Kellogg Brown & Root Inc v Concordia Maritime Ag

This case arises out of the purchase by Kellogg Brown & Root Inc (“KBR”) and Halliburton Produtos Limitada of two 25 year old Stena VLCCs (Very Large Capacity Carriers) for the purpose of converting the tankers into Floating Production Storage and Offtake (“FPSO”) vessels. The VLCCs which were eventually purchased were the Stena Continent and the Stena Concordia. Each vessel was purchased under a separate memorandum of agreement. The claim in respect of the Stena Concordia has been compromised. The seller of the Stena Continent is not a party to these proceedings.

KBR’s claims against Concordia Maritime AG (“D1”) are (for the most part) brought pursuant to a Guarantee provided by D1 on 26 January 2001 (“the Guarantee”). KBR claims D1 is liable for the cost of all steel replacement in excess of an initial 150 tonnes under the Guarantee.

The primary issue is what quantity of renewal steel was in fact required to meet the relevant Petrobras Specification requirements. KBR contends that it was required to renew substantially in excess of 150 tonnes, including significant bottom plate steel replacement of c.1630 tonnes, in order to meet the applicable Petrobras Specification. D1 says that much of this replacement steel can be explained by KBR’s misunderstanding/mis-application of the Petrobras Specifications.

In terms of bottom plate, there is a central issue over the meaning of the words "t_o – original plate thickness", which KBR contends means the original thickness of the vessel’s bottom plate when built in 1975 (i.e. 35mm in the parallel midbody). D1 says that "t_o" is a reference to the thickness actually required for the start of the vessel’s new life as an FPSO, i.e. the reassessed thickness, which D1 says was calculated as 27mm, although KBR says that the reassessed/adopted thickness as approved by ABS and Petrobras was 30mm.

KBR contends that it is entitled to recover the cost of the full amount of steel actually replaced in the tanks bottoms, on the basis that all of this was required even using criteria which were less onerous than required by the Petrobras Specifications (namely the Present Thickness criteria and then the TQ1028 criteria). D1 says that if “t_o” had been understood to refer to the reassessed thickness of 27mm, only about 16.8 tonnes of renewal steel would have been required. KBR contends that it was only after Petrobras agreed to relax its criteria that the extent of the steel renewals decreased.

If, contrary to D1's primary case, "“t_o” is a reference to the original, or "as built", thickness of the bottom plate, D1 says that:

In any event, D1 takes issue with:

KBR also advances an additional claim against D1 based on an alleged implied term contained in an agreement it says was reached in a meeting at Heathrow on 12 October 2001, to the effect that KBR would or might seek a “concession” from Petrobras and would or might reinspect the bottom plate in the light of that concession. It was implicit (KBR says) in that approach that D1 would be liable for the costs incurred in substitution for the plate replacement which KBR alleges would otherwise have been required, and for which KBR alleges D1 would have been liable under the Guarantee.

The mis-statement and collateral warranty claims are based upon certain statements allegedly made by D3-D5 or individuals employed by them during the negotiations leading up to the agreement of the MOA in 1999-2000, concerning the quality and suitability of the Concordia Class vessels (which included the Stena Continent and the Stena Concordia), for conversion to FPSOs.

KBR’s case is that D3-D5 owed a special duty of care to KBR, which they breached by making these alleged statements, because they were made negligently. Alternatively, KBR says that some of these alleged statements amounted to, or perhaps gave rise to, collateral warranties which were broken in view of what, KBR says, was the true condition of the Continent.

It is convenient at this point to set out the relevant Contract Documents and Petrobras Specifications.

The MOA between KBR and the seller was agreed on 19 April 2000. It was on amended Norwegian Sale Form terms. The most relevant terms of the MOA are:

“4.0

Inspections Refer to Appendix 1 – Particular Conditions of Agreement

a)*

b)* Stena Conductor. The Buyer shall have the right to inspect the Vessel’s classification records and declare whether the same are accepted or not within 20 days of the signing of this Agreement. Buyer to inspect vessels records prior to physical inspection…

The Buyer shall undertake the inspections without undue delay to the Vessel. Should the Buyers cause undue delay they shall compensate the Sellers for the losses thereby incurred. The Buyers shall inspect the Vessel without opening up and without cost to the Sellers. During the inspection, the Vessel's deck and engine log books shall be made available for examination by the Buyers. If the vessel is accepted after such inspection, the sale shall become outright and definite, subject only to the terms and conditions of this Agreement, provided the Sellers receive written notice of acceptance from the Buyers within 72 hours after completion of such inspection.

Should notice of acceptance of the Vessel's classification records and of the Vessel not be received by the Sellers as aforesaid, the deposit together with interest earned shall be released immediately to the Buyers, whereafter this agreement shall be null and void.

11.

Condition on delivery

The vessel with everything belonging to her shall be at Seller's risk and expense until she is delivered to the Buyers, but subject to the terms and conditions of this Agreement she shall be delivered and taken over as she was at the time of inspection, fair wear and tear excepted.

However, the Vessel shall be delivered with her class maintained without condition/recommendation*, free of average damage affecting the Vessel's class, and with her classification certificates and national certificates, as well as other certificates the Vessel had at the time of inspection, valid without condition/recommendation* by Class or the relevant authorities at the time of delivery.

“Inspection” in this Clause 11, shall mean the Buyer' inspection according to clause 4 a) or 4 b), if applicable, or the Buyers' inspection prior to the signing of this Agreement. If the Vessel is taken over without inspection, the date of this Agreement shall be the relevant date.

Notes, if any, in the surveyor's report which are accepted by the Classification Society without condition/recommendation are not to be taken into account.”

In addition, the parties negotiated certain particular conditions which were agreed to form part of the MOA, including the following:

“1.0

Purchase

1.1

Buyer shall not be in a position to effect the formal purchase of the vessel, until such time that Buyer’s Client has provided Buyer with Notice to Proceed…for the provision of two FPSO’s for the Barracuda & Caratinga Field Development. This notification date is expected to be mid 2000…

1.2

In the event that Buyer has not been provided with the Notice to Proceed by its Client by 31^st October 2000, Seller shall be entitled to withdraw from this Agreement and re-offer the subject vessel for disposal at no cost to Buyer…

2.0

Inspection and Acceptance

2.1

Acceptance of the Stena Conductor is subject to satisfactory inspection by the Buyer in accordance with Clause 4b) of the [MOA]. Furthermore it is a requirement of Buyer’s Client (BCDC), that each vessel proposed for the Barracuda & Caratinga Fields Development Project is approved by them. In the event of non-approval of the Stena Conductor, Seller shall propose alternative sister vessels, that are acceptable to BCDC and Buyer…

4.0

Guarantees

4.1

The extent of steel to be renewed in the conversion yard, due to structural repair or corrosion of the vessel and/or the additional steel required for the vessel to meet the fatigue requirements contained in Petrobras specifications shall be capped at a cost to Buyer of one hundred and fifty tonnes. Any renewal steel required, in addition to the 150 tonnes, to meet Petrobras specification requirements shall be to Seller's account, calculated at the weight of additional steel in excess of 150 tonnes, times the rate per tonne charged by the conversion yard to Buyer as documented and technically justified in the invoice. No underdeck stiffening required for installation of process equipment shall be for Seller's account.

Seller shall provide a Company Guarantee, in a mutually acceptable form, as surety for the recovery of monies from the Seller in respect of additional steelwork. Such guarantee shall be valid for one year from the date of delivery of the vessel.

This clause 4.1 shall survive the termination or expiry of this Agreement.

4.2

Documents relating to the Petrobras specification requirements are as follows:

1)

General Specification – FPSO – Converted Ship-ET-3010.49-1200-940-PPC-200

2)

Structural Requirements for Converted Ship – ET-3010.49-1200-940-PPC-202 (Sections 3.2 Fatigue, Section 9 Plate Replacement)

3)

Structural requirements for New Building FPSO unit – P43 – ET – 3010.49-1350-140-PPC-002

5.0

Precedence

The conditions contained in this Appendix I to the Memorandum of agreement shall take precedence over those terms and conditions contained within the Memorandum of Agreement SALEFORM 1993.”

The MOA was subsequently varied by the parties by two addenda. Addendum No. 1 (signed 15 December 2000/11 January 2001) concerned the cleaning of the vessel before delivery and provided KBR with some additional options in relation to the dates for receiving Notice to Proceed and delivery of the vessel.

Addendum No.2 (dated 25 January 2001) clarified the identity of the buyer of the vessel and the replacement of the Stena Conductor with the Stena Continent. It also confirmed the terms of the guarantee to be provided by D1:

“(c)

All references to the "Buyers" shall be construed as references to Kellogg Brown & Root Inc (rather than Brown & Root Energy Services)…

(e)

All references in the MOA to “Stena Conductor” shall be deleted and replaced with references to “Stena Continent”…

(l)

The guarantee to be issued as surety for the recovery of monies from the Sellers in respect of additional steelwork under clause 4.1 of Appendix 1 to the MOA is attached as Appendix 1 to this Addendum.”

