received the payment if it had not been assigned to the Security Agent was to be treated as having paid an equivalent amount in respect of his own obligation. Ms. Prevezer submitted that the expression “pro tanto” in this context meant satisfying an equivalent proportion of the relevant obligation, but if that is what the parties had intended it would have been unnecessary for them to include clause 6.16 in the Upstreaming and Standstill Agreement, since payment of hire in full by Brasoil could never have resulted in an overpayment by Petro-Deep to SANA.

The inclusion of clause 6.16 also points towards two other conclusions that may have a bearing on the construction of the transaction documents. First, it tends to suggest that the parties were treating this as a dollar transaction, despite the fact that the price payable for the vessel under the Purchase Agreement was denominated in Lire. That would make good sense, of course, because many of the obligations that were to be discharged out of the hire were dollar obligations and the hire payable under the Bareboat Sub-charter was denominated in dollars. Secondly, it suggests that it was not the parties’ intention that Petro-Deep should make a profit out of the transaction. It could not make a loss, of course, even if the Lire appreciated against the dollar, because clauses 9.2 and 9.3 of the Participation Agreement between them ensured that a payment by Petrobras was treated as discharging Petro-Deep’s corresponding obligations to SANA.

Finally I come to the Security Agency Agreement. Two provisions, clause 4.1, which contained the waterfall provisions on which Petro-Deep and SANA principally rely, and clause 13, which contained provisions dealing with reassignment of security, are particularly relevant to the present dispute.

The opening part of clause 4.1 provided as follows:

“Waterfall in respect of the Vessel Security Account: Subject to the Security Agent receiving notification from the Account Bank of any credit to the Vessel Security Account prior to 5 p.m. (London time) on any date (the “Relevant Date”), the Security Agent (both before and after any enforcement of the Collateral) shall as provided in this Agreement by 2 p.m. (London time) on the Relevant Payment Date give an Instruction to the Account Bank to make payments out of the Vessel Security Account for same day value in respect of the Proceeds in the following order:

. . . . . . . . . . . . ”

There was then set out in order a list of the payments to be made, the last of which was

“(g)

seventhly, any remaining balance, to the SANA Account.”

Clause 13 provided as follows:

“13 Reassignment of Collateral

Upon and subject to (a) each of the Secured Parties being under no commitment, obligation or liability (whether actual or contingent) to make advances or provide other financial accommodation to any of Brasoil, Petro-Deep and SANA under or pursuant to the Transaction Documents or to any other person in respect of whose liabilities any of Brasoil, Petro-Deep and SANA has undertaken a liability to any of the Secured Parties under or pursuant to the Transaction Documents and (b) none of Brasoil, Petro-Deep and SANA having any liability (whether actual or contingent) to any of the Secured Parties under or pursuant to the Transaction Documents in respect of any matter or thing whatsoever, as soon as reasonably practicable thereafter and at the request and cost of Petro-Deep, the Security Agent shall . . . . . reassign the property and assets assigned to the Security Agent by or pursuant to the Transaction Documents and release or otherwise discharge the Collateral but any such reassignment, release or discharge shall be subject to the terms of the Transaction Documents.”

Petrobras was not a party to that agreement either, but as with the Participation Deed it must be taken to have had knowledge of its terms and to have consented to them.

Following the loss of the vessel on 20^th March 2001 Loss Payments became due and payable on 18^th June 2001 by Petrobras to Brasoil under the Bareboat Sub-charter, by Brasoil to Petro-Deep under the Bareboat Charter and by Petro-Deep to SANA under the Purchase Agreement. The obligations of Petro-Deep and Brasoil in this respect (but not the obligation of Petrobras) were secured obligations for the purposes of the Participation Deed and the Security Agency Agreement. The payment of US$325,626,616.36 made by Petrobras to the Security Agent on 18^th June was intended to represent the full amount of the Loss Payment due under the Bareboat Sub-charter, but because of the error in discounting future payments of hire it fell short to the extent of about US$8.9 million and the obligation was therefore not discharged in full. The funds were distributed early in July in accordance with the terms of the waterfall. A little over US$4.5 million was paid to ABC to complete the purchase of the Tortin Debt.

