Petromec Inc v Petroleo Brasileiro SA Petrobras & Ors

This hearing arises out of the judgment of Moore-Bick J, as he then was, on 2 February 2004 and the order of Gloster J dated 27 April 2007, directing further preliminary issues. The background to this matter is sufficiently set out in the judgment of Moore-Bick J, by which he determined various preliminary issues between the parties in relation to various contracts relating to the upgrade of the oil rig P36. At paragraph 202(4) he decided that the claimant (Petromec) was entitled under clause 12 of the Supervision Agreement to recover the additional costs incurred by reason of a change in specification of the oil rig from that required for the South Marlim field to that required for the Roncador field, including costs of financing, administration and general overheads, but not to any additional profit. He further decided that part of that figure had already been agreed by the parties in relation to the first set of variation orders (VO1) and the second set (VO2), save in relation to variation order number 13 (which related to delay and was part of VO2, but was left outstanding). Another preliminary issue of misrepresentation was decided by Gloster J last year.

The order of 27 April 2007 provided for the hearing of preliminary issues in relation to the manner in which the amount due to Petromec from the defendants (Petrobras) in respect of the change in specification was to be assessed. For the purposes of this hearing for the reasons set out by Moore-Bick J Petrobras and Brasoil can be treated as synonymous. The preliminary questions are as follows:-

"Issues of Law

1.

On the proper construction of the Supervision Agreement,

(a)

is the sum due to Petromec pursuant to clauses 12.1 and 12.2 to be ascertained by calculating the difference between:

(1)

The reasonable cost to Petromec of upgrading the Vessel in accordance with the Amended Specification and any instructions issued pursuant to clause 10 of the Supervision Agreement (i.e. the As-built Roncador Upgrade Cost); and

(2)

The cost that Petromec might reasonably have incurred in upgrading the Vessel in accordance with the South Marlim Specification (i.e. the South Marlim Cost).

OR

(b)

is the sum due to Petromec pursuant to clauses 12.1 and 12.2 to be ascertained as follows:

(1)

Pursuant to clause 12.1, to determine, on the basis of evidence of expenditure to be produced by Petromec under clause 12.3, what the reasonable extra cost to Petromec of upgrading the Vessel in accordance with the Amended Specification (as defined) over and above the cost that Petromec might reasonably have incurred in upgrading the Vessel in accordance with the Original Specification (as defined).

(2)

Pursuant to clause 12.2, in the case of further alterations or changes instructed by Brasoil pursuant to clause 10 over and above the change to the Amended Specification, to determine, on the basis of evidence of expenditure to be produced by Petromec under clause 12.3, the reasonable cost to Petromec in progressing the engineering in accordance with such specification as had been agreed before the alteration or change in question together with the reasonable extra cost to Petromec of upgrading the Vessel in accordance with the specification as altered or amended as is contended by Petrobras and pleaded at paragraph 13 of the Amended Defence;

OR

(c)

are the sums due to Petromec to be calculated on some other, and if so what, basis.

2.

Is it or is it not necessary (as a matter of contractual construction) that there be a separate ascertainment of the sums due under clause 12.1 and 12.2.

3.

In determining the cost that Petromec might reasonably have incurred in upgrading the Vessel in accordance with the South Marlim Specification, then insofar as the design engineering for the South Marlim upgrade was never completed, and insofar as there were a series of possible ways in which a contract-compliant South Marlim upgrade might have been achieved, should that assessment be carried out on the basis of

(a)

the cheapest contract-compliant design (as contended by Petromec); or

(b)

the contract-compliant design that was most likely to have been adopted (as contended by Petrobras); or

(c)

the weighted mean of the cost of the possible solutions; or

(d)

some other and if so what basis.

4.

On the true construction of clause 12.3 of the Supervision Agreement, does Petromec need to produce only evidence of what they have in fact spent in order for monies to become due, or must Petromec also produce evidence of what they would have spent had the relevant change not been made before monies become due?"

There were further Case Management issues raised, but the parties agreed that these should not be decided by me at this hearing, since they would require reconsideration after I had determined the four issues of law set out above.

The relevant terms of the Supervision Agreement are as follows:-

"Whereas:

(A)

In terms of the Bareboat Charter and Purchase Agreement, Petro-Deep has undertaken to Brasoil to procure that the Vessel is upgraded in accordance with the Original Specification to the satisfaction of Brasoil and Petrobras within a specified period;

(B)

In terms of the Upgrade Agreement Petromec has undertaken to Petro-Deep to ensure the Vessel is upgraded in accordance with the Original Specification to the satisfaction of Petro-Deep, Brasoil and Petrobras within a specified period; and….

2

Shipyard Contract

Subject to the rights of supervision herein granted:

2.1

Brasoil hereby approves the terms of the Shipyard Contract for all purposes under the Bareboat Charter and Purchase Agreement.

2.2

Petro-Deep hereby approves the terms of the Shipyard Contract for all purposes under the Upgrade Agreement.

3.

General Right of Supervision

Petrobras, Petro-Deep and Petromec hereby grant to Brasoil or its nominee certain rights of supervision and approval in respect of the carrying out of the Work by the Upgrade Contractors upon the terms and conditions set out in this Agreement. Petromec agrees, where appropriate, to act in accordance with and/or be bound by the exercise of those rights, in accordance with the terms and conditions set out herein.

For the avoidance of doubt, neither Brasoil nor Petrobras shall assume liability under any Contract by the exercise of these rights of supervision and approval, except as provided by Clause 4 of this Agreement.