On 26 January 2001, D1 entered into the Guarantee in favour of KBR as follows:

“1.

In consideration of the Beneficiary agreeing to purchase the m.v "STENA CONTINENT" (the "Vessel" from CM Continent Shipping Limited (the "Company") pursuant to the memorandum of agreement dated 19 April 2000 (as amended by addendum no.1 dated 15 December 2000 and addendum no.2 dated 25 January 2001, the "MOA") we, CONCORDIA MARITIME AG (the "Guarantor") irrevocably and unconditionally guarantees the punctual payment of any and all sums payable by the Company to the beneficiary under clause 4.1 of Appendix 1 to the MOA and undertake that, if for any reason the Company shall fail to pay any such sum the Guarantor shall within three banking days (in Switzerland) after receiving a written demand by and from the Beneficiary, unconditionally pay that sum to the Beneficiary…

3.

This Guarantee shall expire at midnight on 26 January 2002 after which no claim may be made against the Guarantor under this Guarantee (but without prejudice to any claim validity made against the Guarantor on or prior to 26 January 2002 and shall survive the termination or expiry of the MOA to the extent of any sums then payable by the Company to the Beneficiary under clause 4.1 of Appendix 1 thereto…”

Clause 4 of Appendix 1 to the MOA referred to certain Petrobras Specifications, including the following:

For completeness, I refer to an earlier revision of Petrobras Specification 202 (rev.E issued on 26 August 1998) and especially section 9 thereof:

“9.

PLATE REPLACEMENT DUE TO CS SURVEYS

In addition to CS Surveys requirements for oil tankers, the CONTRACTOR shall consider the corrosion margin provided by BRASOIL on Section 3.3 of ET-STRUCTURAL REQUIREMENTS of the New Building FPSO Unit.

The renewal thickness, which is based on the reassessment thickness, is defined as the CS Surveys required thickness plus the corrosion margin. This thickness shall be compared to the measured one. If the measured thickness is lower than the renewal one, it is characterized as "Substantial Corrosion" (according to ABS Rules for Oil Tankers), consequently the plate shall be replaced.

All plate replacement shall be submitted to BRASOIL and CS for approval. The sequence of plate replacement shall take into account the building residual stress, i.e. the CONTRACTOR shall minimize these stresses as much as possible...”

The Joint Chronology of Events helpfully prepared by the parties is at Appendix A. I refer to the Joint Chronology which forms part of this judgment.

The definitions of technical terms and procedures helpfully agreed between the experts are set out at Appendix B. I refer to the definitions in Appendix B which form part of this judgment.

Mr Ian Linder

Mr Vince Worsnop

Mr Roger Samways

Mr Paul Phillips

Mr Mark Kilcran

Mr Per Palludan

Mr Ulf Ryder

Mr Ake Rohlen

Mr Per Labom

Mr Robert Blane

I had some reservations about Mr Blane’s evidence. In my view the contemporary documents provide the best guide to the matters he dealt with in evidence.

Mr David Jones

I had some reservations about Mr Jones’ evidence. In my view the contemporary documents provide the best guide to the matters he dealt with in evidence.

Mr Beadnall is a partner in Stephenson Harwood, solicitors for the defendants. He gave evidence in relation to the meeting on 12 October 2001 at the Hilton Hotel, Heathrow Airport.

Mr Biles was called by the claimant. He is a Master Mariner and Naval Architect. He has a current Class 1 (Master Mariner) Certificate of Competence, an Honours Degree in Naval Architecture and a Masters Degree in Business Management. He is a Registered Chartered Engineer with the Royal Institution of Naval Architects and a Registered European Engineer with the Institute of Marine Engineers. He had relevant experience of conversions from VLCC to FPSO in the case of the Sahara/Fluminese and the Lu San/Frade.

Mr Corlett was called by the defendants. Mr Corlett is a professional Naval Architect and Marine Consultant. In the early 1980s he was employed by Single Buoy Moorings as a Senior Naval Architect and was responsible for tanker conversion engineering for various FPSO Projects and Studies which SBM were carrying out at the time. He became a Marine Consultant in 1983 and retained an interest and involvement in FPSO and FSO engineering, carrying out consultancy work on FPSOs and related Projects for various clients.

Mr Corlett has never acted as a Steelwork Inspector on a conversion from a VLCC to a FPSO, although he was involved in the determination of the extent of steelwork repairs during his time at SBM.

I accept the claimant’s submission that Mr Biles has considerably more expertise (and more recent expertise) in the practical field of steel renewals than Mr Corlett. I refer to Mr Biles’ evidence as to his experience in respect of other vessels of negotiating with Class and determining the size and number of inserts. In my opinion Mr Biles’ evidence on the issues relating to the ABS Inserts criteria is generally to be preferred to the evidence of Mr Corlett.

I had some reservations about Mr Corlett’s evidence to the extent set out below. Further, in his report Mr Corlett did not always distinguish between issues which were sensitive to expert evidence and issues which were matters for the Court (taking into account appropriate expert evidence). Although the same point should in fairness be made in relation to some of Mr Biles’ evidence, the point was more pronounced in Mr Corlett’s case. Further, I was on occasion left with the impression that Mr Corlett did not always comply with CPR 35PD.2 (6) (“where there is a range of opinions on the matters dealt with in the report –

The claimant’s case is as follows. At all times, D3 and D4 were acting on behalf of themselves and the Stena Group (or ‘Stena Sphere’ as they refer to themselves in their published literature) more generally. D3 and D4 were at all material times acting on behalf of themselves and the ultimate sellers. In the case of the employees of D3, they were acting on behalf of D3 and as agent for, amongst others, D4. D3 and D4 were pursuing a policy that had been agreed, directed and implemented between themselves to promote the sale of the whole class of Concordia VLCCs for conversion to FPSOs. D4 was the ultimate owner of CM Continent Limited, the owner of the Continent.

The defendants’ case is as follows. The individual employees’ role in the negotiations was as agents for the individual shipowning companies. None of D3-D5 assumed personal responsibility for the representations being made; nor did KBR rely on such assumption of personal responsibility; nor, if it did, did it do so reasonably, and in any event there was no sufficient assumption of responsibility to create a special relationship with any of D3-D5.

It is agreed that a summary of the relevant legal principles is found in Clerk & Lindsell on Tort (19^th Edition, 2006) paras. 8-84 to 8-91. Paras. 8-96, 8-99, 8-101-104, 8-106-107 are also of relevance. The above include the following passages:

As explained in footnote 4 and the cases there referred to, animo contrahendi means:

“with the intent of a contracting party: Alicia Hosiery Ltd v Brown Shipley & Co Ltd [1970] 1 QB 195 at 204, 205 per Donaldson J: “There can be no contract between two parties unless both intend either to enter into contractual relations or so to act toward one another that the law will imply such an intention”.

A helpful recent summary of the relevant legal principles regarding the recognition of pre-contractual promises or assurances as collateral warranties is to be found in the obiter judgment of Lightman J. in Inntrepreneur v East Crown [2000] 2 Lloyd’s Rep.611. His summary is at [10]:

“(1)

a pre-contractual statement will only be treated as having contractual effect if the evidence shows that parties intended this to be the case. Intention is a question of fact to be decided by looking at the totality of the evidence;

(2)

the test is the ordinary objective test for the formation of a contract: what is relevant is not the subjective thought of one party but what a reasonable outside observer would infer from all the circumstances;

(3)

in deciding the question of intention, one important consideration will be whether the statement is followed by further negotiations and a written contract not containing any term corresponding to the statement. In such a case, it will be harder to infer that the statement was intended to have contractual effect because the prima facie assumption will be that the written contract includes all the terms the parties wanted to be binding between them;

(4)

a further important factor will be the lapse of time between the statement and the making of the formal contract. The longer the interval, the greater the presumption must be that the parties did not intend the statement to have contractual effect in relation to a subsequent deal;

(5)

a representation of fact is much more likely intended to have contractual effect than a statement of future fact or a future forecast.”

My analysis and conclusions in relation to the mis-statement claim and the collateral warranty claim are as follows.

The claimant’s case is as follows. In Section 9.2 “t_o – original plate thickness” refers to the as-built thickness of the vessel i.e. its first or ‘original’ thickness. D1 has sought to construct a link between Section 9.1 and 9.2 where none exists. The reason that D1 has sought to construct such a link is to support what is, in effect, an attempt to re-write the language of Section 9.2 so that “t_o – original plate thickness” is re-defined to refer to the “reassessed” or "nominal" thickness. There are no links of the type suggested by D1. Sections 9.1 and 9.2 deal with separate issues. Section 9.1 is concerned with the effects of general corrosion. This relates to the strength of the individual structural member. That explains why the reassessed figure derived from the strength assessment is relevant to that exercise. Section 9.2 is concerned only with the criteria to be applied to determine when pits in the bottom plating must be weld repaired or cut out and replaced with new steel. It is concerned with the risk of pollution. The criteria in Sections 9.1 and 9.2 are separate. They relate to different problems and have separate criteria applied to them. In both cases, however, on KBR’s construction, the primary concern of Petrobras can be seen to be to specify conservative criteria which minimise the risk of Petrobras having to undertake maintenance and repairs to the hull during the 20 year service life of the vessel, which would adversely affect the operation of the FPSO.