Also on 18^th June 2001 in a fax message sent to all parties interested in the transaction Linklaters & Alliance, the solicitors acting for Petrobras and Brasoil, gave notice that Brasoil elected to net off the Final Payment under the Bareboat Charter against the Tortin Debt as contemplated by clause 12.1 of the Participation Deed. However, Ms. Prevezer submitted that this notice was ineffective for a number of reasons so that the Tortin Debt remained outstanding.

The first matter which it is necessary to consider is the nature and status of the Tortin Debt itself. The Tortin Debt arose from a loan facility made available to Tortin through ABC. It was structured in the form of a syndicated loan, but in the event ABC was the only lender. The Facility Agreement under which the loan was made available provided for the transfer by a participant of shares in the loan to another bank or financial institution by novation using certificates of transfer signed by the transferor, the transferee, ABC and Tortin. A supplemental agreement providing for the transfer of shares to Brasoil was executed as part of the transaction documents.

The Debt Purchase Agreement between Brasoil and ABC provided for Brasoil to purchase part of the outstanding principal (described as the “aggregate drawings”) each quarter. It provided for three original transfer certificates to be issued by ABC in respect of each instalment for signature by Brasoil, one of which was to be returned to ABC and one sent to Tortin. In the event, however, those procedures were not properly implemented with the result that by 18^th June 2001 no transfer certificates had been issued by ABC despite the fact that Brasoil had by then paid for almost the whole of the debt. ABC sent Brasoil a batch of certificates covering the individual instalments of the debt each dated 10^th October 2002 under cover of a letter of the same date, but they were not signed and returned by Brasoil at the time, or indeed subsequently. They were eventually signed by Linklaters on behalf of Brasoil on 27^th February 2004. It must follow, therefore, that on 18^th June 2001 Brasoil had not acquired the legal title to the Tortin Debt.

However, I do not think that necessarily means that the netting off was ineffective. Having paid ABC for the debt pursuant to the terms of the Debt Purchase Agreement, Brasoil had acquired the right to require ABC to complete the transfer of the legal title and had thereby become an assignee of the debt in equity. It is true that clause 12.1 of the Participation Deed did not expressly contemplate that situation, but the effect of netting off the Final Payment against the Tortin Debt was not to discharge the debt but simply to transfer the benefit of it to SANA. Clause 12.1 made no specific provision for Brasoil to novate the debt to SANA, but clause 12.1(v) did oblige Brasoil to execute any documents necessary to discharge it. At any time, therefore, SANA could have required Brasoil to execute whatever documents might be necessary to bring that about. In these circumstances I do not think that legal ownership of the Tortin Debt can be regarded as an essential precondition to an effective netting off under clause 12.1(iii).

The next question to be considered is whether, as Mr. Hancock submitted, the manner in which the Final Payment was made lay entirely in the discretion of Brasoil, or whether, as Ms. Prevezer submitted, netting off could only be adopted by agreement with Petro-Deep and SANA. I think Mr. Hancock was right in saying that clause 12.1(ii) contemplated that the series of payments would begin with Tortin, so that if Tortin had paid Brasoil by a transfer of funds, netting off would no longer have been an option. However, in the absence of payment in that form I think Brasoil was entitled to decide which of the methods allowed by clause 12.1(iii) it would use. The language of clause 12.1(iii), which approaches the question from the perspective of Brasoil’s performance of its obligation to make the Final Payment, is consistent with that conclusion and there is nothing in the clause to suggest that its right to net off depended on obtaining the agreement of Petro-Deep, SANA or Tortin. Clause 12.1(v) was included in my view simply to ensure that Brasoil could be required to execute any documents necessary to complete the formal discharge of the debt and its related security.

The fact that steps were not taken to transfer title in the vessel to Brasoil at or immediately before the time when it elected to make the Final Payment by netting it off against the Tortin Debt did not in my view prevent the netting off from being effective to discharge Brasoil’s obligation. Although, as clauses 12.1(ii) and 12.2 make clear, the transfer of title and the making of the Final Payment were to be conditional on each other, the passing of title was a matter that could only benefit Brasoil and was included to protect its position. Brasoil could not be called upon to make the Final Payment unless and until SANA and Petro-Deep were ready and willing to pass title to the vessel, but the language of the clause does not suggest that it could not effectively discharge its obligation to make the Final Payment until they were ready and willing to do so.

