Petromec Inc v Petroleo Brasileiro S.A. Petrobras & Ors [2007] EWCA Civ 1371

[2007] EWCA Civ 1371

Case No A3/2007/1639

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

[2007] EWHC 1589 (Comm)

ON APPEAL FROM QUEEN’S BENCH DIVISION

MR JUSTICE COOKE

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 21/12/2007

Before

MASTER OF THE ROLLS

LORD JUSTICE MAY

LORD JUSTICE PUMFREY

Between

Petromec IncAppellant

Petroleo Brasileiro S.A. Petrobras & orsRespondent

Nicholas Vineall QC (instructed by Curtis Davis Garrard Llp) for Appellant

Christopher Hancock QC, Dr. Malcolm Jarvis (instructed by Messrs Linklaters) for Respondent

Hearing Hearing dates : 27 th November 2007

Judgment

Introduction

[1]On 20th March 2001, a semi-submersible oil production platform, then unexcitingly called “P-36” but formerly called “Spirit of Columbus”, sank on or near its intended place of operation in the Campos Basin off Brazil. There was tragic loss of life and the rig was a total loss. Thus disappeared the product of the effort and expense, part of which is the subject of these proceedings.

[2]The long-running dispute in this case arises out of a singular series of one-off agreements. These included a written agreement which the parties openly did not intend to perform according to its terms at the time it was made. It was a stepping stone towards a further agreement which the parties did eventually enter into whose construction is part of the substance of this appeal from the judgment and order of Cooke J of 6 July 2007,

[2007] EWHC 1589 (Comm)

Facts

[3]The background facts are set out in paragraphs 1 to 22 of an earlier judgment of Moore-Bick J, as he then was, on 2 February 2004,

[2004] EWHC 127 (Comm)

, to which reference may be made. In bare outline, they are as follows. The identity of and relationship between the various parties is explained in Moore-Bick J’s judgment, and for simplicity I shall continue to refer to the claimants and Part 20 defendants as “Petromec” and to the defendants as “Petrobras”.

[4]Spirit of Columbus enters the story as an oil production platform without an oilfield. Petrobras wanted to use it in the South Marlim Field off the coast of Brazil for which purpose upgrade works were needed. Petromec were to procure the execution of these works for Petrobras. A General Technical Specification was prepared. We are told that both Petromec and Petrobras made separate internal estimates of the likely cost of these works, which they did not at the time communicate to each other. We are also told that the Specification was functional, which I understand to mean that it was more a performance specification than one which gave construction details of the works to be carried out.

[5]On 10 January 1997, the parties entered into an agreement described as an Agreement in relation to Bareboat Charter with Purchase Option, paving the way for the execution of a twelve year bareboat charter with an option to purchase the vessel at the end of the charter period and a contract for the upgrading of the vessel to make her suitable for service in the South Marlim Field. However, towards the end of 1996, Petrobras were already thinking of using the vessel, not in the South Marlim Field, but in a very large new oilfield recently discovered in the Campos Basin, now known as the Roncador Field. This would require, and in the event did require, significantly different upgrading works to the vessel. There was pressure for speed on Petrobras, because Brazil was in the process of liberalising the regime of state monopoly on petroleum exploration and production licences. The Roncador Field was still being evaluated and further information was being obtained. “As a result this became a most unusual project in which the design was being developed even while the work of upgrading was in progress.” (Moore-Bick J’s judgment, paragraph 6).

[6]Negotiations continued. There were complicated financing arrangements which Petrobras did not want to unpick. “That explains why on 20 June 1997 the parties entered into formal agreements designed to give effect to the South Marlim Project despite the fact that that project had been superseded months earlier.” (Moore-Bick J’s judgment paragraph 7).

[7]One such agreement was a Bareboat Charter and Purchase Agreement, dated 20 June 1997. Another was an Upgrade Agreement of the same date by which Petromec were to procure that the vessel was upgraded in accordance with an Original Specification. This Specification was for the South Marlim Field. The structure of the agreement was that upgrading works were to be paid for by fixed monthly payments of charter hire over the twelve year period of the charter. It was therefore essentially, if idiosyncratically, a fixed price construction contract, the price being payable by instalments. The contractual definition of the works is to be found in the Original Specification, which this court has not been invited to look at. It is, however, Petromec’s case that it is a functional specification whose works, since they were never undertaken, are now incapable of precise definition.