….

5.

Specific Rights of Supervision

5.1

Brasoil shall be entitled to approve (or otherwise):

(i)

the Upgrade Contractors;

(ii)

the Contracts other than price;

(iii)

any plans, drawings, specifications, calculations and other matters required under the terms of the Contracts and changes thereto;

(iv)

the material, workmanship and manner of construction and installation of the Work; and

(v)

any claim form any of the Upgrade Contractors made prior to the Actual Delivery Date of the Vessel for an extension of time for the completion of the Work.

…

9.

Petromec's Obligations

9.1

Petromec shall:

9.1.1

ensure that Brasoil receives advance notice of all meetings, inspections and tests at which it is entitled to be present pursuant to Clause 6;

9.1.2

permit and/or procure such access to the premises of any Upgrade Contractor where any Work or manufacture in connection with the Upgrade of the Vessel is taking place as Brasoil requires in order to exercise its rights hereunder without restriction or delay;

9.1.3

ensure that Brasoil receives copies of:

(i)

all plans, drawings, specifications or calculations; and

(ii)

notices, applications or certificates;

Which Petromec receives pursuant to the Contracts, within 5 days of receipt thereof.

9.1.4

ensure that the Upgrade is completed in accordance with the Specification, irrespective of default by any Upgrade Contractor.

…

10 Change Orders

10.1

Both for the purposes of this Agreement and on an ongoing basis, Brasoil shall be entitled to instruct Petromec to propose:

10.1.1

any alteration to the Amended Specification; or

10.1.2

any change to any plan, drawing, specification, calculation or other document submitted to Brasoil pursuant to this Agreement; or

10.1.3

any alteration to the arrangements for the maintenance and repair of the Vessel prior to the Actual Delivery Date.

10.2

On receipt of an instruction pursuant to Clause 10.1 Petromec shall be obliged to use its best endeavours to agree the alteration(s) or change(s) set out in that instruction with the relevant Upgrade Contractor(s) pursuant to the terms of the relevant Contracts. If Petromec and the relevant Upgrade Contractors fail to agree on the alteration(s) or change(s) within fourteen (14) days of receipt by Petromec of such proposal, Brasoil shall be entitled to require Petromec to take such steps as may be appropriate to enable the alteration or change to be effected including (but without prejudice to the foregoing) replacing the relevant Upgrade Contractor(s)).

11.

Amendment to Specification

11.1

It is hereby agreed that, pursuant to Clause 10 hereof, the Original Specification is amended by:

(i)

Substituting for the General Technical Specification for the South Marlim Field in document ET.3010.38-1200-940-PPC-001 the Revision A which contains the requirements for the Roncador Field.

(ii)

Adding the Metocean Date - Roncador - contained in document ET.3010.56-1200-941-PPC-001, Revision 0.

12.

Compensation

12.1

In consideration of Petromec's agreement to upgrade the Vessel in accordance with the Amended Specification Brasoil agrees to pay to Petromec an amount equal to the reasonable extra cost (if any) to Petromec of Upgrading the Vessel in accordance with the Amended Specification over and above the cost that Petromec might reasonably have incurred in Upgrading the Vessel in accordance with the Original Specification.

12.2

In the case of any further alterations or changes instructed by Brasoil pursuant to Clause 10 hereof, Brasoil agrees:

(i)

to pay to Petromec the reasonable costs (if any) incurred by Petromec and its contractors in progressing the engineering in accordance with such Specification as was agreed before the alteration or change;

(ii)

to pay to Petromec an amount equal to the reasonable extra cost (if any) to Petromec of Upgrading the Vessel in accordance with the Specification as altered or amended; and

(iii)

to extend the date by which Petromec must complete the Upgrade.

12.3

The additional costs referred to in Clauses 12.1 and 12.2 above will become due and payable on the production by Petromec of evidence of expenditure satisfactory to Brasoil and Brasoil being satisfied that such costs were reasonable and properly incurred.

12.4

Brasoil agrees to negotiate in good faith with Petromec the extra costs referred to in Clauses 12.1 and 12.2 above and the extra time referred to in Clause 12.2 above and upon the determination of the same Brasoil and Petromec agree to enter into one or more addendums to this Agreement specifying the amounts to be paid by Brasoil to Petromec pursuant to this Clause 12 in good time for Petromec to meet its obligations to its contractors and specifying the date by which Petromec must complete the Upgrade of the Vessel in accordance with the Amended Specification."

The critical dispute between the parties is what overall approach should be taken to determine the "reasonable extra cost to Petromec of upgrading the vessel in accordance with the Amended Specification over and above the costs that Petromec might reasonably have incurred in upgrading the vessel in accordance with the Original Specification", as set out in clause 12.1 of the Supervision Agreement. Petromec has advanced a case based on looking at the total cost incurred in building the rig to the Roncador specification, as varied, less the cost that it says would have been incurred in producing the rig for the original South Marlim specification. Because of the finding of Moore-Bick J that there was agreement between the parties as to figures for VO1 and VO2 (less VO13 in respect of delay), an adjustment has to be made to that difference, since Petromec now accepts that it agreed figures for those variations which were less than the actual cost incurred. In addition, of course, payments made have to be deducted.