Clause 12.1 was silent as to the manner in which Brasoil was to exercise its right to make the Final Payment by netting off and in those circumstances I think that Mr. Hancock was right in submitting that any clear and unequivocal communication of its decision to do so would be sufficient. It is unfortunate that in their fax message of 18^th June 2001 Linklaters purported to give notice to SANA of Brasoil’s decision to net off its obligation to pay the Final Payment to SANA against the Tortin Debt. The notice should, of course, have been given to Petro-Deep to whom the Final Payment was due, rather than to SANA, but I do not think the notice was ineffective as a result. The fax was sent to both Tortin and Petro-Deep, among others, and it must have been clear to all concerned that Brasoil had elected to adopt the netting off procedure. As far as I am aware, none of the parties expressed any surprise or doubt about Brasoil’s intentions, either at the time the notice was sent or at any time thereafter. I am satisfied, therefore, that the notice was effective to invoke the netting off procedure provided for in clause 12.1.(iii).

The consequences of invoking the netting off procedure are clear in at least two respects: Brasoil’s obligation to make the Final Payment to Petro-Deep under the Bareboat Charter was discharged and by virtue of clause 12.1(iv) Petro-Deep was deemed to have fulfilled its obligation to pay SANA a corresponding amount of the Final Payment under the Purchase Agreement. Ms. Prevezer submitted that another effect of the netting off procedure was that the benefit of the Tortin Debt was transferred to Petro-Deep, but that cannot be right for a number of reasons. In the first place, there is a complete absence of any language suggesting that the debt was to be transferred to Petro-Deep. On the contrary, clause 12.1(iv) provided that SANA was to have recourse solely to Tortin for so much of the Final Payment due under the Purchase Agreement as was represented by the amount of the Tortin Debt. It could only do so if the benefit of that debt were transferred to it rather than to Petro-Deep. Moreover, a transfer of the Tortin Debt to Petro-Deep would have been inconsistent with the whole thrust of clause 12.1(iv) since it would have resulted in Petro-Deep’s receiving a double benefit in the form of the discharge of its own liability to SANA as well as the value of the debt itself. In my view the parties clearly intended that the netting off procedure should, in effect, operate to transfer the Tortin Debt from Brasoil to Petro-Deep and from Petro-Deep to SANA, thereby discharging pro tanto the respective liabilities of both Brasoil and Petro-Deep. SANA’s obligation as guarantor of the Tortin Debt was necessarily also discharged.

Ms. Prevezer submitted that the proceeds of insurance represented by the undertaking ought to be distributed in accordance with the terms of the waterfall as if the funds themselves had been paid to the Security Agent on that date. That seems to me fairly to reflect the intention of the order made on 16^th April 2003, but I do not think that it necessarily follows that SANA was entitled to receive and retain for its own benefit any balance that might remain after satisfying the obligations owed to all the other interested parties. If that were the case it would mean that SANA was entitled to receive the benefit of a substantial proportion of the insured value of the vessel in addition to the full purchase price, despite the fact that it had undertaken to transfer the whole of its interest in the vessel and the insurance proceeds to Brasoil on receiving payment of the agreed price in full.

In examining Ms. Prevezer’s submission it is necessary to begin with the waterfall. The first person entitled to receive payment is the Security Agent itself and although the determination of the dispute relating to the expenses claimed by DnB has been adjourned to a later date, I shall assume for present purposes that on 30^th April 2003 it had a claim on funds coming into its possession that took priority over all other secured claims.

It was common ground that the next four categories of obligation, that is, those covered by paragraphs (b) to (e) inclusive did not exist or had all been fully satisfied by that time. That brings one down to paragraph (f) which covers “Other Indebtedness” as defined elsewhere in the transaction documents. This paragraph provided for the Security Agent to make payments out of funds in the Vessel Security Account to SANA, Petro-Deep and Brasoil of amounts owed to them by Petro-Deep, Brasoil and Petrobras respectively, but only after it had notified the debtor on the instructions of the creditor that it could no longer make payment direct. In the event, the Security Agent had not given any notice of that kind to Petrobras, Brasoil or Petro-Deep in respect of any of their obligations and therefore sub-paragraph (f) did not apply either. Accordingly, on the face of it the Security Agent would have been obliged to pay the whole of the remaining balance to SANA under sub-paragraph (g).

