Braspetro Oil Services Co & Anor v FPSO Construction Inc & Anor

This trial follows a trial of preliminary issues in 2005 in both the Folio 492 proceedings (the P38 proceedings) and the Folio 491 proceedings (the P40 proceedings). The judgment at the conclusion of the 2005 trial determined that the first claimant ('Brasoil') was 'in principle' entitled to recover from the first defendants FSO Construction Inc and FPSO Construction Inc (collectively 'FCI') sums which Brasoil paid to numerous third party suppliers pursuant to numerous agreements called 'Side Letter Agreements': see Braspetro Oil Services Company & Anr v FSO Construction Inc & Anr [2005] EWHC 1316 (Comm).

At a hearing on 29 September 2005 following the Preliminary Issues judgment the Court gave directions for a full trial to determine what sums were ‘in fact’ due to Brasoil under the Side Letter Agreements and what other sums Brasoil was entitled to recover in restitution and/or on other bases (i.e. where there was no relevant Side Letter Agreement or where the payment made by Brasoil exceeded the value of the particular Side Letter Agreement).

In total Brasoil’s pleaded claims amount to US$ 87,225,217.64 in the P38 proceedings, and US$ 185,714,463.12 in the P40 proceedings, together with very substantial interest.

FCI has admitted claims totalling US$ 36,115,186.14 in P38, and US$ 67,189,990.27 in P40 (with an appropriate adjustment to take account of a calculation error, equating to US$68,143,131.02). Accordingly, this trial does not concern these claims except that the judgment reflects these admissions.

The remainder of the claims have either been not admitted or denied. It is these claims which need to be determined at this trial. Certain claims are no longer pursued.

At the 29 September 2005 hearing directions were given for the trial of the defendants’ cross-claims. Those directions were, in the event, not complied with by the defendants. The result of that non-compliance is that the defendants’ cross-claims were ultimately struck out, the defendants having been given every opportunity to comply with the orders and directions of the Court.

The claims arise in relation to two projects consisting of the conversion of a very large crude oil carrier ('VLCC') into a floating oil storage and off-loading vessel (or 'FSO') (named 'P38') and the conversion of a semi-submersible oil production, storage and off-loading unit (or, 'FPSU') (named 'P40').

The second claimant in each action, Petrobras, is a Brazilian oil company. Brasoil, the first claimant in each action (incorporated in the Cayman Islands) and a subsidiary of Petrobras, is the real claimant, the party seeking to recover the monies expended in this case.

In 1996, Petrobras and Brasoil commenced development of the Marlim Sul oilfield, which is situated within the Campos Basin offshore from Rio de Janeiro, Brazil. The project included the construction/conversion of oil production hardware required for exploitation of these offshore oil reserves, including the FPSU P40 and the FSO P38.

FCI undertook responsibilities in relation to the acquisition and conversion/construction of these units. For the P38 FSO, a VLCC (The ‘World Eminence’) was acquired for conversion; for the P40 FPSU, a floating production unit was acquired for conversion. The conversion works took place during 1998 to 2001.

In these proceedings, Brasoil seeks recovery of sums which it paid to third party suppliers of equipment, material and services for the purposes of the conversion works, which sums should have been (but were not) paid to the suppliers by FCI.

The claims relate to sums paid pursuant to a very large number of individual Side Letter Agreements entered into between Brasoil, FCI and the various third party suppliers during the course of the conversion projects, by which FCI agreed to repay to Brasoil the sums paid by Brasoil to the third party suppliers.

Whilst FSO Engineering Inc and FPSO Engeneering Inc (collectively 'FEI') are named as the second defendant in the P38 and P40 proceedings respectively, the claims are only pursued against FCI, not FEI.

The procedural history of these proceedings has been long and complicated. I refer to all previous judgments in this matter including my ruling on 9 February 2007.

The proceedings commenced in May 2002. The defendants served Heads of Defence and Counterclaim on 16 September 2002. These included at Schedule B very brief details of the cross-claims advanced by the defendants: in the case of P38, numbering 30; in the case of P40, some 32; in both cases, some of the individual cross-claims were composite claims. The claimants served Heads of Reply and Defence to Counterclaims in each action in October 2002. Following judgment in relation to the Preliminary Issues, directions were given in September 2005 leading up to a trial to take place in April 2007. Those directions included, as a necessary first step, the service of revised and, importantly, fully particularised Defences and Counterclaims. The defendants asked for, and were given, about six months in which to serve these statements of case. The defendants told the Court that this was the period they needed to carry out the extensive factual and expert investigations which was necessary to produce fully particularised statements of case. The order of 29 September 2005 recorded the defendants' assurance that this period was necessary and sufficient to enable the defendants to prepare their statements of case. The defendants' statements of case were accordingly due to be served by 31 March 2006. Draft Amended Defences and Counterclaims were in the event not served until 8 May 2006.

The draft Amended Defences and Counterclaims did not contain the full particulars which the defendants had been ordered to provide in September 2005. The claimants accordingly prepared Requests for Further Information as a means of identifying the respects in which the defendants’ statements of case were insufficiently particularised. The defendants subsequently agreed that the vast majority of these requests were requests which they should answer.

The inadequacies with the defendants' statements of case were considered by the Court at a hearing on 19 May 2006 and necessitated further hearings on 16 June, 30 June and 27/28 September 2006.

At the hearing on 30 June 2006, shortly prior to which the defendants had produced further versions of the draft Amended Defences and Counterclaim, the defendants conceded that they had not complied with the order of 29 September 2005 in that certain cross-claims were still inadequately pleaded, that they had not in fact done what they said they would do at the hearing on 29 September 2005 and that they should have returned to the Court and explained the position to the Court, but had not done so. Although permission was given to the defendants to make amendments in relation to certain cross-claims, permission was refused in relation to a substantial number of other cross-claims which the claimants maintained were inadequately pleaded.

In relation to those cross-claims where the claimants maintained their objection, an ‘unless’ order was made to the effect that, unless the defendants served draft statements of case complying with CPR Part 16 and the terms of para. 2 of the 30 June order, by 4 August 2006, they were to be debarred from advancing those cross-claims against the claimants on their alternative, non-quantum meruit, case.

In the Amended Defences and Counterclaims which were served on 4 August 2006 the defendants abandoned a number of cross-claims and contentions which they had previously been advancing. However, the defendants continued to advance the remainder of the cross-claims which the claimants still maintained were inadequately pleaded. In relation to some of these cross-claims, minor changes had been made to the pleaded case. In other cases, no changes at all had been made to the versions of the pleading which the claimants had contended were inadequately pleaded; indeed no changes had been made to some pleadings which the defendants themselves had conceded were inadequate at the 30 June 2006 hearing.

When the matter came back before the Court, on 27/28 September 2006, a number of cross-claims were struck out for non-compliance with the ‘unless’ order made on 30 June. An order was also made requiring the defendants to serve Amended Defences and Counterclaims reflecting the terms of the order and verified by statements of truth, by 5pm on 30 October 2006 (para. 4 of the order made on 28 September 2006). I refer to the judgment of 27 September 2006 for its full terms, reasoning and effect.

The defendants did not serve Amended Defences and Counterclaims reflecting the terms of the order and verified by statements of truth by the deadline of 30 October 2006, and have not done so since.

The defendants took no steps in these proceedings for a number of months:

The defendants withdrew instructions from their solicitors, Curtis Davis Garrard LLP (‘CDG’), in September 2006 just before the hearing on 27/28 September, and no other solicitors were subsequently instructed.

The hearings on 27/28 September 2006, 3 November 2006, 20 December 2006 and 9 February 2007 were not attended by any representative of the defendants.

Various substantial costs orders remained unpaid. There was no explanation whatsoever for the defendants' failure to pay these sums.

The disclosure deadline of 31 October 2006 passed without disclosure being given by the defendants, although the claimants invited the defendants to exchange disclosure lists, and subsequently served their disclosure lists on the defendants in accordance with the Court's order to give disclosure.

The clear and obvious inference to be drawn was that the defendants were not intending to take any further active part in these proceedings.

This was confirmed by the fact that shortly before Christmas, in the days leading up to Brasoil’s strike-out application,proceedings were commenced in Brazil by Maritima Petroleo e Engenharia Ltda (‘Maritima’), an associated company of FCI/FEI and the primary vehicle of Mr German Efromovich, the ultimate beneficial owner of FEI/FCI. In those proceedings, Maritimastated that they (purportedly speaking on behalf of the defendants, FCI/FEI) had dropped their case in the proceedings in London, and purported to bring claims against the claimants specifically in relation to the cross-claims advanced by the defendants in these proceedings: see para. 163 b-2) of Maritima's Brazilian submissions.

The claimants say that the defendants’ intention not to participate in the English proceedings was also graphically demonstrated by the fact not only that the Brazilian proceedings were commenced, but by the fact that the defendants purported at least to give away the cross-claims which they were asserting in the English proceedings to Maritima under an assignment, which was the whole basis for Maritima’s assertion of an entitlement to commence the Brazilian proceedings as regards P38/P40.

In the circumstances of the defendants’ continued failure to give disclosure, at a hearing on 9 February 2007 (attended by Brazilian lawyers acting for Maritima, not the defendants) I decided that it was appropriate to make an ‘unless’ order striking out the remaining cross-claims (although not the defences) unless the defendants complied fully with the orders requiring them to give standard disclosure. I held that a fair trial of the cross-claims was not possible without such disclosure having been given. I refer to the judgment of 9 February for its full terms, reasoning and effect.

No disclosure was subsequently given by FCI/FEI, indeed nothing further was heard from FCI/FEI in response to the order of 9 February 2007, and accordingly on 26 February 2007 an order was made striking out the remaining cross-claims on the basis that the ‘unless’ order made on 9 February 2007 had not been complied with.

Since the 9 February 2007 hearing, I have been informed that the Brazilian proceedings have been dismissed following an appeal, subject to any further appeal.

The defendants’ attitude to these proceedings is most regrettable. In the trial of preliminary issues they lost on one major issue and won on the other. There was no appeal. It would appear that the defendants formed the view that (in the light of the answers to the preliminary issues) the balance of account would result in a very substantial judgment in the claimants’ favour. The defendants (it seems) decided to take no further part in these proceedings for tactical reasons. Yet (I am told) companies closely related to the defendant companies including Maritima continue to instruct solicitors in litigation in relation to P 36 in this Court.

This Court has jurisdiction in relation to P38 and P40. It seems to me that the Brazilian proceedings were an attempt to circumvent the jurisdiction of this Court in the circumstances set out above.

In view of FCI’s non-attendance at the trial, the Court has adopted an approach which reflects the approach followed, for example, in Habib Bank Ltd v Central Bank of Sudan [2006] EWHC 1767 (Comm), [2006] 2 Lloyd's Rep 412.

I have required Brasoil to draw to the Court’s attention points, factual or legal, that might be to the benefit of FCI. I am satisfied that Mr Picken QC and Mr Panayides of Clifford Chance LLP (‘Clifford Chance’) and the team they lead have complied with this direction throughout the hearing.

It should be recorded that Brasoil is only pursuing claims which it says it is wholly satisfied are valid. Claims which on further investigation have been shown to be unsustainable, have not been pursued. To take an example, there are a series of claims set out in Section B to Schedule A to each of the Particulars of Claim where there is no relevant Side Letter Agreement and no Request for Payment, which Brasoil considers it inappropriate to maintain. Those claims amount in total to some US$ 10,249,071.03. A further claim from P40 Schedule A (line 2346) for US$ 486,000 (amongst others) is not pursued for similar reasons.

Brasoil has brought to the Court’s attention points which FCI took prior to its decision to take no further part in the proceedings.

Further, Brasoil has sought to identify points which FCI has not taken, but which occur to Brasoil to be points which FCI might have taken had it chosen to continue to defend the proceedings.

Further, Brasoil has taken all practicable steps to bring to FCI’s attention everything that has been happening in these proceedings. Not only has all relevant documentation been served on FCI (as well as various related parties) but at the hearing on 9 February 2007 Brazilian lawyers actually attended on behalf of FCI’s associated company, Maritima, the claimant in the Brazilian proceedings. I took trouble on that occasion to explain to Maritima’s Brazilian lawyers the position in these proceedings. I refer to the judgment of 9 February 2007 for its full terms, reasoning and effect.

The Court has throughout the eight day hearing carefully examined and tested Brasoil’s case. Claims have been disallowed or reduced to the extent set out below. Further, the award of interest is at a rate well below the highest rate claimed.

The defendants have had notice of the trial commencing on 17 April 2007 as follows.

On 24 October 2005, the trial was fixed to commence on 17 April 2007 (with an original estimate of 12-16 weeks). Solicitors CDG were on the record for the defendants at that date.

Repeated reference was made to the trial due to take place in April 2007 during the various procedural hearings which took place on 19 May, 16 June and 30 June 2006, and in the various procedural witness statements served by the claimants for those hearings. The order made on 30 June 2006 provided that the trial listed to commence on 17 April 2007 was to determine certain issues, and set down amended directions leading up to trial. During this period CDG were still on the record for the defendants.

After the defendants withdrew instructions from their solicitors CDG prior to the Case Management Conference which took place on 27/28 September 2006, the defendants have had further notice of the trial commencing on 17 April 2007 as follows.

On 3 October 2006, the claimants’ solicitors Clifford Chance served the defendants with an order made on 28 September 2006 (in accordance with the alternative service provisions in that order) under cover of a letter which expressly stated that the trial was listed to commence on 17 April 2007 and asked the defendants to confirm their intentions in relation to the proceedings.