This method proceeds on the basis that the total difference between the final cost actually incurred in respect of the (varied) Roncador specification and the projected costs of building to the South Marlim specification (projected because the South Marlim specification was never finalised to the last detail and, of course, the rig was not converted to that specification) is attributable to the changes in specification, as opposed to any other factor such as overpricing, failure in implementing design, poor workmanship or rectification of other errors attributable to the contractors or sub-contractors. This process does not require Petromec to set out details of all the distinct variations and changes since it maintains that all of these were necessary, reasonable and proper in order to meet the final Roncador specification and that the total difference falls within the definition of "reasonable extra cost" in clause 12.1. Petromec's assessment of the cost which Petromec "might reasonably have incurred" to build to the South Marlim specification proceeds on the basis of contemporaneous estimates which, it says, are the best evidence of the cost that Petromec might reasonably have incurred, coupled with supporting expert evidence as to their accuracy and outworking.

Petrobras objects to this approach and insists that the proper approach is to look at each of the alterations to the Original Specification required by Petrobras, other than those in VO1 and VO2 (apart from VO13), to identify the changes sought, the works done as a consequence, and their cost, with the aid of expert evidence. The variation orders and the work can be analysed to see whether or not they fall within clause 12, whether as a change from the Original Specification for South Marlim to the Amended Specification for Roncador or as a variation required to the Roncador Specification by Petrobras. This method, as opposed to Petromec's "global" approach requires detailed analysis of each of the alleged changes. Whilst the VOs may not be 'Change Orders' within the meaning of the Supervision Agreement, they set out work to be done for which Petromec then sought compensation as a result of Petrobras' requests for changes. To the extent that such changes are not referred to in existing Variation Orders, Petrobras says that Petromec can detail them in any other form it likes, but that it must identify such further changes and produce evidence of the additional cost involved.

Petromec justifies its approach by reference to clause 12.1, contending that this clause requires a global comparison of the total that Petromec might reasonably have incurred in building the rig for South Marlim, on the one hand, and the total cost of building to the final Roncador specification, on the other, thus establishing the "extra cost" of that variation, all of which is recoverable, provided it is "reasonable". Petromec points out that there is no specific reference in clause 12.1 either to Variation Orders or Change Orders and argues that there is therefore no basis for saying that the "reasonable extra cost" has to be justified by reference to any such Orders. The only reference to "Change Orders" is in clause 10 which relates to instructions from Brasoil to Petromec to propose alterations to the specification to contractors, whereas the VOs emanated from Petromec, and, as Moore-Bick J found, were in the form of quotations for work to be done, not notification of extra costs within clause 12.1. According to the expert evidence I heard, many VOs include the history of design, beginning with work required for South Marlim, but not calculation of what the work would have cost in line with the South Marlim specification, as compared with estimates of the Roncador cost. In paragraph 91 of his judgment, Moore-Bick J found that no documents were ever submitted by Petromec which would comply with the procedure set out in clause 12. Whilst I have been told that Petromec's contractors and sub-contractors followed the customary process for variations, what Petromec did was to put forward a single global figure as the additional cost of the work to be done which was described in its own VO (see the judgment of Moore-Bick J at paragraphs 65 and 66).

By contrast, Petrobras contends that a proper construction of clauses 10-12 requires the adoption of a variation order method. Petrobras says that this requirement follows from the terms of clauses 12.1 and 12.2 when read in isolation and when clause 12 is read as a whole. This requires the identification of required changes and the analysis of the costs incurred by reason of those changes, which leads to the requirement in clause 12.3 for Petromec to produce evidence of expenditure. If no requested change in specification is identified and no work done which is attributable to that change, there is no entitlement to compensation. It is furthermore only the reasonable extra cost from such a change that constitutes Petromec's entitlement.

Additionally Petrobras argues that the adoption of Petromec's method reverses the burden of proof, gives Petrobras inadequate notice of the case it has to meet, creates difficulties for the parties in the preparation of their respective cases, burdens the parties and the court with unnecessary work and will lead to difficulties in managing and conducting the trial. As a matter of pleading, based on a number of decided authorities, Petrobras contends that it is critical for Petromec to identify the causal nexus between any work for which a claim is made for "extra cost" and a Change Order. This is needed to show that the work constitutes a true difference between the South Marlim build and the Roncador build, for the costing exercise to be done. As a matter of case management the court should also require Petromec to adopt Petrobras' approach.

Petromec maintains that it is entitled to put its case in the way that it wishes and that the court cannot or should not compel it to do otherwise. It is a matter then for Petrobras as to how it wishes to deal with the case put and whether it wishes to adopt its own method of assessment of "reasonable extra cost".

In my judgment, the key issue is the proper construction of the Supervision Agreement. Petrobras maintain that this requires Petromec to plead and prove its case by the Petrobras method and if it does not, its case will necessarily fail. Petromec maintains that its method is the correct method, but does not seek to prevent Petrobras from pleading its case the way it wishes.

Petromec points to the definition of Amended Specification which is "the Original Specification as amended by clause 11 of this Agreement and as further amended from time to time". In consequence, it says that where clause 12.1 refers to "the reasonable extra cost…of Upgrading the Vessel in accordance with the Amended Specification", it refers to the final version of that specification, namely that to which the rig was eventually built for the Roncador oil field. In the parlance which it used for the purpose of argument, Petromec referred to "the cost that Petromec might reasonably have incurred in upgrading the vessel in accordance with the Original Specification" (for South Marlim) as M, to the Amended Specification set out in clause 11 for the Roncador field as R, and the ultimate amended version of that, to which the vessel was ultimately built, as R*. The only comparison which clause 12.1 required, in Petromec's submission, was between the cost of M and R*, because of the definition of Amended Specification contained therein.

