Petromec Inc v Petrobras

This is an application by the defendants, which I shall refer to as Petrobras, for security for their costs in defending Petromec’s claim for the extra costs, which it contends it is entitled to under the supervision agreement in relation to the upgrade of the P36 in order to meet the Roncador specification. The application was originally heard before me on 27^th April, when there was also a case management conference, but the hearing could not be concluded on that date because of lack of time. I heard further submissions on 3^rd May when, again, because of other matters in my list, I was not able to give judgment. Accordingly, this is a short judgment in relation to the security application.

Petromec claims it is entitled to a sum equal to the overall cost of upgrading the vessel to the amended Roncador specification, less the hypothetical cost that might have reasonably been incurred in upgrading the vessel in conformity with the South Marlim specification. The amount claimed by Petromec is in the region of $131 million. It is not necessary to describe the detailed way in which this is calculated.

However, it is accepted by Petromec that it will only be able to recover monies to the extent that it can show that it is owed more under its additional costs claim, including interest from the amount outstanding under the judgment given by Moore-Bick J., as he then was, in February 2004 in favour of Petrobras. Under that judgment, Moore-Bick J. held that Petromec was obliged to repay Petrobras sums advanced by Petrobras under a loan agreement referred to as the Deed of Payment and Indemnity or “DPI”. He awarded judgment against Petromec in the sum of $110 million, which included some $45 million worth of interest to that date. By order dated 17^th December 2004, he ordered a stay of execution of payment of that amount, pending the trial of the fraud claim and the current claim for additional costs in respect of the Roncador upgrade. The fraud claim I decided adversely to Petromec, and accordingly, the stay is now in place by virtue of the continued claim by Petromec for its alleged additional costs.

Petrobras’ application for security is for the security of its costs of defending Petromec’s extra costs claim up until 11^th April 2007, not including its costs of the CMC, which I heard on 27^th April, and not including the costs of this application. I had dealt separately with its claim for security of the costs of the detailed assessment, and I ordered a sum to be paid by way of security on 27^th April. The costs which Petrobras says that it has incurred up until 11^th April are in an amount of some £221,083.61. Petrobras has requested security for the lesser sum of £178,691.16, which represents two-thirds of Linklaters’ fees and the full amount of counsel’s and experts’ fees up until 11^th April 2007.

On 28^th February 2007 I directed that there should be a trial of certain preliminary issues arising in relation to the extra costs claim. That is to be heard, I believe, on 26^th June for four days and, on 27^th April, broadly with the consent of both parties, I settled the form of those preliminary issues.

Three objections were taken by Mr. Vineall QC on behalf of Petromec to the application for security, although the first and second overlapped to a certain extent.

The first objection was that Petromec is now effectively in the position of a defendant. The second objection is that, if an order for security were made and not complied with, so that the extra costs claim was stayed, it would be unjust to lift the stay on the DPI judgment, and to allow Petrobras to enforce it. Accordingly, submits Mr. Vineall, in that event there would be a stalemate. The third objection is that the merits of Petromec’s claim are said to be strong. At the moment, nothing is admitted by Petrobras as being due in respect of the additional costs claim. Therefore, submits Mr. Vineall, the prospects of a complete defence succeeding at trial are extremely remote. He submits that it is inevitable, in effect, that some sum will be recovered by Petromec, although he accepts that he cannot say with any certainty that it will be in excess of the sum awarded by Moore-Bick J.. He cannot say that it will definitely overtop that judgment debt but, he submits, the merits for recovery of a substantial sum are strong.

I turn to consider the first objection, namely that Petromec should be treated in effect as a defendant and, therefore, no security should be awarded, Mr. Vineall submitted that the substance of the position was that Petromec was the defendant because it was the judgment debtor of Petrobras to the tune of (and the precise figures do not matter) $56.5 million, plus interest. The reality, he submitted, is that Petromec is defending that claim by way of setoff, because it has no answer to the DPI claim except its cross-claim for extra costs.

Mr. Vineall also relied upon a dicta of Moore-Bick J. in the stay of execution judgment to the effect that Petromec should be treated as the defendant. In his judgment on the staying application, Moore-Bick J. said this [para.17 of that judgment]:

“Mr. Hancock submitted that a distinction could be drawn between Petromec’s position in relation to the appeal and its position in relation to the outstanding claims for additional costs and damages for fraud. He recognised that there is something unsatisfactory about the prospect of Petromec’s being prevented or hampered in pursuing an appeal against the very liability which his clients seek to enforce and I think he was quite right to do so. He submitted that the position is not quite the same, however, I relation to its claims for additional costs and the claim for fraud because those are not related to the judgment in the same way as the appeal is. I can see some force in that point, but in my judgment, the reality is that those claims operate in practical, if not in legal terms, as a form of defence for the claimant under the Deed of Payment and Indemnity”.