The order made on 3 November 2006 stated that the trial fixed to commence on 17 April 2007 would remain fixed to commence on that date. This order was served on the defendants in accordance with the service provisions of the order made on 3 November 2006.

At the hearing on 9 February 2007, attended by legal representatives of Maritima, a company associated with FCI, I made explicit reference to the fact that a trial was due to take place in April 2007, both during the course of the hearing and in my judgment.

The order made on 9 February 2007 gave certain directions for trial including setting the date of 10 April 2007 as the date for lodging of Trial Bundles. This order was served on the defendants in accordance with the service provisions of the 3 November 2006 order.

During March and April 2007, Clifford Chance served on the defendants various witness statements and hearsay notices; these were served in accordance with the service provisions of 3 November 2006 order. Each of the witness statements stated that they were made for the purposes of the trial; and each of the hearsay notices identified the date of the start of the trial as 17 April 2007.

On 16 March 2007, Clifford Chance served the defendants with the ninth statement of Mr Panayides (in accordance with the service provisions of 3 November 2006 order). That statement stated, at paragraph 2, that it was made for the purposes of the trial listed to commence on 17 April 2007. The service letter referred to the trial taking place in April, and stated that Clifford Chance would provide copies of the Claims Bundles attached to the statement of Mr Panayides in advance of the trial if required.

On 23 March 2007, Clifford Chance wrote to the Court (with a copy to the defendants) referring to preparations and arrangements for trial (service of witness statements, expert report, and trial bundles). The letter referred (at paragraph 5) to the suggestion that the judge would read after the first day of trial (said to be 17 April 2007), with the evidence starting the Monday of the second week.

On 17 April 2007, Clifford Chance served the Skeleton Bundle on the defendants (service was effected in accordance with the service provisions of the 3 November 2006 order):

The Skeleton Argument stated in its title that it related to the trial commencing on 17 April 2007.

The trial timetable (at tab 4) indicated that the judge would be reading for the first week and that the hearing would commence on 23 April 2007.

Between 17 and 23 April 2007, Clifford Chance served on the defendants updates to the Skeleton Bundles, updates to the expert’s report, and additional witness statements (service was effected in accordance with 3 November 2006 order).

On 23 April 2007, at the direction of the Court, Clifford Chance sent a further letter to the defendants stating that the hearing had commenced, that it was open to the defendants to attend the hearing and make representations, but that the trial would proceed whether or not they did attend.

Certain background facts were set out in a statement of facts prepared for the purposes of the Preliminary Issues trial which was agreed between the parties, and recorded in paras. 31 to 174 of the Preliminary Issues judgment. I refer to these paragraphs which should be treated as incorporated into this judgment.

The projects were governed by complex contractual structures, which are described in paras. 11 to 23 of the Preliminary Issues judgment and illustrated by the charts which are contained in its Appendices.

The projects were financed by Mitsubishi and Exim Bank:

The mechanism selected for such financing was entry into Bareboat Charter and Purchase Agreements between special purpose companies of the financing banks (the Petro Dia companies) and Brasoil, pursuant to which the Petro Dia companies were to purchase the units for conversion and undertook with Brasoil to procure their conversion according to an agreed specification within a stipulated time.

The Petro Dia companies chartered the units to Brasoil, on terms that ownership would pass to Brasoil at the end of the (12 year) charter period. Brasoil in turn sub-chartered the units to Petrobras, who would ultimately operate the units at South Marlim.

In order to fulfil their obligations to procure the conversion of the units, the Petro Dia companies entered into Conversion Contracts with FEI (in each case). FEI in turn entered into Full Conversion Contracts with FCI (in each case):

Under the Full Conversion Contracts FCI undertook (to FEI) to procure that the units would be converted in accordance with the specification within the time-frame stipulated in the Bareboat Charter and Purchase Agreement.

A fixed price lump sum was payable to FEI and FCI: US$ 130 million for P38 and US$ 324 million for P40, to cover the scope of work as defined in the Conversion and Full Conversion Contracts and the specifications annexed to the respective Bareboat Sub-Charter Agreements (the parties have referred to this in statements of case and draft statements of case as FCI’s ‘fixed price workscope’).

The fixed price lump sum was to be released to FCI periodically in ‘milestone payments’ according to progress. In practice, the milestone payments were made pursuant to documents entitled ‘Boletim de Medição Servicos’ (‘BMS’) submitted monthly.

FEI and FCI accordingly undertook to carry out the conversion work not to Petrobras or Brasoil but to the Petro Dia companies. However, FEI, FCI, Petrobras and Brasoil did all enter into Supervision Agreements, under which Brasoil was entitled to instruct changes to the specification, and a system was provided for additional remuneration to be paid directly by Brasoil to FEI/FCI in case the change increased the cost of the conversion.

During the course of the project, a procedure was evolved for Brasoil to give instructions for changes (and supplementary instructions not involving changes) in documents named ‘Instructions to Contractor’ (or ‘ITC’), and for submission and resolution of claims by FCI for compensation for additional costs incurred as a result of instructions giving rise to a change to their workscope.

As to the specifications:

In P38, the specification was contained on a CD-ROM issued by the Petrobras department SEGEN/EMPMAR in October 1997. The specification consisted of a draft contract with annexes, technical specifications, data sheets, equipment and documents lists and drawings.

In P40, the specification consisted of a 7-page document dated 7 August 1997 which incorporated by reference all documents included in a compact disk entitled ‘UNIDADE ESTACIONÁRIA DE PRODUÇÃO P-37’ (Rev A). This document also set out requirements to be taken into account to convert the DB-100 semi-submersible platform into the first production unit for the South Marlim field (P40), such as the number of production and injection wells and the typical well fluid composition. This reflected the position that the P-37 unit was for use in the Marlim field, and hence the specification documented on the compact disk required some adaptation to be suitable for South Marlim field. The disk contained draft contract with annexes, technical specifications, data sheets, equipment and documents lists and drawings. The compact disk was replaced in November 1997 by a compact disk labelled ‘Petrobras 37 – Documentos Originais de Projeto Básico – Marlim Sul – Petrobras/SEGEN – Novembro-97’, in which the irrelevant options in the original CD had been eliminated.

Under the contractual structures for the projects described above, FCI was the party responsible for procuring the conversion. It was not contemplated, however, that FCI would actually carry out the requisite services but that FCI would engage third party suppliers of the services, equipment and materials necessary for the conversions.

In practice, the nature and scale of the conversions meant that this required entry into (sub-) contracts with a large number of suppliers. FCI entered into contracts with numerous sub-contractors/vendors of such services, materials and equipment in order to carry out their obligations. It was FCI’s responsibility to pay these sub-contractors/vendors for the services, materials and equipment they supplied under the relevant sub-contracts.

Unsurprisingly, there was a considerable range of services, equipment and materials to be provided and a range of different types of suppliers from different parts of the world:

FCI’s responsibilities extended to engineering design of the units. In that respect, FCI engaged a Brazilian company named Projemar Estudos e Projetos de Engenharia Ltda (‘Projemar’) in the case of P38, and Projemar (for the naval and utilities aspects of the platform) and Internacional de Engenharia S.A. (‘IESA’, also a Brazilian company, for design of the process plant and related aspects of the platform) in the case of P40. This division in P40 reflected the fact that the biggest change in converting the crane derrick barge DB-100 (whose basic structure was retained) to a semi-submersible oil production platform involved the addition of processing equipment, whose design and engineering required expertise distinct from the naval/structural expertise of Projemar.

The major structural work, including repair and renewal of the steel on the existing structures and fabrication and assembly of additional steel structures, was carried out in both projects by Jurong Shipyard Limited (‘Jurong’). The units were both located at Jurong shipyard in Singapore for the majority of the conversion works (during a part of which, the P-37 platform was also under construction at Jurong shipyard pursuant to an agreement between Brasoil and Maritima).

The suppliers of major pieces/systems of equipment included: Bluewater NV, suppliers of the turret mooring system in P38; Nuovo Pignone SA, suppliers of the turbo-generators and turbo-compressors in P40; and Consórcio Modulo Elétrico (‘CME’), suppliers of the electrical module for P40. The purchase orders with these suppliers were each in tens of millions of US dollars.

Classification societies were contracted, Bureau Veritas for P38 and American Bureau of Shipping (‘ABS’) for P40.

There were many other suppliers of lesser equipment and materials. There were also a large number of individuals whose services were engaged as consultants for particular purposes on the projects.

For a number of the key suppliers in P40, FCI used the specification as provided by Brasoil to define the scope of work of the supplier, i.e. they effectively allocated the supplier a defined part of their own fixed price workscope. This was the case, for example, with both Jurong and IESA.

In terms of their obligations under the Full Conversion Contracts in each case, FCI retained responsibility for the performance of the suppliers, and management of the projects including the co-ordination of the suppliers’ activities.

In P40, two major items were added to FCI’s fixed price workscope through further agreements between FCI and Brasoil. The two major items were (a) the electrical generation system (Brasoil agreed to pay FCI US$ 28.2 million for the supply of two turbo-generators and other aspects of the electrical supply system), and (b) the platform’s mooring system (agreed in the sum of US$ 19 million). (The agreements were evidenced by FCI’s letter of 20.4.98 and by the Minutes of the meeting dated 28.5.99 and the Petrobras internal report dated 31.8.99 and see para 57 of the Preliminary Issues judgment). In addition, Brasoil introduced changes to the fixed price workscope for which a number of Change orders were agreed in August/September 1999.

In each of the Conversion Contracts, a period was stipulated for the conversion, beginning with the issue of ‘Service Authorisation’.

In P38, the period was 21 months, and in P40 it was 24 months.

Work commenced on P40 in the latter part of 1997 (service authorisation having been given on 8 October 1997), and on P38 in spring 1998 (service authorisation having been given on 18 March 1998).

The projects should therefore have been completed, including transportation to the Campos Basin, by 8 October 1999 as to P40 and 18 December 1999 as to P38.

By mid-1999, Brasoil/Petrobras had substantial concerns about the degree of progress on both units, which were both substantially behind schedule.

Sub-contractors/vendors contacted Brasoil personnel, in particular Mr Alencar and Mr Musa, to express their concern at FCI’s failure to make payments due to them under the relevant sub-contracts for services, equipment and materials provided by them. This financial problem became acute during the autumn of 1999, with serious consequences for progress on the projects. It gave rise to a crisis which required to be resolved if the projects were ever to be completed. FCI was also failing to place purchase orders with suppliers and sub-contractors on time, which impacted progress. (The background to this issue is that some US$ 50 million had been transferred from the P37, P38 and P40 projects to P36, leaving insufficient funds to pay the suppliers on the P38 and P40 projects).

The failure to pay the third party suppliers was a symptom of a financial problem with very serious implications for the projects.

On 29 September 1999, at a meeting between Mr Musa of Brasoil and Mr German Efromovich and Mr Alberto Padilla representing FCI, Mr Musa was told that FCI would imminently be suffering from a cash flow deficit, i.e. the funds available to them and the funds that they would receive by way of milestone payments under the Full Conversion Contracts would be insufficient to meet their short-term liabilities to their sub-contractors.

Further information provided by FCI on 14 October 1999 suggested that the projects were already in deficit and that this would deteriorate with time.

By this stage, it had become obvious that completion of the projects would be delayed by many months. FCI sought extensions to the scheduled dates for completion. In the case of P40 11 months was sought on the basis of certain changes including the items set out above, and Petrobras internally accepted this.

In the early part of 2000, Brasoil and FCI agreed and operated a ‘tied account’ system, whereby the remaining sums due under the Full Conversion Contracts would be paid (periodically according to progress) into accounts at the Safra National Bank in New York which had been specifically set up for the purpose, and from which payments were made directly to suppliers as agreed between FCI and Brasoil.

This tied account operated until the entirety of the fixed price lump sums under the Conversion and Full Conversion Contracts had been released, which occurred by April 2000. However, these sums were not sufficient to bring more than a relatively small proportion of payments to suppliers up to date.

It became increasingly clear that the remaining funds available to FCI would be nowhere near sufficient for completion of the projects.

By February 2000, information provided to Petrobras by FCI showed that the shortfall of the contractual balance payable in comparison with the estimated cost to completion was some US$ 55.5 million on P38 and US$ 144.7 million on P40. These were funds for which FCI had no obvious source.

At a meeting on 30 March 2000, the Petrobras Executive Board approved the direct payment of FCI’s suppliers by Brasoil. The Board resolved that letters should first be sent to FCI requiring them to make all payments due to their suppliers within 48 hours, and that, if FCI failed to do so, SEGEN (one of Petrobras’ departments) was to take the necessary measures to make direct payments to FCI’s suppliers for 2 months. It was also resolved that an inter-departmental Task Group should be created to analyse the situation.

Letters were accordingly sent to FCI on 14 April 2000. FCI’s formal response to these letters was made (some time later) on 17 May 2000. FCI failed to make the payments called for.

Provision was made by Petrobras for US$ 22.9 million (for P38) and US$ 69.8 million (for P40) to be made available to cover estimated disbursements for an 8 week period.

Further financial resources in the sums of US$ 37.7 million (for P38) and US$ 73.8 million (for P40), to cover the next 7 months (then predicted to be the remainder of the project period), were approved by the Petrobras Executive Board on 21 June 2000.

The means by which direct payments to FCI’s suppliers/sub-contractors were made by Brasoil involved the entry into numerous ‘Side Letter Agreements’ by Brasoil, FCI and each of FCI’s individual suppliers/sub-contractors.