Clause 12.2, on this construction of the contract, related to illustrative matters of detail only, requiring Petrobras to pay Petromec the engineering costs which were thrown away in designing to a Specification which was subsequently varied, whilst repeating that Petrobras should pay for any reasonable extra cost caused by further variations in specifications (clause 12.2(i) and (ii)). Additionally, the date of completion had to be extended in the light of the variations agreed (clause 12.2 (iii)).

In further support of its argument, Petromec relied on clause 12.3 which referred only to "the production by Petromec of evidence of expenditure" which had to be (reasonably) satisfactory to Petrobras. The emphasis on expenditure reinforced the point that it was the total difference which was to be established, and its reasonable extra cost. The "expenditure" referred to was simply that which was actually expended on R*.

Petromec further argued that, even if it was wrong in its arguments about the incorporation of the definition of "Amended Specification" in clause 12.1, nonetheless what the clause was concerned with was the "difference in cost", not the "cost of the differences", between the work for the relevant specifications. The wording of clause 12.1 expressly required an investigation into "the reasonable extra cost". There is here no reference to "changes", "Change Orders" or "Variation Orders". The payment was to be made in consideration of the upgrading of the vessel in accordance with the Amended Specification. The "extra cost" was for upgrading the vessel in accordance with that specification over and above the cost which Petromec might have incurred, had it built the vessel in accordance with the Original Specification. Petromec's analysis of this clause led to the conclusion that Petrobras/Brasoil had contracted into a liability to compensate Petromec on a "global" basis by effecting that "global" comparison, which meant that there was no room for Petrobras' argument that Petromec could not advance a claim of this type.

Petromec also relied upon the absence of any mention of Variation Orders as such in the Supervision Agreement and the limited reference to "Change Orders" in the title to clause 10, with the subsequent text referring to instructions from Petrobras/Brasoil to Petromec to propose alterations to the Amended Specification to contractors. Petromec argues that there is no contractual mechanism or contractual requirement for Change Orders to be individually costed and no need for this to take place in order to carry out the calculation required in clause 12.1, to which alone reference is necessary for this purpose.

Petrobras contends, and I accept, that Petromec's reading of clause 12.1 effectively makes clause 12.2(i) and (ii) redundant and mere surplusage. Petromec's construction also fails to take into account the terms of clause 12.3 and 12.4, the cross-reference in clause 12.2 to clause 10 and the cross-references in clauses 12.3 and 12.4 to clauses 12.1 and 12.2. Although Petromec did not accept this, it appears to me that the logic of its argument leads to the conclusion that no sum is due and payable under clause 12.3 by way of "additional costs" until the "amount equal to the reasonable extra cost" of upgrading the vessel to the final Roncador specification, over and above the cost of building to the Original Specification is quantifiable. That is a highly unlikely conclusion as a matter of commercial reality and is inconsistent with clause 12.4, which envisages a good faith negotiation of the "extra costs" referred to in clauses 12.1 and 12.2 and the conclusion of addenda, specifying the amounts to be paid under clause 12, in order that Petromec should be able to meet its obligations to its contractors. It is plain from this reference to "one or more addendums" (sic) and the meeting of obligations to contractors, that a series of payments was envisaged.

More critically, the terms of clause 12.1 must be read together with clause 12.2, to which clause 12.3 and 12.4 specifically refer. The notion that clauses 12.2(i) and 12.2(ii) are otiose sits ill with these cross-references, which attribute some importance to them, as well as to the "extra time" granted by an extension of the date under the clause 12.2(iii). In my judgment it is clear that, where clause 12.1 refers to the "Amended Specification", it is referring to the Amended Specification current at the relevant date which is the date of the Supervision Agreement. As at that date, the Amended Specification is detailed in clause 11 by reference to the particular documents therein set out. When, in the Interpretation clause (clause 1) "Amended Specification" is said to mean "the Original Specification as amended by clause 11 of this Agreement and as further amended from time to time", it merely refers to the state of amendment at the time at which the matter is being considered. At the time of the Supervision Agreement itself, clause 11 concludes the issue as to the Amended Specification at that point.

In consequence, the structure of clause 12 becomes plain. Clause 12.1 refers to the "reasonable extra cost" of upgrading the vessel in accordance with the Specification set out in clause 11, as compared with what might reasonably have been incurred in upgrading in accordance with the Original Specification. Clause 12.2 then deals with the situation where there are "further (emphasis added) alterations or changes instructed by Petrobras/Brasoil pursuant to clause 10". The "further alterations or changes" are those made after the date of the Supervision Agreement, and the clause 11 Amendment to Specification. Clause 12.2(i) makes it clear that from that point on, Petrobras/Brasoil was to pay the "reasonable costs" of engineering work thrown away in progressing the specification which had existed before that alteration or change had been the subject of instructions from Petrobras/Brasoil. Clause 12.2(ii) then provides for payment of an amount equal to the "reasonable extra cost" of complying with the Specification as amended, in consequence of the further alteration or change instructed by Brasoil under clause 10. Full meaning can be given to clause 12.2 in a way which makes sense when clause 12.1 is read aright.

When reference is then made to clause 10, which is entitled "Change Orders", it can be seen that Petrobras/Brasoil was entitled to instruct Petromec to propose alterations to the Amended Specification, to any plan, drawing, specification, calculation or other documents submitted to Petrobras/Brasoil under the Supervision Agreement or to the arrangements for maintenance and repair of the vessel, prior to the delivery date. Petromec was then obliged to seek to agree such an alteration or change with the relevant contractor. At the material time, as both parties knew, there was a fixed price contract between Petromec and Davie which set out the scope of work for the Roncador Specification in accordance with clause 11 of the Supervision Agreement. Thus, it was future changes which were referred to in clause 12.2 by reference to clause 10, whilst the clause 11 amendment was specifically said to be made "pursuant to clause 10".