In my judgment, the reality of the position here is that Petromec is not, in substance, a defendant. The reality is that, unless its claim can overtop Petrobras’ judgment debt, there is no utility in Petromec’s pursuit of its claim, other than as a setoff to the judgment.

A similar argument was raised in front of Aikens J. when he granted security for the costs of the fraudulent misrepresentation claim on 4^th November 2005. The argument was that Petromec’s costs claim was, in effect, a counterclaim which was closely linked to the defendant’s claim under the DPI, and that it would be unfair to order Petromec to put up security for what it was said was effectively a counterclaim.

In rejecting this submission, Aikens J. said that he did not accept the submission that Petromec was in the position of a defendant in practice. He said at paras.23 & 24 of his judgment:

“23

I do not accept the submission that Petromec is in the position of a defendant in practice. If the fraud case had been pleaded and was being dealt with at the same time as the other claims, then the position would have been as follows:

“(1)

Petromec would have pleaded its upgrade claim on the basis of the Global Payment agreement and it would also have said that no money was due under the DPI.

“(2)

Petrobras would have counterclaimed for the DPI loan repayment.

“(3)

Petromec could have dealt with the fraud case in one of two ways: (a) either it could have pleaded the fraud as an alternative to the Global Agreement basis claim because the effect of the fraud case is to put Petromec in the same position as if that agreement had been finalised; or (b) Petromec could have pleaded the full claim in response to the DPI claim of Petrobras, not as a setoff, because of the terms of that agreement, but in order to get round the terms of the DPI altogether.

“(4)

Either way Petromec would have been in the position of a claimant. It is putting forward positive claims and they originate with Petromec. They are not responsive at all on the proper analysis.

“24

Miss Prevezer relied on some remarks by Moore-Bick J. in the course of his judgment granting a stay of execution of the judgment of the DPI sums, in particular statements at paragraph 17. I understand why Moore-Bick J. put it as he did. But, upon analysis, it is Petromec who are putting forward a case for the recovery of sums which they say are due to them for the upgrading one way or another. If they are successful in the current claim, then it will have the effect of cancelling out Petrobras’ win on the DPI claim. But that is not the point for the present. The point is that Petromec says that Petrobras should not have recovered those sums in the first place because of the fraud.

I respectfully agree with the approach adopted by Aikens J. in his judgment of 4^th November 2005. It is equally applicable to the current additional costs claim. As I have said, the reality here is that, unless the costs claim overtops Petrobras’ claim, there will simply be a setoff of the two amounts. I accept Mr. Hancock QC’s submission that, if one looks back over the history of the litigation, the reality is that Petrobras are the defendants. The original claim was commenced by Petromec invoking this court’s jurisdiction.

Indeed, as Mr. Hancock pointed out, in the past Petromec has relied upon the proposition that Petromec was entitled to dispose of its substantial assets in 2001, without making provision for sums due to Petrobras under the Deed of Payment and Indemnity, because there had at that stage been no hint of any claim for such sum by the defendants. In fact, Moore-Bick J. has already held that the claim under the Deed of Payment and Indemnity was made only in response to Petromec’s claims in these proceedings to recover the additional costs of the upgrade, and that:

“One is left with the impression that they might have been perfectly happy to let the matter drop had Petromec itself not sought to pursue a claim”.

I thus agree with Mr. Hancock’s submission that, in substance, Petromec is indeed the claimant in these proceedings. It is also the case that, if one looks at the nature of the claims made under the latest set of proceedings, that is to say the additional costs of the upgrade claim, the issues that will be canvassed in the existing proceedings are very different from the issues that arose under the Deed of Payment and Indemnity counterclaim. Mr. Hancock pointed out the sums due under the Deed of Payment and Indemnity were, in effect, agreed, save for the treatment of one advance. The only real question before Moore-Bick J. was in relation to the question of interest rates and whether or not they were a penalty.

By contrast, in the current case, Petromec’s claims raise wholly different matters, requiring a detailed factual investigation of the costs involved in the upgrade and the hypothetical costs of the upgrade to meet the South Marlim specifications. It is also relevant to note that, certainly in the past, notwithstanding the contention that Petromec was, in substance, a defendant to the proceedings, it had provided security for the cost of defending its claims in July 2002, October 2003 and November 2004.