The form of the Side Letter Agreements was agreed between Petrobras/Brasoil and FCI at a meeting on 12 April 2000. The agreed form of the Side Letter Agreements was as follows:

This wording was the subject of the Preliminary Issues judgment, specifically paras. 213 to 225 where I set out the circumstances in which Brasoil was entitled to recover from FCI sums paid to third party suppliers under the Side Letter Agreements. In particular, I decided as follows:

Following the meeting of the Board on 30 March 2000, the Task Group established a team of Petrobras personnel, led by Engineer Alencar, to be responsible for developing and operating the procedures for payment under Side Letter Agreements.

Mr Alencar’s team (referred to in some of the contemporaneous documents as ‘SESGE-Mauá’) was based at the Jurong Mauá shipyard in Niteroi.

External management consultants, Andersen Consulting (now Accenture) were engaged to assist this team in developing and operating the procedures for payment, and preparing written procedures which set out the various steps to be taken to effect payment.

An electronic database (the ‘Database’) was also developed by Accenture and used by SESGE-Mauá to record and control the payments made to suppliers.

The first step was to enter into the Side Letter Agreements, and a specific written procedure was set up to govern how this was to happen. The side-letter procedure was set out in a document entitled (in translation) “Contract Management – Platforms P38 and P40, Financial Analysis of Contracts” (‘the Side Letter Agreement Procedure’). The essential features of that procedure were as follows.

Once a Side Letter Agreement had been signed by all parties payment of individual invoices could take place. Petrobras had informed FCI’s suppliers that existing unpaid invoices should be re-issued and addressed to Brasoil, rather than FCI, and that any new invoices should be issued to Brasoil, not FCI. The invoice approval procedure was set out in a document entitled (in translation) “Procedure Governing the Payment of Invoices Relating to Platforms P38 and P40” (‘the Invoice Approval Procedure). The essential features of that procedure were as follows.

After the start of the Side Letter Agreement regime, the RFP form was adapted to provide for signature on behalf of Brasoil as well as on FCI’s behalf. In this way, Petrobras personnel also checked that the invoice was due for payment before signing the RFP on behalf of Brasoil; if the invoice related to an engineering contract or consultant, then the Petrobras team in Brazil were responsible for the check and signature of the RFP; otherwise the Singapore team were responsible for the check and would send the signed RFP to the team in Brazil. Details of the new RFP were then entered into the Database. Petrobras then considered whether the invoice should be paid in the current financial period; if so, a double-check was carried out to ensure that there was a signed Side Letter Agreement for the invoice. Next, Accenture carried out a final check of all the key documentation, namely the Side Letter Agreement, the purchase order or contract, the invoice and the RFP, to ensure that everything was in order. If so, they signed the RFP ‘conferido’ meaning ‘checked’. The invoice was then ‘attested’ by SESGE-Mauá. This involved Mr Alencar checking that Accenture had signed the RFP ‘conferido’, in which case he would ‘attest’ the invoice by stamping and signing the back of it. The Database was updated to record that the status of the invoice was ‘atestada’, i.e. attested.

Once attested the invoice was sent to EMPMAR (Mr Fernandes or Mr Musa) for their ‘release’ prior to being sent to Brasoil. Invoices were sent to Brasoil under cover of a letter directing Brasoil to make payment – a ‘Brasoil Letter’ – which set out the invoice numbers, the amounts due and the due dates. EMPMAR checked that SESGE-Mauá had ‘attested’ the invoices and that the details in the invoices matched the details in the Brasoil Letter; and, if so, ‘released’ the invoices by signing the stamp on the back, signed the Brasoil Letter, and then sent the Brasoil Letter with the attached invoices to Brasoil. Brasoil checked that the invoices had been attested and released, and that the details in the Brasoil Letter corresponded with the invoices. In that event, payment was made of the invoices pursuant to the instructions in the Brasoil Letter. Brasoil then emailed copies of its bank statements confirming that the relevant payments had been made to EMPMAR, who forwarded them to SESGE-Mauá, on a daily basis. This was all done in accordance with a procedure agreed between Petrobras and Brasoil – the ‘Brasoil-Petrobras Payment Procedure’ as set out in a document entitled (in translation) “Contracts Management – P38 and P40, SEGEN/Brasoil’s Payment Procedure for Invoices Relating to Platforms P38 and P40”. The Database was then updated by SESGE-Mauá to record that payment had been made, the invoice accordingly being marked ‘paga’, i.e. paid.

The key documents generated during this process (i.e. the Side Letter Agreement, the invoice, the RFP, the Brasoil Letter, and Brasoil’s bank statement showing payment) were included in the E bundles for each of the disputed (i.e. non-admitted or denied) claims.

At the start of the Side Letter Agreement regime, Petrobras/Brasoil stipulated that no new purchase orders or contracts should be entered into between FCI and third party suppliers without Brasoil’s approval.

Petrobras/Brasoil and FCI agreed that it was not necessary to enter into a new Side Letter Agreement for each new purchase order/contract – instead the new purchase orders/contracts would include wording adapted from the Side Letter Agreements.

These purchase orders/contracts containing this wording served the same purpose and were the equivalent of the free-standing Side Letter Agreements.

FCI has accepted this in these proceedings and admitted numerous claims where there is no free-standing Side Letter Agreement, but the purchase order contains the relevant wording.

It was also agreed between FCI and Petrobras/Brasoil that where a sum was to be paid to a particular supplier/sub-contractor in excess of the limit set out in the relevant Side Letter Agreement, it was not necessary for an additional Side Letter Agreement to be entered into, or for the Side Letter Agreement to be amended, and instead all that was necessary was to include certain wording adapted from the Side Letter Agreement in the RFP relating to the invoice.

The particular wording included in the RFPs echoed the wording of the Side Letter Agreements set out above, in the following terms:

In some instances, the RFPs as originally issued by FCI did not contain the Side Letter Agreement wording, and amendments to the RFPs, signed by FCI, were entered into containing the Side Letter Agreement wording.

FCI has accepted (by admitting numerous claims where the RFP contains such wording) that, as with purchase orders which contained the Side Letter Agreement wording, RFPs which included this wording have the same effect as free-standing Side Letter Agreements.

A modified procedure was put in place for Brasoil’s direct payment of FCI’s consultants. These consultants were employed pursuant to standard form contracts between FCI and the individual consultant (or the consultancy firm if there was one). Exhibit A to these standard form contracts set out certain details, e.g. the consultant’s name, the daily/weekly/monthly rate, and the expected duration of the consultancy. As the contracts for these consultants specified rates for the work to be carried out, rather than a fixed total price, the Side Letter Agreements could not and did not include a fixed financial cap like the other Side Letter Agreements, but instead referred to the consultancy contract and Exhibit A thereto, which was to be attached to the Side Letter Agreement. The agreed procedure was that Brasoil would issue a Side Letter Agreement for each consultant, and each consultant had to attach their consultancy contract (including Exhibit A thereto), and sign and return the Side Letter Agreement with the attachments. As per the procedure for other suppliers, outstanding and new invoices had to be issued to Brasoil, and these were approved for payment and paid as per the system for all other invoices.

These systems for the direct payment of FCI’s suppliers and sub-contractors remained in place until the completion of the project, and are the systems under which the claims now advanced by Brasoil arose. The Petrobras personnel involved in operating the procedures changed from time to time in particular when the units came to Brazil in 2001. At this stage, the procedures were also updated to reflect the fact that the Singapore operations had come to an end.

Mr Eduardo Costa Vaz Musa, a marine engineer who was the Marlim and Marlim South Oil Fields Manager within Petrobras’ Engineering Department at the material time, explained how the Side Letter Agreement regime was set up and agreed with FCI, and how it operated, and described the payments made to Jurong by Brasoil, and the negotiation of the Jurong Settlement Agreement (‘JSA’) in particular.

Mr Jose Orlando Melo de Azevedo, a mechanical engineer employed by Petrobras within the Engineering Department, described in general terms the P38 and P40 projects, and dealt in more detail with the Jurong sub-contracts and the amendments thereto, the payments made to Jurong by Brasoil, and the negotiation of the JSA. Mr Orlando also commented on his involvement in the Side Letter Agreement regime in relation to other suppliers, and in relation to certain payments made pursuant to that regime, in particular payments giving rise to certain claims in the ‘SLA missing/not signed’, ‘Payments made without RFPs’ and ‘Section B’ categories.

Mr Márcio Ferreira Alencar, a civil engineer employed by Petrobras within the Engineering Department, described in detail the Side Letter Agreement regime, including as it applied to new purchase orders and contracts, to payments made in excess of the Side Letter Agreement value, and in relation to FCI’s consultants. He commented on certain particular payments made pursuant to the Side Letter Agreement regime, in particular payments giving rise to certain claims in the ‘SLA missing/not signed’, ‘Total sum paid exceeds SLA limit’, ‘No attachment to SLA/SLA does not cover payment’, and ‘Section B’ categories. He also commented on the payments made to Jurong by Brasoil.

Mr Daniel Lima de Oliveira, who was Deputy Corporate Finance Manager at Petrobras at the time the payments the subject of Brasoil’s claims were made, explained Petrobras’ debt financing during the relevant period.

Mr Alexandros Panayides, a partner in Clifford Chance, the claimants’ solicitors, explained the work that has been undertaken by the Clifford Chance team in relation to all of Brasoil’s claims, including the investigation and checking which has been carried out in relation to the claims falling within the ‘Totally Resolved Claims’category. Mr Panayides set out the position as regards all of the disputed (i.e. non-admitted or denied) claims falling into each of the categories of disputed claims.

I was particularly impressed by the witnesses called by the claimants. I am satisfied that they all were concerned to give a full, accurate and fair account to the Court.

Antonio Francisco Filho Fernandes, an engineer employed by Petrobras who reported to Mr Musa, explained his role in the Side Letter Agreement regime, which was principally to ‘release’ the invoices on behalf of Petrobras before they were sent to Brasoil for payment. He also described the provision of financial resources by Petrobras for the payments made by Brasoil under the Side Letter Agreement regime.

Mr Altamiro da Motta Ferreira Filho, an engineer employed by Petrobras within the Engineering Department, who was involved in the Side Letter Agreement regime from early 2001, described his role in that regime and addressed certain particular payments made pursuant to that regime, including payments made to Jurong, and payments giving rise to certain claims in the ‘Payments made without RFPs’ and the ‘Total sum paid exceeds SLA limit’ categories.

Ms Rosiane Stutz, an employee of Accenture (previously Andersen Consulting), described in detail the procedures established for the Side Letter Agreement regime (including in relation to payments made in excess of the Side Letter Agreement value, and in relation to payments to FCI’s consultants) and the use of the Accenture Database in the regime. She addressed certain particular claims, namely the claims for which signed Side Letter Agreements cannot now be found which fall within the ‘SLA missing/not signed’ category.

Mr Paulo Monteiro Martins, an engineer employed by Petrobras within the Engineering Department involved in the Side Letter Agreement regime from early 2001, described his role in that regime and addressed certain particular payments which were made under that regime, in particular payments giving rise to certain claims in the ‘Payments made without RFPs’ category and the ‘Section B’ category.

Mr Décio Vicente Coelho Rocha, an engineer employed by Petrobras within the Engineering Department who had some involvement in certain direct payments to suppliers, addressed certain payments which were made under the Side Letter Agreement regime, in particular payments giving rise to certain claims in the ‘Payments made without RFPs’ category and the ‘Section B’ category.

Brasoil’s pleaded claims are for the total sums of US$ 87,225,217.64 in the P38 proceedings, and US$ 185,714,463.12 in the P40 proceedings. FCI has admitted claims totalling US$ 36,115,186.14 in P38, and (after taking into account of a calculation error) US$ 68,143,131.02 in P40. Of the disputed amounts, the Jurong claims (i.e. in respect of payments made by Brasoil to Jurong) account for the majority. The non-Jurong disputed claims add up to US$ 10,967,257.04 for P38 and US$ 52,950,977.77 for P40. Brasoil has abandoned some of these claims, as explained below.

Details of all Brasoil’s claims are set out in Schedule A to the Re-Amended Particulars of Claim (P38), and Schedule A to the Re-Re-Amended Particulars of Claim (P40). In each case, Schedule A is arranged as follows:

The defendants’ position in relation to each of Brasoil’s claims is set out in their Responses to Schedule A forming part of their Amended Defences. In their Responses, the defendants identified for each claim:

In column T, whether the claim was admitted in whole or in part (subject to the cross-claims then advanced), not admitted, or denied;

In column U, the amount admitted; and

In column V, the grounds upon which the claim was not admitted, or denied in whole or in part.

The circumstances in which the defendants’ Responses to Schedules A were prepared are set out in Mr Panayides’ 9^th witness statement, paras. 20-24. At the hearing on 19 May 2006, the claimants agreed to provide to the defendants a version of each Schedule A in computer-readable form with links to the key underlying documents, and the defendants were ordered to provide full particulars in response to Schedule A, identifying in respect of each claim listed therein (a) whether the claim was admitted and (b) if the claim was disputed, full particulars of why the claim was disputed, including what the defendants' case was in respect of columns A to S of Schedule A.

The defendants served responses in draft on 14 and 16 June 2006 and were subsequently given permission to amend their Defences in accordance with these drafts.

The position based on those responses is as follows:

FCI admitted a substantial proportion of Brasoil's claims: in P38, totalling US$ 36,115,186.14; and in P40 totalling US$ 68,143,131.02. The claims which FCI admitted in whole total US$ 35,682,269.59 – P38 and US$ 68,012,603.51 – P40. Where FCI admitted claims in part these are taken into account below.