[8]The parties proceeded to instruct and carry out upgrading works for the Roncador Field, although for more than a year after 20 June 1997 there was no formal agreement to do so. “It is perhaps surprising that Mr Efromovich [Petromec] was willing to begin work on the new project without any kind of formal record of the terms on which it was to be carried out, but the fact that he was is a reflection of the high degree of trust and cooperation that had been built up between [Petromec] and Petrobras over many years. Mr Efromovich was assured by Petrobras that it would bear the whole of the costs resulting from the change to Roncador and he was prepared to begin work on the faith of that assurance.” (Moore-Bick J’s judgment paragraph 12).

[9]The Roncador upgrading works were entirely sub-contracted by Petromec. The lead contractor was Davie Industries Inc. and the work took place at their shipyard in Quebec. Meanwhile, as the works were proceeding, negotiations between the parties resulted in a Supervision Agreement, in form dated 20 June 1997, but in fact entered into in August 1998. This agreement made provision for Petrobras to have a high degree of involvement in and supervision of the works – see clauses 3 to 9 of the Agreement. The Agreement also provided formally, in clauses 10, 11 and 12, for the Roncador works to be substituted for the South Marlim works for the purposes of the Bareboat Charter and Purchase Agreement of 20 June 1997; and for Petromec to be paid compensation for the substituted works and any subsequent changes to them in addition to the charter hire, to which they would continue to be entitled. The construction of these three clauses is to some extent in issue in this appeal and I shall examine them in detail below. Mr Vineall QC, on behalf of Petromec, submits that Cooke J misconstrued clause 12 in particular, and that matters of construction are the only issues in the appeal. As will appear, I consider that other case management issues may be equally important.

[10]As the works progressed, there were financial difficulties in part because Davie initially failed to secure financial support from the Export Development Corporation of Canada. As one means of securing extra money, Petromec submitted to Petrobras a series of what were called variation orders in an attempt to recover some of the costs that had arisen from the change of project. Petrobras eventually agreed to pay and did pay additional amounts under two sets of variation orders, except in relation to variation order 13 (part of the second set of variation orders). The amounts which they agreed to pay were less than Petromec had claimed, and Petromec accept in the present proceedings that the agreed amounts were less than their actual costs.

[11]During 1999, the parties tried to reach a global settlement of further amounts to be paid in compensation to Petromec in addition to the charter hire. A team of accountants examined Petromec’s books in August 1999. It was Petromec’s case before Moore-Bick J that an agreement was reached that Petrobras would pay them the difference between their total costs of the project and an amount of US $112m. attributable to South Marlim. Moore-Bick J held that there was no such binding agreement.

[12]Among the numerous other decisions of Moore-Bick J were these (see paragraph 202 of his judgment): (ii) under the terms of the South Marlim Agreements Petromec was under no liability for delay in completing the upgrade or for incomplete or defective work once it had entered into sub-contracts with sub-contractors and suppliers, and on terms, approved by Brasoil; (iii) the Supervision Agreement did not impose any additional liability on Petromec for delay in completing the upgrade or for incomplete or defective work, but in any event Petrobras and Brasoil are estopped from contending that it did; (iv) Petromec is entitled under clause 12 of the Supervision Agreement to recover the additional costs incurred by reason of the change in specification (including costs of financing, administration and general overheads), but not to any additional profit; (v) the negotiations relating to the amount payable in respect of the first set of variation orders were not negotiations of the kind contemplated by clause 12.4 of the Supervision Agreement; (viii) the letter agreement of 9 July 1998 is binding and accordingly the price agreed for the first set of variation orders is final; (ix) the payment agreed for the second set of variation orders was final, except in relation to Variation Order No. 13; (x) Recital (E) of [a further agreement] … precludes Petromec from recovering additional sums in respect of the first two sets of variation orders; (xii) No binding agreement was reached … for the payment of additional costs by reference to a global payment approach – see also finding (xiv); (xxii) [Petromec is not] liable for delay in the completion of the work.