Clause 12.3 will not bear the weight which Petromec wishes to place upon it. Not only does clause 12.3 expressly refer to clauses 12.1 and 12.2 and to "additional costs", which must refer both to the "reasonable costs" in 12.2(i) and to the "reasonable extra cost" in 12.2(ii), but it also refers to the need for Petrobras/Brasoil to be satisfied that "such costs" were reasonable and properly incurred. Whilst it is, I think, common ground that such "satisfaction" must be reasonable, this does not alter the thrust of the clause, which is directed towards the trigger for payment of "additional costs" in both clauses 12.1 and 12.2, which are clearly seen as distinct from one another. It thus distinguishes between payments in respect of the difference between the Original Specification and the Amended Specification referred to in clause 11, on the one hand, and the further alterations to the clause 11 Amended Specification, on the other. Furthermore, I do not consider that "evidence of expenditure" as referred to in clause 12.3, can mean simply evidence of actual expenditure incurred on the final Roncador Amended Specification. In the context of the clause it must refer to the "additional costs" set out in the clause, on which Petrobras/Brasoil has to be satisfied. As Moore-Bick J stated at paragraph 91 in his judgment, "clause 12 contemplates that Petromec will submit a claim identifying the amount which it says is due, supported by evidence of the actual expenditure as against the expenditure required to meet the Original Specification." Unless it does this, Petrobras/Brasoil could not be satisfied that the "additional costs" as set out in clauses 12.1 and 12.2 had been reasonably and properly incurred. In considering "additional costs", Petrobras/Brasoil would, of necessity, have to take into account costs in relation to the Original Specification as well as the Amended Specification.

A further point which militates against Petromec's construction is that the clause 11 Amendment to Specification is expressly stated to be an amendment to the Original Specification "pursuant to clause 10". Thus, although clause 12.1 makes no express reference to a "Change Order", when it refers to the Amended Specification, it refers to the clause 11 documents which have been agreed pursuant to the clause 10 procedure, which involves Brasoil's instruction to Petromec to propose changes. Clause 12.2 then expressly refers to "further alterations or changes instructed by Brasoil under clause 10". In my judgment therefore, although clause 12.1 refers to the global difference between the cost of upgrading the vessel to the Original Specification and the cost of upgrading it in accordance with the "Amended" Specification in force at that date, the parties saw this in the context of Petrobras/Brasoil's instruction to Petromec, which had already resulted in the clause 11 Amended Specification and the contract with Davie on the terms of the clause 11 documents. This was recognised to be a change in accordance with clause 10, in exactly the same way as clause 12.2 further alterations or changes were to take place pursuant to clause 10 also.

In order to answer the questions posed and to ascertain how the case has to be put or pleaded, it is necessary to show what Petromec would have to establish in order to succeed. On the proper construction of the contract, as I have construed it, a distinction is to be drawn between the clause 12.1 variation and the further alterations or changes referred to in clause 12.2.

Petromec has to demonstrate the "reasonable extra cost incurred to upgrade the vessel" in accordance with clause 12.1 and in accordance with changes or instructions given by Petrobras/Brasoil, pursuant to clause 10, for the purpose of clause 12.2. By the terms of clause 12.3 the additional costs (i.e. the reasonable extra costs) referred to in clauses 12.1 and 12.2 are payable only on production of evidence of reasonable and proper expenditure incurred by way of extra cost, which in itself involves the comparisons previously referred to.

In my judgment, therefore, in order to succeed, it is necessary for Petromec to identify the work, and the cost attributable to that work, required to effect changes from the former specification to the new specification under both clause 12.1 and 12.2. In the case of 12.2 it has also to establish the instructions from Petrobras/Brasoil for the alterations or changes, as well as the work done. For both sub-clauses, the reasonableness of the work and costs has also to be shown. When this is done, the appropriate extension of time can be determined.

The question which then arises is whether or not Petromec can establish these elements without descending into the detail that Petrobras insists is necessary. Leaving aside any difficulties in proving what it seeks to establish, its methodology seeks simply to compare its assessment of the costs of M with the costs of R*. Assuming that M can be established, this leaves out of account, or rather assumes, that all the additional cost actually incurred relates to work which falls within clause 12.1 or 12.2, as that which was required to upgrade to the new Amended Specification. It also assumes that instructions were given by Petrobras/Brasoil within clause 12.2 for the further changes, beyond the clause 11 Amended Specification, to be effected. There is no concession by Petrobras on any of these points.

Petromec points to a number of features which suggest that there is no real scope for dispute in relation to this element.

In consequence, it is said that there can be little dispute in relation to the cost of what Petromec refers to as R*. The final rig, as built, was built to the final Amended Specification and the work done was done under Petrobras/Brasoil supervision whilst the cost was the subject of audit. Petromec itself was not liable to Petrobras for any failures in performance by the contractors and suppliers. How then says Petromec, can work done to the Final Amended Specification and the cost thereof not be reasonable and proper?