As to the other claims, which FCI either denied or did not admit, these fell into various categories:

Claims which were denied on the basis that a document was missing, but which have been totally resolved as the document which was missing has now been located.

Claims denied on the basis that no copy of the signed Side Letter Agreement has been found.

Claims denied on the basis that the total sum paid pursuant to the purchase order exceeded the limit of the Side Letter Agreement, and there is no Side Letter Agreement wording in the relevant RFP for the payment.

Claims denied on the basis that there was no attachment to the Side Letter Agreement and so it was (supposedly) not clear whether the Side Letter Agreement covered the payment, or on the basis that the Side Letter Agreement did not cover the payment.

Claims denied on the basis that miscellaneous documents were missing.

Claims denied on the basis that the payment was made without an RFP.

Claims falling within Section B of Schedule A to the Particulars of Claim.

Claims in relation to payments to Jurong.

The claimants have prepared Schedules listing all the claims (identified by their line number in Schedule A) falling into these various categories. These Schedules are the Schedules which were attached to Mr Panayides’ 10^th witness statement, except that certain of the Schedules have been updated.

The Schedules have columns containing the key information from Schedule A, including whether the defendants deny or do not admit the claim (Column T), and the grounds on which they do so (Column V).

The claimants have added a Column W which sets out, for each claim, the 'Claimants' Response' to the defendants' grounds for denying or not admitting the claim.

The E bundles were prepared, containing the key documentation (i.e. the Side Letter Agreement, the purchase order or contract between FCI and the supplier, the invoice from the supplier, the RFP from FCI, proof that the payment was made by Brasoil in the form of a bank statement, as well as any other relevant documents) for each claim appearing in the Schedules. Within these files, the documents relating to each claim are separated by tabs with the relevant claim number.

The table below sets out the categories of claims, the value of those categories, the E bundles containing the relevant documents, and the paragraph numbers in Mr Panayides’ 9^th witness statement where the claims are addressed.

By far the most important category of unresolved claims is the Jurong claims, which concern some US$ 105 million. These are dealt with separately below and do not appear in the above table.

Aside from the payments to Jurong:

The majority of the objections have now been resolved: US$6,737,215.11 (P38) and US$38,109,714.74 (P40).

The other objections added together amount to US$ 4,230,041.51 (P38) and US$ 14,841,263.03 (P40).

These amounts mostly relate to Section B of Schedule A (US$ 3,206,836.70 (P38) and US$ 8,043,618.72 (P40)), as to which in large part Brasoil no longer pursues its claim (where there is no Side Letter Agreement or RFP with Side Letter Agreement wording), leaving only limited issues to be determined at this trial.

FCI denied (or made no admissions in respect of a large number of claims) on the ground that a particular document was not attached to the computer-readable versions of Schedule A supplied to FCI, or that the copy attached was illegible or incomplete: for example, there was no Side Letter Agreement, or no RFP, or no proof of payment, or the invoice was missing or illegible.

These claims have now been resolved, the missing documents having been found. These claims are listed in the Schedules entitled ‘Totally Resolved Claims’. The claims are addressed in Mr Panayides’ 9^th witness statement, paras. 30 to 46.

After receipt of FCI’s Responses to Schedule A, a team at Clifford Chance investigated whether or not the documents which the defendants had identified as missing were in fact included in the underlying documents attached to the computer-readable Schedule A, and if not, searched for them in the claimants' documentation (most of which is available electronically). For a large number of claims, the documents that the defendants had identified as being missing were located: the documents were checked carefully to ensure that they corresponded with the particular sum which is claimed in the relevant Schedule A, and that the existence of this document fully satisfied the point raised by FCI in their Responses to Schedule A. Clifford Chance subsequently wrote to CDG, then the defendants’ solicitors, explaining that a large number of the documents which the defendants had identified as missing had been located and inviting the defendants to admit those claims. No response to those letters has ever been received. As part of further preparation for the trial, the Clifford Chance team continued looking for documents relating to the disputed claims, and in many cases were able to find further documents which were identified as missing by FCI in their Responses to Schedules A. These further documents have also been checked carefully to ensure that for each claim the particular document which was identified as missing by FCI has been found, and that there are no discrepancies or queries arising out of these documents.

I am satisfied that where the documentation has been found Brasoil is entitled to bring the claims (where FCI previously identified documentation as missing).

There are instances in which the information in Schedule A is slightly different to the documents: by way of example only (there are other similarly minor points), in some instances Columns C and D give values and dates which differ from the actual value and dates of the Side Letter Agreements. In certain cases, this is clearly due to typographical errors in Schedule A, or errors based on computer glitches. In other cases, the differences arise because there are numerous Side Letter Agreements for the same purchase order (relating to different revisions of the purchase order), and Columns C and D contain the total (combined) value of all the relevant Side Letter Agreements rather than the individual values adding up to that total. In other cases, a notional split of the total value of the actual Side Letter Agreement has been made for the purposes of Schedule A. These are very minor points, which have no impact on Brasoil's right to recover. Indeed, in many cases the points have not been raised by FCI.

I selected 2 random examples of claims falling within this category, P38 line 720 and line 1641. Mr Picken satisfied me that these claims were correctly described as totally resolved.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 6,737,215.11 - P38 and US$ 38,109,714.74 – P40.

There were many claims which FCI denied on the ground that there was no signed Side Letter Agreement included in the computer-readable Schedule A.

For the vast majority of these claims, a copy of the relevant signed Side Letter Agreement or an RFP containing the Side Letter Agreement wording has been found. These claims are included in the Schedules of totally resolved claims.

For a very limited number of claims, it has remained not possible to locate a copy of the signed Side Letter Agreement or an RFP with the Side Letter Agreement wording.

In those cases, although Schedule A identifies that there was a Side Letter Agreement and gives the date and value of that Side Letter Agreement, either the copy of the Side Letter Agreement that is included in Petrobras' files is not signed or no copy of the Side Letter Agreement (whether signed or unsigned) can now be found.

These claims are set out in the Schedules entitled ‘SLA Missing/Not Signed’. The total value of these claims is relatively small: US$ 72,645.55 for P38 and US$ 65,718.56 for P40. Each of these claims is addressed individually in Mr Panayides’ 9^th witness statement, paras. 80 to 114, and Ms Stutz’s 1^st witness statement, paras. 122-126 and certain claims are also addressed in Mr Orlando’s 2^nd witness statement, paras. 108-110.

In summary, although the signed copy of the Side Letter Agreement cannot now be found, it is quite clear that there must have been a signed Side Letter Agreement for each of the relevant payments. There are a number of reasons why this is established on a balance of probabilities.

First, the Invoice Approval Procedure, the written procedure in accordance with which invoices were approved for payment by Petrobras and paid by Brasoil, contained various checks and controls to ensure that no payments were made unless the relevant Side Letter Agreement had been signed by all parties. Accordingly, it is unlikely that any invoices would have been paid unless there was a signed Side Letter Agreement for the relevant purchase order.

Secondly, for most of the payments, there are documents in Petrobras/Brasoil’s files showing when the relevant Side Letter Agreement was approved for issue or when it was sent to the supplier for signature. In certain cases, these documents show that the Side Letter Agreement was sent to the supplier by Mr Orlando who was based in Singapore. Mr Orlando is sure that Side Letter Agreements would have been signed before payment of the invoices were made. I accept this evidence.

The Database records that the relevant purchase orders for these claims were all ‘com Side Letter’ (meaning ‘with Side Letter’), indicating that a signed Side Letter Agreement had been received.

For each claim the RFP has been signed as ‘conferido’ (i.e. ‘checked’) by Accenture, showing that all the relevant documents had been checked.

Ms Stutz of Accenture is sure that, when she signed the relevant RFPs she would have seen signed Side Letter Agreements for the relevant purchase orders.

There is, in short, considerable evidence demonstrating that there were signed Side Letter Agreements.

The most likely explanation, for these very few payments for which the signed copies of the Side Letter Agreements cannot now be found, is that the signed copies of the Side Letter Agreement have simply been lost. Given the sheer scale of the payments which were being made by Brasoil, it is hardly surprising that this should be the case. Mr Picken took me through line 168 by way of an example for P38 - there are 6 further claims with similar characteristics.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 72,645.55 – P38 and US$ 65,718.56 – P40.

FCI also denied certain claims (in whole or in part) on the ground that the total sum paid under the relevant purchase order exceeded the relevant limit in the Side Letter Agreement, and there was no Side Letter Agreement wording in the relevant RFP.

The claims denied by FCI on this basis (whether in whole or in part) are listed in the Schedules in the Skeleton Bundleentitled ‘Total sum paid exceeds SLA limit’. The total value of the claims which are denied in whole or part on this ground is US$ 216,285.18 for P38 and US$ 432,488.11 for P40. However, the total amount which is in dispute is actually less than this as in some cases the majority of the claim is admitted by FCI and only a small part is denied on the basis that it was paid in excess of the Side Letter Agreement value. The amounts in dispute are US$ 159,632.53 for P38, and US$ 293,081.82 for P40. Each of the individual claims in the Schedules entitled 'Total sum paid exceeds SLA limit' is addressed individually in Mr Panayides’ 9^th witness statement, paras. 122 to 186, and the claimants’ position for each claim is summarised in Column W of the Schedules.

The position in relation to these claims is, in summary, as follows:

There are two types of claims falling within (1) above (the first category) – where in fact the Side Letter Agreement value has not been exceeded and there is therefore no overpayment:

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 211,253.89 and US$ 4,301.38 – P38 and US$ 432,261.15 and US$ 226.16 – P40.

FCI has denied a large number of claims on the ground that there was no attachment to a particular Side Letter Agreement, and therefore it was (supposedly) not clear whether the Side Letter Agreement covered the relevant payment. FCI has also denied many further claims on the related ground that the particular Side Letter Agreement did not cover the relevant payment. These claims are listed in the Schedules entitled ‘No attachment to SLA/SLA does not cover payment’. The total value of the claims is US$ 425,872.17 for P38 and US$ 1,954,438.61 for P40.

It is important to appreciate that the claims falling into this category relate to payments made to consultants employed by FCI under consultancy contracts because, as explained above, the Side Letter Agreement regime relating to consultants' contracts differed slightly from the regime which applied to other suppliers. In particular consultants were employed pursuant to standard form contracts between FCI and the individual consultant (or the consultancy firm if there was one). Exhibit A to these standard form contracts set out certain details, e.g. the consultant’s name, the daily/weekly/monthly rate, and the expected duration of the consultancy. As the contracts for these consultants specified rates for the work to be carried out, rather than a fixed total price, the Side Letter Agreement did not include a fixed financial cap or value as the other Side Letter Agreements did, but instead referred to the consultancy contract and Exhibit A, which was to be attached to the Side Letter Agreement. The agreed procedure was that Petrobras would issue a Side Letter Agreement for each consultant, and each consultant had to attach his consultancy contract (including Exhibit A), and sign and return the Side Letter Agreement with the attachment. Where the consultancy contract was with a consultancy firm (comprising various consultants), the Side Letter Agreement would be with the consultancy firm (rather than the individual consultants). The consultancy firm was required to attach its contract with FCI and the various Exhibits A to it (each individual consultant had their own Exhibit A). The Side Letter Agreement, together with the contract plus Exhibits A, had to be sent to Brasoil by fax and originals (in 3 copies) sent by post or courier. As per the procedure for other suppliers, outstanding and new invoices had to be issued to Brasoil. The standard form consultancy contracts often did not, unlike the purchase orders with other suppliers, have a specific reference number. They identified the consultancy firm, or consultant’s name, but did not otherwise have any identifying reference. The Side Letter Agreement similarly identified the consultant’s name, and referred to the ‘attached contract’, and the consultancy firm was asked to attach the contract with FCI and return it to Petrobras.

For many of the claims in the Schedules, the basis for FCI's denial was that there was no attachment to the Side Letter Agreement. As to this the relevant consultancy contract and Exhibit A were not included in the computer-readable version of Schedule A that was provided to FCI in the middle of last year. In the majority of cases, the consultancy contract (and Exhibit A) has now been found. For a few consultants, the relevant Exhibit A to the contract has been found, but not the contract itself. There is only one consultancy firm for which neither the consultancy contract nor Exhibit A can be found.

For certain claims, the point raised by the defendants has been totally resolved, and no other issues arise. FCI would accordingly be obliged to admit these claims were it now to undertake the exercise which it did last year, when it submitted its Responses to Schedule A. These claims therefore have the comment 'Totally Resolved' included in the claimants' response in Column W in the 'No attachment to SLA / SLA does not cover payment' Schedules. They total US$ 137,342.90 (P38) and US$ 540,530.35 (P40).

However, for many of the claims, the second objection that was raised by FCI appears also to be applicable. This second objection was that the Side Letter Agreement did not cover the relevant payment.

As to that second objection it would seem that the argument raised by FCI is that the Side Letter Agreement is limited to a specific period, and the consultancy services for which payment was made were performed outside that period. FCI appears to say that the Side Letter Agreement was limited to a specific period because Exhibit A to the consultancy contract, which was attached to the various Side Letter Agreements, set out the 'expected duration' of the consultancy contract. FCI's contention appears to be that the term of the consultancy contract was limited to that 'expected duration', and that therefore payments made to consultants for services performed outside this period were not due pursuant to the consultancy contract, and therefore not covered by the Side Letter Agreement.