[13]After Moore-Bick J’s judgment, the litigation proceeded. In October 2004, Petromec produced draft Particulars of Claim in which they claimed additional costs of carrying out the Roncador upgrading works. These particulars were revised on 8 March 2007. Petrobras served a defence to this claim on 23 March 2007, which was amended on 4 April 2007. Petromec served a Reply to the Amended Defence on 5 April 2007. The core of the dispute which emerges from these pleadings is that Petrobras say that the way in which Petromec have framed their claim is not open to them under clause 12 of the Supervision Agreement.

The Supervision Agreement

[14]The relevant clauses of the Supervision Agreement provide as follows:

“1. Interpretation In this Agreement: … “Amended Specification” means the Original Specification as amended by Clause 11 of this Agreement and as further amended from time to time; … “Original Specification” means the specification annexed to the Bareboat Sub-Charter Agreement which contains the documents listed in Appendix A attached hereto and the deviations listed in Appendix B attached hereto; … 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 arrangement 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 affected 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 Data – 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 costs (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. …”

In this Agreement: … 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 arrangement 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 affected including (but without prejudice to the foregoing) replacing the relevant Upgrade Contractor(s). 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 Data – Roncador – contained in document ET.3010-56-1200-941-PPC-001, Revision 0. 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 costs (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. …”

In this Agreement:

[15]Petromec’s essential case is that these clauses entitle them to payment of the difference in cost between(a) that which they might reasonably have incurred in upgrading the vessel in accordance with the Original (South Marlim) Specification, and

(b) that which they in fact incurred in upgrading the vessel in accordance with the Amended (Roncador) Specification as further amended from time to time, that is the costs of upgrading works which they in fact carried out. They say that it is not necessary for them to give particulars of instructions pursuant to which these works were carried out; nor to carry out the entirely artificial exercise of defining the Roncador works as they were specified at the time the Supervision Agreement was entered into; nor to give equally artificial particulars of how the specification moved by instruction from where it was when the Supervision Agreement was entered into to where it ended up on completion of the works. They are not, in short, they say, obliged to particularise the cost of differences. They say that they are not obliged to give particulars of instructions because Petrobras were entitled to and did in fact supervise the works intensively; because everything that was done was done to their liking and implied (if not actual) instruction; and because Moore-Bick J has held that Petromec are not liable for delay or defective work. They accordingly claim their actual costs, which they say have been audited on behalf of Petrobras. They accept that they have to satisfy the court that their actual costs were reasonable. But they can do this by asserting that they are reasonable. That is both sufficient and credible, because the works were under the intensive supervision of Petrobras; because they are not liable for delay or defective work; and because Petrobras have audited the costs. They say that there has to be deducted from their actual (reasonable) costs the best estimate which they (and if necessary the court) can make of the costs which they might reasonably have incurred in upgrading the vessel in accordance with the Original (South Marlim) Specification.

[16]It was Petromec’s case before Cooke J that the “Amended Specification” in clause12.1 of the Supervision Agreement means the Amended Specification as defined in clause 1, that is “the Original Specification as amended by clause 11 … and as further amended from time to time”. It was thus their case that clause 12.1 alone entitled them to the difference in cost between South Marlim and Roncador as eventually constructed. The judge rejected this construction of the “Amended Specification” in clause 12.1, essentially because it would make clause 12.2(ii) in particular redundant. He held that the “Amended Specification” in clause 12.1 meant the specification substituted by clause 11.1, and that clause

12.2 concerned alterations or changes made subsequently. He was, in my view, correct here. Petromec have not pursued the extreme version of this submission in this court. Mr Hancock QC, for Petrobras, says that a main plank of Petromec’s case before Cooke J has gone, and that he is not clear what Petromec’s case on construction now is.