The second objection, which is related to the first objection, is the stalemate point. Again, I reject Mr. Vineall’s arguments on this point. He submitted that, if an order for security were made and not complied with, there would effectively be a stalemate, because Petrobras would not be able to enforce its judgment on the Deed of Payment and Indemnity claim because that judgment is stayed, pending the determination of Petromec’s costs claim.

In my judgment, this is a hopeless point. There is no evidence before me that Petromec would not be able to comply with any order that it provides security for costs. Moreover, whatever the financial position of Petromec, the reality is that Mr. Efromovich, who is the gentleman who has, or appears to have, interests in Petromec, has backed it to date in the sense of funding Petromec’s costs of the litigation and, where security has been required has, it appears, provided the security. There is no evidence before me which supports the proposition that, if Petromec is ordered to do so, Mr. Efromovich will not make funds available to meet an order for security.

Moreover, I do not see the logic of Mr. Vineall’s argument that, if the order for security is not complied with, there will be a stalemate. If Petromec ceases to pursue its claim for additional costs, and decides not to do so because it is not prepared to make the security available, then the rationale for the stay of execution ordered by Moore-Bick J. will disappear. The rationale of

It follows that I agree with Mr. Hancock’s submission that, if Petromec were ordered to provide security and did not do so, that would be its decision alone and it would have no justification for asking that the stay be continued, in effect, indefinitely. I do not therefore see that, in those circumstances, a stalemate would arise. Moreover, there is no evidence before the court that an order for provision of security would stifle Petromec’s claim, and indeed Mr. Vineall did not seek so to persuade me. Accordingly, I cannot see that there would be any unfairness in a situation where the stay was lifted because of a reluctance to provide security.

The third point made by Mr. Vineall was that it is highly likely that Petromec will obtain judgment in some amount and an award of costs in its favour in respect of the extra costs claim. He submitted, in this context, that it was irrelevant whether such an award would be likely to overtop the DPI judgment because the costs of the extra costs trial will follow the outcome of the extra costs claim, and not follow the outcome of the setoff exercise. He pointed out, by reference to internal documents of Petrobras, that there was strong evidence to support his contention that the likelihood would be that Petromec would recover a sum that was likely to be equal (or approaching, in any event) the amount due to Petrobras under the DPI judgment.

He also pointed to Petrobras’ response to the extra costs claim and contended that any positive response remained un-pleaded. He pointed out that beyond what he referred to as the unexplained defence that nothing was owing, Petrobras adopted the Petromec methodology but advanced a positive case that the notional South Marlim cost was $140 million, as against Petromec’s figure of $101 million, and alleged that a variation order adjustments allowance of $56 million was the appropriate figure, as against Petromec’s figure of $43 million. He said there was no real prospect of Petrobras persuading the court that nothing was due in relation to the extra costs claim.

It is rare that it is desirable for a court hearing a security for costs application to make any detailed assessment of the merits. As the Commercial Court Guide, condition 16, para.4 points out, and there is authority to support the proposition:

“Investigation of the merits of the case on an application for security is strongly discouraged. Only in those cases where it can be shown, without detailed investigation of evidence or law that claimant is almost certain to succeed or fail, will the merits be taken into consideration”.

In my judgment, it cannot be shown here, without detailed investigation, that the extra costs claim is almost certain to succeed, or indeed is certain. As Mr. Hancock pointed out, it is certainly arguable under the terms of the supervision agreement that no entitlement to any monies in respect of additional costs arises until Petromec has produced adequate evidence to show such entitlement. There is clearly a dispute as to whether that has yet occurred. There is also clearly a substantial dispute as to whether any amount awarded in respect of the costs claim will exceed the DPI judgment.

However, even if Mr. Vineall is right and there is a clear case here that Petromec would recover substantial sums under the additional costs claim, the reality is that, if the claim was clear and established in a particular sum, the parties would agree that there should be an appropriate setoff with the dispute arising only in relation to the balance. I find it, therefore, somewhat unreal in the context of the DPI judgment to regard this as a case where the real merits of the case depend on Mr. Vineall establishing that Petromec is entitled to some modest sum in the amount of a few hundred thousand dollars. The reality I suspect is, as Moore-Bick J. pointed out some years ago, that, no doubt, if sums are shown to be due, there will be an appropriate setoff, and it is only if there is any likelihood of the amount of the costs claim overtopping the DPI judgment that this case will proceed to trial.