Mr. Hancock accepted that prima facie any funds received by the Security Agent, in this case funds received by way of the proceeds of insurance, were to be distributed in accordance with the waterfall. However, he relied on the fact that the proceeds of insurance had been assigned to the Security Agent as security for the performance of the parties’ obligations under the primary contracts and submitted that once those obligations had all been discharged any remaining security was to be returned to the assignors under clause 13 of the Security Agency Agreement. Accordingly, it would be contrary to the intentions of the parties for SANA to receive and retain for itself any part of the proceeds of insurance that were not required to discharge a secured obligation.

I think it is clear from the terms of the various contracts to which I have already referred that the essential purpose of the security arrangements as a whole, including the waterfall provisions, was to ensure the performance by the parties of their obligations under the primary agreements and the discharge of the various debts owed to the creditors of the MSR group. Ms. Prevezer submitted that at the time the transaction was being negotiated the parties may have been willing to countenance the possibility that in some circumstances SANA, as the original owner of the vessel, might receive for its own benefit a large part of the proceeds of insurance following a total loss, but that strikes me as wholly uncommercial in view of the fact that Brasoil was obliged to pay for the whole of SANA’s interest in the vessel and the proceeds of insurance. It is necessary to look with some care, therefore, at the terms of the Security Agency Agreement to see whether it does bind the parties to an outcome which appears to be so seriously at odds with the object of the transaction as a whole.

Mr. Hancock put forward two solutions to this problem. His first was based on the proposition that the proceeds of insurance had been assigned to the Security Agent only as security for the performance of obligations under the primary contracts. As such, he submitted, they were intended to be available for distribution through the waterfall only to the extent that secured obligations remained outstanding. Any balance over and above that required to discharge any such obligations was to be transferred back to the assignor immediately, even if that meant interrupting the operation of the waterfall.

This submission derives its main force from clause 3.2 of the Assignment of Insurances, under which Petrobras, Brasoil, Petro-Deep and SANA each assigned its interest in the insurance on the vessel to the Security Agent as security for the performance of its obligations, and clause 13 of the Security Agency Agreement, which provided for the Security Agent to reassign the property and assets assigned to it once all the secured obligations had been discharged. It is reinforced, however, by the terms of clause 11.4 of both the Purchase Agreement and the Bareboat Charter and by the terms of clause 3.1 of the Participation Deed under which SANA and Petro-Deep undertook to the Security Agent to account to Petro-Deep and Brasoil respectively for any excess insurance proceeds following a total loss of the vessel. These were themselves secured obligations.

The phrase “property and assets” in clause 13 of the Security Agency Agreement is certainly capable of referring not only to rights assigned to the Security Agent, such as the right to receive the proceeds of insurance, but to any funds that might be held as security as well. That being so, there might appear to be an element of inconsistency between clauses 4.1 and 13 of the agreement inasmuch as clause 4.1 lays down a clear set of rules for dealing with funds received into the Vessel Security Account which does not make any provision for the possibility that only part of those funds may be needed to satisfy all outstanding obligations. However, I think that the terms of clause 13 itself suggest that it was not intended to apply to funds credited to the Vessel Security Account and thus subject to the waterfall provisions.

The conditions for the reassignment of security laid down by clause 13 are that

“none of Brasoil, Petro-Deep and SANA [has] any liability (whether actual or contingent) to any of the Secured Parties under or pursuant to the Transaction Documents in respect of any matter or thing whatsoever”.

These are very wide terms and indicate that the parties did not intend that any security held by the Security Agent should be released until it was clear that none of these three parties owed any liability of any kind to any of the others. Moreover, the clause does not require the Security Agent to take immediate steps to reassign the security as soon as the conditions in clause 13 are satisfied; it simply requires him to act

“as soon as reasonably practicable thereafter and at the request and cost of Petro-Deep”.