[17]Petrobras’ essential case is that clause 12.1 entitles Petromec to the difference between the cost which Petromec might reasonably have incurred in upgrading the vessel in accordance with the Original (South Marlim) Specification and the reasonable cost of upgrading the vessel in accordance with the specification substituted under clause 11 as a change pursuant to clause 10. To this end the difference between the South Marlim Specification and the clause 11 Roncador Specification has to be identified and the reasonable extra cost determined. Petrobras then say that, for further alterations or changes instructed by Petrobras under clause 10, Petromec are entitled under clause 12.2(ii) to the reasonable extra costs of the alterations, changes or amendments to the clause 11 Roncador Specification. Petromec are not therefore entitled to formulate their claim as a global claim which only relies on their actual costs. Rather their claim must in structure be that which clauses 12.1 and 12.2, properly construed, require. For clause 12.1, Petromec must prove the differences and the difference in cost between the South Marlim Specification and the clause 11 Roncador Specification. For clause 12.2, Petromec must prove the further alterations or changes which were instructed and then prove the reasonable extra costs of each of these. In pleading or case management terms, Petrobras say that Petromec must particularise the work content differences and the instructions which gave rise to them, and then particularise the reasonable extra costs of each.

[18]The judge in essence accepted Petrobras’ construction of clauses12.1 and 12.2. In doing so, he referred to clauses 12.3 and 12.4 as distinguishing between the additional or extra costs referred to in clause 12.1 on the one hand and

12.2 on the other as one of a number of indications that clause 12.1 did not embrace the whole of the Roncador upgrading works as they eventually became.

[19]The order which the judge made following his judgment included what are in effect declarations as follows: “(a) On the proper construction of the Supervision Agreement, the sum due to Petromec pursuant to clauses12.1 and

12.2 is 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 Original Specification as amended by clause 11 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 amendments made to the Original Specification by clause 11, 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. (Judgment dated 6 July 2007 at paragraphs 24 to 26 and 48) (b) It is 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 (Judgment dated 6 July 2007 at paragraph 49). (c) On the true construction of clause

12.3 of the Supervision Agreement, Petromec needs to produce evidence both of (i) what they have in fact spent and (ii) what they would have spent had the relevant change not been made before monies become due (Judgment dated 6 July 2007 at paragraphs 22 and 51)” (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 Original Specification as amended by clause 11 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 amendments made to the Original Specification by clause 11, 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. (Judgment dated 6 July 2007 at paragraphs 24 to 26 and 48)

[20]The judge’s reasoning by which he concluded that, as a matter of construction, the “Amended Specification” in clause12.1 referred to the clause 11 Roncador Specification as it was when the Supervision Agreement was entered into, and that clauses 12.1 and

12.2 relate to different lots of extra costs, is in paragraphs 12 to 23 of his judgment. Petromec do not now contend that clause 12.1 alone can carry their entire claim, but Mr Vineall does submit that clause 12.1 expressly relates to the difference in cost, not to the cost of differences. In my judgment, the judge’s construction of clauses 12.1 and 12.2 and his reasoning were correct, with a minor gloss. I explain the gloss later in this judgment. It does not detract from the main effect of the judge’s conclusion as to the construction of clauses 12.1 and 12.2.

[21]In paragraphs 24 to 27 of his judgment, the judge explained the effect of his construction on the way in which Petromec would need to plead and prove their case. For clause 12.1, there was no difficulty in identifying the Original (South Marlim) Specification and the clause 11 Roncador Specification. “What remains to be established is the work done to effect that [Roncador] Specification, the cost of that work and the reasonableness of both the work and the cost involved”. For clause 12.2 alterations or changes, Petromec would have to establish that Petrobras gave instructions pursuant to clause 10 for each of the alterations or changes, and that these changes were then effected. They would have to show the work done to achieve these changes and the reasonableness both of the actual work and the cost. They would also have to show what cost had been thrown away for the purpose of clause 12.2(i). By clause 12.3, the reasonable additional costs referred to in clauses12.1 and

12.2 were payable only on production of evidence of reasonable and proper expenditure. This involved the comparison to which the judge had referred.

The judge summarised this part of his decision in paragraph 26 of his judgment as follows:

“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] for the alterations or changes, as well as the work done. For both sub-clauses the reasonableness of the work and the costs also has to be shown. When this is done the appropriate extension of time can be determined.”