As Mr. Hancock also pointed out, Petromec accepts that it will only be entitled to recover any monies if it can show that it is owed more than it owes under the DPI judgment. The judgment is in a quantified sum, which stood at $110 million back in 2004, and interest has been running on that amount since. Of course, Mr. Vineall says that the interest to which Petromec is entitled under the supervision agreement will, in his submission, wipe out any claim for interest under the DPI, so he says that the position is not so simple. But, in all the circumstances, in my judgment Petromec is in reality the claimant here, who is effectively in a position where, in order to avoid the execution of the judgment against it, has to establish that its claim overtops Petrobras’ claim.

I also remind myself of the fact that, in exercising his discretion to grant the stay of the amounts that were clearly due under the terms of the Deed of Payment and Indemnity, Moore-Bick J., in dealing with the submission made by Mr. Hancock as to the possible types of prejudice which might flow if a stay of execution were granted, said as follows:

“As to the third [and this was the third submission made by Mr. Hancock as to heads of prejudice, namely the prospect of incurring further costs of the continuing litigation] I question whether the prospect of being embroiled in further litigation can properly be regarded as prejudice flowing from the grant of a stay of execution”.

I interpose to say that the prejudice that Mr. Hancock had identified was the prospect that, if there was a stay, Petrobras would have to incur further costs in the continuing litigation, which it would not be able to recover. Mr. Justice Moore-Bick went on to say:

“It seems to me that it is essentially a detriment, if that is the right way to regard it, of having to deal with an arguable claim that in principle ought not to be stifled. I think the right way to alleviate prejudice of that kind is by making appropriate orders for security for costs and perhaps other orders in the continuing litigation”.

It is therefore perfectly clear to me that one of the factors in forming his discretion to grant a stay of the claim was the real possibility that, in relation to any further claims upon which the stay was contingent, Petrobras would be entitled to apply for and obtain appropriate orders for security.

For all those reasons, in my judgment, it is appropriate and fair to grant security in this case. Indeed, given the background to this extensive litigation, in my judgment it would be extremely unfair to Petrobras if it were not to be given appropriate security for the costs of defending Petromec’s additional costs claim.

I turn now to the issue of quantum. Mr. Vineall, in his helpful written and oral submissions, made a number of points on the quantum of the application for security. They are set out in Miss Calnan’s second witness statement, which I have read and considered. It is not necessary for me to deal with the specific points in detail. In headline terms, first of all, there is a complaint that, although Linklaters are only claiming two-thirds of their fees, there is nonetheless a claim for 100 per cent of counsels’ fees and experts’ fees. There is a complaint about the amount claimed for the period from 2004 to July 2006, and the absence of any sufficient breakdown of the time spent during that period. There is a complaint in respect of the period from 1^st August 2006 to 28^th February 2007, where the bulk of the work appears to have been done on documents and correspondence. Again, it is said that it is impossible to understand how the hours were accounted for. Then, in relation to the

These points have been answered in detail within Mr. Hancock’s written submissions. I am satisfied, looking at the matter overall, and in particular at the work that has been done in relation to what is a complicated case, that the sum claimed of £178,691.16 is eminently reasonable in relation to the costs up until 11^th April 2007. I see no reason, in principle, why disbursements - that is to say counsel’s and experts’ fees - should not be paid as to 100 per cent and I see nothing exorbitant or exaggerated in relation to the costs which Linklaters have themselves incurred. Accordingly, I propose to award security up until 11^th April in the full sum claimed.

I deal now with the assessment of costs of this application. One can only approach this in a broad brush way. £26,426.57 is claimed by Petrobras. Mr. Vineall has various points in relation to the fact that the claim was originally for £700,000, and the work done related to the amount that was then being claimed and, in fact, the application was then reduced to a lesser figure. He also has comments about the attendance of two solicitors at the various hearings and also two lots of counsel.

These sort of applications are always difficult, because they often change their nature and scope during the course of negotiations or shortly before the hearing. I thus have some sympathy with Mr. Hancock’s point, that originally it was not quite clear what the scope of the preliminary issues would be and whether it was appropriate in those circumstances to go for an application for security for the full amount.

I think the best course here is for me to assess the costs on a summary basis in a sum slightly less than the £26,426.57 claimed. I am going to knock £2,000 off to reflect some of the points made by Mr. Vineall. In particular, I suspect that when the claim was originally for £700,000 by way of security greater, a considerable amount of work had to be undertaken in producing the evidence to support that. So I am going to reduce it to £24,500.