Any such argument by FCI is, in my opinion, unsustainable for the following reasons. The standard form consultancy contract stated, by clause 1, that it remained in force until the Contract between FCI and Petrobras (as defined in the consultancy contract) terminated; clause 13 provided that the contract could be terminated by notice. Although Exhibit A set out the 'expected duration' of the consultancy contracts, where the projects were delayed and the conversion periods extended as a result, the 'expected duration' would be exceeded and the consultants would remain involved in the projects for longer than originally anticipated – as indeed happened with FCI’s obvious concurrence, since it was FCI which was employing the consultants. Further, FCI issued and signed RFPs for all these payments, as well as entering into Side Letter Agreements in respect of the consultancy contracts, in many cases after the expiry of the ‘expected duration’ of these consultancy contracts.

For completeness, although it is not necessary to consider the position of each of the consultants, (given that FCI’s point is plainly wrong), this has been done in Mr Panayides’ 9^th witness statement, paras. 198-371. In that statement, for each consultant the ‘expected duration’ of the consultancy contract identified in Exhibit A is noted, and an explanation given as to whether or not the invoiced services for each claim fall within or outside that period.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 425,872.17 – P38 and US$ 1,954,438.61 – P40.

Aside from the categories addressed above, there were other claims which FCI chose not to admit or to deny on miscellaneous grounds concerning the non-inclusion of various documents in the computer-readable Schedule A provided to the defendants. These claims are listed in Schedules entitled ‘Miscellaneous Queries’. Their total value is US$ 80,844.39 for P38 and US$ 1,169,407.76 for P40.

The issues which arise on these claims are mainly minor. In many cases, FCI identified a particular document as missing (e.g. an RFP), and a copy of that document has now been found, but there is some minor point of clarification required on the document. By way of example, the RFP might give the old invoice number (i.e. the invoice as it was originally issued to FCI), rather than the reference number for the re-issued invoice addressed to Brasoil. It is, however, clear in each case that the RFP relates to the relevant payment, as Mr Panayides explains in detail.

In other cases, the document which FCI identified as missing (e.g. an RFP or an invoice) has not been found, but it is clear from the other contemporaneous documents or from the Database that the missing document did exist. By way of example, the invoice for the claim in P38 Schedule A, Section A, line 1529 (payment to Projemar) cannot be found. However Schedule A gives the reference number of the invoice as 2000-068 (Column F) and the amount of payment as US$ 7,518.84 (Column H). RFP-BR-P38-6049 (at P38/E9/1529), signed by FCI, gives the same invoice reference number and amount. These same details are given on the Database. They are consistent also with the bank statement showing that payment was made.

There are a few other miscellaneous points arising on other claims, each of which is addressed by Mr Panayides in his 9^th witness statement.

There are three claims (P38 Schedule A, Section A, lines 1617-1619) which are not addressed in the 'Miscellaneous Queries' section of Mr Panayides’ 9^th witness statement, since they were at that time included in the 'Totally Resolved Claims' category and Schedule, but which do require some explanation (and which have now been moved to the ‘Miscellaneous Queries’ Schedule). This explanation is given in Mr Panayides’ 10^th witness statement, paras. 76 to 81 to which I refer.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 80,844.39 – P38 and US$ 1,169,407.76 – P40.

There are various claims, in addition to those addressed above, where the basis of the non-admission by FCI, in its Responses to Schedule A, was that there was no RFP in the computer-readable Schedule. FCI therefore essentially puts Brasoil to proof that the money was owed to the third party supplier as a matter of fact and law, since FCI accepted in its Amended Defences that if there was an RFP that was sufficient to constitute such proof.

These claims are set out in the Schedules entitled 'Payments made without RFPs'.

It is important to appreciate that they are not cases where there was or may have been an RFP which cannot now be located, but instances where FCI refused to issue an RFP.

For each of these payments, there is, however, a document called a 'Solicitação de Pagamento' from the relevant project manager at Petrobras authorising the payment of the invoice, or a fax from someone at Petrobras (usually Mr Orlando, as project manager) authorising payment of the invoice in the absence of an RFP.

The total amount claimed for P38 is US$ 227,557.52 and the total amount for P40 is US$3,175,591.27.

In some, but not all cases, there are Side Letter Agreements which cover the payments. In such cases, Brasoil is entitled to recover where it can show (i) that there was an invoice addressed to Brasoil by the supplier for the sum in question, and (ii) that the services the subject of the invoice had been carried out.

These claims are as follows: P38 Schedule A, Section A, lines 434 (Daniel Measurement & Control Inc.), 588 and 590 (Forship Engenharia), 1131-1137 and 1140 (Kromav Engenharia); P40 Schedule A, Section A, lines 1409, 1470 and 1471 (Inepar/IESA – partly), 1982-2006 and 2011-2044 (Kromav Engenharia – partly), 2314, 2343-2345 and 2347 (Nuovo Pignone), lines 2554 and 2556-2567 (Projemar Estudos e Projetos de Engenharia - partly).

Out of these, for P40, the largest items are the claims in respect of sums paid to Nuovo Pignone for the turbo generators and turbo compressors, the subject of claims 2314, 2343, 2344, 2345 and 2347, totalling US$ 2,122,000. Each of these claims fell within a Side Letter Agreement, and the requirements identified above were satisfied in each case. Sums were properly owed to Nuovo Pignone since the services all fell within the original purchase order P40-CO-0002 placed with Nuovo Pignone, together with its First Amendment. A Side Letter Agreement was entered into dated 28 April 2000 with a value calculated to represent the balance of the sums then outstanding and that would become due under the original PO and the First Amendment to that PO. After a number of substantial payments had been made under the Side Letter Agreement, at a meeting on 26 July 2000, representatives of Brasoil, FCI and Nuovo Pignone agreed a timescale for the payment of the sums then outstanding, according to progress on specifically identified outstanding tasks (see Mr Orlando’s second witness statement, paragraphs 124-131). The subsequent invoices, the subject of claims 2314, 2343, 2344, 2345 and 2347, expressly referred to the tasks to which the further payments were linked via the minutes of the meeting of 26 July 2000. Thus, the payments in these entries all related to services provided for under the original contract P40-CO-0002, according to the timing established at the meeting of 26 July 2000. Invoices were submitted to Brasoil by Nuovo Pignone in each case. The work was duly carried out, as explained by Mr Altamiro at paras. 33 to 46 of his 1^st witness statement. It follows that these sums were due to Nuovo Pignone as a matter of fact and law, and are properly recoverable from FCI pursuant to the Side Letter Agreement.

For a number of the other claims (besides Nuovo Pignone) falling within this category, it is clear that the services in question were covered by the relevant Side Letter Agreement, that an invoice was submitted to Brasoil by the supplier in question and that the work had been duly completed by the supplier, who was entitled to payment; in other words, the requirements set out above are satisfied. These claims are therefore recoverable in whole.

As to P38 claim 588, I am not satisfied that Brasoil has established that the work the subject of that claim was carried out at FCI’s request and I accordingly disallow that claim in the amount of US$ 7,123.07.

In relation to the claims where part of the sums paid to a particular supplier, but not all of them, were covered by a Side Letter Agreement, Brasoil is entitled to recover for the part of the claims in respect of a particular supplier which fall within the relevant Side Letter Agreement (but not as regards the payment in excess of the limit contained in the Side Letter Agreement). These claims are as follows:

P40 Schedule A, Section A, lines 1409, 1470 & 1471 (Inepar/IESA): there is a balance of US$ 39,323.66 unused under the Side Letter Agreement, which is less than the total sum of these claims. Invoices were submitted to Brasoil for each of these claims, and the work which gave rise to the invoices was properly carried out. The invoices themselves as issued by Inepar for claims 1470 and 1471 both note expressly that the invoice ‘is part of the old contract between Inepar and FCI’ (i.e. the contract the subject of the Side Letter). In the circumstances, Brasoil is entitled to recover US$ 39,323.66 in respect of these claims.

P40 Schedule A, Section A, lines 1982-2006 and 2011-2044 (Kromav): there is a balance of US$ 48,296.92 available under the Side Letter Agreement (taking into account claims that FCI has admitted). The claims total US$ 140,285.59. All these Kromav invoices relate to the costs of translating manuals and drawings from English to Portuguese, the subject of the original contract placed by FCI with Kromav. In the circumstances, it is clear that Brasoil has good claims for the unused balance of the Side Letter Agreement, namely US$ 48,296.92.

P40 Schedule A, Section A, lines 2554 and 2556-2567 (Projemar): there is an unused balance under the relevant Side Letter Agreement of US$ 113,475.46, which is substantially less than the total sum of these claims. Invoices were submitted to Brasoil for each of these claims, and the work which gave rise to the invoices was properly carried out. The vast majority of the invoices were for work in relation to administration of manuals and data-books. This work fell within Projemar’s original contract, to which the Side Letter Agreement related. Thus services to the value of the unused part of the Side Letter Agreement were paid for via the invoices the subject of these claims. In the circumstances, Brasoil is entitled to recover US$ 113,475.46 in respect of these claims.

Brasoil no longer pursues the following:

P38 Schedule A, Section A, lines 1568-1579 and 1586, for (in total) US$ 169,462.09 paid to Projemar, as these did not fall within any Side Letter Agreement, there were no RFPs issued by FCI in respect of these payments, and, on analysis, Brasoil accepts that there is no entitlement.

P40 Schedule A, Section A, lines 276-280 and 291-292, for (in total) US$ 184,945.33 paid to ABS, for the same reason.

The parts of the claims in respect of Inepar/IESA, Kromav and Projemar in P40 which do not fall within the Side Letter Agreement limits.

P40 Schedule A, Section A, line 2346, for US$ 486,000 paid to Nuovo Pignone, as it has been identified that it does not fall within the Side Letter Agreement, because it relates to services performed pursuant to a contract placed directly by Brasoil with Nuovo Pignone.

Thus the claims maintained by Brasoil within this category are: for P38, US$58,095.43 and for P40 US$2,323,096.04. I have disallowed in the case of P38 claim 588, so US$ 7,123.07 falls to be deducted from US$ 58,095.43 i.e. US$ 50,972.36.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 50,972.36 – P38 and US$ 2,323,096.04 – P40.

Section B of Schedule A sets out the claims which are brought in restitution and/or on other bases, because there was no Side Letter Agreement pursuant to which the payment was made by Brasoil; as opposed to cases where there is a Side Letter Agreement or an RFP or Purchase order with Side Letter Agreement wording, in which case the claim falls with Section A.

The total amount claimed in P38 Schedule A, Section B is US$ 3,206,836.70; the total amount claimed in P40 Schedule A, Section B is US$ 8,043,618.72.

However, in the case of certain Section B claims research has shown that there is in fact a Side Letter Agreement (usually in the form of an RFP containing the Side Letter Agreement wording). In these cases, despite the fact that the claims are set out in Section B, they fall to be treated as though they were Section A claims because they are brought in contract on the same basis as the other claims in Section A; they are not pure Section B claims.

For P38 the Section B claims which are in truth Section A-type claims are at lines 21-29 of Section B. These are all payments to Maritima Overseas Inc., another company (like FCI) in the Maritima group. For each of these claims, the relevant RFP contains the Side Letter Agreement wording. FCI has raised various grounds of defence in relation to certain of these claims, all of which are addressed in Mr Panayides’ 9^th witness statement, paras. 499-501. There is no substance in any of FCI’s points. FCI have in addition effectively admitted the claim in line 30.

For P40 the Section B claims which are in truth Section A-type claims are addressed in Mr Panayides’ 9^th witness statement, para. 503.

In summary:

Brasoil confirms that claims in Section B where there is no Side Letter Agreement or RFP are no longer pursued. In addition, certain claims in Section B are no longer pursued because it has not been possible to locate sufficient information to justify maintaining the claims.

The claims no longer pursued for the reasons given above are the following: P38 Schedule A, Section B, lines 3-17 (Forship Engenharia), line 18 (Frank Mohn A/S), line 19 (Fullion (S) Pte), line 20 (Kongsberg Maritim Ship), lines 31-32 (Ohji Hercules Industries) and line 33 (Wartsila); P40 Schedule A, Section B, lines 3-7 (AC Engenharia e Sistemas S/C), line 8 (Advantech Peripherals), line 9 (Dockwise), lines 10-39 (Forship Engenharia), lines 40-41 (Fullion (S) Pte), lines 42-46 (GSI Pte), line 47 (Harribel), lines 48 to 53 and 56 (Inepar/IESA, save insofar as covered by a Side Letter Agreement as discussed above), lines 59-63 (L.C. Inspeçõs Técnicas), lines 74-75 (Norsafe), lines 76-77 (Ohji Hercules Industries Pte), lines 79 to 80, 82 to 83, 85 to 87, 90 to 101 (Projemar, save insofar as covered by a Side Letter Agreement as discussed above), line 125 (Promosub Projeto e Monitoração de Corrosão) and lines 127-135 (Ultratec Engenharia).

Brasoil says it has no desire to take up time advancing arguments which might be described as speculative, the more so in circumstances where FCI is not attending trial and where the Court shares Brasoil’s concern that only claims for which there is a sound basis are put forward. The consequence of Brasoil no longer pursuing these claims is that, the total amount claimed in P38 Schedule A, Section B is US$ 123,419.52, and the total amount claimed in P40 Schedule A, Section B is US$ 816,390.15. From US$ 816,390.15 falls to be deducted US$ 29,350 = US$ 787,040.15.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 123,419.52 – P38 and US$ 787,040.15 – P40.

Brasoil does not maintain all its pleaded claims but is instead seeking judgment (on the basis set out above), as follows:

I give judgment in relation to admitted claims and disputed Non-Jurong claims for (a) US$ 43,384,492.58 and US$ 4,301.38 – P38 and (b) US$ 112,854,280.52 and US$ 226.16 – P40.