Mr Vineall on behalf of Petromec challenges this paragraph in particular of the judge’s judgment on this appeal. He submitted to this court that what the judge there required was impossible to achieve. The judge recorded that before him Petromec did not assert that it was impossible, but rather that there were difficulties which meant that Petromec might not make full recovery – see paragraph 39 of the judge’s judgment. This latter submission was repeated in this court. It is said that, if the judge is right, there will be a shortfall eating into Petromec’s profit. They say that the contract was essentially cost reimbursable, so that all Petromec should be required to prove is their actual cost.

[23]The judge then considered whether Petromec could establish the elements which he regarded as necessary without descending to the detail that Petrobras insisted was necessary. Petromec sought simply to compare the likely South Marlim costs with their eventual Roncador costs. This would assume that all additional costs actually incurred related to work under clause12.1 or 12.2. It also assumed that Petrobras gave instructions within clause

12.2 for all further changes. The judge then set out at length the reasons advanced by Petromec why there was no real scope for dispute as to the elements which the structure of their claim left out of account. He summarised these submissions in paragraph 29 of his judgment as follows:

“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’] 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?”

[24]There should accordingly, said Petromec, be no difficulty in putting the practical onus on Petrobras to say where there were issues about work not required to conform with the Amended Specification, work unreasonably done and unreasonable or improper costs. The judge saw some force in this argument. But Petrobras did not accept that there was no room for dispute. If the work done to achieve the final Roncador Amended Specification and its cost were in issue and there was scope for argument, the judge did not see how Petromec could simply assert that the final Roncador costs represented the conclusion of the processes set out in clauses12.1 and

12.2 from which the reasonable extra costs could be calculated. The burden was on Petromec to establish all the elements necessary to make good its entitlement to the sums it claims. It therefore had to specify what works it had to do to bring the vessel up to the clause 11 specification and to particularise what Petrobras instructed it to do pursuant to clause 10. “The essential problem with Petromec’s methodology is that it fails to grapple with the issues of instructions from [Petrobras] pursuant to clause 10 for the purpose of clause 12.2 and fails to identify the work done whether pursuant to clause 12.1 or 12.2”. Petromec’s method would not establish that the difference in cost was reasonable extra cost. It would reverse the burden of proof.

[25]It is the giving of the extensive particulars which the judge’s decision requires which Petromec wish by this appeal to avoid. Mr Vineall says that in practice the judge’s requirement would deny Petromec some costs to which they are entitled because not all costs can be tied to particular instructions.

[26]The judge referred to a number of authorities and text books in paragraph 42 of his judgment which tend to disapprove global claims. Rather, if there is a claim under a construction contract for multiple breaches or multiple variations, there is a need to show the consequences of complying with instructions in terms of work done and cost reasonably incurred. The causal nexus must be spelt out in intelligible form. The terms of clauses12.1 and

12.2 did not obviate this need. The judge accepted that an adequate indemnity was given, but that indemnity was circumscribed by the terms of clauses 12.1 to 12.3. The judge accepted that the court should not dictate to a party to litigation the case that the party must advance so as to put the party into a straight jacket of the court’s devising. If, therefore, Petromec’s method had been sufficient to prove its case, the judge would not have debarred it from pleading and proving it by that method.

[27]In summary, therefore, the judge held in paragraph 48 of his judgment, that, on the proper construction of the Supervision Agreement, the sum due to Petromec under clauses12.1 and

12.2 cannot be ascertained by calculating the difference in the manner which Petromec proposed. Petromec must specify the instructions, the work required to comply with those instructions (or with the Amended Specification under clause 11), and the cost attributable to that work. The changes and causal nexus must be pleaded. Petromec can contend that the work done and the cost is reasonable. By one means or another, it must plead with sufficient particularity the work done and its cost by reference to the Amended Specification or the instructions given. The judge, however, said, in paragraph 49 of his judgment, that it was not necessary to ascertain separately sums due under clauses 12.1 and 12.2. All that was necessary was to establish the total of the additional costs referred to in clauses 12.1 and 12.2. What mattered was the total reasonable extra cost payable in consequence of complying with Petrobras’ instructions under clause 10, as reflected in clauses 11.1 and 12.1 or 12.2.