Petromec contends that if there really was some serious issue about work or costs not linked to instructions or some element of unreasonable costs, this would have surfaced long since as a result of the supervision and audit. Any suggestion that there was a failure to contract sensibly with a contractor or supplier or that there had been some major failure by such a contractor or supplier which had not properly been taken into account in payment to them, is therefore fanciful. In consequence, if there really is little room for dispute in these areas, there is then, in Petromec’s submission, no difficulty about using Petromec's methodology and placing the practical onus on Petrobras to say where there are issues about work not required to conform to Amended Specification, work unreasonably done and unreasonable or improper costs.

There is some force in this argument, in broad terms, but Petrobras maintains that there is considerable room for dispute about whether all the costed work done was necessary to achieve the contractual requirement of the Amended Specification, as it existed from time to time, and whether the cost involved was reasonable. Even if Petromec has no liability for poor performance of the work by the contractors, there is scope to argue that work was unnecessarily done, that there was damage to installed works, that there was overpricing, that there were failures in design, supply, installation and workmanship which led to repairs, remedial work, replacements of non functional or defective items, and disruption, delay and acceleration of costs, which would not constitute reasonable and proper "extra costs". The audit team could not and did not reach conclusions on every item nor on the basic question of the need for such works to be done. Each of the points made by Petromec, set out in the previous paragraph goes only so far and will not take it the full distance. Petrobras' experts point to costs incurred on this project, as with most other projects, in the shape of "remedial costs" which were incurred because of poor design, poor installation, faulty vendor supplied goods and/or damage caused to installed works. An example was given of a crane which had to be repaired, the cost of which fell into the total cost of the project.

If the work done to achieve the final Roncador Amended Specification and the cost thereof is in issue (as they are), and there is scope for argument about the matters which are suggested (as there is), then I do not see how Petromec can simply assert that the final Roncador costs (R*) represent the conclusion of the processes set out in clause 12.1 and 12.2, from which the reasonable extra cost attributable to upgrading the vessel in accordance with the final Amended Specification can be calculated. The "reasonable extra cost" cannot be assessed without investigation as to whether the total actual Roncador costs, as alleged by Petromec (R*), were properly and reasonably incurred and the burden is on Petromec to establish all the elements necessary to make good its entitlement to the sums it claims. It becomes necessary for Petromec to specify what works it had to do to bring the vessel up to the clause 11 Specification and to particularise what Petrobras/Brasoil instructed it to do pursuant to clause 10. Petromec would have to show which items of work were required to meet the new specifications which fell within clause 12.1 and 12.2 and the reasonable cost of doing that work.

There is also no concession by Petrobras as to "the cost that Petromec might reasonably have incurred in Upgrading the Vessel in accordance with the Original Specification". Whilst the issue as to which version of Annex X is part of that specification could readily be resolved, the question of what work had to be done to develop the functional design set out in the documents at Appendix A and B to the Supervision Agreement is in issue.

Once again however Petromec says that there is ultimately likely to be little dispute on this or that the dispute will be in a narrow compass.

Despite Petromec's submissions on this point, it appears to me that, were the Petromec methodology to be followed, there would be considerable argument and evidence addressed to the question of what cost Petromec might reasonably have incurred in converting the vessel to the Original Specification. There was quite a spread of figures, as shown in the previous paragraph of this judgment and the fact that a "horse trade" was almost concluded is beside the point. Whilst ultimately, the parties could, with goodwill on both sides, reach agreement on a figure, this is unlikely to happen and extensive evidence from experts is likely to show considerable divergence of views. That, in itself, would however present no bar to Petromec, in pleading or seeking to prove this element in its methodology.

Some of the VOs were "Change Orders" within the meaning of clause 10, but they identified work to be done. VO1 and VO2 were, I was told, largely concerned with variations to achieve the clause 11 specifications, and, as might be expected, the earlier sets of VOs relate to the majority of the changes, in terms both of volume of work and cost. On Petromec's figures there is a $42 million adjustment to be made because the figures which Moore-Bick J found to be an agreed settlement ($43 million approximately) undercompensated Petromec substantially. There is, according to Petromec, little room for Petrobras to dispute the extent of Petromec's concession, because it must have valued the work in order to agree the payment figures.

Equally, it would not matter whether there were evidential difficulties in examining VO1 and VO2 and ascertaining the costs which were actually incurred in doing the work which was the subject of those VOs and which led to the agreement as to fixed sums, to which the judgment of Moore-Bick J refers. Evidential problems do not prevent a party from pleading and proving its case in the way it wishes.

The essential problem with Petromec's methodology is that it fails to grapple with the issues of instructions from Petrobras/Brasoil pursuant to clause 10 for the purposes of clause 12.2 and fails to identify the work done, whether pursuant to clause 12.1 or 12.2. To proceed on the basis of final costs of R*, as compared with the costs of M, assumes that which it is necessary to prove. As Mr Christopher Hancock QC submitted for Petrobras, if Petromec proved the actual cost of M and R*, the cost differential between the agreed sums for VO1 and VO2 and the actual costs incurred in respect of that work, that would not be enough to entitle Petromec to judgment. Petromec would not have proved that the cost differential between M and R* (with the adjustment for VOs 1 and 2) was the "reasonable extra cost" of upgrading the vessel to the clause 11 amended specification or to further changes instructed by Petrobras/Brasoil after the date of the Supervision Agreement. The assertion that this cost differential, in its methodology, represents the "reasonable extra cost" avoids, and is intended to avoid, the necessity and burden of showing that all the work done, to which these costs relate, falls within the terms of clause 12, that it was work reasonably and properly done and that the cost itself was reasonable. This is to reverse the burden of proof, since it then places upon Petrobras the onus of showing that some elements of costs do not follow from the amendments to the Original Specification and further changes instructed, and the unreasonableness of the course adopted or the cost incurred. The relevant causal nexus between the change of specification to the clause 11 Amended Specification and the work done and cost incurred is not shown by establishing the two actual costs figures for M and R. Equally the causal nexus between any instructions given by Petrobras/Brasoil under clause 12.2 and the work done and costs incurred is likewise not established by showing the actual cost of R and R*. These are matters which Petromec has to prove, together with the reasonableness issues, in order to succeed. It cannot avoid pleading and proving these by using the methodology it puts forward.