In view of my conclusions set out above it is unnecessary (save to the extent that I have already done so) to consider, in the case of the non-Jurong claims, the alternative claims in restitution and/or on other bases.

The Jurong claims relate to Brasoil’s payments totalling US$ 45,182,321.38 in P38 (see P38 Schedule A, Section A, lines 875 to 893) and US$ 64,775,762.56 in P40 (see P40 Schedule A, Section A, lines 1708 to 1748).

Of these amounts, US$ 40,575,691.02 is disputed in the case of P38, and the entirety is disputed in the case of P40.

It is convenient at this point in the judgment to refer to the background.

In the summer of 1999, as Brasoil was becoming concerned at the progress being achieved on the projects, it identified that (in its view) part of the responsibility for the delays rested with Jurong, as well as with FCI’s management of the project which was having an impact on Jurong’s ability to carry out its work.

Brasoil discovered that Jurong had a number of outstanding claims against FCI for variations to their scope of work, and that Jurong attributed the delays to FCI’s unwillingness to settle these variation order requests.

Jurong contacted Brasoil in March 2000, saying that it was owed very substantial sums of money by FCI and threatening that it would stop work if the outstanding sums were not paid soon. Petrobras/Brasoil took steps to reassure Jurong that it would receive payment through direct payment by Brasoil to suppliers including Jurong.

Jurong was paid some sums under the tied account system operative during the early part of 2000, although this did not extinguish the arrears owed to it.

Jurong was a key supplier to whom the Side Letter Agreement system described above was to be applied. Information was sought and obtained from Jurong during April to June 2000 in order that a Side Letter Agreement could be entered into to reassure Jurong that it would continue to receive payment for its services. The position was complicated by the fact that Jurong had a large number of unresolved variation order requests, and continued to submit further variation order requests, and wanted reassurance that these would be dealt with. However, Brasoil had only recently become aware of these variation order requests, and was not willing to commit to paying sums without being satisfied that they were properly due.

Further, there were two Amendments entered into between Jurong and FCI, during the period in which information was being sought from and provided by Jurong as to their financial position with FCI: (i) the Second Amendment to the P38 Jurong sub-contract dated 22.6.00, whereby FCI agreed to pay Jurong US$ 9,374,507.73 for the execution of additional repair steel of 3,629.31 tons, and (ii) the Third Amendment to the P40 Jurong sub-contract dated 8.6.00, whereby FCI agreed to pay Jurong US$ 8,014,987 for the execution of work said to be additional to the original sub-contract, which was identified by reference to an attached list of variation orders.

Side Letter Agreements were entered into between Brasoil, FCI and Jurong on 6 and 7 July 2000 (for P40 and P38 respectively), with values of US$ 31,505,724.81 and Sing$ 566,878.96 for P40 and US$ 20,991,682.90 and Sing$150,507.35 for P38. The Singapore dollar figures were provided for in order to cover certain payments made by Jurong to third parties at FCI’s request, which Jurong was entitled to recover from FCI. These Side Letter Agreements did not cover the above-mentioned amendments.

Payments were made under these Side Letter Agreements in July and August 2000. Brasoil now seeks to recover these payments.

Further Side Letter Agreements were entered into in respect of purchase orders issued by FCI to Jurong whereby Jurong was to contract with third parties for the supply of materials, equipment or services, and would then invoice FCI the sum charged to Jurong by the third parties, plus a 10% administration fee.

Jurong continued to submit variation order requests to FCI during the summer of 2000.

From this point, FCI started to pass these variation order requests on to Brasoil and to assert that Brasoil should issue a corresponding Change order to FCI. Brasoil says that this was mostly inappropriate. However, by this stage, it was clearly very unlikely that FCI would be paying any further significant sums to Jurong, as FCI had apparently run out of funds to complete the projects; consequently, the resolution of these variation order requests was of particular practical importance to Brasoil/Petrobras.

In these circumstances, Brasoil/Petrobras commenced detailed analysis of the outstanding variation order requests as well as the variation order requests that had been agreed in the Third Amendment to the P40 Jurong sub-contract.

By the autumn, completion of the units to the state where they could be transported back to Brazil was approaching. The issue of outstanding variation order requests by Jurong to FCI was, however, threatening to derail completion and release of the units.

On 8 September 2000 FCI sent Brasoil lists of the outstanding variation order requests submitted by Jurong, which Jurong valued at nearly US$ 28 million for P38 and nearly US$ 34 million for P40. It was clear that Jurong might well have refused to release the units if the variation order requests remained unresolved and unpaid.

In circumstances where the funds to make any payment to Jurong would have to be provided initially by Brasoil, it clearly made sense for Brasoil (i) to negotiate with Jurong and FCI to attempt to promote and reach a solution satisfactory to all parties, and (ii) to continue to analyse the variation order requests submitted by Jurong in order to be in a sensible position to negotiate. Both of these courses were pursued in September, October and into November 2000.

The primary focus of the negotiations was effectively to determine the sum which would be paid to Jurong in respect of its unresolved variation order requests. The sum to be paid to Jurong in respect of the services provided by Jurong would be (i) the unpaid parts of the original fixed price lump sums under the Jurong sub-contracts, (ii) the unpaid sums in respect of agreed change orders and amendments, and (iii) the sum agreed in respect of the unresolved variation order requests. As (i) and (ii) were fixed, the key issue under negotiation was the quantum of (iii).

The outcome of these negotiations was entry by Brasoil, FCI and Jurong (now known as SembCorp Marine Ltd) into the Jurong Settlement Agreement (‘JSA’) on 14 November 2000. Under the JSA, a quantum was agreed for the unresolved variation order requests (labelled in the JSA as ‘Last VO’s agreed’) as part of the identification of the sums due from FCI to Jurong in clause 1. Global sums due under the Jurong sub-contracts were divided in clause 1 into the ‘Amount Due Now’ and the ‘Retention amount’. Clause 3 of the JSA provided:

Payment of the respective “Amount[s] Due Now” was made by Brasoil to Jurong on 24 November 2000, in the sums of US$ 36,137,875.25 for P38 and US$ 46,428,905.53 for P40.

In addition and subsequently payments were made by Brasoil to Jurong under Side Letter Agreements covering the purchase orders issued by FCI in respect of contracts with third party suppliers entered into by Jurong at FCI’s request; and in October 2002, Brasoil paid Jurong the Retention amounts as provided for in the JSA.

Brasoil claims in these proceedings from FCI all the sums which it paid to Jurong, comprising: (i) the sums paid in July and August 2000 after conclusion of the Side Letter Agreements on 6 and 7 July 2000; (ii) the sums paid on 24 November 2000 and in October 2002 following conclusion of the JSA; and (iii) the sums paid to Jurong in respect of Jurong’s payments to third parties.

Following the payments made on 24 November 2000, the units departed Singapore and were transported to Brazil, where they arrived in January 2001.

Further work was then carried out on the units, still within the ambit of FCI’s responsibilities under its fixed price workscope (which subsisted until redelivery at the Campos Basin) and pursuant to contracts entered into directly between FCI and the relevant suppliers.

On 28 April 2001 (for P38) and 23 July 2001 (for P40), the respective Protocols of Delivery were signed by Brasoil and FCI, and the units were then moved to the Campos Basin, where further work was carried out.

Against this background, it is important to appreciate that Brasoil’s Jurong claims are made in contract alternatively in restitution and/or on other bases.

It is necessary to address Brasoil’s claims by reference to five categories, as follows:

These are contractual claims under the Side Letter Agreements dated 6 and 7 July 2000. The claims relate to the payments which Brasoil made to Jurong in July and August 2000. The payments (and therefore the claims) total US$ 4,606,630.36 in P38 and US$ 5,346,792.19 in P40. Alternatively Brasoil brings the claims in restitution and/or on other bases.

These are claims which on Brasoil’s primary case are also brought in contract, again under the Side Letter Agreements dated 6 and 7 July 2000 and/or under the JSA. Alternatively, Brasoil brings the claims in restitution and/or on other bases. Category 2 relates to the parts of the payments made on 24 November 2000 following the JSA which are covered by the unused part of the values in the Side Letter Agreements dated 6 and 7 July 2000, i.e. US$ 16,385,052.56 (of the total sum of US$ 36,137,875.25 paid on 24 November 2000) in P38 and US$ 26,158,932.62 (of the total sum of US$ 46,428,905.53 paid on 24 November 2000) in P40.

These are claims for the part of the payments made on 24 November 2000 following the JSA which Brasoil accepts do not fall within the Side Letter Agreements dated 6 and 7 July 2000 since the limits contained in those Side Letter Agreements had been reached when the 24.11.00 payments were made. On any view, those payments exceeded the values in the two Side Letter Agreements. This category accordingly relates to the sums of US$ 19,752,822.69 in P38 and US$ 20,269,972.91 in P40. These claims are brought under the JSA and/or in restitution and/or on other bases.

These are claims for the Retention amounts paid (in accordance with the JSA) by Brasoil to Jurong in October 2002. The sums involved are US$ 3,898,251.97 in P38 and US$ 5,841,498.70 in P40. Since the payments were paid pursuant to RFPs issued by FCI which contained the Side Letter Agreement wording, these claims are contractual; alternatively they are brought under the JSA and/or in restitution and/or on other bases.

These are claims for payments made to Jurong in respect of sums payable by Jurong to third parties pursuant to contracts entered into at FCI's request, described in clause 2 of the JSA as ‘third party reimbursable cost’. These claims are made under Side Letter Agreements and/or under the JSA and/or in restitution and/or on other bases. They total US$ 539,563.79 in P38 and US$ 7,158,566.13 in P40.

Before addressing each of these five categories in turn, it is convenient to set out the components of the sums which it was agreed would be paid to Jurong under the JSA:

For P38, the payments comprised:

The fixed price lump sum which was payable under the original sub-contract between FCI and Jurong (P38-CO-001): US$ 24.5 million.

The further monies which FCI and Jurong had agreed would be paid under Amendment No. 1 to P38-CO-001 for US$ 5,108,012 dated 27 March 2000, which concerned the execution and completion of additional new conversion steelwork over and above the limit in the original sub-contract.

The further monies which FCI and Jurong had agreed would be paid under Amendment No. 2 to P38-CO-001 for US$ 9,374,507.73 dated 22 June 2000, in respect of the execution of additional steel repair over and above the limit in the original sub-contract.

The further monies which FCI and Jurong had agreed would be paid under Amendment No. 3 to P38-CO-001 for US$ 2,103,313.63 dated 22 June 2000 (described in the JSA clause 1 as US$ 2,103,314), in respect of execution of certain listed work.

Approved Change orders totalling US$ 223,486.65.

Last VOs Agreed: US$ 12 million, being the sum settled by tripartite negotiations for the unresolved variation orders submitted by Jurong.

For P40, the monies consisted of the following:

The fixed price lump sum under the original sub-contract between FCI and Jurong (P40-CO-001): US$ 38.5 million.

The further monies which FCI and Jurong had agreed would be paid under Amendment No. 1 to P40-CO-001 for US$ 1,550,000 dated 26 March 1999 in respect of the execution of total repair/renewal steelwork above the limit in the original sub-contract up to 1,100 tons.

The further monies which FCI and Jurong had agreed would be paid under Amendment No. 2 to P40-CO-001 for US$ 10,350,000 dated 20 April 1999 in respect of the installation of the Riser Deck, fabrication and erection of piping on the Riser Deck, electrical and instrumentation cable installation on the Riser Deck and blasting and painting of the (whole) unit.

The further monies which FCI and Jurong had agreed would be paid under Amendment No. 3 to P40-CO-001 for US$ 8,014,987 dated 8 June 2000, in respect of the execution of certain listed work.

The further monies which FCI and Jurong had agreed would be paid under Amendment No. 4 to P40-CO-001 for US$ 210,549 dated 2 October 2000, in respect of the execution of certain other listed work.

Approved Change orders (17 in total) in the total sum of US$ 2,631,886.62 dated between 28 April 1998 and 10 April 2000.

Last VOs Agreed: US$ 18 million, being the sum settled by tripartite negotiations for the unresolved variation orders submitted by Jurong.

In both P38 and P40, certain payments were made in July and August 2000 under the Side Letter Agreements entered into at the beginning of July 2000.

In P38, the payments amount to US$ 4,606,630.36 (P38 Schedule A, Section A, lines 876-878), and are admitted by FCI and taken into account above.

In P40, the payments amount to US$ 5,346,792.19 (P40 Schedule A, Section A, lines 1709-1711), and were disputed by FCI on the grounds that no Side Letter Agreement, invoice or proof of payment had been provided.

As to those disputed (P40) claims, the documentation for the claims in lines 1709-1711 identified by the defendants as missing has all been located and provided to the defendants by Clifford Chance's letter of 11 September 2006, so resolving the objections which the defendants had raised.

These claims are straightforward contractual claims under Side Letter Agreements where all the requisite documentation has been provided (including RFPs submitted by FCI).

In view of FCI's admission of the equivalent claims in P38, these claims are now therefore established.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 5,346,792.19 – P40.

In view of my conclusions set out above it is unnecessary to consider the alternative claims in restitution and/or on other bases.

Category 2 is the parts of each of the payments of the Settlement Sum on 24 November 2000 (the subject of line 875 in P38 Schedule A, Section A, and line 1708 in P40 Schedule A, Section A) which Brasoil contends (but FCI denies) were paid under the Side Letter Agreements entered into in July 2000 and/or under the JSA.