[28]Sub-paragraph (c) of the judge’s order was made with reference to his short paragraph 51. It concerned what Petromec had to establish under clause 12.3 of the Supervision Agreement to become entitled to payment. We are told that the preliminary issue to which this was an answer relates only to a future claim for discretionary interest. We were also told that, perhaps surprisingly, this was not raised at the hearing before the judge, although it did appear in one party’s written skeleton. It seems to me that consideration of questions relating to interest in this litigation is premature, and that a bare question of construction decided out of the context in which the question arises may have unfair consequences. I would set aside this part of the judge’s order for this reason. This would not prevent the court reaching an equivalent conclusion as part of a wider discretionary decision about interest. But I do not think that it is appropriate that the court or the parties should be required to address the question of interest bound by a decision which apparently did not focus on the full context to which the decision was directed. I shall refer briefly to clauses 12.3 and 12.4 below.

[29]At a later case management hearing, the judge made an order for a Scott Schedule without specifying in the order the structure of the schedule or its headings. No doubt these matters were taken to be largely apparent from the judgment under appeal. But the court should not, in my view, order a Scott Schedule or similar document without stipulating its form and the nature of the detail which each party is sequentially required to give. Without these matters, the particularised detail which the court requires is not sufficiently determined.

The appeal

[30]Mr Vineall submitted that the only main issue in this appeal is a question of the construction of clause 12 of the Supervision Agreement. He submitted that this clause entitled Petromec to the difference in cost and that they should not be required to identify in detail the work to which the costs related. I do not agree that the only question is one of construction. Matters of construction do arise, but the difference between the parties on construction is now narrower than it was before the judge. There are also important questions of pleading and case management.

[31]In reality, the core dispute concerns the degree of particularity with which Petromec must plead its case. This raises questions of fairness, practicality and the appropriate means of enabling the court to define and decide issues between the parties, as much as questions of construction. Whatever the construction of clause 12 of the Supervision Agreement, it would not be fair to Petrobras, nor a practical way of the court proceeding, if Petromec were not required to give adequate particulars of their claim. At the least, if Petromec say they are entitled to a quantified additional cost which they assert was reasonably incurred, it must in broad terms be fair and appropriate to require them to give particulars of the work content which they say gave rise to these costs. On the other hand, the court should not devise its own straight jacket requirements if the effect is to refuse to allow Petromec to adopt a structure which, with proper particulars, the court would not strike out.

[32]In my view, this court should proceed in this case with caution on questions of detailed case management. The court has been provided with a small number of documents only. We do not, for instance, have the specifications and other documents referred to in clause 11 of the Supervision Agreement; nor do we have the schedules to Petromec’s Amended Particulars of Claim. We are not, therefore, for example, able to form any view of our own as to the extent to which the General Technical Specification for South Marlim or the Amended clause 11 Roncador Specification defined a work content. We may note generally that the parties agree that these were functional. Moore-Bick J has held that the Roncador design was being developed even while the work of upgrading was in progress. We may note that it is Petromec’s case that the work content of the Roncador clause 11 specification cannot be defined. They are entitled to assert this and may in due course establish it. It might have some effect on the detailed extent to which the court should require them to particularise their case; but not, in the end, I think, much effect.

The construction of clauses 10 to 12 of the Supervision Agreement

[33]I have set these clauses out in full earlier in this judgment.

[34]Clause 10 provides for what its heading refers to as “Change Orders”, which by clause 10.1 include any alteration to the Amended Specification. Apart from further changes to which clause 12.2 applies, the Amended Specification means the Original (South Marlim) Specification as amended by clause 11, which I have referred to as the Clause 11 Roncador Specification. Clause 10 is thus to an extent illogically placed in the Agreement. It should logically appear after clause 11. Clause 11 substitutes by agreement for the identified South Marlim General Technical Specification the Clause 11 Roncador Specification, referred to in clause 11.1(i) as Revision A with the added Metocean Data referred to in clause 11.1(ii). For all that clause 11 has the words “pursuant to clause 10 hereof”, this is in substance patently incorrect. In truth the substitution was by agreement as expressed in clause 11 and not by what would be unilateral instruction under clause 10. This is the minor gloss on the judge’s construction to which I referred in paragraph 20 above. Not a lot turns on this, except that the difference in cost for the purpose of clause 12.1 is not conceptually a difference deriving from a change order.