D1’s case is as follows. Original plate thickness means the applicable reference thickness – i.e. the approved scantling thickness. In the context of a conversion in which there is to be an approved reassessment, it means the reassessed thickness. This is in accordance with normal industry practice and the universal practice of Class. To construe it as meaning as built thickness would mean introducing a different reference thickness for bottom pitting repairs than for other steel repairs, and moreover the use of an unapproved thickness. Neither expert had ever encountered a steel repair specification or a steel repair job where this approach had been followed. Furthermore the use of as built thickness as a reference thickness leads to consequences which are technically illogical and which flout technical commonsense. It would also lead to the replacement of bottom plating in circumstances where effectively no steel renewals were required by Class or were otherwise technically necessary, a wholly unreasonable and uncommercial result.

The relevant legal principles are as follows.

In my judgment “t_o- original plate thickness” means “as built” thickness. I consider that this construction is consistent with the relevant explanations of and meanings of the Technical Terms and Procedures set out in Appendix B. It is consistent with the ordinary meaning of the word “original” (see 4 above). It is consistent with the careful and separate definitions of the various thicknesses referred to in Section 9.1 and 9.2. If for example it was intended that ‘t_o’ should have the same meaning as ‘tn’, there would have been no need to provide a separate definition of ‘t_o’. It is consistent with the context of a generic specification (see 8 above). It is consistent with the conservative approach adopted by Petrobras in certain other respects (see 9 above). It was understandable in commercial terms that Petrobras would take a conservative approach to pits in the bottom of a vessel (see 10 and 12 above). This construction is consistent with the fact that the Projects were intended to be fast track projects, with blasting etc followed by inspection followed by painting or renewal (see 11 above).

I add the following footnote. It should be remembered that in the carefully drafted email of 27 September 2001 the defendants (and in particular D1) alleged “that the specification appended to our contract is simply incorrect in defining t_o as original rather than nominal thickness” (emphasis added). Thus on 27 September 2001 it was being alleged that a mistake had been made, and not that KBR had misconstrued the meaning of Section 9.2.

The claimant’s case is as follows. A relaxation was obtained on site in Singapore to use a slightly more relaxed set of criteria for the bottom pitting inspections after blasting in mid-August 2001 - the Present Thickness criteria. As set out in Mr. Blane’s “check” calculation of 23 August 2001, the use of the Present Thickness criteria was less onerous and therefore beneficial to the defendants. The Present Thickness criteria were a practical application of the Section 9.2 criteria, employed to take account of the fact that there had been some limited general corrosion on the Continent. The May TQ did not raise any query in relation to the reference thickness to be used for the bottom pitting inspections under Section 9.2. The May TQ was limited to (a) asking Petrobras for a relaxation of the pit diameter criteria (i.e. the 200mm limit referred to in Section 9.2.1 and 9.2.2(a)), which KBR requested to be relaxed to 300mm, and the correction of the minor typographical errors that were evident in the wording of Section 9.2. These points had been picked up by Mr. Jones when he first read Section 9.2 in February 2000. Petrobras’ answer was to reject the request for a relaxation in relation to the pit diameter criteria and to correct the minor typographical errors. The May TQ did not have the effect of substituting a new reference thickness for the as-built thickness in Section 9.2. Even if, contrary to the claimant’s case, it could be said to have had such an effect, it was superseded by the agreement to the Present Thickness criteria.

D1’s case is as follows. The May TQ superseded Section 9.2. It represented a complete redraft of Section 9.2 and rendered irrelevant the formulae used therein and the consequential abbreviations and definitions used such as “t_o” and “original plate thickness”. The reference thickness in the May TQ is “T” or “bottom plating thickness”, as it is in the ABS guidance from which the May TQ was taken. It is common ground between the experts that “T” in the ABS guidance refers to the current approved scantling thickness, which in this case would be the approved reassessed thickness. If so, it must have the same meaning in the May TQ. There is no proper basis as a matter of construction for giving it some special and different meaning – a fortiori in circumstances where there is no need to refer back to Section 9.2. The agreement to apply the Present Thickness criteria was not the subject of a TQ and did not change the specification requirements. They remained as set out in the May TQ.

TQ 007 (also called the May TQ) was submitted to Petrobras requesting clarification of parts of Section 9.2 on 23 April 2001. TQ 007 was returned by Petrobras on 9 May 2001. The answers to the Technical Query should be read in the light of the particular queries raised.

I accept Mr Worsnop’s evidence to the following effect. Prior to commencing the close-up inspections on P43, he reviewed the applicable Petrobras specifications, and in particular, Section 9.2 in relation to bottom pitting criteria. He noted that the Petrobras criteria provided that the maximum pit diameter was 200mm. This was stricter than the ABS criteria, which permitted a maximum pit diameter of 300mm. He therefore asked the Petrobras site team whether the Petrobras specification could be brought in line with the ABS criteria in this regard, and drafted a local Technical Query and enclosed sheets. The mechanism available for putting this query to Petrobras was via a TQ from JSPL to KBR, albeit drafted by Mr Worsnop. Petrobras rejected KBR’s request and continued to require that the maximum nominal diameter of any pit did not exceed 200mm. Petrobras effectively restated the Section 9.2 criteria as being applicable.

The May TQ corrected the typographical errors that had been noted in Section 9.2 and identified in the email from Mr Rohlen of 15 February 2000. TQ 007 did not change the reference thickness. TQ 007 did not seek to raise any query about the definition of “original plate thickness” and did not substitute the reassessed thickness as a new reference thickness for pitting inspections.

Further it should be noted that at the stage TQ 007 was issued, the bottom of the vessel had not been blasted (bottom shell blasting commenced on 15 August and the first bottom plate inspection did not end until 26/27 September).

For the reasons set out above Issue 16 does not arise. The Present Thickness criteria were (I find) the criteria discussed and agreed with Petrobras and ABS before the bottom pitting inspections commenced and were the criteria actually applied by KBR, Petrobras and ABS during the first inspection in August/September 2001 that led to the renewals in DD1 and DD2. I accept Mr Samways’ evidence as to the circumstances in which the use of the Present Thickness criteria was discussed and agreed. The conduct of the parties was inconsistent with TQ 007 superseding Section 9.2. I reach this conclusion having reviewed all the relevant evidence.

The claimant’s case is as follows. There was no obligation on KBR to mitigate the seller’s/guarantor’s liability. It cannot be negligent to implement what the contract requires. Nor can it be "unfair" or "unreasonable" to implement the very obligation that the seller/guarantor have agreed will be for their account. There is no principle of law that required KBR to seek a relaxation to the Specification which would have the effect of increasing the amount of welding to be undertaken (on D1’s case, at KBR's cost) in order to reduce the seller’s/guarantor’s liability. Even if there is such a duty, there was no breach on the facts of the present case, nor was KBR’s conduct “unfair” or “unreasonable”. Petrobras would not have accepted a revision to their criteria earlier than they actually did.

D1’s case is as follows. KBR’s failure to agree criteria with Petrobras akin to TQ 1028 before they actually did so was unreasonable and/or negligent and was a consequence of (1) KBR’s failure to put forward a steel replacement procedure in a proper and timely fashion as they ought to have done and had stated that they would do; and/or (2) KBR’s failure to seek clarification of the reference thickness under Section 9.2 despite this being both unclear and, if it meant as built thickness, technically illogical and unreasonable; and/or (3) KBR’s failure to ensure that an approved reassessment was obtained in a timely fashion, and on any view well in advance of steel inspections and/or (4) KBR’s failure to use the determined but the yet to be approved reassessed thicknesses for such inspections. KBR cannot recover in respect of renewals carried out as a consequence of its own unreasonableness and/or negligence because the indemnity only extends to renewals which were properly and reasonably required and/or because it does not indemnify KBR against the consequences of its own negligence and/or because in such circumstances the renewals would not be “required” and/or as a matter of causation.

In my judgment it was not unreasonable and/or unfair and/or negligent of KBR to fail to agree criteria with Petrobras similar to TQ 1028 before they actually did so. Even if KBR was under some form of duty to seek to agree criteria with Petrobras similar to TQ 1028, I do not consider that KBR acted unreasonably or unfairly or negligently. Further, I do not consider that Petrobras would have agreed criteria similar to TQ 1028 before they actually did so.

I refer to the chronology of relevant events as set out in the Chronology of Events.

I accept the evidence of Mr Kilcran as follows –

“Petrobras were not unaware of the problem and were very concerned by the amount of pitting but I know from other experiences that they knew exactly what their specifications stated and were very reluctant to give them up. … They were open to reconsideration. We went as far as negotiating TQ 1027 with them and, even before submitting it, I felt that they were in a place where they were ready to approve that TQ. It included certain qualifications which they had asked us to include in it. They still rejected it. They were also not prepared to give relaxations without fully understanding the consequences of what they were doing. … They may or they may not have agreed a technical(ly) supportable argument. They had already identified what they wanted in their specification.