I am not going to grant permission to appeal. Although theoretically there may be a point of law here, in not granting security in respect of the £103,000 in respect of which security was claimed relating to the drawing of the bill of costs, I did not decide anything as a point of law.

The reason why I was concerned about that very large figure being included in the bill was (a) because it appeared to be a very high figure, (b) because I considered that the costs judge would be in a much better position than I was to assess the legitimacy of that amount, and (c) I though there was some merit in the argument that the matter should, in the first instance, have been referred to the costs judge who had jurisdiction to deal with the application for security. But, as the parties were before me and skeleton arguments had been put in, I was reluctant to send the matter off to the costs judge for him to determine.

I also gave Petrobras their costs of the application before me which, as Mr. Hancock pointed out, if I had transferred it back, there would have been clearly an issue as to whether Petrobras would have been able to recover some part of its costs. It is said by Mr. Hancock that I was wrong in principle to exclude the £103,000 from the reckoning, which I did in applying Mr. Vineall’s approach of taking out the £103,000 altogether, and therefore he seeks permission to appeal on that basis.

As I have said, I think it would be wrong for me to give Mr. Hancock permission to appeal in circumstances where I did not decide the point of law one way or the other. My view was that in circumstances where the point taken by Mr. Vineall was that the bill of costs was itself part of the costs of the action in relation to which security had already been sought, it would be preferable for that issue to be decided, at least in the fist instance, by the costs judge.

However, Mr. Hancock makes a second point, where he says my approach was wrong and he said that it may be that, in doing the arithmetical calculations that I did by reference to Mr. Vineall’s spread sheet, I had not appreciated the point. The point is this. In Mr. Vineall’s spread sheet, in the penultimate column he has deducted the sums which he contended Linklaters had accepted should be deducted from the claim for security. Therefore, in Mr. Vineall’s column, they appear as a deduction in the entirety of the amounts disputed, arriving at a figure of £200,836 before applying the so-called two-thirds rule.

The reality, submits Mr. Hancock, is that, although it is accepted as per his skeleton argument, that there is some merit in certain of the arguments put forward by Mr. Vineall, or by Miss Calnan in her statement, the reality is that either the points are very small, or alternatively, they are catered for already by the two-thirds reduction that has been offered.

He also makes the point generally that, if there is a question mark over the quantum of the drawing of the bill of costs, again that can be reflected by an appropriate deduction, as opposed to deleting the £103,000 in its entirety. Unfortunately, there is not a transcript of the judgment that I gave on the previous occasion and I have not been provided with a note of it. However, as I have already said, I certainly did not decide as a point of law that the fees incurred by the costs draftsman for drawing up the bill of costs were not costs of the assessment and were exclusively costs of the action. I simply approached the matter, as I have said, on the basis of general discretion, which is why I am not going to give permission to appeal.

However, I think that there is merit in Mr. Hancock’s second argument; namely that I wrongly assumed when approaching the matter that Linklaters had agreed to the methodology set out in the penultimate column in Mr. Vineall’s spread sheet, that is to say knocking off 100 per cent of the

So it seems to me that it is appropriate that I should reconsider the exercise of my discretion in relation to the application for security for the costs of the detailed assessment, albeit that I am not going to grant leave for permission to appeal in respect of it, basically because it was an exercise of my discretion.

So I conclude that the appropriate thing to do is this. To reflect my concern over the drawing of the bill of costs, it is right that a substantial amount of that amount should come out, albeit not all of it. So I am going to add back in, in the exercise of my discretion, on a rough and ready basis, £20,000 in respect of that. That is effectively a third of the amount, with a further slight deduction. That also reflects my concern, as expressed in my earlier judgment, that a costs judge would be in a better position to decide whether those costs are reasonable and whether they are indeed costs of the application or costs of the assessment.

Before I leave the point on the drawing of the bill, it is also right to say that the figure of £2,624 should be deleted. That is the cost of preparing the bill of costs for the application for security of costs. That, it was accepted by Mr. Hancock, was not part of the figure that should go in at all. Otherwise, I consider that Mr. Hancock’s approach is right and that the points which have been accepted are adequately catered for in the two-thirds reduction, which Linklaters have already arrived at in coming to their figure of £147,785, which is based on the two-thirds.

So, just to clarify, what I am going to do is, having originally ordered a figure of £65,224, is to revise that calculation. I am going to take out the £103,000 before one gets to the figure of £221,677. I am going to take out the £2,624, which gets the figure to £116,053. I am then going to add back the £20,000 that I am giving as a rough and ready figure, but that is already subject to the one-third deduction.