[35]There is no longer an issue as to the meaning of “Amended Specification” in clause 12.1. It means the Roncador Clause 11 Specification. As a bare matter of construction, and if the vessel had been upgraded strictly and only in accordance with the Roncador Clause 11 Specification (and if that was ever capable of being done), Petromec would have been entitled to the difference between the cost that they might have reasonably incurred in upgrading the vessel in accordance with the Original South Marlim Specification and the reasonable cost of upgrading the vessel in accordance with Clause 11 Roncador Specification. To achieve this, it would have been necessary for Petromec to give adequate particulars of(a) their case as to the costs they might reasonably have incurred in giving effect to the Original South Marlim Specification, and

(b) the work content of achieving the Clause 11 Roncador Specification and its costs. For pleading purposes, they could no doubt assert that their costs were reasonable for the reasons they have advanced. It would not, however, have been necessary for Petromec to establish the comparative differences between the work contents of the Original South Marlim Specification and of the Clause 11 Roncador Specification, as if the substitution was effected by change order, which in substance it was not. To this extent, the reasonable extra cost would have been the difference between two global sums separately calculated – at least at one stage in the hearing Mr Hancock accepted this. But each of the two global sums would require adequate particularisation with reference to work content.

[36]Clause 12.2 concerns further alterations or changes instructed by Petrobras, that is changes to the Clause 11 Roncador Specification. Clause 12.2(ii) entitles Petromec to the reasonable extra cost resulting from these changes, that is in concept the cost caused by the changes. That in theory might require a comparison between the work content and cost of the Clause 11 Roncador Specification (or part of it) and the work content of the instructed changes. Conventional particulars of this would require Petromec to identify the change order instructions, and to give sufficient particulars of the work content and reasonable cost of each. The judge in effect so decided in paragraph 48 of his judgment. As a matter of the abstract construction of clause 12.2 alone coupled with an orthodox approach to pleading and case management, I think he was correct. But there are two further considerations. First, Petromec are entitled to assert as their case that the Clause 11 Roncador Specification was not a document which defined work content and that the design only emerged and became buildable as it went along. Second, Petromec’s entitlement to “reasonable extra cost” of upgrading in clause 12.1 is the same measure of cost as the “reasonable extra costs” of upgrading in clause 12.2(ii). This means – and Mr Hancock was inclined to accept – that the sum of the reasonable extra costs under clauses 12.1 and 12.2(ii) taken separately ought to be the same as Petromec’s reasonable extra costs of upgrading the vessel in accordance with the Roncador Specification as eventually instructed, including the further alterations and changes to be paid for under clause 12.2. For these reasons, I do not consider that the court would strike out a formulation of Petromec’s claim which sought to deduct the costs that Petromec might reasonably have incurred in achieving the Original South Marlim Specification (properly particularised) from the reasonable costs (properly particularised) of achieving the eventually instructed Roncador Specification. This is no doubt what the judge had in mind when he held in paragraph 49 of his judgment that it was not necessary for there to be a separate ascertainment of the sums due under clause 12.1 and 12.2. There does not therefore have to be a pointless separate costing of the works notionally required to achieve the Clause 11 Roncador Specification, which was never executed in that form, even if that were possible. That does not, however, let Petromec off the hook of having to give proper particulars.

[37]Clauses 12.3 and 12.4 appear to me to have ceased to be of much relevance to the present dispute, except perhaps as one element of a discretionary judgment about interest. Certainly the separation in them of clauses12.1 and

12.2 was an indication in support of the judge’s correct appreciation of the relationship between clauses 12.1 and 12.2. But Petromec no longer contend that their entire extra costs can be recovered under clause 12.1 alone. In my view, clauses

12.3 and

12.4 were mainly concerned with stage payments while the work was in progress. The reference in clause 12.4 to Petromec meeting its obligations to its contractors is one indication of this. Because of the singular structure of the various contracts, Petromec were entitled to no payment for the upgrading works, apart from the payments of charter hire as they became due, unless they could show that whatever they were claiming was extra costs. Thus, under clause 12.3, Petromec would be entitled to payments during the course of the works on satisfying Petrobras that their costs were reasonable and properly incurred. But they also had to show that they were additional costs. Hence the need to demonstrate differences with reference to work content under clause 12.1 or 12.2.