… I do not believe, if we had asked Petrobras in August, they would have relaxed their criteria. They relaxed their criteria quite reluctantly anyway … in November.”

Having carefully considered all the evidence in my opinion on a balance of probabilities Petrobras reluctantly agreed to TQ 1028 in November because Petrobras was subject to pressures (from sources other than the parties), to make faster progress in relation to extracting oil generally, and the Project in particular.

The claimant’s case is as follows. There is no principle of law that would require KBR to cancel the dry dock(s), incur cancellation charges (for its account), incur welding charges (which on D1’s case were for KBR’s account), take the commercial risks of the future availability of the dry docking facilities and the potential impact on the overall schedule in order to relieve the seller/guarantor of a contractual liability that they had voluntarily assumed.

D1’s case is as follows. Even before the Heathrow meeting, it was known that ABS agreed to the re-assessed thickness being used as the reference thickness and, following the discussions with ABS at the meeting, it was apparent that they essentially agreed with the approach which had been proposed. It was anticipated that Petrobras would or would substantially follow ABS’ lead and KBR’s own view was that significant steel renewals could thereby be avoided. There was at that time still no agreement between KBR to JSPL for steel renewals to the bottom plate to go ahead at DD1. In all the circumstances, it was unreasonable and/or negligent for KBR to go ahead with significant steel renewals at DD1.

In my judgment KBR is entitled to recover from D1 in respect of the plate replaced at DD1 based on the first inspection to the extent set out below. In my opinion KBR did not act unreasonably and/or unfairly and/or negligently in failing to defer carrying out any renewals at DD1, until the plate had been re-inspected.

On 13 November 2001 TQ 1028 was formally approved by Petrobras, subject to ABS issuing a statement regarding In Service Inspection criteria consistent with the pitting criteria set out within the TQ. DD1 commenced on 17 October 2001. Steel was renewed against the Present Thickness criteria.

I refer to the history of the relevant events as set out in the contemporary documents, including (without limitation) the chronology set out above. When regard is had to all the relevant circumstances (including the various contractual relationships to which KBR was party), I do not consider that KBR acted unreasonably and/or unfairly and/or negligently in failing to defer carrying out any renewals at DD1 until the plate had been re-inspected.

I refer to the position between KBR and JSPL as reflected in:

In all the relevant circumstances (including, in particular but without limitation, the position between KBR and JSPL and Petrobras) KBR had no sensible commercial alternative but to proceed with renewals at DD1 based on the first inspection.

I refer to and accept Mr Phillips’ account and analysis in his witness statement. I also refer to and accept the reasons given by Mr Phillips in evidence as to why KBR had no sensible commercial alternative but to proceed with renewals at DD1 based on the first inspection.

I accept the claimant’s submissions as follows. The significant increase in the quantity of steel that had to be renewed as a result of the extent of the pitting in the bottom of the Continent, placed the claimant in an extremely difficult position in relation to both JSPL and Petrobras. It gave rise to a number of significant commercial pressures referred to by Mr Phillips. In order to undertake the steel renewal during the planned Dry Dock, significant preparatory work was required. By mid-September 2001 it was apparent that the bottom plate renewals would have to be undertaken during more than one Dry Dock (as opposed to the original plan to undertake bottom plate renewals in the first Dry Dock – see Mr Witton’s email to Mr Jones of 13 August 2001). In order to undertake a dry dock, steel had to be sourced and fabricated. The quantities of steel involved would not have been readily available from local stockholders. Thus a procurement period in advance of fabrication and dry docking was required. Fabrication of bottom plate replacement had started before 26 September. By that date some 1,443 tonnes of steel plate for bottom renewal were subject to purchase orders or were in stock and would be available before 29 September. A further 1,200 tonnes of 30 mm plate was to be ordered by JSPL for availability by DD2 in December 2001. Further, on 26 September “JSPL highlighted that KBR response to VOR 15 [which became VO 16], “DD extension must be made before 28 September 01 to secure dock allocation.” JSPL was in an extremely strong commercial position as against KBR. KBR was under intense pressure from Petrobras to maintain the schedule. KBR was caught between Petrobras and JSPL at a time when plate had already been ordered and fabrication had commenced, with no realistic commercial alternative but to proceed with plate renewals at DD1. There was no viable alternative for any person other than JSPL to complete the work. The terms agreed were the best deal that KBR management believed they could obtain given all the circumstances at the time. Delaying the steel work renewals was not an option. KBR was subject to a fast-track contract on which the Project depended. Delaying the work was not an option. KBR had to manage the relevant commercial risks. KBR held back for over a month in an attempt to agree better terms with JSPL. JSPL reduced their demand from $5,400 per tonne down to $4, 900 per tonne. KBR had a tight schedule and had to move forward. KBR took and made what they considered to be the best decisions based on the information available at the time.

The claimant’s case is as set out above in relation to issues 21 and 22.

D1’s case is as follows. KBR is not entitled to recover in respect of plate replaced based on the first inspection for the reason that, by the time of DD2, TQ1028 had been agreed and it follows that the only steel renewal that was at that stage “required” was that called for under TQ 1028. In any event, it was unreasonable and/or negligent for KBR to go ahead with the replacement of plate on the basis of the first inspection in circumstances where TQ1028 had been agreed and it was apparent that it would make a huge difference to the quantity of renewals required.

TQ 1028 was formally approved by Petrobras on 13 November, subject to ABS issuing a statement regarding In Service Inspection criteria consistent with the pitting criteria set out within the TQ. DD2 began on 24 November.

In my judgment KBR is entitled to recover from D1 in respect of the plate replaced at DD2 based on the first inspection to the extent set out below. I reject D1’s submission to the effect that KBR is only entitled to recover in respect of that proportion of the plate replaced at DD2 which would have been condemned if TQ 1028 had been applied. I refer to and repeat the analysis set out above in relation to issues 21 and 22.

I refer to the history of the relevant events as set out in the contemporary documents including (without limitation) the chronology set out above and the Chronology of Events.

When regard is had to all the relevant circumstances (including the various contractual relationships to which KBR was party) I do not consider that KBR is only entitled to recover in respect of that proportion of the plate replaced at DD2, which would have been condemned if TQ 1028 had been applied.

I refer to the position between KBR and JSPL as reflected in:

The dilemma that KBR faced was described in an email from Mr Witton to Mr Press on 19 November 2001 in the following terms:

“We have a dilemma.

DD2 is scheduled for this Friday 24 Nov’01 (this is a long story). We have only completed the bottom plate re-inspection of 4S and that shows dramatic savings over the original inspection criteria, however we (VW & Roger Samways) do not believe that this will be similar in all cases. JSL have already completed the preparation of 880t steel plate for DD2 so there are inevitably costs associated with the cancellation of the DD2 if we wish to complete the re-inspections of tanks 1C, 2S & 3C.

We have been discussing this with JSL and they have presented the attached spreadsheet that shows the cost difference between cancelling the DD and progressing to the original plan. The benefits of progressing to the original are;

•

A happy client

•

A happy Subcontractor

•

No future disagreements during blast inspection before painting (a big plus)

•

Negate disagreements on grinding preparation before coating

•

Schedule, through less disruption

•

Client will be easier on coating acceptance

•

Negate any claims from JSL

Downside is US$372,802.14

It’s worth noting that the revised reduced btm steel replacement quantities in the spreadsheet are a “best guess” by us.”

Mr Phillips’ view of the position was set out in his email to Mr MacKintosh of 22 November as follows:

“My apologies for not copying you onto the latest developments regarding ‘DD2 and Bottom plate replacement’.

The short story is that DD2 is to commence, 24 November 2001.

880 Tonne of steelwork will be replaced by JSPL during DD2.

DD2 scheduled period – 21 days.

Basis of ‘accepted’ agreement as follows:

•

Anticipated / notified ‘claim’ via JSPL for ‘deletion’ of DD2 – US$3,626,395.71 (term b – Attachment A – To be claimed against xstg V.O No 16).

•

DD2 cost of replacing 880 Tonne – US$4,372,000.00 (880 Tonne @ $4900/Tonne + Pit repairs – Item a Attachment A)

•

Potential ‘saving’ as negotiated – circa U.S $745,604.29.

•

Revised quantity of replacement plate – est against new criteria – circa 286 Tonne.

The bottom line is that we are paying approximately $450k additional to replace 880 Tonne as opposed to replacing a potential $286 Tonne. This takes into account:

•

Mats/fab to date 1,018,710.00

•

Dry Docking 140,700.00 (Based on 21 days @ U.S $6,700/day)

•

Pitting repairs 510,000.00 (Based on significantly increased No: pits to repair due to original plate remaining in-situ.)