That is scarcely consistent with interrupting the operation of the waterfall part way through its course. In the light of those provisions, although I accept that the right to receive the proceeds of insurance does fall within the expression “property and assets” in clause 13, so that on completion of the transaction it would fall to be reassigned, I do not think that the proceeds of the policy themselves are to be treated as security once they have been paid into the Vessel Security Account with a view to distribution in accordance with the waterfall.

The question then arises whether the proceeds of insurance lose their identity as such for all purposes when they are paid into the Vessel Security Account. I see no reason to think that they should and I am unable to accept Ms. Prevezer’s submission that any money directed into the SANA account by the operation of the waterfall was necessarily to be retained by SANA for its own benefit. Since the proceeds of insurance were intended to be available for the satisfaction of secured obligations, it makes perfectly good sense that they should be distributed through the waterfall, but that does not mean that they need lose their character as a result. I agree with Mr. Hancock that the Security Agency Agreement was not intended to create rights in favour of, or confer benefits on, SANA, Petro-Deep, Brasoil or Petrobras where none existed under the primary agreements and that a construction which would have that effect should be rejected as contrary to the parties’ intentions.

Mr. Hancock submitted that if the balance of the insurance proceeds was payable to SANA as a result of the operation of the waterfall, SANA, with the concurrence of Petro-Deep, if necessary, was obliged to account to Brasoil for that balance under clause 11.4 of the Purchase Agreement and the corresponding provision of the Bareboat Charter. Ms. Prevezer challenged that submission on a number of grounds. First, she relied on the fact that in neither case does clause 11.4 refer to “excess insurance proceeds” as such, but only to the transfer of SANA’s “right, title and interest in and to any insurance proceeds”, the suggestion being that SANA was only obliged to transfer such interest, if any, as it had in the proceeds, which in this case was minimal or non-existent. However, clause 3.1 of the Participation Deed contains an express cross-reference to clause 11.4 of the Bareboat Charter, so there can be no doubt that the parties intended that SANA should account to Brasoil under clause 11.4 for any insurance proceeds that remained in its hands after all the obligations owed to it had been satisfied. In my view the most likely explanation for the use of the word “excess” in clause 3.1 of the Participation Deed is that the draughtsman was directing his mind to the security arrangements and to the possibility that SANA (and through SANA Petro-Deep) might receive more than was necessary to satisfy the obligations owed to it. However, clause 3.1 does help to make it clear that neither of them was intended to benefit from the receipt of insurance proceeds beyond what was necessary to satisfy the obligations owed to them.

Ms. Prevezer’s next point was that the practical effect of construing the contracts in that way proposed by Mr. Hancock would be to substitute Brasoil for SANA in clause 4.1(g) of the Security Agency Agreement. However, in my view that is not a valid objection. The fact that in certain circumstances the operation of the waterfall may lead to one party’s receiving money for which it is obliged to account to another may at first sight be a little surprising, but, as paragraph (f) demonstrates, the parties did not intend that every obligation should automatically be discharged out of funds held by the Security Agent. In any event, there is nothing inherently unsatisfactory about establishing a mechanism in the form of a waterfall for the regular distribution of funds during the life of the contract while at the same time requiring one party to account to another under specific circumstances for certain amounts received through the operation of that mechanism.

Ms. Prevezer’s third point was a different aspect of an argument that I have already touched on, namely, that SANA had no interest in the proceeds of insurance capable of being transferred to Petro-Deep or Brasoil under clause 11.4 of the Purchase Agreement. I cannot accept that. If the transaction had been fully implemented in accordance with its terms, the whole of the proceeds of insurance would have been paid to the Security Agent by the underwriters following the loss of the vessel in accordance with the assignment and the ‘loss payable’ clause. The proceeds would have satisfied the various obligations owed by and between the different parties to the transaction, but a substantial balance would have reached SANA under clause 4.1(g) and would represent funds to which, subject to any other obligations arising under the transaction documents, it would have been beneficially entitled. I quite accept that the assignment contemplated by the security documents ought to have resulted in SANA’s interest passing to the Security Agent, but that is beside the point. The whole purpose of clause 11.4 was to bring about a complete transfer of SANA’s interest in the vessel and any rights relating to it once the purchase price had been paid in full. If SANA acquired or retained an interest of any kind in the proceeds of insurance after it had received payment of the price in full, it was obliged by clause 11.4 to transfer that interest to Brasoil. Clause 11.4 does not direct itself to the manner in which SANA might have acquired its interest or to the precise nature of it. Accordingly, if, having received payment in full, it received any part of the proceeds of insurance, it was bound to transfer it to Brasoil, as is reflected in clause 3.1 of the Participation Deed. Any other conclusion would be quite contrary to one of the primary objects of the transaction.