[38]However, the works are now complete. Clause 12.4 is redundant and was, according to Moore Bick J’s judgment never fully operated. The parties are now in dispute and Petromec had to satisfy the court, not Petrobras, of the amount of their reasonable extra costs.

[39]Mr Vineall submits that the expression “evidence of expenditure” in clause 12.3 supports Petromec’s case that they need only give particulars of and establish what they have spent. This is not persuasive. It might be that, while the works were in progress, evidence of expenditure and demonstration that it was reasonable and properly incurred would in practice secure a stage payment. But entitlement to payment also depended on showing that the costs were additional costs for which some analysis of work content was necessary. Now that the dispute is before the court, there is the added procedural requirement of proper particulars.

[40]What then are proper particulars? That in detail is a matter for the judge or whichever other judge carries the resolution of this dispute forward. The structure of the particulars should, I think, be determined in detail by the court ordering the structure and headings to the columns of the Scott Schedule. In principle, however, the judge correctly summarised what is needed in paragraphs 26 and 48 of his judgment. For the eventually executed Roncador upgrading works, Petromec should specify in the schedule with sufficient itemised particularity the work content, the authority under which they did that work, and what they claim to be its reasonable cost. The authority under which they did the work will either be because it was required to comply with the Clause 11 Roncador Specification (clause12.1 ), or because it was instructed as an alteration to that specification (clause

12.2 ), in which event there must be particulars of the instructions. If a paper instruction (or perhaps a provable oral instruction) cannot be produced for some of the work, Petromec will have to find a means of particularising sufficiently why they say nevertheless that they were obliged to carry out the work. They will also, where necessary, have to plead a causal nexus, as the judge put it. No doubt, for much of the direct work, the causal nexus will be obvious and need not be spelt out – as if there is an instruction for additional steelwork and this is the direct cost of the additional steelwork. Other indirect work and its costs may need a better particularised causal link to the work content and instruction which caused the cost to be incurred. I emphasise that the details are for the case managing judge, not for this court.

[41]The giving of particulars of this kind is always burdensome. If it becomes necessary for the judge to determine whether essentially compliant particulars are adequate, it will be appreciated that oppressive requests for yet further particulars should not be used by the requesting party as a means of excusing themselves from completing their part of the Scott Schedule. The practical reality of litigation such as this is that disputes are usually compromised when both parties have completed their parts of a Scott Schedule, if not before.

[42]For these reasons, in my judgment the judge in substance correctly decided the main issue which is the subject of the appeal. I would dismiss the appeal with reference to paragraphs (a) and (b) of his order, with the gloss that I would omit the references in the paragraphs (a)(1) and (2) to evidence produced under clause 12.3. I would set aside paragraph (c) of the order for the reasons which I have given.

VO1 and VO2

[43]I do not propose to embark on any analysis of VO1, and VO2, which were a subject of Moore-Bick J’s judgment and which Cooke J referred to briefly in paragraphs 36 and 37 of his judgment. There will, it seems, have to be substantial adjustments to the reasonable cost of the eventually instructed Roncador upgrading works for the part settlements embraced in VO1 and VO2. Determining these adjustments may be problematic, but that is not a subject for this appeal. I note without comment that Mr Hancock submitted that, to deal with VO1 and VO2, it would be necessary to define the Clause 11 Roncador work, because in the main they concerned work resulting from that.

[44]I agree.

Master of the Rolls:

[45]I also agree that the appeal with reference to paragraphs (a) and (b) of the judge’s order should be dismissed in the terms of paragraph 42 of May LJ’s judgment and for the reasons he gives; and that paragraph (c) of the judge’s order should be set aside again for May LJ’s reasons.