•

Seam repairs 80,000.00

•

Replacement Stl 1,401,400.00 (Revised quantity to replace – 286 Tonne @ U.S $4,900.00)

•

Total 3,150,810.00

The ‘downside’ of the deal is that we are replacing 880 Tonne of steelwork in a timescale which, is to JSPL’s schedule requirement, without and until recently, against KBR wishes. Also, we must consider the fact that JSPL have deliberately misled KBR, (we are the DONKEYS) with respect to the steelwork replacement / Dry dock rate i.e. U.S $4,900/Tonne. (The rate was based upon the JSPL supplied data which, indicated a maximum achievable productivity rate of 22.5 Tonne/day of bottom plate replacement.) DD1 achieved a productivity rate as follows; 780 Tonne replaced in 19 days = 41.05 Tonne/day. Double the JSPL supplied data upon which their DD was calculated i.e. 110 ‘additional’ days. Taking this a step further:

Counter Claim:

DD1 Productivity: 41.05 Tonne day.

Revised Inspection criteria – Anticipated replacement stl = Additional 500 Tonne max. (On top of DD1 replacement tonnage @ 780 tonne = 1300 Tonne Max.)

Contract schedule for Dry docking – 42 Days (Incl mobilization of which, 28 days detailed by JSPL as bottom replacement work. 28 @ 22.5 t/day = 602 Tonne.)

1000 Tonne less 602 = 398 Tonne @ contract rate $3054.00 = $1,215,492.00 plus 300 Tonne @ enhanced rate $4900 = $1,470,000 = $2,685,492 TOTAL.

No of DD days = 1300 Tonne / 41.05 Tonne = 32 Days Total. (Not significantly different from original contract data!)

Of course, now that we (KBR site team plus T. Press), have ‘agreed’ to JSPL request to replace the 880 Tonne during DD2, our position regarding a ‘counter-claim’ is somewhat weakened, (if the intent can be found) and leaves us with a further potential problem with the likes of the Stena deal. ”

In all the relevant circumstances (including, in particular, but without limitation, the position between KBR and JSPL and Petrobras) KBR, in my opinion, acted reasonably in proceeding with DD2 based on the first inspection.

I refer to and accept Mr Phillips’ account and analysis in his witness statement. I also refer to and accept the account and reasons given by Mr Phillips in evidence. In particular (but without limitation) I accept Mr Phillips’ evidence to the following effect. As at 30 October steel had already been fabricated for a Dry Docking to take place at about the end of November. “The results of the implementation of TQ 1028 were not known, and the threat, because that is what it was, from JSPL, was that, “Should you not go ahead with [DD2], the proposed time scale, i.e. 24 November start date, then we cannot guarantee you another available Dry Docking scope as and when it may have been required.” The decision to go ahead with DD2 was made by KBR senior management based on the information they had available at the time and a limited number of difficult options. They took into consideration all of those options.

I accept the claimant’s submissions as follows. Work on the Project could not be put on hold pending a decision by Petrobras as to whether or not to agree to a relaxation and, if so on what terms. Following the agreement of ABS to the revised criteria on 19 October, TQ 1027 took a little time to produce. It involved discussions with Petrobras and was finalised and submitted on 1 November. The time taken was reasonable. A summary by Mr Jones of the meeting on 31 October stated “From my discussion later that day with our inspector in Angra he confirmed seeing a very impressive 7 page document prepared by KBR justifying their request to Petrobras.” In the event Petrobras rejected TQ 1027. JSPL had by 19 November already completed the preparation of 880 tonnes of steel plate for DD2, as stated in Mr Witton’s email of 19 November. JSPL’s threats prior to DD2 were of substance, given JSPL’s past behaviour. JSPL stated that the date (24 November) for DD2 was the only Dry Docking slot available to KBR, and if KBR chose not to use it, then in addition to presenting KBR with a claim for JSPL’s cancellation costs, JSPL could not guarantee that another Dry Dock slot would become available as and when required, due to the state of business at the shipyard. KBR was subject to similar commercial pressures to those that applied in relation to DD1. Similar hard choices had to be made and similar risks and uncertainties managed (although by this stage TQ 1028 had very recently been approved). The commercial realities favoured continuing with DD 2 and it was not negligent of KBR to go ahead with it. As Mr Phillips put it: “… We had a project to deliver a vessel within a certain timescale. We needed to proceed with the works. We could not afford any schedule slippage. The potential was … for significant slippage. The potential … was for a significant claim …, and the potential was … for further risk due to the unknown factors that … were [mentioned] by Jurong, future Dry Docking space may not be available as and when you need it. That … was a major risk item that had to be managed.”

The claimant’s case is as follows. The first sentence of clause 4.1 of the MOA sets the overall limit of the claimant’s liability for steel renewals. It provides that the extent of the claimant’s liability for steel to be renewed in the conversion yards is limited to “the cost to the Buyer of one hundred and fifty (150) tonnes”. The second sentence of clause 4.1 imposes a liability on the seller (and therefore on D1) for the cost of steel renewals in excess of that cap. The liability of D1 is “Any steel renewals, in addition to the 150 tonnes, to meet the Petrobras specification requirements…”. There is no precise figure that could be identified as the quantity of steel that was the absolute minimum that was required to meet the specification requirements. The extent of the renewals will depend on numerous factors and, in relation to the identification and replacement of steel for replacement, will depend on the judgment of different surveyors. This is illustrated by the present case where the surveyors and other inspectors involved in the identification and mark up of steel for renewal due to bottom pitting included KBR (Mr. Samways), Stena (Mr. Blane), Petrobras (Mr. Machado), JSPL (in determining their cutting plans) and the ABS surveyors (Mr. Ang, Mr. Han and Mr. Chong). In addition, Mr. Samways and Mr. Worsnop were involved in direct discussions with JSPL and ABS. As both experts agreed, that is not a precise science – it is a practical exercise, involving judgment made on the ground. Clause 4.1 of the MOA is a commercial document relating to steel renewal in a shipyard on a fast-track conversion to an FPSO and must be construed in that light. It covers steel renewed to meet the relevant Petrobras Specifications applying normal industry/shipyard practice and, in so far as the steel was required by Class, providing that it is a reasonable application of the requirements of ABS as understood at the time. Further, clause 4.1 is concerned with the actual quantity of steel renewed – it creates a liability in the seller (and thus D1) for the actual quantity of steel renewed at the rate actually charged by the shipyard. It is not limited in the way D1 suggests, namely to a figure equivalent to a theoretical minimum figure resulting from a desk top exercise undertaken many years after the event by experts who were not present at the time.

D1’s case in relation to the inserts criteria is that the quantity of renewal steel which the claimant can prove was required in order to meet the Petrobras Specification is the quantity which is the minimum requirement of class – i.e. that required on a practical application of the ABS criteria.

In my judgment, in order to recover under the Guarantee for steel renewals resulting from the application of the ABS Inserts criteria at each of DD1, DD2 and DD3, KBR has to prove on a balance of probabilities that the amalgamation of inserts was a reasonable application of the ABS Inserts criteria and/or other requirements of ABS as understood at the time, having regard in particular (but without limitation) to normal industry practice. I do not consider that the “reasonable application” test is likely to produce a result that in practice differs materially from the result of the first test (KBR has to prove that the amalgamation of inserts was the minimum that was required in order to comply with the ABS Inserts criteria and/or other requirements of ABS).

I accept the claimant’s submission that Mr Biles has considerably more expertise (and more recent expertise) in the practical field of steel renewals than Mr Corlett. I refer to Mr Biles’ evidence as to his experience in respect of other vessels of negotiating with Class and determining the size and number of inserts. In my opinion Mr Biles’ evidence on the issues relating to the ABS Inserts criteria is generally to be preferred to the evidence of Mr Corlett.

Further I accept the claimant’s submission that the relevant exercise is a practical exercise involving judgment made on the ground, and that care should be taken before placing reliance on a theoretical desktop exercise undertaken many years after the event by experts who were not present at the time.

I accept Mr Samways’ account of the relevant events as set out in his witness statement. I refer to the full account there set out.

Mr Worsnop sent copies of the fair sketches to JSPL QA Department during August/September 2001. JSPL used these to produce their “Bottom Shell Renewal and pit repair by welding” documents for each of the tank areas. These were initially issued by JSPL at the RevA “Issued for approval by KBR & ABS”. These showed that JSPL had in many instances amalgamated the mapped defects into larger areas of proposed steel renewal. When KBR received the first of these documents from Jurong, Mr Samways reviewed it and then went to discuss Jurong’s approach with Mr Ganesan, Jurong’s QA manager for the P43 vessel. He stated that multiple inserts would not be acceptable to ABS, as such inserts would not comply with ABS’ rules in relation to the maximum number of inserts permitted in a strake or the proximity of welds, and nor was such an approach in accordance with good engineering practice. He also noted that the fair sketches showed circular inserts and explained that Jurong did not fit circular inserts. The Jurong IFA documents were reviewed by Mr Samways, Petrobras and ABS. Once each party approved a document, it was returned to Jurong to incorporate any comments and for issue at the “Approved for Construction” revision.

I accept the claimant’s submission that the contemporary documents show that Mr Worsnop was endeavouring to keep Mr Jones up to date with information, as it became available. Mr Jones knew as at 20 September 2001 that KBR was requesting ABS to comment on steel substitutions in relation to the bottom renewal (see Mr Jones’ email to Mr Carlsson (the President of Concordia Maritime AB) dated 20 September 2001).