On 30^th April 2003 part of the Loss Payment due under the Bareboat Sub-charter remained outstanding. If the balance of the proceeds of insurance had been paid to the Security Agent on that date and distributed in accordance with the waterfall, part would have been used to discharge that obligation and the balance would have been paid to SANA under clause 4.1(g). SANA, with the concurrence, if necessary, of Petro-Deep, would then have been obliged to account to Brasoil for that sum. If the proceeds of insurance had been disposed of in that way, Brasoil’s obligation to make the Loss Payment would have been discharged in full and no further payment in respect of it would have been required or made.

In these circumstances it must follow from the parties’ agreement that the payment into court by Petrobras on 25^th June 2003 was to be treated as payment of the balance of the Loss Payment and overdue interest on that date and that no part of the money treated as having been paid to the Vessel Security Account on 30^th April can be regarded as having been used to discharge that obligation. Accordingly, SANA is obliged to account to Brasoil for the whole of that sum after allowing for any other secured claims.

For these reasons I am satisfied that as between SANA, Petro-Deep, Petromec and itself, Brasoil is entitled to recover the whole of the balance of the insurance proceeds currently deemed to be held by the Security Agent. The sum paid into court in respect of the balance of the Loss Payment is to be distributed in accordance with clause 4.1 of the Security Agency Agreement.

As at 5^th July 2001 the Security Agent had incurred fees and expenses in the sum of US$622,086.74. It had also paid a sum of US$6,571.65 to ABC in respect of interest on the final instalment of the Tortin Debt. As a result the fund available for distribution through the waterfall was reduced by a total of US$628,658.39. SANA and Petromec between them sought to recover the whole of that sum on a number of different grounds, only two of which were eventually pursued in argument. The first was that the sum in question represented, at least for the most part, their share of interest earned on the funds placed on deposit by the Security Agent. The second was that the reduction in the amount available for distribution resulted from breaches of contract on the part of Petrobras and Brasoil in relation to the vessel’s insurances, in particular in failing to give notice of assignment to the insurers and in failing to ensure that a ‘loss payable’ clause was included in the hull and machinery policy.

It was common ground that interest earned on funds placed on deposit should be distributed in due proportions to those who were entitled to receive capital sums and it is apparent from the accounts produced by the Security Agent that all the interest has in fact been distributed on that basis. Accordingly, I am unable to accept that SANA or Petromec have a claim on the fund as such for outstanding interest. If they have a claim, it must be for loss arising from the failure of Petrobras to perform their obligations in relation to the insurance of the vessel.

The Assignment of Insurances took the form of an agreement to which SANA, Petro-Deep, Brasoil, Petrobras and the Security Agent (but not Petromec) were all parties. It contained an immediate assignment of the parties’ interests in the hull and machinery policy to the Security Agent as well as undertakings by Brasoil and Petrobras to perfect that assignment by giving notice to the insurers and to ensure that the policy contained a ‘loss payable’ clause. In the light of those provisions the parties clearly did not contemplate that Petrobras would receive payment of the insurance proceeds following a total loss of the vessel and if the agreement had been performed in accordance with its terms, it would not have done so. Insofar as Petrobras did receive the insurance proceeds, however, it must have held them for the benefit of the Security Agent as an equitable, if not a legal, assignee.