There were substantial balances available from the July 2000 Side Letter Agreements, which had not been used by 24 November 2000. For P38, the Side Letter Agreement dated 7 July 2000 had a value of US$ 20,991,682.90 and Sing$150,507.35. The payments made on 9 August 2000 totalled US$ 4,606,630.36, leaving a balance of US$ 16,385,052.56 (and Sing$ 150,507.35) to be paid before the Side Letter Agreement value was reached. For P40, the Side Letter Agreement dated 6 July 2000 had a limit of US$ 31,505,724.81 and Sing$ 566,878.96. The payments made on 25 July and 9 August 2000 totalled US$ 5,346,792.19, leaving a balance of US$ 26,158,932.62 (and Sing$ 566,878.96) to be paid before the Side Letter Agreement value was reached.

As to this:

The Side Letter Agreements covered sums falling due from FCI to Jurong under the P38 and P40 Jurong sub-contracts, P38-CO-001 and P40-CO-001.

Pursuant to the Side Letter Agreements, where FCI failed to pay Jurong, Brasoil was obliged, on receipt of an appropriate demand, to make payment to Jurong of the sums invoiced, unless and until the Side Letter Agreement limit was reached.

These requirements are all satisfied in respect of the Category 2 payments. The entirety of the sums paid on 24 November 2000 in respect of both P38 and P40 were sums that had fallen due from FCI to Jurong under the sub-contracts P38-CO-001 and P40-CO-001. The payments were made in respect of the ‘Amount Due Now’ or ‘Settlement Sum’ identified in clause 1 of the JSA, which was expressly identified in clause 1 and the recitals to the JSA as arising under the respective sub-contracts P38-CO-001 and P40-CO-001.

Each Side Letter Agreement covered all payments referable to the contract the subject of the Side Letter Agreement. The specific items by reference to which the Side Letter Agreement values were calculated (and which, on any view, therefore, must have been covered by the Side Letter Agreement) remained mostly unpaid by 14 November 2000 and were expressly included in the Settlement Sum. The value of the Side Letter Agreement in P38 was calculated by Brasoil to cover (i) the then unpaid part of the original fixed price lump sum under the sub-contract, (ii) the sum due from FCI to Jurong under the First Amendment to the P38 Jurong sub-contract, and (iii) other relatively minor items. The value of the Side Letter Agreement in P40 was calculated by Brasoil to cover (i) the then unpaid part of the original fixed price lump sum under the sub-contract, (ii) the First and Second Amendments to the P40 Jurong sub-contract, (iii) the Agreed Change orders, and (iv) other relatively minor items.

FCI would have been aware that the Side Letter Agreement values had been calculated to cover these amounts. It would have been obvious to FCI that the items identified above were covered. Clause 1 of the JSA expressly identified the sums due at that point under each component, as well as the sums paid to date under the sub-contract. Even if the entirety of the sums paid to date were to be allocated to the original fixed price lump sum, the unpaid balances of the items by reference to which the Side Letter Agreement values had been calculated would be some US$ 16,334,818.84 for P38 and some US$ 26,044,868.23 for P40. Therefore these components of the Settlement Sum on any view related to matters covered by the Side Letter Agreements.

FCI has denied that the payments were made under the Side Letter Agreements and contended that they were made pursuant to the JSA, presumably relying on the fact that clause 3 of the JSA includes an express undertaking by Brasoil, at FCI’s request, to pay the agreed sums to Jurong, including the Settlement Sum. The JSA did not state that the existing Side Letter Agreements relating to Jurong ceased to apply. The Side Letter Agreements remained in place as valid continuing contracts.

Further, documentation consistent only with the operation and continued effectiveness of the Side Letter Agreements was submitted after the entry into the JSA. FCI’s submission of RFPs was consistent with Brasoil being called upon to make a payment under a Side Letter Agreement, since there was no express requirement for RFPs to be submitted under the JSA. When the time came for payment of the Retention amounts in 2002, FCI submitted RFPs which included the Side Letter Agreement wording - action which was consistent with FCI’s contemporaneous understanding that the JSA operated in tandem with the Side Letter Agreement arrangements.

Further or alternatively, I consider that the sums claimed under Jurong Category 2 are recoverable under the JSA for the reasons set out under Jurong Category 3 below.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 16,385,052.56 – P38 and US$ 26,158,932.62 – P40.

In view of my conclusions set out above it is unnecessary to consider the alternative claims in restitution and/or on other bases.

Category 3 relates to the payments made on 24 November 2000 following the JSA (the subject of line 875 in P38 Schedule A, Section A, and line 1708 in P40 Schedule A, Section A). This category relates to the sums of US$ 19,752,822.69 in P38 and US$ 20,269,972.91 in P40. In both cases, the sums in question are payments of the ‘Settlement Sums’the subject of clauses 1 and 3 of the JSA.

The Jurong Category 3 claims are brought under the JSA and/or as payments to a third party at the defendants’ request and/or on the basis that Brasoil’s payments were made under compulsion of law and/or on the basis that a right of contribution arises (because FCI made a common demand for such payments to both Brasoil and FCI).

Under the terms of the JSA Brasoil was (as between Brasoil, FCI and Jurong) contractually bound to pay Jurong the sums in question “for and on behalf of FCI”. The liability discharged was that of FCI to Jurong (see the express terms of clause 1). Thus Brasoil agreed to discharge liabilities of FCI, which Brasoil was not otherwise liable to pay. The plain intention of clause 3 was that Brasoil should be entitled to be indemnified by FCI in respect of the payments in question (subject of course to any cross-claims that FCI had against Brasoil) by virtue of the express terms of clause 3 (or alternatively under a term to be implied to give effect to the obvious intention of the parties). The contractual arrangements thus adopted were not in the same terms as the Side Letter Agreements, but similar in effect to the Side Letter Agreements. It was contemplated that a final account would be struck as between Brasoil and FCI and that the payments in question made expressly “for and on behalf of FCI” would be brought into account as sums due from FCI to Brasoil (subject to any cross-claims).

I turn to consider whether any deduction should be made from the sums claimed under this head in respect of the ‘Last VO’s agreed’ element of the ‘Settlement Sum’. These Variation Orders were addressed in a document provided to the Court in the course of the hearing, entitled “P40/P38 Components of JSA Settlement Sum and Retention Amount”.

That document showed that to the extent that there might be a cross-claim in respect of the ‘Last VO’s agreed’, the relevant variation orders are those which concern the extension of the project schedules and the overtime worked in order to try to complete the projects as quickly as possible.

The total value of the last variation orders submitted by Jurong amounted to US$ 37,243,453.89 in the case of P38, and US$ 42,836,139.31 in the case of P40. However, the value of these variation orders was agreed in the JSA at a much lower sum: US$ 12 million in the case of P38 and US$ 18 million in the case of P40. These figures were agreed on a global basis, rather than by attributing a particular value to each of the many variation orders.

The variation orders which related to delay and overtime were:

At the invitation of the Court, Brasoil’s witnesses were asked for, and expressed, their view as to the amount of delay which could be attributed to changes introduced by Brasoil.

In the case of P38, Mr Musa’s and Mr Orlando’s view was that no more than 2.5 months’ delay (out of the total of 11 months’ delay) could be attributed to changes introduced by Brasoil. Mr Alencar’s view was that only 5% to 10% of the delay was due to Brasoil.

In the case of P40, Mr Musa’s and Mr Orlando’s view was that, at the most, 11 months (out of the total of 18 months’ delay) could be attributed to changes introduced by Brasoil. Mr Alencar’s view was that less, in the region of 10% to 15% of the delay could be attributed to Brasoil.

Brasoil reserves its position in this regard were the matter to go to the Court of Appeal.

In financial terms, taking a broad-brush approach and applying the proportions (namely 2.5 over 11 for P38, and 11 over 18 for P40) to the notional sums agreed in the JSA for the Jurong variation orders relating to delay and overtime, this would equate to a total of US$ 1,244,138.36 in P38 and US$ 6,437,883.19 in P40.

I consider that these sums should be deducted from the claim under the heading Jurong Category 3.

Brasoil is alternatively entitled to recover the sums paid to Jurong on 24 November 2000 on the grounds that the sums were paid at FCI’s express request.

The same principle is recognised in Halsbury’s Laws of England 4^th Ed., Vol. 40(2) at para. 1377:

Similarly, Goff and Jones, ‘The Law of Restitution’ 7^th Ed. refer at para. 15-020 to the contrast between the right of restitution and the right of an indemnity, as follows:

In these circumstances, as the above passages indicate, there is no need for a payment to have been made under compulsion of law, if the reason why the payment was made was an express request that it should be made.

This was made clear also by what Scarman LJ had to say in Owen v Tate [1976] 1 QB 402 at pages 411-412 when prefacing his observations concerning compulsion of law with the words, ‘If without an antecedent request …’, as follows:

The relevant express requests in this case were the RFPs issued by FCI relating to the Jurong (category 3) payments, and clause 3 of the JSA:

In these circumstances, Brasoil is entitled to recover the sums paid on 24 November on this alternative basis, as sums paid at FCI’s express request. Again the sums claimed should be subject to the deductions referred to above for the reasons set out above.

In my judgement Brasoil is entitled to recover under this head of claim US$ 19,752,822.69 – US$ 1,244,138.36 = US$ 18,508,684.33 – P38 and US$ 20,269,972.91 – US$ 6,437,883.19 = US$ 13,832,089.72 – P40.

As to the alternative case based on compulsion of law, it is not necessary to consider this alternative basis of claim in view of my conclusions set out above.

In the further alternative Brasoil relies upon the existence of a liability by each of Brasoil and FCI to a common demand by Jurong.

It is not necessary to consider this further alternative basis of claim in view of my conclusions set out above.

I should add for completeness that the Particulars of Claim include a plea that Brasoil is entitled to contribution under section 1(1) of the Civil Liability (Contribution) Act 1978. Having investigated the matter further, Brasoil does not pursue its claims on this basis since (according to Brasoil) it seems likely that the 1978 Act does not apply where there is liability for the same debt, as opposed to liability for the same damage: see Goff & Jones at para. 14-003A.

This category relates to the payment of the Retention amounts identified in clause 1 of the JSA, in the sums of US$ 3,898,251.97 for P38 and US$ 5,841,498.70 for P40. These were the parts of the sums identified in clause 1 of the JSA as due from FCI to Jurong under the sub-contracts, payment of which was to be deferred. Pursuant to clause 3 of the JSA, Brasoil agreed (at FCI’s request) to pay, inter alia, the Retention amounts. Clause 4 of the JSA provided, inter alia: ‘The Retention amount shall be paid without deduction on due dates in accordance with the Sub-Contracts’. The Retention amounts reflected para. 9.0 of Appendix 2 to each of the P38 and P40 Jurong sub-contracts, which provided for payment of the instalments of the fixed lump sum price to be subject to a 10% retention, to be payable as to half upon Final Acceptance Term of the unit by Brasoil, and as to half upon expiry of the Warranty period. Brasoil’s obligation under the JSA was to make payment of the identified Retention amounts at the point in time thus determined. Payments were made: US$ 3,898,251.97 on 15 October 2002 for P38 (line 879 in the P38 Schedule A, Section A); and US$ 5,841,498.70 on 8 October 2002 for P40 (line 1712 in the P40 Schedule A, Section A).

FCI has denied these claims on the basis that the payments were made pursuant to the JSA and that Brasoil accordingly has no claim under any Side Letter Agreement for their repayment. I do not accept FCI’s contentions. I consider that the sums claimed under Jurong Category 4 are recoverable under the JSA for the reasons set out under Jurong Category 3 above.

Further, the payments were paid pursuant to RFPs issued by FCI which contained the Side Letter Agreement wording. In both P38 and P40, the payment by Brasoil was made pursuant to submission of an RFP issued by FCI in September 2002 (i.e. nearly two years after the JSA) and containing the Side Letter Agreement wording (whereby FCI acknowledged and agreed that any payment made in accordance with the RFP could be recovered by Brasoil from FCI). FCI has in effect acknowledged (in my view correctly) that an RFP containing wording to the same effect as the Side Letter Agreements gives rise to a right to recovery by Brasoil in the same way as under a Side Letter Agreement. It follows that FCI is liable for these sums on this alternative basis.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 3,898,251.97 – P38 and US$ 5,841,498.70 – P40.

In view of my conclusions set out above it is not necessary to consider the alternative claims in restitution and/or on other bases.

This category comprises all the payments made by Brasoil to Jurong in respect of purchase orders other than the P38 and P40 Jurong sub-contracts.

A large number of such payments were made, in both projects. These payments were made to Jurong in respect of sums payable by Jurong to third parties, pursuant to contracts entered into by Jurong with those third parties at FCI's request.

The payments in this category total, for P38, US$ 539,563.79, and for P40, US$ 7,158,566.13; these relate to lines 880 to 893 in the P38 Schedule A, Section A and lines 1713 to 1748 in the P40 Schedule A, Section A. These claims are contractual claims, brought under a number of Side Letter Agreements. All the requisite documentation (the Side Letter Agreement itself, invoices from Jurong to Brasoil, RFPs, proof of payment) is present in respect of all these claims. Brasoil treated these Side Letter Agreements in exactly the same way as the other Side Letter Agreements in terms of the system for making payments under them. As regards the existence of Side Letter Agreements for these payments, the purchase orders in question included the Side Letter Agreement wording and were signed by each of Jurong, FCI and Brasoil as for a free-standing Side Letter Agreement. In some instances in P40, payments were made where the value in the relevant Side Letter Agreement was exceeded. However, in each of these cases, the RFP included the Side Letter Agreement wording, and so the claim is a contractual one in all cases. The same applies to one P38 claim, namely line 880. In relation to that payment, the RFP contains the Side Letter Agreement wording.