On 20 September 2001 Mr Carlsson sent an email to ABS, asking ABS to investigate the extent of the steel renewals on the Concordia and the Continent and the criteria that were being applied. This direct approach to ABS was not revealed to KBR. I would be surprised if such a direct approach to ABS (without informing KBR) accorded with good industry practice. On 21 September ABS issued instructions to their field surveyors for use as the criteria for pitting repair of both bottom plate and internal structural members. KBR was not informed by ABS of this guidance until 10 October.

The first bottom plate inspection ended on 26/27 September.

On 27 September Mr Rohlen (Vice President of Stena Bulk, who was in charge of selling the Concordia Class tankers for conversion and negotiations with KBR from February 2000) sent the email to KBR which had been carefully drafted by a number of persons on behalf of the defendants. The email said:

(i)

“It is your position that the guarantee covers more than fatigue requirements, which we deny …”.

(This contention is no longer pursued by D1).

On 1 October Mr Worsnop participated in a telephone conference call arranged and attended by Mr Press and the FPSO team in Rio. Mr Press distributed an action list to the FPSO team dated 1 October. Mr Worsnop was asked to prepare for a further telephone conference scheduled for 3 October to discuss the potential to reduce the replacement steel quantity, KBR’s exposure to additional cost and the current status of the new steel order etc. Mr Worsnop was of the opinion that the exercise of attempting to reduce the replacement steel quantity, and still be in compliance with ABS requirements and the Petrobras Specification, was futile. This was because when it became apparent that significant amounts of steel renewal were required to meet the Petrobras Specification and ABS requirements, he and others had revisited the Petrobras Specification together with the inspection report several times, to ensure that KBR was renewing the minimum quantity. Nevertheless he complied with Mr Press’ request and arranged for a further discussion as to the minimum steel renewals with the ABS Offshore Manager, on the following day.

Mr Worsnop was seeking confirmation from ABS that the steel replacement which KBR proposed was the minimum steel replacement required by ABS in order to achieve class requirements. At this stage ABS were not asked to comment on the Inspection criteria giving rise to individual areas of plate replacement for bottom pitting repairs as shown on the first sketches. What was required from ABS was confirmation of their criteria regarding the allowable number and proximity of inserts. Mr Worsnop initially spoke with Mr Han, the ABS surveyor attending on site, and informed him that KBR intended to request that ABS review the proposed steel replacement and confirm that it was the minimum steel renewals required to meet Class requirements. This conversation took place on about 1 October. Following this conversation Mr Worsnop telephoned Mr Ang, the ABS Offshore Manager for Singapore, to arrange a meeting regarding ABS’ review of Jurong’s proposed bottom plating renewals. The meeting took place on site on 2 October. The meeting was attended by Mr Ang, Mr Sewell (the KBR Construction Manager for the P 48/Concordia conversion in Brazil), Mr Samways and Mr Worsnop. Mr Worsnop produced a record of the discussions during this and subsequent meetings, to which I refer.

I accept the claimant’s submission that KBR was engaged in a genuine attempt to understand and determine the extent of the steel renewals that would be required by ABS across the Projects, and that Mr Sewell’s attendance was further confirmation of this.

On 3 October KBR faxed Mr Ang six examples of typical plate inserts to confirm that KBR’s interpretation of the application of the guidelines was correct. KBR asked if Mr Ang would review the proposed bottom plate renewals to ensure that the proposed renewals were not excessive and/or that these renewals were the minimum requirements to repair the defective areas. Mr Ang agreed that ABS would do this and advised KBR to contact Mr Chong, who would be the ABS surveyor responsible for carrying out this task.

On 4 October there was a further meeting, this time with Mr Chong of ABS attended by Mr Worsnop, Mr Sewell, Mr Witton and Mr Samways. Mr Chong confirmed that he understood the nature of KBR’s request, i.e. to confirm that the proposed steel renewals were the minimum plate renewals required to satisfy ABS guidelines or to show areas where they could be reduced. He said that he would respond by 9 October. Mr Chong had been made aware that KBR representatives were departing for London on 10 October to have meetings in relation to bottom plate with the defendants. KBR provided Mr Chong with four sets of the fair sketches for all the tanks which had been marked up to show the proposed repairs edged in pink.

On 6 October Mr Chong told Mr Worsnop that he would be forwarding a copy of the drawings to ABS Houston. Mr Worsnop pointed out in his witness statement that there had been no mention of ABS Houston becoming involved in the process, and KBR saw no need why they should become involved. Further, KBR had some reservations because it was KBR’s understanding that Mr Jones had been a long time employee of ABS and had been based in America.

On 9 October Mr Chong attended the site with a letter in which ABS stated that the proposed repairs were acceptable to ABS, but which did not state whether the proposed steel renewals were the minimum as per KBR’s request. The letter said:

“We have received four sets of bottom plate steel renewal proposal. Providing all repairs and renewals are carried out in compliance with our rules and procedures and all workmanship is to attending surveyor[’s] satisfaction, we would have no objection to your proposal as outlined. Three sets of bottom plate steel renewal proposal [have] been endorsed and returned to you.”

There followed a number of discussions including phone calls with Mr Ang and Mr Tan, but ABS were not prepared to commit to stating in writing that the renewals were the minimum renewals. In his witness statement Mr Worsnop said that at the time he felt that ABS Singapore had been told by ABS Houston to avoid making any comments regarding the quantity of bottom plating steel required, as ABS did not want to get involved in the arguments that KBR were then having with the defendants.

On 10 October Mr Witton of KBR sent a fax to ABS in relation to bottom steel replacement – “we take your acceptance of the proposed bottom plate steel renewal, as ABS’ confirmation that this represents the minimum steel quantity required to meet the Project and the Class requirements.”

There was no response by ABS to this letter. Nor did ABS identify at any time before completion of DD2, any areas of steel that could be saved or were outwith ABS’ requirements. At no time did ABS suggest that the ABS Inserts criteria had been incorrectly interpreted or applied by KBR/JSPL.

In my opinion KBR acted reasonably in approaching ABS as set out above. It may be that a classification society will not ordinarily provide confirmation that proposed bottom plate steel renewal represents the minimum steel quantity required to meet the Project and Class requirements. But I find that the probability is that the defendants’ approach to ABS (without informing KBR of the same) had some effect on ABS’ response. KBR fairly acknowledge in their closing submissions that the defendants did not intend that the result of their direct discussions with ABS in Houston from 20 September onwards, should be a decision by ABS to reply as they did. It is possible that had there been a joint approach by all interested parties to ABS, ABS’ response might have been different.

Mr Biles undertook the exercise of applying the ABS Inserts criteria to the areas of steel renewals as identified by Mr Samways and Mr Blane. For his first and second exercises he applied the criteria of a maximum of two inserts per strake width turned sideways. These criteria are less onerous than the earlier criteria of a maximum of three inserts in a half strake length that, according to the evidence of Mr Worsnop, were applied in relation to the amalgamation of steel for DD1 and DD2. Mr Biles pointed out that if the criteria to be applied to the work undertaken in DD1 and DD2 included the more onerous “three inserts in a half strake length”, this would increase the areas to be amalgamated and therefore increase the tonnage. Mr Biles should have set out in relation to his third exercise the precise nature of his instructions. In his third exercise Mr Biles revisited the exercise in relation to the tanks that were included in the first two dry docks, to reflect the application of the more onerous criteria. In the time available he had not been able to perform any detailed calculations to recalculate the tonnage on this basis, but from an inspection of the diagrams he said that the tonnage would increase compared with the first two exercises. From a review of the ABS Insert sketches he believed that it was reasonable to conclude that the amalgamation of inserts carried out by KBR/JSPL, as shown by the pink line on the ABS Inserts Sketches (for those tanks included in the first two dry docks), was largely consistent with the ABS Inserts criteria, based upon a maximum of three inserts in a half plate length. In carrying out this third exercise, Mr Biles identified those areas where KBR/JSPL appear to have taken areas of plate that would normally be saved using a strict application of the ABS Inserts criteria. He also identified those areas which would ordinarily be taken (even though as a matter of fact they were not) using a strict application of the first ABS Inserts criteria. It is important to note that the final figure (1,720 tonnes based on three in one/two plate length) is based on the as built thickness and is therefore higher than the actual claim figure (which includes three tanks that were replaced during DD2 with 30mm plate). Thus the 1,720 tonnes figure was included for comparison purposes only.

I consider that there is force in the claimant’s submission that Mr Biles’ third exercise provides some further evidence that KBR’s/JSPL’s interpretation of the criteria was reasonable and in accordance with the ABS Inserts criteria applicable during DD1 and DD2.

It was pointed out to Mr Corlett that his figure of 997.3 tonnes was based on the use of 35mm plate throughout, whereas the as-fitted thicknesses on DD2 were lower in some areas. On that basis, he has now calculated a figure of 1, 010.9 tonnes for all three dry dockings. On that same basis, Mr Biles’ 1,255 figure comes down to about 1,208 tonnes.

In undertaking their respective analyses, the experts identified the following issues in relation to the application of certain aspects of the ABS criteria, in particular:

I generally prefer Mr Biles’ evidence in relation to these issues.