Since Petrobras failed to give notice of assignment to the insurers and failed to arrange for a ‘loss payable’ clause to be included in the policy SANA can establish breaches of clauses 3.3 and 3.4 of the Assignment of Insurances which, if implemented, would have resulted in payment of the insurance proceeds direct to the Security Agent. Petromec itself was not a party to that agreement, but it was one of the persons for whose benefit the Security Agent was acting in entering into it and, in the absence of any submissions from Mr. Hancock to the contrary, I am prepared to assume that it was entitled to enforce the agreement, if necessary through the Security Agent. However, it is still necessary for the claimants to show that the losses they seek to recover were caused by these breaches of contract and it was to this point that Mr. Hancock directed his main challenge to the claim. Despite a formal request for information relating to the nature of the fees and expenses and the purposes for which they were said to have been incurred, neither SANA nor Petromec have given any further details of the nature of their case, nor did they seek to support it by reference to any evidence. In these circumstances, although it is likely that the Security Agent incurred some expense in responding to the dispute that arose in relation to the proceeds of insurance, it is impossible to know what, if any, part of the sum of US$628,658.39 can properly be attributed to it and the claim has therefore not been made out.

In the early summer of 2002 DnB became increasingly reluctant to continue acting as Security Agent. By then it had already incurred a significant amount of costs in the form of solicitors’ fees and was uncertain whether there would be further payments into the Vessel Security Account from which it might recover its expenses. As a result it approached SANA with a request for an indemnity both in respect of the fees and expenses that it had already incurred and in respect of any fees and expenses that it might incur in the future. Discussion between them led to an oral agreement that SANA would reimburse DnB for all costs incurred in its role as Security Agent until further funds flowed into the Vessel Security Account. SANA also agreed to reimburse DnB in respect of the costs incurred as a party to these proceedings. Pursuant to that agreement SANA has paid, either to DnB or directly to its solicitors, sums totalling £545,741.64. It now seeks to recover that amount out of the fund represented by the proceeds of insurance.

SANA’s claim to recover these amounts is closely bound up with DnB’s own claim to recover its costs from the fund and for the most part, therefore, the issues to which it gives rise can best be determined at the same time as that claim. However, Mr. Scorey submitted that on the true construction of the Security Agency Agreement SANA was entitled to recover its outlay from the fund in any event, leaving DnB and Brasoil to resolve at a later date any dispute over the Security Agent’s right to be indemnified out of the fund without involving SANA. In those circumstances I decided that it would be sensible to deal with that part of the argument straight away since, if Mr. Scorey was right, it might result in some saving of costs.

SANA’s case in this respect was based on clause 8.15 of the Security Agency Agreement, the material parts of which provide as follows:

“ (a) Notwithstanding anything else herein contained, the Security Agent may refrain from doing anything which would or might in its opinion be contrary to any relevant law . . . . .

(b)

Notwithstanding any other provision of this Agreement, the Security Agent may refrain from taking any action or exercising any right, power, authority or discretion vested in it under this Agreement or otherwise in respect of or in relation to this Agreement, the Collateral or the Vessel until it has been (i) indemnified and/or secured to its satisfaction(whether by payment in advance or otherwise) against any and all losses, damages, costs, charges, claims, demands, expenses, judgments, actions, proceedings or other liabilities whatsoever . . . . . . which might be brought or made against it or suffered , incurred or sustained by it as a result and (ii) instructed by the Secured Parties in accordance with this Agreement.

(c)

Nothing in this Agreement shall require the Security Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties or the exercise of any right, power authority or discretion hereunder if it has grounds for believing the repayment of such funds or adequate indemnity against, or security for, such risk or liability is not reasonably assured to it. . . . . . .

(d)

To the extent that, having been indemnified and/or secured by any Secured Party under Clause 8.15(b)(i) . . . . . and having received any payment under such indemnity and/or security which has not been repaid to the relevant Secured Party (each an “Unreimbursed Expense”), the Security Agent receives notification as contemplated in Clause 4.1 of any credit to the Vessel Security Account, the Security Agent shall pay an amount equal to the aggregate amount of such Unreimbursed Expenses to the relevant Secured Parties. . . . . .”

Mr. Scorey submitted that the indemnity given by SANA to DnB falls within clause 8.15(b) and that SANA therefore has a right to obtain reimbursement in accordance with clause 8.15(d).