The defences to these claims advanced by FCI are that the payments in question were made subsequent to the JSA, and were made under no obligation to make such payment, since the JSA determined all Brasoil's and FCI's liabilities to Jurong, and that in any event there was no reason why Brasoil should be entitled to claim any such sum from FCI.

Although it is not expressly identified in the Amended Defences, the reference to determination of all Brasoil's and FCI's liabilities to Jurong must be a reference to clause 8 of the JSA, entitled 'No More Claim', which provided:

I reject this line of defence. Clause 8 expressly excepted third party reimbursable cost from the ambit of Jurong's agreement and confirmation that they had no further claim/backcharge whatever against Brasoil. The payments the subject of these claims were made in respect of third party reimbursable cost(s) covered by that exception (i.e. costs payable to third parties for which Jurong was entitled to reimbursement). Contrary to what FCI says, by clauses 2, 3 and 4, the JSA expressly provided for the payment of all third party reimbursable cost in addition to the Settlement Sum and the Retention amounts. Further, in the case of each payment, and subsequent to the JSA, FCI submitted an RFP requesting Brasoil to pay the amount in question (sometimes including the Side Letter Agreement wording). In addition in many cases, FCI actually signed the Side Letter Agreement on or after the date of the JSA, 14 November 2000. These Side Letter Agreements were signed by Jurong, Brasoil and FCI as part of purchase orders placed by FCI with Jurong, after entry into the JSA. In these circumstances, FCI’s contention that it is entitled to refuse to reimburse Brasoil as it undertook to do (by the Side Letter Agreements and RFPs), on the grounds that the JSA had determined all liabilities between the parties, is untenable.

These are all contractually based claims, for which all requisite documentation is present. The only defence to these claims advanced by FCI being untenable, there is no basis for denying Brasoil its right of recovery.

I am satisfied that Brasoil is entitled to recover under this head of claim US$ 539,563.79 – P38 and US$ 7,158,566.13 – P40.

In view of my conclusions set out above it is unnecessary to consider the alternative claims in restitution and/or on other bases.

It follows that in my judgment Brasoil is entitled to recover in respect of the disputed Jurong claims:

The power to award interest is contained in Section 35A of the Supreme Court Act 1981, which provides that:

Interest is awarded because it is just that a person who has been deprived of the use of money due to him should be paid interest on that money for the period during which he was deprived of its use. (per Lord Salmon in General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd [1975] 1 WLR 819 at 841) (The Law Commission expressed the principle at para 1.9 supra: -

Section 35A gives the court wide discretion. There are five separate layers of discretion. Four are mentioned in subsection (1) namely: whether to award interest at all; the rate of interest; the proportion of the sum that should bear interest; and the period for which interest should be awarded. Section 35A (6) then goes on to confirm that “interest may be calculated at different rates in respect of different periods”, giving a fifth discretion on whether to vary the rate. Although the section allows for rules of court, these only apply to default judgments. For the most part, the court’s discretion is unfettered (see The Law Commission supra at para 2.31).

If a claimant wishes to claim interest other than at the customary rate it is for him to adduce evidence of the rate at which a person with his general attributes (but ignoring his particular position) could have borrowed the money over the period. (Otton LJ in Baker v Black Sea and Baltic General Insurance Co [1996] LRLR 353 at 364).

As to the practice in commercial cases where a foreign currency is involved, different interest rates may be appropriate for different currencies. The Commercial Court may have regard to the interest-rate tables published by the London Maritime Arbitrators Association (“LMAA”) (Staughton LJ in Baker v Black Sea supra at 360).

When considering a claim for interest where a foreign currency is involved, it may be necessary to adopt a broad approach after balancing a number of factors.

In considering a claim for interest in a commercial case where a foreign currency is involved, it may be appropriate when considering the general attributes of the claimant to have regard to (among other factors): -

The award of interest having regard to the principles set out above involves the exercise of a discretion, the court being concerned to produce a fair and just result.

In The “Mosconici” [2001] 2 Lloyd’s Rep 313 at 316 David Steel J referred to the well-established practice in the Commercial Court to award interest at base rate plus 1 per cent, adding “in the context of United States dollars, that [is] equivalent to or analogous with the United States prime rate.”

The 1% over base figure has been described as “no more than a presumption” which could be displaced by evidence of the rates applying to borrowers with the general attributes of the claimant. For example, in Jaura v Ahmed [2002] EWCA Civ 210, Rix LJ applied a rate of 3% above base, which he thought reflected a more realistic assessment of the rates at which small businesses borrowed. He said: -

A Report approved by the LMAA Committee in 2003 said:-

The 1996 Arbitration Act was based on the UNCITRAL Model Law on International Commercial Arbitration (1995). Although the Model Law did not mention interest, it was decided that the Act should grant arbitrators broad discretionary powers to grant simple or compound interest (see section 49(3) Arbitration Act 1996). It was felt that this would reflect commercial reality and discourage respondents from delaying payment. It is common for international organisations that provide arbitration services to include powers to award compound interest.

In my opinion it is regrettable that in commercial cases there should be any distinction between the power of the Commercial Court and the power of arbitrators in the City of London.

The Projects were governed by complex contractual structures, as illustrated by the charts in Appendix A (P38) and Appendix B (P40) to the Preliminary Issues judgment.

The Full Conversion Contracts between FEI and FCI provided that should FCI default in payment of any amount due, then FCI should pay to FEI interest thereon at the rate of 2% over Prime Rate from the date when the amount became due (P38, clause 16.3).

The Bareboat Charters and Purchase Agreements between the Petro Dia companies and Brasoil provided in relation to over-due payments –

two per cent (2%); and

the London Inter-Bank Offered Rate for Dollar deposits of not more than one month’s duration (as selected by Petro Dia in the light of the likely duration of the default in question).

The Bareboat Sub-Charter Agreements between Brasoil and Petrobras contained a similar provision in relation to overdue payments (see clause 16 for both P38 and P40).

For completeness it should be noted that the Supervision Agreements provided that if the impact of an alteration or change could not be agreed Brasoil should be entitled to refer the dispute to such expert resolution as the President for the time being of the LMAA deemed appropriate (see clause 6.2 for both P38 and P40).

Mr Clokey of PricewaterhouseCoopers LLP provided four reports as an expert witness. Mr Clokey’s curriculum vitae is set out at Appendix 1 to his first report. For the reasons set out in his reports Mr Clokey considered that a bond rate provides the more appropriate interest rate than the short-term bank rate.

According to Mr Clokey a broad rule of thumb is that the difference between these two rates is 3%. A more precise arithmetic calculation put the difference at an average of 2.73% during the relevant period (2000 to 2007).

According to Mr Daniel De Oliveira all the sums claimed in the present case were lent by Petrobras to Brasoil under the following arrangements. By the relevant period (2000 to 2007) Brasoil’s operations were completely integrated with those of Petrobras. Although Brasoil did have a limited capability to raise funds independently of Petrobras, in practice it was necessary that the funds to make the payments in question came from Petrobras. This was not a situation where Brasoil would receive the funds generated by the productive use of the assets to which the Projects related. Raising bank finance in Brasoil’s own right would not have been a viable option. In the terms of the inter-company accounting, Petrobras charged interest on the sums provided to Brasoil at a rate of 3% over LIBOR, reflecting the rate at which Petrobras would be assessed for tax in respect of this inter-company loan. Thus the rate of interest charged for inter-company borrowing between Brasoil and Petrobras was LIBOR plus 3%. The Brazilian tax authorities require the rate of interest charged for inter-company loans, in the assessment of taxable profits, to be at least LIBOR plus 3%. Companies are able to charge a higher rate to their subsidiaries, in which case they will pay the tax on the higher rate. If a company charges less, it will still pay tax as though it enjoyed an income of LIBOR plus 3%. This regulation acts as an incentive for companies to price inter-company loans at LIBOR plus 3% (see paragraph 2.5 of Mr Clokey’s fourth report).

It important to note that Brasoil made payments between May 2000 and December 2003 at irregular intervals and in amounts which varied widely. Appendix 1 to Mr Clokey’s second report helpfully contained a chart showing the “Timing of Supplier Payments”.

Mr Clokey was able to use Bloomberg to identify some of the bank borrowing facilities that Petrobras and related companies used over the relevant period.

In the case of Brasoil (amounts US$ 30m and US$ 120m – effective date 5.10.00) the rate (including fees) was LIBOR plus 2.3%.

In the case of the seven transactions listed by Mr Clokey (including the two Brasoil transactions referred to above) the average effective rate (including fees) was LIBOR plus 2.56%.

Mr Clokey pointed out that the probability was that Brasoil had to provide security to achieve the rate of 2.3% (either in the form of security over Brasoil’s assets or in the form of a parent company guarantee). It should be emphasised that the sum of US$ 150m borrowed by Brasoil as above had no connection with the sums claimed in this action and represented only part of Brasoil’s borrowing, the lion’s share being provided by inter-company loans from Petrobras at LIBOR plus 3%. The effect of Mr Clokey’s evidence was that a prudent Treasury Department would cause Brasoil to borrow by way of syndicated loans to the extent that reasonable rates could be achieved, but that such borrowings would be limited by the extent of the security that Brasoil was able to provide.

According to Mr De Oliveira, at the beginning of 2000, Petrobras could only access long-term capital through asset-based financing. At the bottom of the Brazilian financial market’s cycle in 1999, the bond market was available to Petrobras only at rates that were unattractive. From May 2001 the bond market became available for Petrobras at commercially acceptable rates, through the technique of offering political risk insurance to support the bonds. The bond market was a source of much longer-term borrowing than trade-related finance could provide. In terms of bank borrowing, normal credit lines were available to Petrobras on a short-term basis from banks outside Brazil, which could be obtained at around the LIBOR six-monthly rate plus 0.75% (for short-term loans up to six months) to 2% (for a term of say three years), at the beginning of 2000. As Petrobras’ financial profile has improved, the premium to LIBOR has become much lower, thus the premium over LIBOR for a 2-3 year period (including transaction costs) has moved from around 2.25% at the beginning of the period to 0.35% - 0.45% today. As Petrobras replaced imported crude with domestic production (which was much cheaper), cash generation improved considerably, facilitating access to cheaper and more stable sources of funds, particularly through issuing corporate bonds on the international bond markets. The improvement was enhanced from the beginning of 2002 when a long-term increase in the price of oil started, which magnified the positive consequences of the increase in domestic production. (The rate of interest charged by Petrobras to Brasoil remained at LIBOR plus 3% throughout.)

Mr De Oliveira explained that although they are hardly insignificant, within the context of the operations of a company like Petrobras, the sums of money with which the present proceedings are concerned would be unlikely to have required the raising of specific debt finance. Further, it is very difficult to identify a specific funding source when a project is up and running, particularly when the money is needed quickly. Hence the payments in question would have been funded from the funds generally available for Petrobras’ corporate uses, rather than specific financing. In these circumstances it is not realistically possible to identify particular debt financing obtained specifically for the purpose of making these payments.

Mr De Oliveira added that if it had been necessary for a financial manager to consider how to borrow the necessary funds to make the payments in question, given the importance to Petrobras of commencing production at South Marlim as quickly as possible and therefore the need for immediately available finance, recourse would probably have been had to bank borrowing from close to the expensive end of the spectrum, thus at something like 3% over LIBOR. It would then have been sensible to re-finance this in due course, most likely through the issue of corporate bonds.

Mr De Oliveira exhibited to his witness statement a page containing summaries based on the figures in Petrobras’ Balance Sheets (from their audited accounts) showing the composition of Petrobras’ debt at the financial year ends for 2000 to 2007. This was referred to in the course of the hearing as the basket of borrowings.

Mr Clokey said in the course of giving evidence that although he had set out short-term and medium-term bank borrowing rates in paragraphs 2.6, 2.7 and 2.8 of his fourth report (including the Bloomberg listed transactions referred to above), it is necessary to have regard to the basket of borrowings by Petrobras on the global markets in relation to short-term debt, medium-term debt and long-term debt over the period in question. The basket of borrowings referred to above reflects the fact that Petrobras borrowed partly at floating rates and partly at fixed rates. Borrowing at medium and long-term fixed rates is generally more expensive than borrowing at floating rates, but reduces risk and provides certainty. The mix of borrowings in the basket was (according to Mr Clokey) wholly understandable and consistent with the approach to be expected of a prudent Treasury Department of a leading international company.

Interest should commence to run from the moment each cause of action accrued, i.e. when Brasoil made each payment.

The judgments are in favour of Brasoil not Petrobras. The rate of interest charged by Petrobras to Brasoil remained at LIBOR plus 3% throughout. The Brazilian tax authorities at all material times required the rate of interest charged for inter-company loans, in the assessment of taxable profits, to be at least LIBOR plus 3%. This regulation acts as an incentive for companies to price inter-company loans at LIBOR plus 3%. Thus a company with the general attributes of Brasoil would generally pay a rate of 3% to its parent. I consider however that some allowance should be made for the other factors set out above. In all the circumstances in my judgment the (simple) interest rate should be LIBOR + 2.5%.

Accordingly I award interest of US$ 31,525,289.48 (P38) and US$ 65,734,021.50 (P40) on the total sum in respect of which I give judgment being US$ 82,720,346.61 – P38 and US$ 171,192,386.04 – P40.