Petromec did not assert that it was impossible for it to proceed to enumerate the changes made and cost incurred, pursuant to clauses 10-12, but maintained that there were difficulties which meant that it might not make full recovery if it did so. Petrobras points out that if this is so, it must largely be the result of keeping inadequate records, which its experts say that the contractors submitted applications for variations in standard form which required proper recording of extra work and costs claimed.

Mr Nicholas Vineall QC submits that the use of Petromec's methodology cannot lead to Petromec being better off as a result of the changes of specification that it would otherwise have been. All that it is seeking is to be reimbursed that which has been paid by it. It is out of pocket in respect of sums paid to contractors, suppliers and in respect of direct and indirect costs incurred. That is what it seeks to recover. It could however be worse off, in failing to make a full recovery, if it has to be pursue the Petrobras methodology because of the well known difficulties in establishing how individual elements of cost flow from particular variations. There are inevitable difficulties in additional costs caused by late procurement, disruption or acceleration work. These are the areas of costs which tend to "fall through the cracks", when a court insists on a high degree of particularity in causation. Whilst this point attracts some sympathy, it does not, in the end, obviate the need for Petromec to prove each element which is required to establish its entitlement. There can be no shortcut which this court can approve.

I was referred to a number of authorities. Petrobras contended that courts in this jurisdiction, the United States and the Commonwealth, have all tended to disapprove of "global claims" such as the one advanced by Petromec. The reasons for this have been variously expressed but include the following:-

A number of authorities were relied on in this context, including Bernhard's Rugby Landscapes Limited v Stockley Park Consortium Limited [1997] 82 BLR 39 (in particular at pages 73, 75-76 in the judgment of HHJ Humphrey Lloyd QC), Wharf Properties Limited v Eric Cumine Associates (1994) 52 BLR 1 (PC) (per Lloyd Oliver at page 23) and John Holland Construction & Engineering Pty Limited v Kvaerner RJ Brown Pty Limited [1997] 82 BLR 81 (Supreme Court of Victoria) (particularly at pages 90-91, per Byrne J). Reliance was also placed on Hudson's Building and Engineering Contracts, 11th edition 1995 at paragraph 8.200-8.211A, Duncan Wallace, Construction Contracts: Principles and Policies in Tort and Contract, 1986 at paragraph 8.40-9.45 and Keating on Construction Contracts, 8th edition, 2006 at paragraph 18.011. It makes no difference whether consideration is being given to multiple breaches or multiple variations. The overall principle remains the same. There is a need to show the consequences of complying with the instruction in terms of work done and cost reasonably incurred. The causal nexus is important and must be spelt out "in an intelligible form".

It was said by Mr Nicholas Vineall QC that these authorities were inapplicable to the particular contract with which this court was concerned. The Supervision Agreement was not the normal fixed price construction contract, where an employer was alleging a series of breaches or variations which gave rise to entitlement to damages or payment. In those cases, liability, causation and quantum had to be established in relation to each element of the claim. Here, on the wording of clause 12 of the Supervision Agreement, this was not the process which the contract required, so that Petromec was entitled to plead the case in the manner it had. For reasons already set out, I do not accept this construction of the contract and the line of authorities is therefore of direct application.

Petromec contend that there are difficulties standing in the way of using the sets of Variation Orders and the methodology put forward by Petrobras. It is said that there is a well known difficulty in identifying exactly what cause led to a particular increase in costs and the purpose. The intended effect of clause 12.1 of the Supervision Agreement was to give a full indemnity to Petromec for any increase in cost as a result of the changed specification, subject only to the question of reasonable expenditure ("difference in costs, not cost of the differences"). Whilst I accept that adequate indemnity has to be given, that indemnity is circumscribed by the terms of clause 12.1-12.3 and the need to establish to Petrobras/Brasoil's reasonable satisfaction that the "additional costs" have been reasonably and properly incurred. That question now falls to the court to decide. Whatever difficulties there may be in showing causation, whether in the form of out of sequence working, costs of disruption and other matters arising out of a change of specification, these are no more than those which arise in large numbers of trials of disputes about building contracts. The courts regularly determine such matters and this therefore is no basis for contending that Petromec can avoid the burden of proving what the Supervision Agreement requires to be proved to show entitlement.