In considering the claimant’s primary case that it is entitled to recover the full amount claimed in relation to DD1 and DD2 some allowance should in my opinion be made for the consideration that it was in JSPL’s interests to make the inserts as large as possible (although this factor should not be overstated). I reject any suggestion (if it is made) that the sketches submitted by KBR to ABS were deliberately misleading.

In the event ABS did not confirm that the proposed bottom plate steel renewal represented the minimum steel quantity required to meet the Project and the Class requirements.

It is important to remember that the application of the ABS Inserts criteria was a practical matter. The object would always be to achieve the minimum plate replacement in the context of what the surveyor was prepared to allow. The role of the owners’ representative would be to influence that decision on a practical basis.

Mr Biles accepted in cross-examination that his second exercise was “an application of the ABS criteria, if I was doing it with an ABS surveyor.” Applying the ABS criteria, as he considered an ABS surveyor would do, Mr Biles arrived at a figure of 1255 (which has to be adjusted to 1208). But it must be remembered that he applied criteria less onerous than the criteria of a maximum of three inserts in a half strake length that were applied in relation to the amalgamation of steel for DD1 and DD2.

I take into account the various matters that emerged in cross-examination of the experts.

I take into account in answering issue 37 my answer in relation to issue 38.

The answer to issues 37 (which takes into account the answer in relation to issue 38) involves a difficult and complex balancing exercise of the various facts, matters, opinion and considerations identified above. Having carefully reviewed the various facts, matters, opinions and considerations identified above and the evidence as a whole, my answer to issue 37 is 1200 tonnes.

The claimant’s case is as follows. D1 is liable for the actual weight of the steel replaced calculated at the rate per tonne actually charged by JSPL. Mr. Corlett’s suggestion that the reassessed thickness had to be 27mm under the terms of the Specification results from his misunderstanding of what the Petrobras Specification required, including what is required to be done with Section 9.1. Projemar, KBR, Petrobras and ABS properly understood and applied the Specification. In simple terms, the Specification is aimed at making the maximum use of the available strength in the existing hull structure. As such, Projemar correctly derived as its final design basis from the existing thickness of the hull. This gave a gross thickness of 30mm which was then proposed to Petrobras and ABS as the reassessed thickness. That figure was approved by Petrobras and ABS. Once approved, the 30mm reassessed thickness was used as the basis for the final design by Projemar (to be verified by Finite Element Modelling), as the input figure in Section 9.1 (to determine when individual structural elements needed to be replaced due to general corrosion) and as the reference thickness for ABS’ future in service inspections. Further, there is no evidence that Petrobras would have accepted a reassessed thickness of 27mm. Plate could only sensibly be replaced at the thicknesses actually used. D1’s contentions to the contrary ignore the commercial realities of the position in which KBR was placed.

D1’s case is as follows. 27 mm ought to have been used because that was the minimum acceptable scantling thickness determined by the strength assessment referred to in s.9.1 and on the true construction of the specification that was the thickness which was required to be used. Alternatively, any steel renewal costs resulting from KBR’s decision to use a greater thickness were not “required” and/or were not “due to” corrosion and are accordingly irrecoverable.

Issues 38 – Analysis and conclusions

I repeat my conclusions in relation to issue 17. In my judgment it was not unreasonable and/or unfair and/or negligent of KBR to fail to agree criteria with Petrobras similar to TQ 1028 before they actually did so. Even if KBR was under some form of duty to seek to agree criteria with Petrobras similar to TQ 1028, I do not consider that KBR acted unreasonably or unfairly or negligently. Further, I do not consider that Petrobras would have agreed criteria similar to TQ 1028 before they actually did so.

The following is agreed between the experts. If the determination for steelwork replacements for bottom pitting was to be made on the basis of the minimum required scantlings, then the results of the reassessment were necessary, prior to any inspection for pitting.

If the determination for steelwork replacement for bottom plating was to be based on the original (as built) scantlings (as I have held), then the results of the reassessment would not be necessary prior to any inspection for pitting.

Where renewals are necessary, once the minimum required scantling results from the reassessment are known and approved, it is normal practice to use the reassessed scantlings for hull plating (which includes the appropriate corrosion margins) for replacement. However, there is no overriding technical reason why thicker plates should not be used.

For DD1 c.800 tonnes of 35mm plate was procured, of which c.658 tonnes were installed during DD1. The balance of the tonnage in DD1 was plates of other thicknesses (e.g. in the taper regions). KBR says that some (c.42 tonnes) of this 35mm plate procured in advance of DD1 was used in DD3. The defendants agree that c.42 tonnes of 35mm plate was used at DD3, but say that there is no evidence which explains why this happened.

For DD2, c.764 tonnes were installed of which c.542 were 30mm plate, some (but not all) of which was used to replace what had previously been 35mm plate. Of the total installed tonnage of 764 tonnes, therefore, a significant quantity was replaced at less than as-built thickness.

It is necessary when considering these issues to pay careful regard to the contemporary documents.

On 19 September 2001 ABS sent a fax to KBR stating that ABS would only accept renewals with plates that were the same thickness as the original scantlings, and not the reassessed scantlings. Mr Moloney had raised the matter in a fax dated 17 September. ABS’ requirement (which KBR had to comply with) was that “when the scantlings are physically renewed, the renewed plate thickness is to be that of the original scantlings, not the reassessed scantlings.”

On 24 September 2001 KBR re-confirmed verbal instructions to JSPL as follows:

“1.

That in all areas (except for keel plates), where thickness of original plate is 30mm or thicker, you shall replace with ABS approved plates 30mm thick, of equivalent grade. …

However, to secure suitable plates in time for the planned First Dry-docking, we hereby agree that you should proceed to purchase 800MT of ABS approved 35mm thick, grade EH-36 plates. JSPL is hereby instructed to source the remaining plates at 30mm thickness.”

On 25 September a fax from ABS to KBR approved mid-ship section and typical transverse sections (based on adopted thickness of 30mm for bottom plate). I refer to the Table of the mid-ship section scantling reassessment.

Minute 3.2 of Weekly Progress Meeting number 35 between KBR and JSPL recorded “Activities planned for this coming period 26 September – 2 October 01 … Bottom Plate replacement – fabrication, started.”

On 5 October 2001 ABS responded to CSQ/050 to confirm that structural reassessment for FPSO criteria would form the basis for renewal requirements for class purposes and that ABS would accept renewal with reassessed plate thickness (which in context meant 30mm). I find that KBR had pursued the matter reasonably and timeously with ABS. ABS’ Response was in these terms-

“Please be advised that ABS has decided that the structural reassessment as per SH for FPSO criteria will form the basis for renewal requirements for class purposes, and will accept replacement of scantlings to be renewed with the reassessed plate thickness. In case renewal plate has less thickness than adjacent plating, ABS requirements for edge preparation and fit-up are to be met. Details of edge preparation and fit-up are to be to the Surveyor’s satisfaction.”

DD1 commenced on 17 October. Steel was renewed against Present Thickness criteria.

On 13 November TQ 1028 was formally approved by Petrobras, subject to ABS issuing a statement regarding In Service Inspection criteria consistent with the pitting criteria set out within the TQ.

On 23 November KBR issued a further CSQ (058) requesting ABS to review TQ 1028 and confirm ABS’ acceptance criteria for the inspection and identification for the repair of the Barracuda and Caratinga vessels.

DD2 began on 24 November.

On 7 December ABS responded to CSQ 58 as follows:

“We notice pitting criteria, as indicated in the attached TQ, is being proposed solely based on original thickness and does not refer to the actual gauged thickness. In this case, we have no objections to the proposed attached bottom pitting repair criteria during conversion work, provided the actual gauged scantlings are 1.5mm in excess of the reassessed approved scantlings, which is 30mm amidships.”

I refer to Appendix D (Plate replacement applied to mid ship section reassessed scantlings) which against the line bottom … plate stated 35.0mm (as-built), 30.0mm (2000 ABS Rules), 24.0mm (ABS Renewal), .20 (r), 1.4mm (Corrosion margin) and 26.9mm (Petrobras equation minimum allowable effective thickness).

I also refer to the documents listed in paragraphs 68 and 78 above.

When Mr Corlett was cross-examined he accepted that he had not seen certain documents attached to ABS’ response to CSQ 58. When shown Appendix D Mr Corlett said “it would appear that the calculation has been done on the basis of the adopted thickness, which is the thickness that was approved by ABS and it is being done on the basis of gross thickness … This is the way they applied it in practice. I do not dispute that that is the way they did it.” Mr Corlett added “It is not the way that I would interpret the specification”. I consider that Appendix D provides material support to relevant aspects of the claimant’s case.

Mr Biles’ evidence based on relevant recent experience provided material support for the proposition that it is not uncommon for a considerable time to elapse before an approved reassessment is available from class and that in the meantime plate would ordinarily be replaced at the as-built thickness.

The answer to issue 38 involves a difficult balance in all the circumstances referred to above.

I have made allowances for these conclusions in arriving at the figure (1200 tonnes) in answer to issue 37.