This submission is attractive at first sight, but I think it is wrong. I accept that in May 2002 there was a real threat that DnB might resign from its position as Security Agent and that that was a matter of concern to SANA, but I do not think that is enough to bring the agreement between them within the scope of clause 8.15(b). The relationship between the parties to the transaction and the Security Agent was contractual in nature, being governed by the terms of the Security Agency Agreement. The Security Agent received a fee for its services and was entitled to recover expenses incurred in carrying out its functions. It was entitled to resign at any time on giving 90 days’ notice. The contractual nature of the relationship is important because it obliged the Security Agent to act in accordance with the terms of the agreement while it held that position.

It is against that background that one comes to consider clause 8.15. Mr. Scorey’s submission was, in effect, that the Security Agent was entitled to refrain from carrying out its functions under the agreement at any time if it did not receive an indemnity against, or security for, all its expenses, both those incurred in the past as well those likely to be incurred in the future. It was certainly open to the parties to make an agreement of that kind, but in my view that is not the effect of clause 8.15.

In the first place, I do not think that the clause is dealing with expenses incurred in the past. As the opening words of paragraphs (a), (b) and (c) all make clear, clause 8.15 gave the Security Agent the right to refrain from acting in certain circumstances, but it did not prevent it from acting if it chose to do so. Under paragraph (b) the Security Agent could refrain from exercising its rights under the agreement unless it received an indemnity from the Secured Parties, but if it chose to act without receiving an indemnity it was obliged to wait until funds were received in the Vessel Security Account in order to obtain reimbursement. Similarly, although by paragraph (c) the Security Agent was not bound to risk its own funds in the performance of its duties, there was nothing to prevent it from doing that if it so chose. Moreover, the indemnity which the Security Agent could require under paragraph (b) related to any losses, damages, costs etc. which might be incurred or sustained by it as a result of taking action, or exercising rights given to it, under the agreement. In other words, the indemnity related to the future: the Security Agent was entitled to refuse to exercise rights vested in it under the agreement unless he received an indemnity against the consequences of doing so. Nothing in paragraph (b), or paragraph (c) for that matter, gave it the right to demand an indemnity against expenses already incurred. Accordingly, insofar as SANA agreed to reimburse DnB in respect of expenses already incurred and did so, it cannot recover what it has paid under the provisions of paragraph (d).

The position in relation to expenses incurred after the indemnity was given is different, of course, but even those expenses must have been incurred by DnB as a result of its taking some action under, or in relation to, the agreement if they are to be recoverable under paragraph (d). The difficulty for SANA in the present case is that the indemnity was given to induce DnB not to resign as Security Agent. Clause 8.15(b) is primarily directed to situations in which the Security Agent is contemplating taking steps against a third party, or perhaps one of the secured parties, for the benefit of the secured parties as a whole, for example, steps to perfect or realise a security. Here all that DnB was contemplating was resigning its position as Security Agent. At best, therefore, the only relevant action that it was contemplating and in respect of which it was seeking an indemnity was continuing to act. I do not think that clause 8.15(b) extends to expenses incurred simply as a result of continuing to occupy the position of Security Agent, but even if it does, I am unable to accept Mr. Scorey’s argument that SANA is entitled to recover the full amount it has paid DnB regardless of whether the expenses are properly recoverable by DnB itself. Payments recoverable as unreimbursed expense under clause 8.15(d) must have been made to indemnify the Security Agent under clause 8.15(b) against losses or expenses incurred as a result of taking action or exercising rights under the agreement. It follows that in order for SANA to recover under paragraph (d) it must show that the costs against which it has indemnified DnB were incurred as a result of its continuing to act as Security Agent. That makes sense because either way only expenses that have been properly incurred ought to come out of the Vessel Security Account. In these circumstances SANA’s submission that it is entitled to be reimbursed under clause 8.15 in any event cannot succeed. Whether all the expenses incurred by DnB are properly attributable to its acting as Security Agent and therefore recoverable out of the fund is one of the matters still in dispute. However, it will have to be resolved on another occasion when SANA will have an opportunity to make whatever submissions it wishes.