I heard expert evidence as to the relative ease or difficulty which would be involved in the pursuit, in this litigation, of the rival methodologies. Both parties maintained that its methodology was likely to resolve matters with greater speed, economy, efficiency and accuracy. There was a slight air of unreality about Petrobras’ expert evidence, because of the heavy involvement of Petrobras/ Brasoil in the progress of the works, because of the absence of any substantial complaint about work done in purported pursuance of amendments to specification, because of the work already done by Petrobras in the context of seeking to agree a global payment (as pointed out by Petromec), because of the limited study of disclosed documents by the experts and the limited areas of real dispute which, it appeared to me, were truly likely to arise on Petromec's methodology. Petrobras’ experts conclusions as to time taken and expense proceeded on the basis that every aspect of the work and costing would be in issue, save for VOs 1 and 2. Nonetheless, if there was no concession about anything, and Petrobras did not instruct its experts that there were areas which did not require investigation, the effect of their expert’s evidence was that the time taken by them, on the Petrobras methodology, would be 2200 hours, whilst the time taken on the Petromec methodology would be 3600-6600 hours, depending on what was really required to assess the South Marlim costs (which in turn depended upon the extent of design studies which had been carried out). The difference in time for such work amounted to 3 months on the one hand or 6-9 months on the other. The referable costs would be £400,000 on the one hand or £900,000 on the other. This was much disputed and in the context of the Petrobras method, it was common ground that the work covered by VOs 3-5 was much less defined than in VOs 1 and 2, so that greater work would be needed to analyse and explore the issues which arose out of them.

If Petromec could, by its own methodology, establish that which was necessary to prove its case, it would be a very tough case management approach to prohibit it from doing so, on the basis that this was an extravagant way of achieving success. Even with the increased case management powers of the court to direct that matters be dealt with in the most economic, efficient and expeditious way, for the benefit of the parties, the court and other litigants, a judge, it seems to me, is not entitled to "dictate what case a party shall be required to advance, limiting him to contentions which do not in fact represent that party's case". Petromec relied upon the dictum of Simon Browne LJ in GMTC Tools v Yuasa 73 BLR 107 at page 114 (a pre-CPR case). A judge, in the pre-CPR days was not entitled to force the plaintiff's damages claim into a straight jacket of his own devising and to impose, as an absolute requirement, that a direct link be asserted and established between each defect, each period of consequent down-time and each resultant item of loss. If a claim can properly be put on a broader basis, why should the court prevent a party from putting its case in that way, particularly if it is told that there are evidential difficulties in putting the case in what the court regards as the most economic way? If, in such circumstances, at the end of the day, it became apparent that the case could have been put much more simply and economically by a successful claimant, that party might have to bear the consequences in relation to recoverable costs. If unsuccessful, it is likely that the party would bear the increased costs of both parties and, if there was any doubt as to ability to pay, there would have been an order for security which would ensure that such an order was effective.

If therefore Petromec's methodology had, in my judgment, been sufficient to prove its case, I would not have debarred it from pleading and proving it by that method.

For the reasons set out above, on the proper construction of the Supervision Agreement, the sum due to Petromec pursuant to clauses 12.1 and 12.2 cannot be ascertained by calculating the difference in the manner which Petromec proposes. Petromec must specify the instructions, the work required to comply with those instructions (or the Amended Specification under clause 11) and the cost attributable to that work. The changes and causal nexus must be pleaded. It can contend that the work and the cost is reasonable and wait for any challenge to that but its own methodology is not what clause 12 envisages, not what the law allows, nor what the Rules of Court require for it to put and establish its case. Petromec is not compelled to do so by reference to the VOs it has previously put forward, which do not correspond to the requirements of clause 12, although the material in them refers to work which Petromec alleges to be work done for clause 12 purposes. By one means or another, it must, with sufficient particularity, plead the work done and the cost thereof by reference to the Amended Specification or the instructions given. The answer to preliminary issue 1 in the issues of law is therefore that set out in paragraph 1(b).

As to issue 2, it is not necessary that there be a separate ascertainment of the sums due under clause 12.1 and 12.2. All that is necessary is to establish the total of the "additional costs" referred to in clauses 12.1 and 12.2, since these are payable by Petrobras. What matters is the total of "reasonable extra costs" payable in consequence of complying with Petrobras/Brasoil's instructions under clause 10, whether as reflected in clauses 11.1 and 12.1 or clause 12.2.

As to issue 3, the Supervision Agreement provides that the South Marlim Element is constituted by "the cost that Petromec might reasonably have incurred in upgrading the vessel in accordance with the Original Specification". On the face of the clause, it would appear that the court would have to decide, on the balance of probabilities, what cost would have been incurred in upgrading the vessel in accordance with that specification, although the words in the clause are "might reasonably have incurred". This may allow for some flexibility in the court's approach to the course which Petromec would have adopted, particularly bearing in mind its desire to do the work on the cheapest possible basis to comply with the Original Specification, because of the profit risk which Petromec was running against the fixed payments of hire which constituted the consideration for its original upgrading procurement obligations. I do not think that question 3 can be answered in the abstract. The question is a fact-sensitive one, with which the trial judge will have to grapple, in due course. Moreover as it will be dealt with in the context of deciding what work results from the amendment to the Original Specification or changes to the clause 11 Amended Specification, the trial judge is likely to be faced with the question of options which might be adopted in a number of different cases, where the evidence could be very different with regard to each. I would not feel it right to tie the trial judge's hands by holding that any approach was necessarily right in the absence of an evaluation of the evidence which he or she will hear.

I have answered the fourth question in relation to the true construction of clause 12.3 of the Supervision Agreement. In my judgment, on its true construction what is required is that Petromec should produce evidence of expenditure of the "additional costs" referred to in clauses 12.1 and 12.2 and the propriety and reasonableness of such costs. This inevitably involves making good to Petrobras/Brasoil's reasonable satisfaction (and now to this court's) both the costs which would have been incurred prior to the amendment and the costs following the amendment, to show what costs were caused by it.

In the light of my decision, it should be possible for the parties to agree the form of order to be made and, absent any special considerations of which I am unaware, costs should follow the event. If there is any room for debate about these matters, I will hear submissions on the formal handing down of this judgment.