The claimant’s case is as follows. There was an implicit agreement between the parties at the Heathrow meeting on 12 October 2001 that if any proposal for a relaxation to the pitting criteria set out in Section 9.2 was accepted by Petrobras, and if the claimant chose to implement those relaxed criteria thereby giving a concession to the seller under Clause 4.1 of the MOA, as this would lead to a reduction in the amount of steel plate replacement to the account of the seller and D1, then the lesser costs of re-inspecting against the relaxed criteria and of increased numbers of pit weld repairs in lieu of plate replacement would be encompassed by Clause 4.1 of the MOA, and therefore to the account of the seller (and D1). The total amount recoverable under this head of claim is said to be US$1,126,468.

D1’s case is as follows. There was no implied term as alleged and there is no evidence to support the implication of any such term. The strict legal requirements for the implication of terms are not satisfied. Even if they were, the additional costs would not be recoverable under the Guarantee unless there was a written variation of the Guarantee, which there was not (nor is any such variation alleged). Further, if the terms of the contract between KBR and the seller were varied as alleged, then D1 would be discharged from any liability under the Guarantee.

I agree with D1’s submission that the strict legal requirements for the implication of terms are not satisfied - see Chitty on Contracts volume 1 paragraph 13-001 and following. The alleged implied term is not necessary, in the business sense, to give efficacy to the contract. It is not an obvious inference from the agreement. Clause 4.1 of the MOA contained a carefully structured bargain between KBR and the seller. It would have been open to the parties to vary that agreement by amending clause 4.1, but they did not do so.

This issue is answered above.

The claimant’s case is as follows. Clause 4.1 of the MOA provides that any renewal steel required, in addition to the 150 tonnes, to meet the Petrobras Specification requirements:

“shall be to Seller’s account, calculated at the weight of additional steel in excess of 150 tonnes, times the rate per tonne charged by the conversion yard to Buyer as documented and technically justified in the invoice”

It is the actual rate per tonne that was charged by JSPL to KBR as documented in the JSPL invoice which is the amount that has to be paid under Clause 4.1 (No issues now arise in relation to technical justification).

D1’s case is as follows. The quantity falling within the estimated quantity included as part of the lump sum conversion contract (which it says is the first 1,000 tonnes) can only be charged to it at US$2,880/ tonne. This was the actual “cost” to KBR of this renewal steel; if some or all of it had not been required, KBR would have received a credit at that rate. For any steel in excess of the estimated quantities, D1 can only be charged at the contractual rate for increases to the estimated quantities of US$3,054/tonne and not at the rolled up rate which KBR agreed with JSPL. The rolled up rate of US$4900/tonne in fact included fixed costs which cannot properly be claimed under the Guarantee, but deliberately dressed up as a rate per tonne for the purposes of seeking to do so.

I refer to the Vessel Conversion Original Subcontract number F008 dated 22 January 2001 between KBR and JSPL and the Annexes to that Contract including in particular Annex A – 1 Attachment II – Weight Table and Annex D – 1 Article 3.0 Pricing for Changes. Article 3.0 Pricing for Changes provided: -

“The Lump Sum set-out within Item 1.1.4, Accommodation Unit, Item 1.1.5 Office Block and Item 1.1.6 Vessel Structure/ outfitting, shall be based upon the Structural Quantities included within Annex A-I, Attachment 2, Steel Weight Table. In the event that the final agreed measured quantities for each of these categories vary by more than +/- 5% then the Lump Sum amounts shall be adjusted by the application of the unit rates set-out in Item 3.2. Unit Prices. These Lump Sum Adjustments to the Subcontract Price shall be in accordance with the provisions of Article 12 as set forth in the General Terms & Conditions.

In addition, BRES may request, and Subcontractor shall provide, proposals, for other Scope of Work changes (additions and deletions) which are to be priced, at BRES’ option, by one or a combination of the following methods:

…

2.3

Unit Prices

2.3.1

Unit Rates for Changes in Steelwork Weight. The Unit Prices below are to be inclusive of, but not limited to construction engineering, material supply, prefabrication, supervision, installation, blasting and protective coatings, NDT as required, making good, indirect services such as fire-watching and scaffolding.

Item	Unit	Unit Price Additions US$	Unit Price Deletions US$
1.1.6.A – Hull Repair & Replacement	T	3,054	2,880

In relation to the variation rates of bottom plate, the sub-contract included a provisional 1000 tonnes which was described on the Weight Table as relating to three distinct types of steelwork renewals (bulkhead, deck and shell) but the 1000 tonnes quantity was not broken down, so as to allocate distinct tonnages to the three specific categories. I find, having carefully considered the available materials as a whole, that on a balance of probabilities KBR reached an agreement with JSPL that of the 1000 tonnes, 300 tonnes would be attributed to bottom plate. (See in this connection the document entitled “Steelwork Evaluation” which confirms this finding).

There was no question of a credit of $2,880. The first 150 tonnes was for KBR’s account. In my judgment the next 150 tonnes (being the first 150 tonnes which D1 is liable for under the Guarantee) falls to be charged to D1 at the rate of $3054.

The claimant claims the balance at the rate of $4, 900 (subject to a discount achieved in relation to steel renewals in DD2). In my judgment the appropriate rate per tonne for all further bottom plate recoverable under the terms of the Guarantee given by D1 falls to be charged to D1 at the contractual rate for additional steel of $3054 for the following reasons. The Guarantee provided that D1 is liable for “Any renewal steel required, in addition to the 150 tonnes, to meet Petrobras specification requirements … calculated at the weight of additional steel in excess of 150 tonnes, times the rate per tonne charged by the conversion yard to Buyer as documented and technically justified in the invoice.” These words should be read together with the opening words of clause 4.1 “The extent of steel to be renewed in the conversion yard, due to structural repair or corrosion of the vessel …”. In my opinion D1’s liability under the Guarantee extends to liability for the costs referred to in the Unit Prices in 2.3 above (“the Unit Prices below are to be inclusive of, but not limited to construction engineering, materials supply, prefabrication, supervision, installation, blasting and protective coatings, NDT as required, making good, indirect services such as fire-watching and scaffolding.”) Further, in my opinion, D1’s liability was for reasonable costs incurred.

In his email to Mr Wyse of 18 October 2001 Mr Phillips said: -

“The agreed, all inclusive unit rate against ‘additional’ tonnage of replacement steelwork is $4900/tonne (No detailed breakdown of this rate has been made available or could be reasonably justified by JSPL).”

Further, Mr Phillips’ email to Mr MacKintosh of 24 February 2002 stated: -

“Attached is the latest ‘forecast’ regarding costs allocated to Stena in connection with P43 steelwork renewal / repair.

You will note that the cost forecast includes the following categories:

•

Cleaning (sweep blasting, mechanical cleaning, chemical)

•

Inspection (UT/MPI etc)

•

Production of shop drawings

•

Pitting and Seam weld repairs

•

Access costs (Scaffolding)

•

Steelwork renewal

•

Third party costs

•

Material procurement cancellation charges

All are included on the basis that ‘ancillary/supporting’ trades are necessary to complete the prime function i.e. the renewal/repair of steelwork to ensure that vessel meets the required standards. (Bottom line is that Stena will dispute most if not all of the ancillary costs and a large proportion of the steelwork renewed during DD1 & DDQ.)

DD1: Steelwork renewed. 967.50 Tonne. (Tonnage calculated / renewed in accordance with “original” criteria.)

DD2: Steelwork renewed. 845.40 Tonne. (Tonnage replaced in accordance with KBR requirements). **

** The ‘revised’ criteria against which bottom plate renewal was to be calculated, could be argued from Stena perspective, to have been available in time to allow KBR to instruct JSPL to replace a fraction of the 845.40 Tonne. (Approx 286 Tonne was estimated at the time although this has subsequently been reduced.)

Another contentious point will be the rate at which steel renewal is calculated. (DD1 + DD2 rate = U.S $4900/Tonne v U.S $3054/Tonne contract rate).

Bottom line is that I believe recovery from Stena will be in line with the following (Maximum);

Dry Dock 1 renewal steelwork 967.50 Tonne @ $3054 = 2,954,745

Dry Dock 2 ‘revised criteria renewal steelwork 160.00 Tonne @ $3054 = 488,640 (Approx weight)

Dry Dock 3 Steel renewal ‘to go’ 65.00 Tonne @ $3054 = 198,510

3,641,895 U.S $ ”

In February 2002 Mr Phillips considered that the maximum rate per Tonne recoverable from D1 was US$3054. I agree with that conclusion for the reasons set out above.

The parties have agreed a commercial compromise in relation to these items of a notional 160 tonnes at a rate of US $3,054 per tonne.

Interest payable, if any, in relation to these items remains in dispute.

I add the following footnote. I did not case manage the pre-trial stages of this case. It is now clear (with the benefit of hindsight) that this case would have benefited from a direction along the following lines – before instructing experts the parties should agree (as far as practicable) the materials and questions to be placed before the experts (and should if necessary refer any point of difficulty in this connection to the Court). Had such a direction been given considerable time and expense would in my view have been saved.